Investing in the future

The riches of the sea have long shaped Norway as a nation of traders. Centuries before Norway’s first stock exchange, the ‘Christiania Exchange’, opened an office at Madam Jørgen Pløens Gaard in April 1819, Norwegians were plying Europe’s markets with dried cod produced by the millions from the Lofoten Islands – and making a profit. Today’s wealth comes from the sea in a slightly different form – as oil and gas – but the message is the same: Norwegians have a long history of successfully trading in international markets.

Fishing and aquaculture remain an important component in Norwegian trade, but Norway has evolved to become a modern day international market place, where the country’s financiers and business people deal in an impressive range of products and services offering attractive investment potential for overseas investors. Some, like oil, energy, seafood and shipping, have their roots in Norway’s natural resources and long history as a maritime nation. Others, such as real estate development and investment opportunities in developing countries in Africa and Asia, are based on Norwegian expertise and ingenuity in finding fertile prospects and making the most of them.

 
At the hub of all this is the Oslo Børs, Norway’s only exchange for equities, bonds and derivatives. It’s a market place that has grown and expanded to meet the demands of today’s complex global markets, says Bente A. Landsnes, President and CEO of Oslo Børs.
 
 “Our objective is to make the Oslo market so attractive that an ever-increasing number of Norwegian and foreign investors continue to invest increasing amounts of capital in Norwegian business and industry through the Oslo Børs market place,” Landsnes says. Foreign investors familiar with the European Union market place also need not worry about the complexities of market regulation in Norway, she adds. While Norway itself is not a member of the European Union, it is a part of the European Economic Area (EEA), and thus complies with applicable EU legislation.
 
Trading at the Oslo Børs
© Pål Bugge/Innovation Norway
A Market in Growth
When the Oslo Børs first opened its doors in 1819, its primary purpose was to allow for currency exchange and commodities. By the early 1900s, the market place listed prices for goods including sugar, flour, potato flour, butter, fruit, cooking oil, various foods, green soap, herring oil, herring meal and fish. Trade in equities began in 1881, with prices listed once a month.
 
Things are a little different now: In 2006, the Oslo Børs average daily turnover reached NOK 10.3 billion, or USD 1.66 billion, a 72 percent increase over 2005 and a 187 percent increase over 2004. The total number of daily average transactions has more than doubled, from 13,500 in 2004 to 35,200 in 2006. The market itself has also blossomed, with 22, 46 and 32 new listings in 2004, 2005 and 2006 respectively. In Europe, only the London exchange had more initial public offerings in real numbers in 2005. Trading has continued to be strong in 2007.
 
With Norway as one of the world’s largest petroleum exporters, it should come as no surprise that fully 12 of the 32 new listings on the Oslo Børs in 2006 were energy companies. The energy sector now accounts for 50 percent of the exchange’s listed market cap. New and developing technologies in solar, wind and other alternative energy sources are another source of economic growth, with one of the global leaders in solar energy, the Norwegian company Renewable Energy Corporation (REC), listed on Oslo Børs.
 
The Norwegian Government has also put great weight on expanding the country’s already strong maritime cluster. The maritime industry employs roughly 90,000 Norwegians, and is characterized by breadth and experience, from the shipping classification and risk assessment giant Det Norske Veritas, to shipbuilders such as Aker Yards. Oslo Børs also offers investment opportunities in 22 shipping companies ranging from cruise ships to gas transportation.
 
An International Market Place, Easier Listings
Oslo Børs is a truly international market place: of the 59 investment banks and brokerage houses trading on the exchange, fully 35 are based outside of Norway, with 45 percent of all trading conducted through international investment banks and brokerages.
“That means foreign investors are able to trade in the Norwegian market through their usual brokers”, says Lisbeth Lindberg, Sales and Marketing Director for Oslo Børs.
 
Oil from the North Sea makes an important, but not exclusive, contribution to the Norwegian economy.© Øyvind Hagen, Statoil
In fact, 40 percent of the total listed market cap is actually owned by international investors; UK and US investors account for around 25 percent. “The large Norwegian companies have a long standing history of addressing and communicating with international investors – many have been doing investor relations in the London market since the 1980s, and a number started to work actively with the US market beginning in the 1990s,” Lindberg adds. “There is a very strong foothold for making investments in Norway listed companies in the US and UK markets.” In fact, she adds, in 2007, the British company London Mining preferentially chose to be listed on the Oslo Børs rather than the London stock exchange.
 
