Nasdaq Helsinki – a value trap?

The weak performance of Nasdaq Helsinki over the past 2.5 years is getting on investors' nerves. Especially considering that the global bull market started back in the fall of 2022. Nasdaq Helsinki may look cheap, but is it a value trap?

A value trap is an investment that looks cheap and attractive on the surface but is actually a lousy investment.

 Nasdaq Helsinki is by no means alone. Chinese stock markets have developed even worse in recent years. Many readers may be surprised to learn that Nasdaq Helsinki has returned about 8% annually over the past 10 years, including dividends. That's not bad. Nasdaq Stockholm, full of high-profile companies, has returned the same amount in euro terms.

On the surface, Nasdaq Helsinki looks cheap, like many other European stock markets. The forward-looking P/E ratio, based on analysts' earnings forecasts, is hovering around 13x, while the post-financial crisis average, despite several downturns, has been 15x.

 Nasdaq Helsinki is highly concentrated: The 13 largest companies account for 75% of the stock exchange's market capitalization of around 250 BNEUR. We can therefore start to solve the puzzle by looking at the largest companies that drive the stock market. I asked around for the opinions of our analysts.

Based on the responses, it seems that most of our large companies are able to grow at a leisurely pace and create value, despite the drag from the likes of KONE (no earnings growth for 9 years) and Nokia.

There’s no reason to expect dynamic earnings growth from Nasdaq Helsinki in the long term. For example, Nordea, Finland's national treasure, with a net profit of 5 BNEUR and a quarter of Nasdaq Helsinki's profit, will grow at about the same rate as the Nordic economies' GDP in the long run. For a bank to grow faster than GDP would actually be suspicious.

The largest market area for Nasdaq Helsinki is Europe, although for a few companies, such as Wärtsilä and Metso, the market is evenly spread around the world. This makes Europe's long-term growth outlook the best indicator of Nasdaq Helsinki's growth drivers. According to Bloomberg forecasts, the euro area's growth potential will be around 1% in the coming years, falling to 0.6% by the 2050s. If inflation were to average 2% per year, as targeted by the central bank, Nasdaq Helsinki's nominal earnings growth could be roughly estimated at 2.5-3% over the long term.

That doesn't sound like much, considering that the earnings per share of the S&P 500 index, for example, have grown at a nominal rate of 7.1% per year over the past 60 years (although this includes share buybacks, which inflate EPS).

After all, Nasdaq Helsinki is not really a growth stock market, although there are some fast-growing companies such as Kempower, Gofore, Revenio, Harvia and Qt Group beneath the surface of the index. But it's the big companies that weigh the most on the stock market, and Kempower, worth €1.3 billion, would not sway the market significantly even if the company were to grow tenfold over the next decade (not a baseline scenario).

Nasdaq Helsinki is a cash flow exchange. Companies collectively return about 2/3 of their profits to owners in the form of dividends. The OMXH25 index has a dividend yield of about 5%. As many as 43 companies pay dividends of more than 5%.

 
By investing in Nasdaq Helsinki, you are betting on the continuation of the current earnings level, rather than on the future growth. In contrast, the S&P 500 index (P/E 20x) relies heavily on future value-creating growth (which the world's best companies are undoubtedly capable of).

Assuming no change in valuation multiples, a dividend yield of around 5%, and nominal earnings growth of 3% well into the future, Nasdaq Helsinki could be expected to return around 8% per year, in line with its ten-year yield level. The investor's money would double every nine years.

Such a return cannot be considered a value trap.