The iShares MSCI Denmark Capped ETF (EDEN) offers targeted exposure to the country’s equity market, allowing investors to capture macro trends and themes driving the Danish economy. Amid a historic year in financial markets which has seen extreme levels of volatility given the COVID-19 pandemic, the Denmark ETF has curiously been one of the best-performing country-specific funds, up 31% year to date. While the economy has been impacted much like every other part of the world with a technical recession, the fund’s unique portfolio concentrated among some key high-growth stocks has driven the overall strong returns. Overall, EDEN is a high-quality fund well-positioned to benefit from an improving macro outlook that can support continued upside through 2021.

(Source: Seeking Alpha)

EDEN Background

EDEN, with $139 million in net assets, features an expense ratio of 0.53%. The fund tracks the MSCI Denmark IMI 25/50 Index, which is a market capitalization weighting methodology that limits the weight of any single issuer to a maximum of 25%, thus the term “capped” in the official fund name. Notably, the fund yields 0.52% through a variable semi-annual dividend.

(Source: iShares)

The portfolio currently includes 46 equity holdings across several sectors, although the composition is relatively concentrated. The fund’s largest position is in Novo Nordisk A/S (NVO), with a 21.8% weighting which is based on the company’s market capitalization of $153 million, significantly larger than all other publicly traded Danish companies. NVO is a global biotechnology firm that controls nearly 50% of the world’s global insulin market as a leading provider of diabetes care products. Other health care sector stocks include Coloplast A/S (OTCPK:CLPBY) and Genmab A/S (GMAB), each with a 4% weighting. The biotech industry is important in the country, and the health care sector represents 38% of the fund’s weighting.

(Source: Seeking Alpha)

Logistics within the industrial sector is also important in the Danish economy. DSV Panalpina A/S (OTCPK:DSDVY), offering worldwide transport services by road, air, sea, and train, is the second-largest holding in the fund with a 9% weighting. There is shipping giant A.P. Moller Maersk A/S (OTCPK:AMKBY) with a 3% weighting in the fund.

Two stocks that we think are particularly interesting are Vestas Wind Systems A/S (OTCPK:VWDRY) and Orsted A/S (OTCPK:DNNGY), which offer exposure to themes in clean energy. Vestas is recognized as one of the largest wind turbine manufacturers in the world, supplying wind farms globally. To that point, Orsted operates offshore wind farms primarily in Europe.

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Other notable names within the portfolio include brewing company Carlsberg A/S (OTCPK:CABGY), audio speakers manufacturer Bang & Olufsen A/S (OTCPK:BGOUF), and jewelry brand Pandora A/S (OTCPK:PANDY). Overall, it’s a diverse portfolio of large global companies. While we’d like to see less concentration among the top holdings, the exposure to several Danish financial sector companies like Danske Bank A/S (OTCPK:DNKEY) helps capture trends across the domestic economy.

EDEN Performance

From the stocks mentioned above with their respective ADR shares referenced, we highlight that returns have been strong this year driving gains for EDEN, which is up over 30% in 2020. The large exposure to the health care sector stocks that have been relatively resilient against pandemic disruptions, along with strong growth trends for the wind energy-related holdings, helps explain the fund’s momentum.

A 19% gain from Novo Nordisk A/S in 2020, as the largest holding of the fund, has contributed to the overall solid momentum. Vestas Wind Systems A/S and Orsted A/S, up 96% and 75% each respectively in 2020, have been two of the top-performing stocks within EDEN.

ChartData by YCharts

Considering the fund’s inception date of January 2012, we highlight that EDEN, up a cumulative 283% over the period, has impressively been able to outperform the S&P 500 Index (SPY) over the time frame. Again, the returns here are not necessarily related to a particularly exceptional macro-environment specific to Denmark, but is more of a reflection of the concentrated portfolio in high-quality companies that have delivered strong returns. The results here are impressive for any portfolio to beat the S&P 500 during what has been a record bull market, considering the fund does not have exposure to the mega-cap technology sector leaders that defined the rally for U.S. stocks over the past decade.

