Denmark’s Danica Pension upbeat on Asian equities

The Danish pension fund sees both absolute and relative gains for its Asia stocks strategy, its head of equity tells AsianInvestor.
Denmark’s Danica Pension upbeat on Asian equities

Asia's battered equity markets may still be finding their feet following Covid and a year dominated by historic inflation and central bank money tightening, but Danish pension fund Danica is seeing plenty of upside over the long-term in the region.

Danica Pension's head of equities Esben Larsen said told AsianInvestor that Asian equity markets are set to increase their presence in the fund's asset allocation strategy.

The Danish pension subsidiary of the Danske Bank group had assets under management worth DKK415 billion ($60.7 billion) as of June 30 2022, of which about DKK120 billion were invested in equities.

“Asia has been the growth engine in the recent 20 years compared to Europe and US, especially with interesting opportunities in the growth spurt of China," Larsen says. "Asian markets are also different in terms of economic cycles, so it works to our advantage that they are slightly out of sync with Western markets.” 

It is especially those emerging markets within the Asia region that Danica finds attractive.

Larsen highlighted India as a market that the pension fund is strategically focusing on through an active equity mandate.

“Like India, we are looking at Indonesia and other Southeast Asian countries and their growth trajectories and potential. That means businesses keep developing and earning, which provides opportunities for investors like us,” Larsen said. “They look for overseas investment and we are looking for good investment cases so that is a good match, quite simply.”


Larsen said Asia’s emerging markets take up the lion’s share within Danica’s emerging markets pool, adding that the fund also invests in two other pools - domestic market and global stocks within developed countries.

These include Japan and Singapore among Asian markets. Other than this, Asia dominates Danica’s emerging markets exposure with around 85%, Larsen explained.

Market turmoil in 2022, he said,m meant that its active equity strategy looked favourably at Latin America emerging markets stocks, since they did well due to strong commodity prices. But the value of the Asia strategy also proved its worth during the Covid-19 pandemic.

“The Covid-19 pandemic has shown the value of being diversified in Asia’s different market cycles. Asia’s markets reacted relatively quickly to the pandemic and dropped due to uncertainty but were back up rapidly due to a distinctive Covid strategy. While US and Europe then took a dive, we could increase our allocation into Asian equities because they took the hit early on,” Larsen said.

Asia is the pension fund’s primary focus for emerging market equities, as opposed to fixed income. And after following a Greater China-focused strategy the last few decades, the focus is now a broader one.

“More recently, we see that Chinese Purchasing Managers' Indices (PMIs) have probably bottomed out and are heading outwards, while we expect a slowdown in US and Europe. In that way it is great to have investments that are not directly correlated and have variances within overall macroeconomic trends. That facilitates better risk-adjusted returns by diversifying our equity exposure to Western markets,” Larsen said.


With a tumultuous 2022 still at the back of its mind, the big factor for Danica’s overall 2023 investment strategy is increasing interest rates. Weighing in inflation concerns, bonds are now a realistic alternative compared with the previous years, he said.

Larsen jokingly dubbed the previous year’s investment approach as the year of Tina: short for "there is no alternative". During that time, Danica, to some extent, had to focus on buying equities and products with similar risk levels, such as alternatives.

With the pension fund able to get what Larsen termed a “decent, foreseeable yield” from investments such as Danish government bonds or a US treasury bond, Danica sees good reason in weighting towards fixed income right now and is looking at other tactical and strategic allocations despite the dangers posed to yield from rising inflation.

Whether the trend is sticky or transitory remains to be seen, he said. 

“However, despite the returning attractiveness of fixed income, and the 2022 challenges in emerging markets, and emerging Asia in particular, we might see a valuation where we historically should close our eyes and buy emerging Asia equities,” Larsen said.

“Expectations built on historical data say that the probability of positive returns over a 12-month period are above 90%, so with that as a guide, we see opportunities.”

As a general strategy to mitigate risk and prepare for various scenarios, Danica makes annual allocation plans, which include one- and five-year models, and sets targets accordingly. Extensive data research is used to shape these plans, and different scenarios are built into them.

“For instance, the factor of whether inflation will stay high or ease during 2023 - and how it will likely influence interest rates and equity markets - is built into our current allocation plans.

"Worst case is a stagflation scenario where nothing works; interest rates remain high while equity markets drop, and we all get relatively poorer. We also look at more positive outlooks where we believe equity markets will prosper,” Larsen said.


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