As many seemingly impregnable developed market economies wobble under the weight of debt and sluggish growth, countries in the Scandinavian region are gaining fans.

At Rothschild Wealth Management, its head of fixed income and currencies, Rob Stewart, giving his views in a note, sang the praises of investments in this region, pointing to their virtues at a time when investment “safe havens” have become “much scarcer”.

“Since late 2010, we have included an allocation to Norwegian and Swedish bonds, alongside those from Switzerland, Canada and Australia, as an explicit part of the cyclical asset allocation that forms the framework for our portfolios,” he said.

“In our view, Scandinavian bonds and currencies can play an important role in preserving capital within portfolios and bring valuable diversification. In particular, these currencies offer an important alternative store of value which, during a deep crisis in the eurozone, may translate into currency gains for investors,” Stewart said.

Learning to love the Scandinavians

Stewart’s comments are part of a trend. To illustrate, foreign investors increased their holdings in Danish government debt from a total share of 27 per cent to 35 per cent in the first 11 months of 2011, according to the country’s central bank. To take another case: in July last year, Collins Stewart explained that Norway, having never defaulted on sovereign debt and with strong finances, was a secure investment haven.

Rothschild’s Stewart is certainly keen to focus on such attributes.

"Although current bond yields are low, we like these securities as their credit standing is supported by the sovereign issuers’ relatively strong economic fundamentals. We see them first and foremost as currency instruments and a compelling alternative to government bonds issued by the US, UK, Germany and Switzerland,” he said.

Stewart continued: “For diversified currency exposure, we suggest continuing to hold the Norwegian krone and the Swedish krona. For euro-based investors, we see the Danish krone as a substitute for the single currency, one that should perform relatively well if the euro collapses or in conditions where the currency peg is abandoned.”

“In fixed income, we suggest holding exposure to all three Scandinavian bond markets through short-dated government bonds and short-dated supra-national and agency-issued paper. Investment grade corporate bonds denominated in the Norwegian krone and the Swedish krona can also be attractive,” he said.

However, the main concern in making such investments is the limited liquidity in the Scandinavian investment markets. “The Scandinavian foreign exchange markets are small, and the same is true for their bond markets, with Sweden and Denmark each around one-tenth the size of Germany. That, combined with the high level of foreign involvement and ownership, raises concerns that this is becoming a ‘crowded trade’ and that positions might become hard to sell during a crisis,” he added.