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After three years of outsized stock market gains, Denmark started 2022 as the world’s worst-performing country benchmark. And its lack of exposure to value sectors that are now in favor sets the scene for a tough year ahead.
The OMX Copenhagen 25 Index is down 14% year-to-date, compared with a 5.5% drop for the Stoxx Europe 600 Index. It’s quite a turnaround after Denmark’s gauge posted an average annual return of 25% in the past three years.
The shift comes amid rate-hike concerns that have put more expensive sectors, such as technology, and indexes like the Nasdaq 100 Index, on the back foot, with investors now favoring cheaper shares. Markets in Nordic neighbors Sweden and Finland — where so-called growth stocks with high valuations are equally abundant — are also among the world’s top 10 worst performers of 2022.
“The Danish equity market will suffer from the fact we don’t have any value stocks or energy stocks, which typically would be the best performers in the environment we are in,” Tine Choi Danielsen, chief strategist and director at PFA Asset Management, said by phone. “It’s definitely going to be a more challenging year.”
Of the 25 members in the Copenhagen benchmark, eight are in the more defensive health-care sector, which has underperformed in the rotation to so-called value stocks. At the same time, issues for Novo Nordisk A/S — the gauge’s biggest stock — around the supply of obesity drug Wegovy have been a drag.
Among other sectors, formerly high-flying renewables stocks Vestas Wind Systems A/S and Orsted AS have also had a bad start to 2022, while Denmark is lacking in banks — an industry group that has been outperforming in an environment of rate hikes. Danske Bank A/S and Jyske Bank A/S are the only lenders in Denmark’s gauge and account for just over 5% of the index.
Declines this year have made Denmark’s market look fairly cheap, at least compared to its history. After peaking in March 2020, the index’s valuation premium to the Stoxx 600 has been totally erased, leaving Danish stocks trading in line with the continental gauge at about 14 times estimated earnings.
But even after this year’s drop, Danish stocks may not be cheap enough to lure nervous investors. There are “alternatives that are better priced elsewhere in the world right now,” Otto Friedrichsen, head of equities at asset manager Formuepleje, said by phone. While Danish equities have been a “fantastic story” for years, stock picking is now a better strategy than buying the index, he said.
And while the overall gauge’s valuation is coming down, high expectations — and corresponding valuations — are still a problem for some of the country’s most well-known companies. Vestas, for example, trades at 65 times estimated earnings, while health-care company Ambu A/S has a ratio of 80 times.
Still, the view for Denmark looks a bit rosier when calculating the aggregated average price targets that sell-side analysts have for companies in the index. That number suggests about 20% upside for the benchmark over the next 12 months.
And some remain positive for a recovery. “A lot of Danish companies are the best-in-class in their industries,” Jacob Pedersen, head of equity research at Sydbank, said by phone. “I think that will enable them to claw back returns in the longer term, even if the short term can be more challenging.”
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