It’s easy for international investors and brokerage firms to trade on the Oslo Børs because of standardized regulation, which is compatible with international regulations, particularly those from the European Union. Companies listed on the Oslo Børs have to report according to the IFRS (International Financial Reporting Standards). Currently, the exchange is in the process of implementing two important EU directives, the MiFID and the Transparency Directive. Norway has also implemented corporate governance standards that are in line with international regulations.
 
But what makes the exchange wholly unique is its expertise clusters in energy, shipping and seafood. “These are based on Norway’s natural resources – our natural benefits – where we have been able to develop a large number of interesting companies over time,” Lindberg says. “We also see that foreign companies operating in these sectors find it attractive to list on our market places, whether Oslo Børs or the new authorized market place, Oslo Axess, because there is a cluster of investment banks, lawyers, the investor community, all of whom understand these businesses well and know how to evaluate them in order to get the right pricing.”
 
In May 2007, Oslo Børs introduced Oslo Axess. Companies on Oslo Axess differ from those on the main exchange mainly in the length of the company’s history and its operations, its market capitalization and number of shareholders. Oslo Axess will also be open to pre-commercial companies for listing. In order to protect investors Oslo Axess is subject to the same control mechanisms and surveillance efforts as in the exchange market.  
 
Electrifying Success
Sometimes being first translates into being the best. That’s certainly been true for Nord Pool, the Nordic power exchange, which was established in 1993 as Europe’s first power exchange. These days, Nord Pool has the honour of being the world’s first international commodity exchange for power, green certificates and carbon emissions trading. In 2006, Nord Pool’s total volume in the financial power market (traded and cleared) amounted to 20 Twh, worth EUR 79.1 billion, contracts in the physical power market alone totalled 251 Twh, worth EUR 12.2 billion. That makes Nord Pool Europe’s largest power exchange.
 
Torger Lien, CEO Nord Pool ASA © Anders Nielsen/Innovation Norway
The Nord Pool Group is divided into Nord Pool Spot, a physical market place where electricity contracts are traded, Nord Pool Financial Markets, a regulated financial market place for trading in standardized derivatives, and Nord Pool Clearing, a licensed and regulated clearing house. The exchange itself features more than 420 members in the physical and financial markets, with over 100 active participants trading daily in power derivatives and emission related contracts and quotas. Trade in the financial markets was roughly seven times the physical electricity consumption in the Nordic region, strong evidence of the attractiveness of the Nord Pool financial market, says Torger Lien, CEO of Nord Pool ASA. “We have companies from Scandinavia, the UK and Europe – even the USA,” Lien says. “And we have the top international financial firms – Citigroup, UBS, Merrill Lynch, Morgan Stanley – investing in power derivatives in the Nordic sector.”
 

Lien says Nord Pool should be particularly attractive to energy funds, diversified funds, brokerage houses and investment firms. “If a company is looking for liquidity and solidity, and a well-functioning market place for power market derivatives, there is no other market in the world that has the same opportunities as Nord Pool,” he adds. Traders also benefit from Nord Pool’s transparency: all available information about trading offers and bids, and volumes and prices is openly published, although the identity of those making offers or bids is confidential. At the same time, the EU has recognized Nord Pool’s information regime as the best of all European power markets.
 
Nord Pool’s trading also extends to dealing in carbon emissions, whether it’s the EUA system governed by the European Union, or the UN-based Carbon Emissions Reduction credits, or CER. Today the exchange remains the only one in Europe offering both types of carbon-related commodities for trade. Deadlines imposed by the international climate change agreement known as the Kyoto Protocol have made the EUA and the CER an important offering for Nord Pool. “There is huge interest and a growing demand for these,” Lien says.
 
Transparent Trading, Clear Regulation
From banks to pension funds to the Oslo Børs and Nord Pool and external accountants and auditors – virtually all aspects of banking and trading are overseen by the Financial Supervisory Authority of Norway, Kredittilsynet. Kredittilsynet serves as part watchdog and part mother hen in its role as an independent government agency that acts on laws and decisions from the Norwegian Parliament and the Ministry of Finance, and on international standards for financial supervision and regulation.
 
