The insurance company and pension fund selectors our researcher interviewed in late August were unanimously positive on the broad economic picture – a huge improvement in sentiment since last year’s Expert Investor Denmark conference (see chart 1).
Domestic economy
Fund selectors are upbeat on Denmark
Research consultancy Capital Economics noted that Denmark’s 0.7% second quarter expansion came on the back of strong export growth, in part reflecting an economic upturn in Germany – its biggest trading partner.
However, the firm warned that the country’s exports are likely to weaken in the months ahead, and that household deleveraging will weigh heavily. As a result, it predicted that the Danish economy will grow by just 0.5% in 2014 – well below consensus expectations of 1.5%.
Copenhagen-based fund selectors agreed that Denmark lacks economic “dynamism”, but they perceived it as generally robust and stable compared with other countries.
They were also unperturbed by the potential long-term effects on consumer spending of Denmark’s burst housing bubble, which saw property values double between 2001 and 2007 before crashing by 20%.
Western and EM stocks
US equities are the asset class of choice
As a result, Danish fund selectors see the best long-term opportunities in equities – a significant shift in a market which has traditionally focused on fixed income. Interviewees said global investors were approaching a “tipping point”, following the 30-year bull run in bonds.
The US is the equity region of choice, and all the fund selectors we consulted planned to increase their allocations over the following year – an about-turn from last year’s Expert Investor Denmark, when investors expected in aggregate to reduce their weightings (see chart 2).
Appetite for European and emerging market equities was also strong, with more than two-thirds of our interviewees planning to increase their exposure to both regions over the next year (see charts 3 and 4).
Japanese equities
Little demand despite strong performance
Fund selectors were universally ambivalent towards Japan, however – perhaps surprising, given the strong performance of this market in 2013.
All interviewees expected to keep their Japan equity allocations at the same level, marking a fall in appetite for the region since 2012, when a net 5% of Danish investors planned higher weightings.
In contrast, more than half of fund selectors this year said they would increase their Asia ex Japan equity exposure – up strongly from a net 10% last year.
Government and mortgage debt
Realkredit bonds have fallen from favour
Fund selectors displayed a strong aversion to low-yielding Danish sovereign debt last year, despite its previous long-standing status as a core holding for institutional investors.
Little has changed since to alter sentiment on the asset class.
Almost a third of our interviewees said they had no dedicated exposure to developed market government bonds more broadly, and those that did planned in aggregate to reduce such allocations over the next 12 months (see chart 5).
In contrast, attitudes towards Danish mortgage bonds – or realkreditobligationer – have shifted significantly.
Such securities reputedly date back to the 18th century – when they provided funding to rebuild Copenhagen, following a fire which destroyed a quarter of the city’s housing – and Danish fund selectors last year viewed them as an attractive, low-risk alternative to domestic sovereign debt.
In contrast, this year some of our interviewees described mortgage bonds as “dangerous”.
Other fixed income
Only EM credit allocations likely to grow
Western investment grade and high yield debt suffered similar falls from grace over the past year, as Danish appetite for both sectors went into reverse (see charts 6 and 7).
Demand for emerging market fixed income proved resilient, meanwhile, despite heightened volatility in 2013.
EM sovereign debt appetite is likely to remain flat in aggregate over the next 12 months, but demand for corporate bond strategies looks set to grow, with more than two-fifths of interviewees planning to bolster their EM credit weightings (see charts 8 and 9).
Alternatives
Appetite for absolute return is rising
While the main focus for Danish investors is equities, there was also considerable interest in Ucits absolute return vehicles – a sector which accounts for assets under management of more than €100bn, according to recent estimates.
Almost 60% of interviewees said they expected to increase their exposure to such strategies – up from just two-fifths at last year’s Expert Investor Denmark – and none anticipated reducing their allocations.
Patrik Engstrom and Will Jackson, members of EIE’s research team, collected the information in this document through a series of interviews with senior fund selectors and asset allocators, plus publicly sourced data.
For more information, contact Patrik at patrik.engstrom@lastwordmedia.com or on +44 (0)20 7065 7582.
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