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May 2012: Long Basic Resources, Short Eurostoxx50

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Long Basic Resources, Short Eurostoxx50  
 

This month we buy the Stoxx600 Basic Resources index with 5% weight and buy the Eurostoxx50 short Index with 5% weight financed from our EONIA position which is reduced from 10% to 0%. With this move we keep our net equity position at a low level of 20% including defensive sectors Healthcare and Utilities. The defensive stance has helped our portfolio to hold up relatively well during the recent equity market decline and has now a performance of 0.7% YTD after 2.1% in 2011, 10.3% in 2010 and 12.0% in 2009.
The momentum has been weak recently with regard to equity performance, economic data surprises and the Euro crisis. We think it is too early to increase our low equity weight now and instead prefer a relative trade. The “Long Basic Resources, Short Eurostoxx50” trade reflects our preference for Global (and China) GDP growth vs. Eurozone GDP growth and Sovereign debt crisis. The gap between the economic momentum in the Eurozone and the global momentum has increased over the last months. The Eurozone PMI index has fallen to a 12-month low while the global PMI index has slightly recovered over the last months. The Eurostoxx50 index could suffer from an ongoing escalation of the Euro crisis while Basic Resources sector could benefit from improving economic data outside the Eurozone, particularly China We also stick to our preference for US equities vs. Eurozone equities because of the growth gap between US and Eurozone. We stick to our positions in the MSCI Japan, in Gold and in Oil. The MSCI Japan gives Yen exposure and hence currency diversification outside the Euro. We also stick to our Short IBoxx Euro sovereign index. We see more risks of rising yields than a continuing decline.

Portfolio Position Rational
Weight – Open Positions – Rational

5.0% MSCI JAPAN TRN Index
Japan has the second highest trade surplus of all countries globally in 2010 and a high earnings growth for 2011 of 20% and for 2012 of 25% partly due to recovering earnings after the earthquake. The MSCI Japan also gives Yen exposure and thereby currency diversification outside the Euro. Especially, in times of risk aversion the Japanese Yen should benefit.

10.0% Stoxx 600 Utilities TRN Index
Utilities performance has strongly suffered over the last years and we see rising  hances of a recovery. Utilities sector is relatively immune to current key risks for the overall European equity market.

Further arguments for Utilities include: 1) the potential improvement of the supply/demand situation, if loss making generation capacity is closed, 2) the negative impact of the gas-to-oil spread should continue to fade by 2013, 3) a high dividend yield.

5.0% S&P 500 Index

Reasons for the US to outperform the Eurozone are: 1) the GDP growth gap which is expected to reach a 20 year record high of 2.8 pp in 2012E: US GDP growth 2012E of +2.7% compared to -0.2% for the Eurozone, 2) a less restrictive fiscal policy in the US, 3) better economic data from the US than from the Eurozone.

5.0% DJ EURO STOXX 50 SHORT
5.0% Stoxx 600 Basic Resources Index
The gap between Eurozone economic momentum and global momentum is increasing. Basic Resources could benefit from improving economic data particularly of China while EuroStoxx50 could suffer due to escalation of ongoing Euro crisis

5.0% DJ EURO STOXX 50 SHORT
5.0% Stoxx 600 Health Care Index
According to our CROCI team analysis Healthcare is the only deep value sector on a global basis. The Healthcare sector allows investors to buy a much more stable earnings stream compared to the Stoxx600 without paying significant P/E premium.

15.0% Emerging Markets Liquid Eurobond Index
The main reason for the buy was the attractive coupon. We clearly admit that this is a high risk investment. It offers some sort of regional diversification to our other largely developed countries exposure with the two major regional blocks Latin America and Emerging Europe.

10.0% Euro Inflation Swap 5 Year Total Return Index
The inflation swap index offers protection against rising inflation without suffering from rising interest rates. A monetary policy that is too easy at the global level is driving the prices of goods, services, commodities, and assets. The uncertainty about the longer-term inflation outlook has risen substantially in the light of the rising oil and commodity prices.

15.0% Short IBOXX Euro Sovereigns Eurozone TR Index
We expect continuing rising bond yields considering the continuing peripheral stress as well as the possible downgrade of further sovereigns in Europe. The rising fiscal deficits and higher debt issuance by governments seem to be not fully reflected in bond market prices so far.

10.0% DB Physical Gold Euro HE
We view tail event protection such as a break-up of the euro zone as sustaining private sector demand for gold. Aside from negative real interest rates and a weak US dollar environment, we believe gold prices have also benefited from a significant rise in the US equity risk premium over the past decade. Moreover, gold can have a strong diversification effect in a portfolio as it is likely to move up if risk aversion continues to increase.

5.0% DB Brent Crude Oil Booster
Escalation of geo-political tensions remains a risk for capital markets. We see more upside chances than downside risks for the oil price.

5.0% Fed Funds Effective Rate Total Return Index
The risks for the Euro remain elevated after the recent elections, in our view. This US-Dollar position gives us downside protection in case of strong negative surprises in the Eurozone. We think currency diversification outside the Euro is important.


21052012_1

Source: 09 May 2012:  Absolute Return Index portfolio – Deutsche Bank AG

 

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rated “BB”. 13% of the basket is rated “B” and this is one issuer, Venezuela. So the country
with the biggest weight in the index is also the country with the lowest rating. While
Venezuela is clearly a high risk country with 13% weight in the index, the remaining countries
are clearly more solid (for more details on the “MSCI USA TRN” ETF see ETF: Ideas and
Flows, 25 November 2009).
“db x-trackers Currency valuation” ETF 20% weight
In currency markets the majority of the participants are “liquidity seekers”. “Profit seekers”
are a minority in currency markets and can generate returns on the expense of the “liquidity
seekers”. Profit-seekers can generate returns by buying “under-valued” currencies and
shorting “over-valued” currencies. A widely used measure to determine “under-valued” and
“over-valued” valuation for currencies is the concept of “Purchasing Power Parity” where
“fair” exchange rates are calculated by comparing the prices of a basket of goods in different
countries. The ETF “db x-trackers Currency valuation” buys each quarter the three currencies
with the “lowest” valuation out of the universe of the G10 currencies and sells the three
currencies with the “highest” valuation using the PPP concept. In addition, the correlation to
equities and bonds is very low and therefore the currency valuation index helps to diversify
our ETF portfolio. The index is currently long in the US Dollar, New Zealand Dollar, and the
British Pound whereas the index is short in the Swiss Franc, Swedish Krona and the
Norwegian Krona. Risks to the investment include that currencies movements become less
rational again. Especially increased uncertainty about the economic development could
trigger a flight back into expensive currencies like the Swiss Franc (for more details on the
“db x-trackers Currency valuation” ETF see ETF: Ideas and Flows,12 June 2009).
Trading portfolio
We have kept the portfolio unchanged this time. Earlier we bought the “Emerging Markets
Liquid Eurobond Euro Index” ETF with 10% weight and sold the “db x-trackers DJ Stoxx
Global Dividend 100 ETF”. The portfolio targets absolute return and has the EONIA index as
benchmark.

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