2008 will go down in history as a nightmare for investors. Dizzying amounts were lost, economies were on the verge of collapse and storm clouds blew in over the economic horizon at a pace that no-one could have anticipated. 140 companies on Oslo Børs lost over half their value, and the Benchmark Index fell by all of 54%, which is the steepest fall seen in modern times. Share prices fared slightly better in international markets, but even so global equities indices were down by around 40%.
Investors have been jolted out of an almost fear-free environment and forced to recognize that nothing lasts forever. After 4½ years of continuous growth, with share values multiplying and an endless flow of positive news, the market hit back. Of course many people did recognize that global economic growth depended on continuing strong consumption in the USA that was in part at least debt-financed, and we held on to the hope that this and other factors would continue to support the markets. It is human nature to hope for better times, and we very much hoped that nothing worse would happen to the global economy than a soft landing. This proved to be very wrong.
Difficult start to the year
January was a tough month for investors in the Oslo market. The Benchmark Index dropped 20% on worries over how the expected deterioration in the American economy would affect global economic growth and, not least, the wider consequences of a global downturn. However, market sentiment had recovered by February, and although worries over the international downturn did not go away the market staged a strong recovery through to the second half of May. This recovery came at the same time as oil prices reached new heights, peaking in July when the oil price almost reached USD 150 per barrel. This meant that oil-related shares played the major role in sustaining the Oslo market’s recovery, but this picture changed very quickly as the oil price fell back from its July peak by almost 80%.
The credit problems that became apparent in the second half of 2007 went on to create such a level of turbulence in the world’s financial markets in 2008 that we can now recognise the features of a very serious financial crisis. As we start 2009, the consequences of this crisis for the global real economy are still not fully apparent. However, what is clear is that the consequences are so serious that governments around the world are not prepared to leave the markets to deal with the crisis on their own. Emergency packages and exceptional measures have been implemented and more will come, and it seems very likely that these will have the desired positive effect. However, the question is how long the downturn will last, and what else may happen in the meantime.
Crisis becomes a reality
Although uncertainty intensified over the summer months, the big drop in securities markets came in September. A number of American banks ran into major difficulties, and similar problems began to emerge in Europe. The American authorities allowed the investment bank Lehman Brothers to collapse on 15 September, and this immediately forced a big increase in money market interest rates and prompted signs of panic in securities markets around the world. A number of banks in the USA and Europe ran into difficulties as they faced the need to recognize big losses as a result of falling property prices and, in some cases, as a result of long-standing irresponsible behaviour by both lenders and borrowers. This meant that in some countries banks had to be rescued by the authorities to avoid the entire economic system collapsing. In addition, it became apparent that the Asian markets, which until the summer had been expected to carry the global economy through the American downturn, could no longer maintain the explosive growth seen over recent years. This meant that the financial crisis was now a reality, and slowly but surely the knock-on effect for the real economy started to become apparent. In October the Icelandic economy buckled under the weight of its collapsing banking industry, and it became an unwilling example of what can happen when a country’s banks fail and its economic system breaks down.
Over the autumn months, the authorities in the USA, Europe and Asia fell into line to launch a range of emergency packages and other policy measures to try and deal with the difficult situation. Sharp cuts in interest rates, pumping liquidity into the banking system and promises that important industries and sectors would be supported were among the medicine prescribed. The authorities in Norway implemented many important and appropriate measures, but were a little slow to fully appreciate the scale and speed of the impact on the Norwegian economy. They were scarcely alone in this.
It is a little difficult to understand why earlier in the year most Norwegian economic experts rejected the idea that problems in the US economy and the global economy would affect Norway and the Norwegian economy. Indeed, there was a general view that the Norwegian economy was so strong and in such a unique position that it could shrug off international economic problems like water off a duck’s back. The Norwegian authorities seemed to subscribe to this view for quite a long time. It was not until October that the authorities recognized that conditions in the Norwegian money market were so serious that they threatened a sharp slowdown for the economy as a whole, with many companies facing difficulties.
Stock market riding for a fall
It is a feature of efficient modern stock markets that share prices move in anticipation of future developments in the economy. It is therefore not unreasonable to suggest that the danger signals started to emerge well before the impact of the financial crisis on the real economy first became apparent in autumn 2008. The stock market first showed signs of unease in autumn 2007. When the market did start to fall in 2008, it did so on a big scale. From the end of May to the beginning of October, the value of shares listed on Oslo Børs fell by more than half. This meant that more than NOK 1,100 billion of value disappeared in just four months. Some of the largest companies saw falls of 50-70%, and shares in companies that just a short time ago had been investors’ favourites were now tossed aside.
The collapse of the American housing market and the general financial crisis also had an effect on the Norwegian property market. This meant that listed property companies were among those showing the largest falls in share prices. Scandinavian Property Development, BWG Homes, Norwegian Property and Faktor Eiendom all lost around 90% of their value over the course of the year. At the top of the fallers’ list for the year we find three IT companies, Tandberg Data, Tandberg Storage and Eltek, which each lost more than 95% of their value. These companies all experienced major liquidity problems during the year. This was also the case for the other companies on top of the fallers’ list: Crew Gold Exploration, Electromagnetic Geo Services, Kongsberg Automotive and CanArgo. These companies all lost more than 90% of their value.
Even the largest companies did not escape unscathed. Telenor and Norsk Hydro both fell in value by 64%, while Seadrill and Orkla were down by 58 and 57%. REC had an even tougher time, falling by all of 76%. One of the market’s winners in 2007, Yara, fell by 41%. Norske Skog struggled for much of the year with its high indebtedness and a lack of investor confidence. This historic company closed the year with a fall in share price of 70%. The largest listed company, StatoilHydro, fell somewhat less than the overall market with a drop of 32% for the year.
