Danish investors continue to invest, however, following strong inflows into most asset classes during 2010, they expect 2011 to be more challenging.
Governments on both sides of the Atlantic don’t seem to be able to get the sovereign debt crisis fully under control, casting doubts over bond investments. In addition investors have mentioned paying more attention to currency hedging.
As a consequence, interview partners have indicated they favour assets invested in Danish kroner.
• In an attempt to protect the taxpayer from funding any further fall-out from the financial crisis, Danish lawmakers are considering a new bill making it easier for healthy banks to take over their troubled peers.
• Denmark’s parliamentary elections must be held before November 12, but voters are waiting for PM Lars Løkke Rasmussen to call for them. Recent polls indicated that the opposition Social Democrats are ahead by five points.
• The European Banking Authority has confirmed that all Danish banks that took the 2011 stress test are able to cope with significant losses or an economic downturn.
• The new debt ceiling for the US has relieved many Danish companies relying on affluent capital markets and consumers.
• Denmark’s credit default swaps suggest investors are concerned about the crisis affecting the wider economy. Danish government bonds performed worst of any government in July, up to 88 basis points from 28 bps in June.
What everyone is talking about
• Sovereign debt crisis – the impact on bond holders
• Fixed Income – can HY deliver?
• Emerging Markets – how strong are equity markets?
• Currencies – impacts of a weak US$ and EUR
• Equities – core markets can benefit
For international bonds, shorter durations have become more attractive recently. Of course there is a strong home bias with almost all investors having minimized their exposure to Greece especially, along with the other PIIGS countries: “we want to see a short-term solution for the markets”. The new aid package of €109bn should do just that!
When it comes to bond investments, high yield is clearly preferred, while “the US government must reduce government debt” to continue to attract investors.
Danish investors have become fairly positive on the US equity market following good economic data.
Following on from the Expert Investor Europe’s Danish investor sentiment survey in October 2010, interviewees remain hopeful for European equities – “core markets are able to benefit from the currency weakness and economies are growing”.
This positive attitude doesn’t reflect on the fund flows in 2010, when European equity products saw redemptions of nearly DKK5bn.
The emerging markets story is still continuing, but slowing down. In particular on the bond side investors have been finding fewer opportunities.
The equity markets remain an attractive diversifier, with some using these to access commodities. On a global scale these markets remain important. In particular South America and China generate the most interest.
This hasn’t changed in comparison to the survey data from October 2010, in which nearly 70% of Expert Investor Denmark attendees indicated a positive outlook towards emerging markets, with the rest staying neutral.
The Wild West
In our research, the distinction was made between traditional emerging markets and those falling into frontier markets category. The frontier market economies, while attractive, are not established enough for most institutions. They are limited either by mandate or by their conservative outlook.
Solvency II was frequently mentioned, however, Danish investors generally have great confidence that their insurance and pension business will generally not be affected because Denmark already has some of the strictest rules in the world.
But while capital adequacy and other structural issues are not expected to be affected, there was a concern that Solvency II would force a change in asset allocation strategies.