Scandinavia is well placed to generate the next big European unicorn as its competitive strengths and its small cap ecosystem are among the best in Europe. The author of this article examines the details.

The country of Sweden has garnered plenty of headlines this year because it has bucked the global trend of lockdowns to cope with COVID-19. It is also still an important centre for manufacturing, but some of its businesses in the small- and medium-sized end of the spectrum are not widely known outside the country. There is also a broader Nordic story to tell investors, so the author of this article argues. 

The writer here is Peter Kraus, head of small cap equities at Berenberg WAM, part of Berenberg, the Germany-based banking group. The editors are pleased to share these views, and invite readers to enter the conversation. The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Investors in European stocks are often missing a trick when it comes to small and microcap stocks. These stocks have relatively poor analyst coverage and as such many fund managers frequently shy away from them. Yet they are often the winners from long-term structural trends, such as digitisation and major sector changes, as in the healthcare sector. One region in which this is especially true is Scandinavia, and Sweden in particular.

The economic structure and stock market landscape of the Scandinavian countries is characterised by a large number of small and medium-sized companies. This is even more pronounced than in Germany, where SMEs are considered the driving force behind the growth of Europe's largest economy. 

Recently, the European Commission in its European Regional Competitiveness Index described the region around the Swedish capital Stockholm as the most competitive in Europe - even ahead of the British capital, London. Indeed, in the Stockholm region the density of unicorns (start-ups with a valuation of more than one billion dollars) is the second highest in the world, right after Silicon Valley. Another statistic is even more interesting: Sweden has 20 start-ups for every 1,000 employees, compared with only five in the USA. Swedish startups are particularly strong in the digital sector.

The roots of Sweden's vibrant digital economy go back to the first half of the 1990s, when the country was recovering from a severe banking crisis. At that time, the government provided a boost through start-up-friendly reform measures such as lowering corporate taxes, easing the burden on smaller companies and opening the market to foreign companies. In addition, special regulations like tax breaks for the purchase of computers or the expansion of fast internet connections ensured that Sweden had a clear head start on other countries at the beginning of the digital revolution. 

Culturally Swedish society is tech-savvy and open-minded. This can be observed in the nation’s so-called “science parks”. These are dynamic areas set up to strengthen research partnerships where companies, start-ups, universities and municipalities come together. The government has maintained this policy of facilitating cooperation between startups, larger companies and universities in recent years, setting up the National Innovation Council in 2015 to oversee policies promoting collaboration between government, universities and companies. 

The prime example of a successful Scandinavian start-up is the music streaming service Spotify, which has its roots in Stockholm. Launched in 2008 as a small startup, Spotify went from strength to strength. But the success of Spotify is far from an isolated case. Sweden boasts many innovative medical companies. Biotage from Uppsala offers a range of separation and synthesis technologies across three product areas: organic chemistry, analytical chemistry and industrial products. The company is a global leader in separation technologies for drug discovery and development, analytical testing and water and environmental testing. Biotage enjoys high single-digit organic growth with a very strong and visible revenue stream. Its entry into biomolecules is likely to be its next growth initiative. 

Within the IT sector, Scandinavian companies are among the most innovative and future-oriented in the industry, offering popular and successful solutions and products. Fortnox is one example of this. The company develops and sells cloud software in the administration segment for small and medium-sized businesses. It offers software for accounting, CRM, archiving, invoicing, orders, time recording, web shops and customer management. These solutions are cloud-based, so customers can access the software and their data at any time and from any place via the internet.

The Scandinavian small cap ecosystem means that its small and medium startups consistently do better than those of other European countries. We can see this by a look at performance of the MSCI Nordic Small Cap versus the MSCI Europe Small Cap over the last twenty years, with the former clearly outperforming the latter. 

Source: MSCI

However, while the economy and start-up culture is booming, the Scandinavian stock market is still underrepresented in investors' portfolios. This is reflected in analyst coverage. For example, Bloomberg’s analysis portal contains ten analyst recommendations for the British manufacturer of wound care products and medical materials Advanced Medical Solutions (AMS) but only two for Biotage, despite the latter having a higher market capitalisation than AMS.

Scandinavia is well placed to generate the next big European unicorn as its competitive strengths and its small cap ecosystem are among the best in Europe. Investors looking for growth opportunities could do worse than go hunting for the next unicorn in the Nordics. One should not forget: even companies like the London Stock Exchange or Halma were once small.

About the author
Peter Kraus, CFA, has been Head of Small Cap Equities at Berenberg since October 2017. He began his career in 2000 as an equity analyst for a corporate finance consultancy in Munich before moving to Deka-Investment in Frankfurt in 2003. There he worked as an analyst for European Small Cap stocks. In 2006 he joined Allianz Global Investors as fund manager for European Micro and Small- Mid Caps. He is also portfolio manager of the Berenberg European Small Cap fund and Berenberg European Micro Cap funds.