100 years ago on the 6th December 1917 Finland declared independence from Russia. Throughout this year they have been celebrating this heritage and their culture: which includes everything from summer-houses to baby-boxes, from some of the most stable politics in the world to the best education system in Europe. Finland is Aa1/AA+ rated according to Moody’s and Standard and Poor’s. It is rated 4 Star according to our Net Foreign Asset Model, meaning that it has accumulated neither significant Net Foreign Assets nor Liabilities. But from an investor’s view the country offers little value to celebrate over: with a negative sovereign yield curve up to 7 years and with yields less than 1.2% in the 30 year space. This works out at a spread of just 11 basis points to Bunds which seems very expensive; considering that bonds like Abu Dhabi Government 30-year bonds trade at a spread of 140 bps (vs US Treasuries), whilst being rated only one notch lower at Aa2/AA.
And not all in Finland is a bed of lilies. BMI famously called Finland the “sick man” of Europe - “set for years of economic stagnation, and will be one of the worst performing eurozone economies in growth terms". GDP growth looks set to fall from 1.9% to 1.3% by 2019 and its demographics is aging as fast as the country itself. Now ten years since Nokia lost its crown (when it contributed a quarter of the country’s GDP) there is little of significant interest for markets in the region; and then there’s the 830 mile border with its somewhat intimidating bigger brother Russia.
Although the scenario of Finland is much different to the Baltics one must remember some of the history of the region’s ties to Russia and why Finland is stalwart on being seen as neutral, not joining NATO and maintaining pragmatic relations with Russia. (The 200 years of Soviet rule since the Great Northern War, the momentum of the 1905 Russian Revolution bearing fruit in the aftermath of the First World War with Finland then Ukraine, Lithuania, Estonia and Latvia declaring independence.) And although Finland didn’t suffer the Baltics’ Soviet re-occupation in the 1940s, ‘liberation’ by Nazi Germany and re-re-occupation by the Red Army (The Baltics only being recognised as independent in 1991) Finland has endured a civil war and warring with Russia between 1939 and 1944 and will always remain cautious of its voracious neighbour. We think just because it’s 100 years old doesn’t mean Finland should be given favourable rates; a largely negative curve and just 11 bps of spread at the long-end is far too expensive and not enough compensation for the given risks.