Nordic Small Caps: More Attractive Than They’ve Been in a Long Time

• Hans-Marius Lee Ludvigsen
  Portfolio Manager
  DNB Asset Management

While investors have primarily focused on large U.S. technology companies in recent years, a completely different story has been unfolding at the other end of the stock market. Nordic small caps—one of Europe’s highest-yielding segments for decades—have lagged significantly since the end of the pandemic. The underperformance was particularly pronounced in Sweden. It is precisely there that an interesting opportunity could now be emerging.

Since 1999, Nordic small-cap stocks have averaged a return of just under 12% per year in euros, outperforming global small-caps as well as Nordic and global large-caps. Since the pandemic, however, this picture has changed. At the same time, price gains on global stock markets have increasingly been concentrated in large technology and AI stocks. The ten largest holdings in a global stock index now account for around 25 to 26%. Nordic small-cap stocks are almost the exact opposite: smaller companies, more focused on specific niches, and with significantly less analyst coverage. 

Sweden as a Drag

The segment’s weakness can be explained to a significant extent by Sweden. The country accounts for about half of the market capitalization of the Nordic small-cap universe. Norway accounts for about a quarter, Denmark for 15%, Finland for 10%, and Iceland for a small portion. 

Over the past five years, investors have withdrawn approximately €3.3 billion from Swedish small-cap funds. Of that amount, €2.6 billion was withdrawn in the past twelve months alone. In addition to retail investors shifting their portfolios toward global and U.S. funds, a shift in Swedish pension funds also weighed on the market: capital moved from smaller companies to large-cap stocks. Recently, there have been signs that this selling pressure might be easing. In months with lower outflows, smaller Swedish companies performed significantly better; in May, their outperformance relative to large-caps reached nearly 12% at times. 

A look at the various market-cap segments reveals just how pronounced this shift was. While Swedish large-caps gained about 45% over the period under review and mid-caps rose 8%, small-caps lost 25%. For micro-caps, the loss even totaled around 60%. This trend suggests that size and liquidity, in addition to fundamentals, became decisive factors. Added to this is the composition of the Swedish stock market. Sweden has a higher proportion of real estate and growth stocks, as well as many companies that rely more heavily on equity and debt markets for their expansion. The rise in interest rates therefore hit them harder than, for example, Danish healthcare and medtech companies or Norwegian energy and commodity stocks. 

Valuation Discount of More Than 30%

After several weak years, much of this trend has now been priced in. The Nordic small-cap benchmark was most recently trading at 15.5 times expected earnings for the next twelve months. Compared to Nordic large caps, this represents a discount of more than 30%—a valuation gap of this magnitude that has rarely been observed before. 

Yet small-caps tend to post higher growth rates over the long term. Historically, Nordic small-caps have increased their revenue by an average of about 11% and their earnings by about 17% per year. In recent years, however, earnings have been held back by rising interest rates. On an operational basis, many companies performed better, while higher financing costs weighed on net income. Should this headwind subside, the earnings leverage could be correspondingly stronger. 

Another factor is M&A activity. Smaller publicly traded companies, in particular, are classic targets for strategic buyers and private equity firms. The average premium in the universe under review was around 35%; in some cases, premiums of around 100% were even paid over the past two years. 

The limited coverage by analysts also creates significant valuation discrepancies. On average, a Nordic small-cap stock is covered by only about three sell-side analysts. For large-caps, the number is 16 to 17. Mispricings can therefore persist for longer, in either direction. 

Gaming Instead of the Magnificent Seven

Embracer illustrates just how different investment cases can be. Following the sale of various business units, the Swedish gaming group still owns several valuable gaming and media rights. These include the Middle-Earth universe centered on “The Lord of the Rings” and “The Hobbit,” as well as Tomb Raider. Added to this are game franchises such as Kingdom Come and Metro. “Metro Exodus” alone has sold approximately 16 million copies to date. New games, TV productions, and further corporate restructuring are on the horizon in the coming months and years. Based on the underlying analysis, the individual business units are valued at approximately 25 to 30 billion Swedish kronor. This story thus differs significantly from the classic AI bet on semiconductor manufacturers. Yet even in the Nordics, the artificial intelligence boom is now leaving its mark—in some cases, in unexpected places.

One example is Bravida. Among other things, the company installs electrical, heating, and building systems and has traditionally been heavily dependent on new construction and renovations. The weakness of the real estate market weighed on its business. However, data centers are now generating additional demand. A return to normal margins combined with additional data center orders could increase operating profit by 30 to 40%. On this basis, the valuation would drop to about 12 times operating profit. A potential upturn in the traditional residential and renovation business would not yet be factored into this. 

When AI Losers Become Turnaround Candidates

On the other side of the AI trade is Addnode. The Swedish software provider distributes solutions from Autodesk and Dassault Systèmes, among others, and supplements these with its own software and services for construction and industrial companies. In addition, Addnode operates document and process management systems that are widely used in the public sector in Scandinavia. The stock has lost nearly 50% at times this year. It was weighed down by weak sentiment toward the software sector and concerns that AI could put pressure on traditional software and reseller models. As a result, the valuation in parts of the group fell to less than ten times EBIT. For the more stable business with public administrations, the analysis applied a multiple of around 14. Overall, this results in a valuation of about twelve times EBIT—significantly below previous levels. The key question will be whether the operating business can return to organic growth after several quarters. 

Humble Group illustrates even more clearly the risks inherent in smaller companies. The consumer goods group produces, among other things, protein bars and other health and lifestyle products, and also manufactures for private labels. The company is growing organically by about 6 to 7%, but had to scale back its original acquisition strategy following the rise in interest rates. Debt stands at about 2.4 times EBITDA. Following investments in additional capacity, more cash flow is expected to become available in the future. At the same time, the stock has suffered because growth and balance sheet performance have fallen short of earlier expectations. 

It is precisely such cases that demonstrate why low valuations alone are not a buy signal. Small-cap companies often have a high concentration of customers, weaker balance sheets, and lower liquidity than large companies. The same mechanism that opens up disproportionately high upside potential during a recovery amplifies losses during weak periods. 

The headwinds are easing

By 2026, the outlook had brightened. The DNB Fund Nordic Small Cap posted a net return of 16.17% in the six months through the end of May, compared with 8.77% for the VINX Small Cap. According to the documents, since its launch in late 2019, the fund had gained approximately 135% after fees by the time of our subsequent interview, compared with about 70% for the benchmark. The portfolio remained broadly diversified: as of the end of May, it comprised 101 stocks, with the ten largest positions accounting for about 32% of the fund’s assets. 

The key story, however, is unfolding less at the fund level than in the market itself. Years of outflows, rising interest rates, and a flight to large, liquid stocks have weighed heavily on Swedish small-cap stocks in particular. Valuations of around 15.5 times expected earnings now stand in contrast to historic double-digit revenue and earnings growth.

At the same time, new growth drivers are emerging: data centers are fueling installation companies, gaming groups are monetizing valuable brand rights, and some supposed AI underperformers could become turnaround candidates.

Therefore, things don’t suddenly have to go perfectly for Nordic small-caps. Even a normalization of capital flows and financing costs could be enough to at least partially close the valuation gap that has developed over the years.