Is This The World's Best Country?

Published in Investing on 3 September 2010

Norway has grown rich on oil and fish.

Norway is a great place to live, if you believe the UN. It rates Norway as the world's best country, due to its healthy life expectancy, literacy rates and thriving economy.

That puts it just ahead of the likes of Australia, Canada, New Zealand, Switzerland and the other Scandinavians, and miles ahead of the UK, which has just slid out of the top 20.

Norway doesn't look so good from the bottom of a beer glass, unless you like paying £7 for a half-litre of indifferent local pilsner, but will investors find it better value?

Oil and fish

I'm mostly based in Norway and whenever I've mentioned that fact, several fellow Fools have recommended the country as an investment safe haven, a cosy port to ride out the global economic storm. They're only slightly wrong.

Norway is an oil giant, the third biggest oil exporter in the world, producing around 3 billion barrels of oil every day. That's a lot of money, when you divide the proceeds by a population of just under 5 million. It also has plenty of gas, most of which it exports, preferring to use hydroelectric power on the home front.

But unlike the UK, Norway hasn't squandered its good energy fortune. Instead, it saves its oil wealth in a giant state pension fund that is now worth $440 billion, the second largest in the world.

It doesn't spend any of that, not even on pensions, which are funded on a pay-as-you-go system. The oil fund is being saved for when the energy dream finally runs dry, to preserve the country's welfare state. Unlike their Icelandic neighbours, Norwegians have learned not to get carried away during the good times.

Norway doesn't just have oil and gas. It also has shipping, power generation, chemicals, forestry and fishing, all of which attract global demand. The Norwegian market is up 16% over the past 12 months, according to MSCI, while Europe has fallen 2%.

The country's demographics are pretty healthy as well, thanks to some of the most generous maternity benefits in the world.

Pining for the fjords

The oil industry is also heavily taxed, and around 70% state owned, which explains why Norway is currently running a 10% budget surplus, when the UK has a deficit of over 13%. Unemployment is just 2.2%, against an EU average of 10%.

The land is a fiscal dream. When China recently launched the Dagong Global Credit Rating Co as a snub to flawed Western credit rating agencies, it rated Norway AAA, while cheerfully downgrading the US to AA with a negative outlook, and marking Britain AA-.

And rightly so. Norway is economically, socially and politically solid, and its people are prosperous. The average full-time salary in Norway is $67,543, compared to just under $40,000 in the US and UK. That partly explains the price of beer -- although tax is the main culprit.

The Norwegians have regularly voted against EU membership, and have kept their own currency, which Europhobes see as an example to the UK. The truth is that the Norwegian petrodemocracy is a special case.

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Heroes of Telemark

Previous Fool posters have been drawn to Norway by its strong currency and stable economy. So should you be investing there? If one of the attractions is the strong krone, that is also one of the drawbacks. The pound doesn't go far in Norway these days (as I know to my cost). Another problem is that as a minor currency, the krone tends to bob up in and down in line with the euro.

In early March, the pound hit a low of just 8.80 NOK and €1.10 but it rallied during the Club Med sovereign debt crisis to hit a peak of 9.75 NOK and €1.22 in August. There were good reasons for the euro to slide against the pound, but no reason why the blameless Norwegian krone should suffer. Yet it did.

I mention this because earlier this year, one Fool posted a message saying he was shifting money into Norwegian banking stocks, to protect against further UK currency weakness. This strategy wasn't quite as clever as he thought (although the pound dropped to 9.45 NOK on Wednesday).

You won't go bust investing in Norway, but you do face a surprise currency risk.

Viking raid

If you're looking for a solid banking stock, you might start with the country's main bank, DnB Nor. The stock is trading on a p/e 10.6 for this year and 9.3 next year, and is on a forecast yield of 4.1% for 2010, and 4.9% for 2011. Its forecast earnings per share (EPS) growth is 9% for 2010 and 14% next year.

Norwegian oil giant Statoil is on a forecast p/e of 8.4 for 2010 and 7.1 per 2011, with forecast yields of 5.3% and 6% respectively. It currently trades at 121 NOK, down from 150 NOK at the start of the year, so maybe this is a good time to buy in. Forecast EPS growth is 150% in 2010, and 18% next year.

You might also be tempted by the country's main telecoms operator Telenor, which is on a forecast p/e of 12.6 for 2010 and 11.6 for 2011, and forecast yields of 3.6% and 4.5%.

Socialism in one country

Norway is as solid as a Western economy gets these days, and far more socialist. Norwegians will be the first to admit that their country is hardly a hotbed of entrepreneurial activity, there is too much state regulation. Investors looking for aggressive growth are likely to find Norway a little too comfortable.

Astonishingly, the Norwegian government successfully introduced a law insisting that 40% of boardroom members are female, backed by threats to shut any company that failed to comply.

The future for Norway looks bright, far brighter than the UK, even after oil reserves start declining in a decade (it still has the gas and hydroelectric), but watch out for that surprise currency risk.