While the agency’s job is complex, its goal is to create a secure, transparent market place that protects investors and offers a competitive environment.
 “Effective competition between actors in the financial and securities markets and good rules of conduct are important to promote well-functioning markets,” says Bjørn Skogstad Aamo, Kredittilsynet’s Director General. “Kredittilsynet focuses primarily on developing a sound body of rules and proactive enforcement of these rules. We therefore seek to promote compliance with the rules of conduct, and to prevent conduct that may undermine confidence in the financial market.”
 
Aamo says that investors and consumers should be able to accumulate financial savings safely and securely. “We must therefore ensure that product information is adequate and understandable. As more and more people save in financial instruments, there will be a growing need for correct and understandable information,” he says. “Good information is essential for genuine competition in the market.”
 
Norwegian shipping is a vital part of the country’s economy. © Anders Nielsen/Innovation Norway
Investors and regulators work hard to make Norwegian markets accessible and understandable for all traders. The Norwegian Financial Services Association is a membership-based group that works in this capacity, offering an invaluable resource for foreign investors. Members, which are banks, insurance companies and other financial institutions, receive up-to-date facts on all aspects of the Norwegian financial markets, says Alf A. Hageler, Director. “Our role is, among other things, in understanding the market and providing information about the regulatory aspects of the market on a regular basis to our members,” he says.

And when the Norwegian Government is evaluating new regulations or trying to figure out how a law will affect financial markets, the Norwegian Financial Services Association provides an important source of feedback. “We have a large number of committees and working groups who work together on all sorts of questions that concern the regulatory environment and relations between institutions working in the market,” Hageler says. “And the regulatory environment that we are working in is very much a result of this work.”
 
The association also works with authorities to achieve a level playing field for all companies that operate in Norway, regardless of ownership. At the same time, the Norwegian financial market is subject to the same rules and regulations that govern the European financial market, Hageler adds. Through the EEA Agreement, any changes in EU legislation have exactly the same consequences for Norwegian financial institutions as for institutions located within the EU. “We adhere to all the directives and legislation coming out of Brussels concerning the financial markets,” Hageler says.
 
Rebuilding Eastern Europe
It’s no secret that the Internet has transformed society, shrunk distances and eliminated the need for individuals to be physically present in a place to do business there. But sometimes actually being there helps, as the real estate investment group Verdispar has shown with its investments in Norway’s Baltic neighbours. The company has offices in Zagreb, Croatia and Vilnius, Lithuania, and has invested more than NOK 1.5 billion in Baltic real estate. “This is what makes Verdispar different – we have our own organization in place in these countries,” says Halvor Z. Olsen, Verdispar Group Executive Officer. “Our local people have a great deal of experience in real estate, banking, government and consultancies.”
 
The company sees Romania, Bulgaria, Slovenia, Russia and the Ukraine as future investment possibilities. As these economies develop, the real estate market typically grows, but local investors often don’t have the capital to build on the scale needed, Olsen notes. The investment group has roughly 2,000 clients who have invested NOK 1.1 million on average.
 
Verdispar develops projects based on a local presence in each market, with a focus on commercial properties and residential projects. The advantage of this approach is that the projects offer future potential as the value of developed properties increases, along with regular rental income.
 
One of the company’s many real estate development projects is Lithuania’s first office park, comprised of five, seven-storey Scandinavian style buildings, each containing 7 to 8,000 m2. Construction of the first phase will start late in 2007 and finish by the end of 2008. At the same time, Verdispar is undertaking a new endeavour for investment funds interested in getting involved in the Baltic and SE Europe real estate markets. “For investment funds that want to get into those markets, we are currently developing services so that we find development projects for them and manage them,” Olsen says.
 
A Diverse Market Place
Norway’s diverse market place also offers foreign investors the ability to trade on a wide variety of Norwegian-based bonds and derivatives. Norwegian government bonds are traded at the Oslo Børs, along with private and financial sector bonds. The exchange also offers the Alternative Bond Market (ABM), established in June, 2005, as a separate market place with a simplified listing process. Issuers on the ABM are not required to prepare consolidated accounts in accordance with the International Financial Reporting Standards (IFRS), but the ABM’s continuing obligations and trading rules are the same as in the exchange market.
 
The exchange has just begun to offer trading in covered bonds issued by mortgage institutions, as a source of low-cost funding of mortgages to homeowners, all backed by real estate as collateral. These mortgage institutions are normally owned by banks, which are also the distribution channel for homeowner loans. “The security of these bonds is high, and the risk is low, so they offer favourable financing for the banking sector,” the Oslo Børs’ Lisbeth Lindberg says. At the close of 2006, nearly 1,000 loans were listed on the Oslo Børs and the ABM, representing an outstanding volume of NOK 587 billion.
 