The sharp falls in share prices were in part due to the market’s anticipating slower growth and weaker corporate earnings in the future. However, share prices were also pushed lower by forced sales, panic, and widespread uncertainty over what would happen next. At times it seemed that investors were indiscriminately offloading shares ”for safety’s sake”, and there can be no doubt that some shares have suffered from the market over-reacting.
Few bright spots
Bright spots were few and far between, but one company worth a particular mention is the Canadian oil and gas company Questerre. After reporting a number of finds of oil and gas and good earnings, the company’s shares went very much against the flow and gained all of 180% for the year. The Norwegian telecommunications company Opera Software was also in favour, and its share price gained 30%.
Lower turnover
Average daily turnover in the equities market fell from NOK 12.9 billion in 2007 to NOK 9.9 billion in 2008. Turnover fell steadily through the autumn months once the financial crisis took hold. The fourth quarter saw average daily turnover of around NOK 6.5 billion, which is only half the level seen in the same period in 2007. The drop in turnover reflects both lower share prices and the fact that many investors have pulled liquidity out of the market for a variety of reasons.
On the other hand, the average number of transactions showed an increase of almost 40% to around 67,000 daily. Much of the increase was caused by greater use of program trading, i.e. computers programmed to trade in response to particular developments and price changes. In addition, broking firms reported an increase in trading by private individuals, which can only be interpreted as evidence that an increasing number of Norwegians believe that the share prices seen in the autumn represent a good investment opportunity.
New listings and share issues dry up
Only five new companies were admitted to listing on Oslo Børs in 2008, and all of these were in June and July. This is in sharp contrast to the 130 companies admitted to listing over the 2004-2007 period. However, it is scarcely surprising that many companies that would like to join the market have decided to postpone their plans in the hope of better times, and the level of new listings typically reflects the state of the economy. Once management and shareholders see a recovery in the strength of the Norwegian economy, more companies will look to a stock exchange listing and the access it gives to risk capital.
2008 also saw a sharp decline in new issues. Companies raised around NOK 13 billion of share capital over the course of the year, as compared to some NOK 54 billion in 2007. Of the NOK 13 billion of share issues in 2008, around NOK 10 billion was raised in the first half of the year. Much of the decline can be explained by the sharply lower level of new listings and fewer big projects, but the decline is principally evidence that investors were no longer able or willing to provide risk capital for companies’ projects and future plans.
Big names on the acquisition trail
Norwegian acquisitions by Microsoft and Nokia were among the more positive events in the Norwegian market in 2008. The American company Microsoft acquired the search engine company Fast Search & Transfer, while the Finnish mobile telephone giant Nokia purchased the Norwegian software company Trolltech. In total, 21 companies were deleted from listing on Oslo Børs over the course of 2008. This is in line with the average for recent years, and serves to indicate that the stock market continues to function as an arena for corporate structuring even during difficult times.
Loss of confidence in financial companies
One company that attracted a lot of attention in 2008 was Acta. Initially the media put the company’s approach to customer advice and sales under a very unfavourable spotlight. However the most damage was done in the summer when Økokrim (the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime) brought charges in respect of trading in Acta shares. This hit confidence in the company, and the share price collapsed by 90% in four months.
DnB NOR went through some difficult weeks following the announcement of the Norwegian government’s first package of emergency measures on 12 October. Kredittilsynet (the Financial Supervisory Authority of Norway) launched an investigation into the way the bank traded in government bonds in advance of the announcement, and this was followed by Økokrim bringing charges against two of the bank’s employees for possible abuse of inside information. This caused a lot of adverse reaction, and the bank’s share price fell by all of 40% over October and November. For the year as a whole the DnB NOR share price fell by 67%.
Oslo Axess
Oslo Axess admitted 10 companies to listing in 2008, while three companies were deleted from listing. 2007 saw 28 companies admitted to listing, with no companies deleted from listing. This marketplace also saw a lower level of activity, with average daily turnover of NOK 24 million. The equivalent figure for 2007 was NOK 57 million.
Better internationally
Norway has benefited for a number of years from high commodity prices, which played a very large part in the market’s upturn since 2003. However, the recent turbulence in the financial markets has also caused a repricing of commodities. This has meant that the Oslo market has been more exposed than many other stock exchanges. For example, in Europe the stock markets of London, Frankfurt and Stockholm fell by xx%, xx% and xx% respectively, while american Nasdaq and Japanese Nikkei fell some more than xx%. In global terms, share prices have fallen by around 40%.
And the future?
The start of 2009 may quickly be affected by the continuing difficult climate in which many Norwegian companies are operating. The headlines may well continue to reflect corporate insolvencies, job losses and high unemployment. We must also expect more negative macroeconomic news from the major markets, including the USA where falling house prices and unemployment will continue to represent particular challenges.
The performance of the Norwegian economy in 2009 will again depend on what is happening in the world around us. A major challenge for our economy in Norway is that if oil prices remain below USD 40 this will lead to new projects being postponed and a sizeable fall in oil-related investment. As one would expect, investment spending by oil companies is heavily affected by the level of oil prices, and many companies are reluctant to launch new projects with oil prices at the current level.
As we move into 2009, there is much to suggest that the New Year will be a challenging time for many companies and employees. Fortunately, it does seem that governments the world over are taking the situation extremely seriously, and have fully appreciated that the consequences of economic collapse are so great that the markets cannot be left to deal with the crisis on their own.