More from Harvey Jones:

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

JeremyBosk 03 Sep 2010 , 2:32pm

How does a UK investor get hold of Norwegian shares?

theRealGrinch 03 Sep 2010 , 2:46pm

It just goes further to show that we were stupid enough to join the common market. Norway, has been shining for some time now. Good article.

philidor 03 Sep 2010 , 5:36pm

I'm really impressed by Harvey's claim that Norway is producing 3 billion barrels of oil a day. Everyone else thinks it's closer to 2 million, and world usage is 80-90 million barrels a day, so this is a very important secret, perhaps.

supasap 03 Sep 2010 , 5:37pm

I went there in 1980 ans stopped with norwegians, but had it not been for generosity of hosts then could not afford a pint or most things, it also seems very regimented but even then it was obviously a rich country and quite beautiful, still think culturally we're miles ahead, we have had Beatles and Smiths and Libertines..... Norway gave us Aha bless them

DexETF 03 Sep 2010 , 7:00pm

No mention of withholding tax on dividends for a UK investor... More info around this area would be useful.

sunnyjoe 04 Sep 2010 , 3:55pm

What is Norwegian food like? My Swedish colleagues are very disparaging of it.

10to20toptax 05 Sep 2010 , 11:56am

I visited Norway for the first time last month, and it was a fascinating experience. The price of everything was, as expected, astronomical. The city we stayed in (Bergen) is apparently the wettest in Europe. The weather was mentioned during a brief conversation with a Norwegian banker and his wife: this elicited a smile and the response that every time it rains it fills the hydroelectric dams nicely!

Norwegian homes use electric heating. Meanwhile, our government continues to encourage homeowners to replace their gas boilers with more efficient versions that burn - Norwegian/Russian gas because we haven wasted our own.

By the way the food was delicious and Bergen was beautiful.

Fool245852358 05 Sep 2010 , 1:22pm

Jeremy

You can buy all 3 mentioned companies thro' Xetra, Telenor [OG8C]and Statoil [OM2Z] also on the LSE International but only DnB and Statoil are available thro' Selftrade.

DonaldTramp 05 Sep 2010 , 11:11pm

I go to Norway regularly and have spent a great deal of time there. The ONLY reason for the countries wealth is Oil. Without their luck in Geological terms this tiny country would still have packing fish as it's main industry.
As for all the comments about Britain "wasting" it's oil and gas....I agree to an extent, it could have been used far more wisely. Too late, it's running out.
We have a population of around 60 million compared with Norway's 5 million. Our Oil has had to go a long way.

Norway can only afford it's socialist wonderland because of oil.

Most of their industry is "state sponsored". And guess what pays for it....you've got it, Oil. Hardly dynamic.

As for the author's comments about "when Oil starts declining", It already has (nearly 10 years ago!).
Norway's Oil production peaked in 2001 and is steadily declining (UK production started it's decline in 1999). For further info see here...
http://www.tsl.uu.se/uhdsg/publications/DeclineRateStudyNorway.pdf
They'll still be exporting for a long time though.


What's going to support the socialist dream long term?

It is a beautiful country and I have many Norwegian friends but I'm sorry, the food is absolutely dreadful!

Jonesey12 06 Sep 2010 , 10:14am

Harvey Jones here.

Norwegian food isn't dreadful, the bread is great (much better than Swedish bread), the general quality is good, but the diet can be a bit repetitive (no more open sandwiches, please!). Norwegian pilsner is poison, to the tastebuds as well as the wallet, although their Christmas beers are pretty good. They also eat a lot of frozen pizza.

And yes, it's expensive. The locals nip across the border to Sweden, of all places, to buy cheap food.

Sorry about the mistranscribed three billion barrels, the report I was quoting put it as three million, but others say 2.54m.

Oil is the main driver of the Norwegian economy, but they have still handled their windfall superbly.

Thanks for your comments.

Jonesey12 06 Sep 2010 , 10:25am

Hi supasap

Do you really rate the Libertines up there with the Beatles and the Smiths?

Harvey

coocoo88 06 Sep 2010 , 2:14pm

Why isnt the world beating a path to prosperous Norway instead of coming to bankrupt UK ?

JeremyBosk 06 Sep 2010 , 3:29pm

Thanks, Peerless.

supasap 06 Sep 2010 , 4:23pm

hi Harvey, ha, I thought I may get a response to that statement..... I was trying to think of bands throughout the generations of pop that were great and so British ie could not have come out of America (and there are many great acts to come out of there) the Kinks fit the bill perfectly but were of the 60's and 70's..... to me the libertines were the modern Kinks, they only did 2 albums but the songs were strong and radical and above all the creative force (Docherty and Barat)was genuine and lovable...... like the Beatles and Smiths they for sure could not have come out of Norway (no disrespect to Hans and Oula who put me up) - guess that is the price we pay, Norway is fantastic country in terms of the indices and yes used its oil sensibly wheras we squandered it "what a waste, what an effin waste" as the libertines put it, good article Harvey we could do with more comparisons

Jonesey12 07 Sep 2010 , 11:41am

Hi supasap. I quite liked Up the Bracket but the Libertines' second album was a bit too ragged for me, and I hated the NME hype.
But I'' always forgive them for the line:
"There is no sadder sight than that of an Englishman in a baseball cap..."

Poor old rich little Norway. At least they have Alexander Rybak (of Eurovision fame).

Harvey

supasap 08 Sep 2010 , 4:12pm

yes harvey and for that line alone I think they are in the category of British and great

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