Another attractive trading option is a derivative based one on the OBX Index, which covers the 25 most traded companies on the Oslo Børs. In addition to the tradable Index, Oslo Børs also offers derivatives on 17 underlying stocks. The latter are among the most liquid stocks at the exchange. The composition of the OBX Index is reviewed twice a year. “In order to safeguard liquidity, all products have at least one market maker,” Lindberg says.
 
Nordea is Norway’s leading domestic bond house. © Nordea
Oil, Shipping, Seafood
Nordea Bank is Norway’s leading bond house, offering international investors and issuers access to domestic markets. “Norway’s domestic bond market can offer bonds across the entire credit spectrum, from unrated high-yield bonds to bonds with official AAA ratings. And the bond market offers bonds denominated in both kroner and dollars,” says Preben Stray, Chief Originations Manger for Nordea Markets. By virtue of its size, Nordea also has special insight into the offshore, oil and shipping sectors. “Our status as the largest offshore, oil and shipping bank in the world puts us in a fairly unique position in this high-yield sector,” Stray says.
 
Nordea’s Norwegian equity research product focuses on the bank’s areas of global leadership – shipping, offshore, oil and fish farming. The bank also has an institutional and private individual equity sales desk, guaranteeing extensive coverage for the investor market.
 
Nordea also offers a select range of bond funds, many of which focus on the unique strengths of the Nordic currencies and national bond markets. For example, the Danish and Norwegian bond markets have consistently outperformed their equivalents in the countries covered by the European Monetary Union. Nordea’s offerings are complemented by Nordea Investment Management’s broad product range, including Nordic and International Funds and private equity fund of funds. The company currently manages approximately EUR 110 billion, of which EUR 380 million is in fund of funds and tailor made mandates, which offer institutional and corporate investors access to the world’s leading private equity partnerships globally.
 
The Oslo Børs and the Norwegian Central Securities Depository (VPS) offer secure electronic trading that conforms to the highest international standards. © Anders Nielsen/Innovation Norway
Safe, Predicable Transactions
The Norwegian Central Securities Depository, or VPS, offers a broad range of services that enable companies to trade in confidence. The VPS Group is comprised of VPS Holding ASA, VPS ASA, VPS Clearing ASA and Manamind AS, which combined provide banks, brokers and mutual fund managers effective and secure routines for account keeping, clearing and settlement. The company currently serves 225 banks, brokerage houses and mutual fund management companies that supply account, settlement and related services to more than 800,000 securities holders.
One of the most visible aspects of VPS is VPS Clearing and Settlement, a full service clearing house. Investments in VPS-registered securities give investors access to safe, predictable transactions without hidden costs. Anne Ekeren Bjone, Executive Vice President and Head of VPS Clearing and Settlement, says the benefits offered by her organization for the foreign investor are clear. “It’s easy to communicate with us, and everything is completely automatic,” she says. “We operate to international standards that are easy to understand.”
 
VPS as a whole has two target groups – investors and issuers. The organization sees as its primary task to make it easy and safe for investors to purchase, hold and sell securities while providing services that make it simpler for companies to obtain capital and keep track of their shareholders.
 
“VPS is one of the most standardized of central securities depositories,” says Sveinung Dyrdal, Executive Vice President and Head of VPS Securities Services. “It is quite easy to hook up to our services. And we are very safe and predictable.” With the value of the Norwegian securities market approximately NOK 3600 billion, the importance of strong securities and backup measures in accordance with the highest international standards cannot be overrated. VPS is also a neutral service provider. “VPS is one of the pillars in the Norwegian financial community,” Dyrdal says. “We are not a commercial player per se. We are a part of the infrastructure.”
 
In addition to its clearing and settlement services, the group offers Account Services, which allows investors to track all types of VPS-registered securities, as well as tax assistance. Companies looking to improve their shareholder relations can take advantage of VPS Corporate Services, which provides services to simplify a range of corporate activities, from dividend payments to reverse splits. Mutual fund distributors can take advantage of a similar offering through VPS Mutual Fund Services and its VPS account system.
 
