NVO Novo Nordisk

By Ben Dummett 

Nasdaq Inc. is cleaning up on both sides of the Atlantic.

In the U.S., the stock-exchange operator's Nasdaq indexes are the country's best-performing major stock benchmarks this year. In Europe, the Nasdaq-owned Copenhagen exchange's index is leading the charge.

Like its U.S. counterpart, Denmark's stock exchange is thriving in a coronavirus world. But the narrower base of big stocks behind the gain could make it a riskier bet.

The Copenhagen exchange's OMX Copenhagen 20 index is largely dominated by the health-care sector. High single- and double-digit gains in three constituents -- Novo Nordisk A/S, Genmab A/S and Coloplast A/S -- all of which are health-care stocks, have helped lift the benchmark more than 13% year to date. Meanwhile, Europe's other 18 country equity benchmarks are all trading lower.

That outperformance comes as Europe battles the coronavirus-induced recession, pushing investors into so-called growth and defensive sectors. Health-care stocks are often in that group because sick people can't do without drugs and treatment. Insulin maker Novo Nordisk and Coloplast, a supplier of continence care and other products, both reported higher sales for their latest quarters, citing supply stockpiling as a reason.

Still, the concentration leaves the market index at risk of an abrupt downturn if any of these health-care companies suffer a surprise setback. Novo Nordisk, for example, carries an index weighting of 33%. That compares with a combined weighting of about 40% for the five biggest stocks in the Nasdaq Composite Index -- Apple Inc., Microsoft Corp., Amazon.com Inc., Facebook Inc. and Alphabet Inc. -- big drivers behind its outperformance in 2020. Together with Genmab, a Danish biotech company, and Coloplast, the three health-care stocks' total weighing is close to 50%.

"There is some stock-specific risk that you really need to look out for, " said Kenneth Lamont, a research analyst at Morningstar.

In 2018, Novo Nordisk fell 7.3% in one session on disappointing earnings. Danske Bank at the time blamed the sell off for a big part of a 3% drop in OMXC20 and its underperformance against rival markets that day.

The Xact OMXC25 and iShares MSCI Denmark ETF are exchange-traded funds that allow investors to bet on the Copenhagen exchange. While each ETF tracks more companies than included in the OMXC20, health-care weightings remain the biggest for each.

The OMXC25 trades at around 29 times projected earnings of the constituent companies, compared with a 10-year average of 18.6 times, according to Danske Bank, suggesting valuation is another potential risk. The growth outlook of companies such as Genmab helps to explain the richer valuation. In June, the biotech company struck a $750 million deal with AbbVie Inc. to develop cancer treatments, and the stock is up about 15% since then.

Still, Danske Bank recommends underweighting the Danish market. Growth stocks like health care are expensive, and more cyclical stocks should perform relatively better over the next three to nine months as the economy recovers, said Chief Equity Strategist Mattias Sundling.

Germany's DAX stock index, which has big weightings in industrials and autos, has gained more than 45% from its low in March, outperforming the OMXC20's 37% gain over the same period, in a possible sign of support for that view.

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Write to Ben Dummett at ben.dummett@wsj.com

(END) Dow Jones Newswires

August 03, 2020 05:44 ET (09:44 GMT)

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