EDEN: European Beacon (BATS:EDEN) | Seeking Alpha

The iShares MSCI Denmark ETF (BATS:EDEN) tracks the MSCI Denmark index and has $290M in assets across 52 total assets at the time of writing. The Danish economy has captured news headlines in the last year, due in part to Novo Nordisk’s (NVO) meteoric rise on the back of weight loss drugs Ozempic and Wegovy. The company is up ~50% on a trailing 1-year basis. Projected GDP growth in Denmark is one of the highest in Western Europe, and there are supportive monetary conditions in place. But EDEN also isn’t cheap, the fund has begun to price in the hype.

Novo Nordisk exuberance impacting stat lines

Denmark is an anomaly in Western Europe and broader developed markets. It is one of very few countries that has experienced an upward revision in 2024. The domestic economy is expected to expand 2.4% in 2024, nearly double that of previous expectations. Given that the IMF projects advanced economies will grow just 1.7% on average in 2024, Denmark’s recent GDP revision is something to behold.

In terms of monetary conditions, Denmark has also been a standout. Inflation has been forecasted to reach 4% this year, which is half of that of the inflation reported in 2022. Part of the reason inflation has been able to come down so quickly is a reduction in local energy prices. However, the Central bank has also warned that the pattern of increased wages (buoyed, in part, by NVO’s recent success) could push the price of goods and services up, accelerating inflation once more.

EDEN is more than just NVO

EDEN is a sector concentrated ETF, with 42% of all assets allocated to the Health Care sector. Other sizable allocations include industrials, as well as financials. The sector allocation of the fund displays a more defensive, value-tilted profile. However, given the innovation within the health care sector, EDEN is also blending in some growth opportunities along with the value that are worth highlighting.

Outside of NVO, which accounts for ~22% of the fund, other important holdings include Novonesis, formerly Novozymes (OTCPK:NVZMF), which merged with Chr. Hansen (OTCPK:CHYHY) earlier this year. Novonesis is a materials company that specializes in the production of “biosolutions” which are aimed at addressing major environmental challenges. DSV (OTCPK:DSDVF), which holds around 5% of the fund, is a materials company providing freight and logistics services for global supply chains. While NVO occupies more than a fifth of the fund’s holdings, the remaining top 9 holdings are more evenly distributed and the total assets in the top 10 holdings are ~59%.

Positive flows follow the positive vibes

EDEN’s flow pattern has been encouraging. Despite net outflows in 2019, and 2021, the fund has largely seen years of net inflows, including 2020. This is likely indicative of both a flight to quality in the COVID year, as well as the fact that the fund is concentrated in health care stocks, which experienced more attention in that year.

Higher regional valuation multiples

EDEN is currently trading at a price-to-book ratio of 2.8x and 19.4x earnings. When we compare this to some regional peers, we see that Denmark’s P/E is higher than Sweden’s (EWD) at 15.2x, Finland’s (EFNL) at 15.4x, as well as Belgium’s (EWK) at 13.1x. While 19.4x is certainly not in the “red zone” it is still fairly high for an ETF whose sector make-up looks more value-oriented.

A note on stock-specific risk

Two things (among many) usually happen to companies with NVO’s kind of explosive innovation and profitability: 1.) They catch the attention of regulators and 2.) The market corrects for (or overreacts to) it. It’s hard to overstate the impact of this new wave of weight-loss drugs on both Denmark and the rest of the world. Several news profiles have cited how this boom has transformed the town that manufactures it into a modern “company town,” a welcome reprieve from the usual story around jobs disappearing abroad. And given the broad-reaching health impacts of obesity, it is likely that the FDA will confer secondary approvals for this new class of drugs, which will drive sales higher for NVO. However, the inverse can also be said, where regulations will make expansion more difficult, as regulators and insurers combat the craze. These decisions will likely have huge impacts on EDEN’s volatility profile, which I anticipate will rise as the behemoth NVO trudges forward. However, I’d like to take this opportunity to remind readers that there is another 78% of then fund that is not allocated to NVO – such is the beauty of ETFs!

Closing Thoughts

EDEN’s performance and Denmark’s economic landscape has been shaped by Novo Nordisk’s success. Those who might be concerned by “Dutch Disease” or the fund’s overreliance on NVO to move the needle, are within reason. However, Denmark’s projected GDP growth stands out in Western Europe.” EDEN’s sector allocation is defensive and value-oriented, with a touch of growth potential, but its valuation remains elevated compared to regional peers. Still, I think there is plenty of quality and some growth to be found here. I currently rate EDEN as a buy.