As the Norwegian Central Securities Depository, VPS has many functions that are complementary to those offered by the Oslo Børs, which has led the two organizations to approve a merger, now being evaluated by Norwegian authorities.
 
From Singapore to Stamford, Connecticut
Norwegian markets offer savvy traders an impressive variety of investing choices, whether hedge funds or freight derivatives. One of the world’s most unique markets can be found at IMAREX – the International Maritime Exchange – the world’s only regulated market place for trading freight derivatives. IMAREX is coupled with the Norwegian Futures and Options Clearinghouse (NOS Clearing) a leader in clearing for the international commodities markets.
 
“We are the only exchange that has ocean going freight as our specialty - and freight futures and options are the missing links in global commodity markets,” says Mikal Bøe, Managing Director of IMAREX Asia. With offices in Singapore, Houston, London and Oslo, the group is able to access the fast growing emerging markets in every corner of the world.
 
Participants typically come from shipping companies, oil refiners, trading houses and financial players who trade financial freight contracts at IMAREX. Contracts are financially settled against the spot indices of Baltic Exchange and Platt’s. There is no physical delivery of any contract.
 
Electronic trading, with the ability to execute orders, calculate margins, settlements and collateral requirements to provide instant straight-through clearing, is one of the keys to IMAREX’s success. This ensures that all market participants can execute trades anonymously and efficiently in a transparent market.
 
The strength of the IMAREX NOS approach means that “ship owners from Greece can trade with financial institutions in Korea, Wall Street banks can trade with smaller freight players in Singapore, and the playing field is completely level - no one of our 200 plus members has to worry about credit risk because no one needs to be concerned with who the other market participants are. That’s the beauty of IMAREX,” says Bøe.
 
Maritime isn’t the only place to find intriguing investment possibilities: The Fund Management Group (FMG) offers hedge products that have both a local and global component, says Gunnar Detlie, one of the company’s five analysts. The company has about 10,000 clients, with a minimum investment level of USD 10,000. FMG maintains a range of offices around the globe, from Oslo to Stamford, Connecticut, deep in the heart of the hedge fund industry. Locating in strategic areas enables investors to become intimately familiar with local markets. In Norway, for example, that means a deep understanding of the oil and offshore sectors. “That is the bread and butter of the Norwegian economy, and we know all the advantages and risks,” Detlie says.
 
FMG is also an early investor in new markets in Russia, China, the Middle East and Africa, with FMG investing in Russia as early as 1995, as one example. “We’re really ahead of the curve in finding new markets that haven’t been found by big western financial institutions,” Detlie says. “We like to be the early investors who come in when market legislation opens a country up.” The success of FMG’s approach is evidenced by its outcomes: In 2006, three of the company’s funds were listed on the Barclay International Group’s top 10 list.
 
Saving Oil Wealth for the Future
No look at Norway’s financial markets is complete without a glimpse at the country’s giant Government Pension Fund – Global, which since 1996 has been fuelled by the country’s oil revenues. As the world’s third largest oil exporter, Norway has won considerable wealth from the North Sea, but Norwegians have recognized their obligation to share that wealth with future generations by way of the fund.
 
The opening of the enormous Snøhvit gas field in the Barents Sea has expanded Norwegian shipping of LNG. © Statoil
The fund’s market value in mid-2007 was NOK 1939 billion (EUR 243 billion). Transfers amounting to NOK 68 billion were made by the Ministry of Finance during the second quarter of 2007 alone. Not surprisingly, the fund is managed very conservatively by a combination of Norwegian and foreign portfolio managers. All of the Global funds are invested outside of Norway, which offers an important counterbalance to the natural volatility of the oil market, says Martin Skancke, Director General of the Norwegian Ministry of Finance. Without a mechanism for decoupling oil revenues and the economy, volatility in oil revenues translates into volatility in the economy. “By investing the fund outside of Norway, it insulates the economy from the effects of changing oil prices,” Skancke says.
 
Since the first deposits were made in 1996, the fund has been invested in a 60/40 split between fixed-income bonds and higher yielding stocks; in 2007, that allocation was reversed, with higher yielding stocks now commanding 60 percent of all investments. Fund administrators have also recommended allowing real estate investments, a proposal that is currently under consideration.
 
The importance of the fund for investors is that it represents sound macroeconomic policy in practice. “I think on the whole that people would say that Norwegian macroeconomic policy implementation has been fairly successful,” Skancke says.

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