Value in Scandinavia

By Ugo Lancioni

The New Year started positively – with US equity markets reaching all-time highs and relatively low levels of risk aversion, despite the high degree of political uncertainty. In the US, fundamentals are robust and improving. With the Fed expected to hike rates two or three times in 2017, the dollar could again move higher. However, although recent domestic data has been strong, we believe this has already been reflected in the dollar.

Therefore, should the data fail to satisfy the optimism, especially with the implementation of Trump’s policies, the dollar may suffer. In Europe, after three years lagging the US, the gap has started to narrow. Data has been surprising on the upside with many indicators pointing towards stronger growth for 2017.

The market is not pricing the possibility of a further cut in the ECB’s easing policy, which, in a reflationary environment, could see European rates move higher and offset the stronger dollar. So where should investors be looking from a currency perspective?

Our analysis suggests Scandinavian currencies, which are closely linked to the European trading bloc, remain significantly undervalued: 15-20% relative to other major currencies. Scandinavian nations could outperform other G10 countries this year. In terms of overvalued currencies, our analysis suggests the Swiss franc is significantly overvalued.