ChartData by YCharts

Denmark Macro Outlook 2021

According to the latest Economic Survey published by the Denmark Ministry of Finance, the economy is in a technical recession with a decline in GDP for both Q1 and Q2. The coronavirus pandemic impacted all segments of the economy, leading to a large output gap and a sharp rise in unemployment. The government responded with a large fiscal stimulus package that included enhanced wage assistance support and broader measures to support public investment. For context, the fiscal budget deficit this year is estimated at 3.9%, compared to a surplus of 3.5% in 2019. By this measure, government spending has helped to soften the loss of production. Nevertheless, the forecast is for GDP to decline by 4.5% this year.

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(Source: Denmark Ministry of Finance)

Favorably, conditions have improved in recent months with the economy growing again. Indicators like retail sales and job gains have gained momentum, suggesting an ongoing recovery. For 2021, the forecast is for a 4.2% increase in GDP, driven by a 4.7% climb in private consumption and continued fiscal stimulus measures. Notably, the consumer price inflation index at 0.3% has provided flexibility for the Denmark Central Bank to pursue an accommodative monetary policy of negative interest rates.

The Danish economy is growing again following declines in GDP in the first and second quarter this year. A projected decline in GDP of 4.5 per cent this year is expected to be followed by an increase of 4.2 per cent next. Although GDP for this year is set to decline, the recovery is expected to have started in the third quarter. The economic recovery is aided by significant economic stimulus, which already exceed DKK 76 bn., and the proposed budget bill for 2021 proposes an expansive fiscal policy.

Analysis and Forward-Looking Commentary

Recognizing the underlying portfolio is comprised of global companies that largely generate revenues internationally, macro themes are important beyond the Danish market. Currently, there is enthusiasm for a rebound in global growth with anticipation of a COVID-19 vaccine that can end the pandemic. The expectation is for sectors impacted in 2020 to rebound while normalizing consumer spending trends will be positive for the global economy. By this measure, we expect 2021 to be positive for Danish companies benefiting from these trends, whether through the domestic or international growth environment.

We are bullish on the fund and believe it can continue the positive momentum supported by strength from the underlying companies. Generally, we believe international stocks are well-positioned to outperform in 2021, and the EDEN provides exposure to a collection of high-quality companies.

While the Danish krone is officially pegged to the Euro at DKK 7.46 per EUR, fluctuating around a narrow band, U.S. dollar-based investors can still benefit from a strengthening krone against the dollar. Effectively, EDEN investors are exposed to the FX variations between the euro and dollar currencies. A strengthening euro implies a stronger krone against the dollar, driving an incremental return for EDEN investors as a bullish tailwind.

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Indeed, the trend has been for a weaker dollar and stronger euro this year, driving a strengthening of the krone. The krone is up approximately 6.5% year to date. Fundamentals like dovish monetary policy in the United States and the expectation of continued fiscal stimulus measures by the U.S. government in the context of a low-interest rate environment are factors driving weakness in the U.S. dollar, which we expect to continue.

(Source: XE.com)

The other side here is that the trends in FX remain an important monitoring point and risk to watch for EDEN investors, as a reversal or depreciation of the krone could pressure returns for the fund based on the currency translation for the companies within the portfolio that generate revenues in the domestic market. In a scenario where the global growth outlook deteriorates, it’s possible renewed bearish sentiment towards international stocks could drive a correction lower in the fund as a risk to watch.

Final Thoughts

EDEN, with a portfolio of stocks from Denmark, is a unique fund that has delivered impressive returns in recent years with strong momentum in 2020. We are bullish and view EDEN as an attractive way to gain exposure to a basket of international stocks that can benefit in 2021 from an improving macro outlook and trends in a weaker U.S. dollar. The exposure to several market-leading companies that are not widely held can also act as a portfolio diversifier with the potential to generate positive risk-adjusted returns.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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