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The Oslo Børs Benchmark Index gained 11.5% in 2007, despite a second half of the year characterised by greater uncertainty and turbulent credit markets internationally. The level of trading activity was higher than ever before, with turnover up by 25% and more new listings than in any previous year. This high level of activity may well be one of the reasons for the Norwegian market continuing to climb for the fifth year in a row.
However, there can be little doubt that 2008 starts with a relatively high level of unease among investors. Even so, the state of the Norwegian economy and the performance of Norwegian listed companies in isolation will encourage many investors to remain optimistic about the future. On the other hand, much will depend on economic growth internationally, with the performance of the US economy and the pace of economic growth in China and India playing major roles. The outlook for oil prices is also important, but will perhaps be somewhat less important than in earlier years.
Frightened by the credit crunch
2007 was the year when everyone had to come to terms with a new concept: subprime. This refers to the market for lending to borrowers who do not qualify for normal mortgage terms and therefore take on unsecured loans at very high interest rates. Falling prices in the American residential property market have led to high rates of default by American subprime borrowers, and this has caused big losses for the banking sector. Following a number of announcements of loan losses from some of the world's largest investment banks, the total value of reported losses had reached around USD 100 billion by the end of 2007, and there are some signs that this may not yet be the end of the story.
Here in Norway, the credit crunch made itself felt when news broke that several of municipalities in the north of the country had lost large amounts on subprime related investments in the USA. In addition to the damage this caused to the finances of the municipalities affected, the Norwegian broker firm Terra Securities, which had sold these products to the municipalities, filed for insolvency.
Signs of slower growth
There are signs of slower growth in corporate earnings, both here in Norway and internationally. Many companies announced third quarter results that fell short of expectations, and the closing months of the year saw a number of profit warnings. This has created some uncertainty ahead of the fourth quarter reports, which will tend to set the direction for the market.
Less dependent on oil prices?
The Oslo stock exchange is often thought of as an oil-related market, meaning that the overall market follows the performance of oil prices. There is still a lot of truth in this, but there are also many signs that the market's performance is becoming more dependent on factors other than oil prices. This is true not least for the state of the international economy, which can be said to have played a greater role than the oil price in 2007. Oil prices rose by around 60% in 2007, but oil-related shares did not in general reflect anything like this performance. There were some notable exceptions, including the oil company Petrobank Energy and the rig company Sevan Marine, where share prices rose by 240% and 141.17% respectively. StatoilHydro, which came into being in March following the merger of Statoil and Norsk Hydro’s oil and gas activities, lagged the market very considerably and only managed a couple of percentage points improvement in its share price.
Solid gains
Golden Ocean Group, a dry bulk company dominated by John Fredriksen, was the best performing share in the Oslo market in 2007, gaining all of 245.99%. This was a worthy follow on from the gain of almost 200% seen in 2006. Belships and Jinhui Shipping were also strong performers, with share prices up by 122.65% and 85.53% respectively. The common feature for these three companies was the red-hot dry bulk market, which consistently set new all-time highs for bulk rates over the course of the autumn.
2007 was undoubtedly also a good year for Renewable Energy Corporation (REC), which gained over 140%. Strong earnings and a number of new investments helped to create great optimism among investors, and increasing awareness of climate change and the strong interest seen in alternative energy also helped the market's view of REC, leading to an increase in market capitalisation of more than NOK 80 billion over the course of the year. REC’s largest shareholder, Orkla, has benefited strongly from its investment in the solar cell industry. Orkla owns almost 40% of REC, and Orkla shareholders enjoyed an increase in share price in 2007 of close to 50%.
The overall performance of the Oslo market in 2007 also reflects important contributions by Yara, Frontline, Norsk Hydro, Seadrill and Telenor. 2007 was a particularly good year for Yara, which was also one of the shares that shrugged off the more turbulent conditions towards the end of the year. The Yara share price gained around 80% in 2007, reaching a number of all-time highs towards the end of the year.
Tough times for some
Joining the stock market proved to be a tough experience for two of the new companies listed in 2007, namely Repant and Elektromagnetic Geoservices (EMGS). These companies saw their share prices fall by 78% and 65% respectively. Tandberg Data attracted a lot of attention towards the end of the year with shareholder disquiet, replacement of both the executive management and the board of directors and, not least, a warning that the company needed to raise more capital. Despite a healthy improvement between Christmas and New Year, the Tandberg Data share price fell by almost 60% over the course of 2007.
The company most in the news was Norske Skog, which saw its market capitalisation slashed by all of NOK 12 billion over the course of the year. The company has struggled for a number of years with weak profitability and hefty losses caused by tough competition in the paper industry. The scale of the company's losses became a hot topic for investors in 2007, and it seemed for a while as though nothing would stop the slide in the company's share price. After falling as low as NOK 30 during the autumn, the Norske Skog share closed the year at NOK 45.20, equivalent to a decline of 55.63% for the year as a whole.
Downturn for aquaculture and health services
Falling prices and salmon diseases made life more difficult for a number of the fishery and aquaculture companies listed on the Oslo market - a sector that was the strongest performer in 2006. Marine Harvest and Grieg Seafood were among the companies that saw sharp drops in share price. However, there were also some stronger performances in this sector. Salmar and Codfarmers are examples of companies that produced a decent share price performance in 2007.
The health sector also features among the list of falling share prices. Clavis, Biotec Pharmacon, Axis-Shield, Algeta and Photocure suffered some of the largest falls in share price in this sector.
More records broken
Oslo Børs has seen strong growth in stockmarket turnover for a number of years. While the pace of growth was a little slower in 2007, average daily turnover of NOK 12.9 billion still represents a 25% increase from 2006. The number of transactions showed an even bigger increase, with a daily average of 48,500 trades. This represents a 37% increase from 2006.
2007 saw 57 companies admitted to listing, including 27 companies listed on Oslo Axess. This is one company more than in 1997, when 56 companies were admitted to listing on Oslo Børs. Listed companies also raised a record amount of new capital in 2007, with almost NOK 60 billion finding its way to companies listed on Oslo Børs and Oslo Axess.
Success for Oslo Axess
Oslo Børs launched the new authorised marketplace Oslo Axess in May, which rapidly proved to be a success. As many as 27 companies were admitted to listing between May and year-end, with a further 4 companies approved for admission at year-end. This means that the level of new listings activity on the new marketplace was just as great as on the ordinary Oslo stock exchange. This means that many companies which would not normally satisfy all the requirements for an ordinary stock exchange listing have gained access to a capital market in much the same way as stock exchange listed companies, and this has made it possible for more companies to develop their business ideas and projects.
Average daily trading volume on Oslo Axess approached NOK 60 million in 2007, with an average of 100 trades. The level of activity showed a good increase over the last few months of the year, in pace with the number of companies listed. This market too offers good prospects for continuing growth in activity.
Variable results for international stock markets
Over recent years, the performance of the Oslo stock market has been in a class of its own compared to the major European markets. The picture for 2007 was somewhat different, with Oslo in the middle of the field by international comparison. The stock markets of Germany and Finland produced strong performances, both up by over 20%, while most other European markets managed increases of just a few percentage points. One exception was the Stockholm market, which recorded a small decline over the course of 2007.
What are the outlook for 2008?
It seems that most experts are cautiously optimistic at the start of the New Year, with a number of different analyses leading to the same conclusion that the Oslo stock market will repeat its 2007 performance in 2008, meaning about a 10% increase. Time alone will tell whether they are right, but there can be little doubt that many investors start 2007 in a rather less optimistic mood than for quite some time.
