With hindsight, Sampension in Denmark said reeling in its equities exposure this spring was premature – but a gloomy view on interest rates and the economy going into next year is nevertheless keeping the pension fund’s portfolio in cautious mode.
Jesper Nørgaard, deputy chief investment officer of the DKK269bn (€36bn) labour-market pension provider, told IPE: “Already in the spring, we took a somewhat more cautious approach, the reason being that the consensus building in the market was a story about a soft landing – a kind of Goldilocks scenario – and we tended to disagree there.
“Not that we foresee a big recession or anything, but we believe it’s unlikely that we’ll have a smooth landing and believe that both US and investment in Europe will face problems going into 2024,” he said.
With the economy and risk assets under pressure from this likely outlook, listed equities were currently “priced to perfection”, according to Nørgaard.
“We went to an underweight of listed equities in the spring which was – with hindsight – a little bit early,” he said.
The equities market in fact performed until early summer and was then flat, he said, but now facing headwinds.
Sampension has retained that cautious tactical portfolio position, he said, though selling equity futures as an overlay via its listed equities portfolio – rather than having made any strategic changes.
While it was hard to say for sure how these positions might change, the CIO said, Sampension was likely to maintain current levels of portfolio risk for now.
“It’s a kind of ‘damned if you do, damned if you don’t’ scenario for central banks because if we do have a smooth landing, then inflation will probably not come down to the 2%-plus level we’ve seen historically, which means central banks will keep interest rates higher for longer, and that will be difficult for financial markets to withstand without some kind of correction in asset prices,” he said.
“Central banks do not communicate that way, but in reality they need to see some kind of hard landing for inflation to come down sustainably,” the deputy CIO said.
With an inverted yield curve, fixed income markets are saying that central banks will start cutting rates in the spring. he said, adding: “That will not happen without a recession in front of us.”
“Either or, equities will have a difficult time,” Nørgaard said.
In a commentary earlier this week, Sampension said its total return for 2023 so far was positive at between 2.3% and 6%, depending on a customer’s age and investment profile.
Nørgaard said despite the uncertainty regarding financial markets this year, Sampension hoped the breadth of its investments – including, for example, forestry assets, wind turbines and different types of shares - would “provide a good starting point for a positive return”.
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