“Risk-on” remains the dominant headline among the financial press across asset classes at the beginning of this year while central bank policies around the globe remain loose and fiscal deficit spending continuous. Negative real yields could force investors out of “safe-haven” assets, thereby continuously fuelling the hunt for any asset offering significant yield above DM government bonds (e.g. EM bonds, Corporate HY debt)…..
Therefore, we continue to feel well positioned with our EM debt and Eastern Europe equity positions. This trend is well reflected in fund flow data (see top right chart) and confirmed by our cross asset scorecards where the gap between positive momentum for Equities stands out vs. much weaker momentum for Bonds (see middle right table).
Consequently, we further increase our portfolio risk this month as we 1) close out our S&P500 Inverse position (-2.5% weight) and 2) shift the vacant portfolio weight into our long Stoxx600 position (+2.5%). 3) As our “Idea of the Month”, we further include a US TREASURIES SHORT position (+10% weight) and fund this trade out of our Gold (-5% weight) and EONIA cash position (-5% weight).
Our Fixed Income strategists expect UST 10-year yields to reach 2.75% by 2013 year-end on back of 1) expectations towards a mild sell-off on a resolution of the fiscal negotiations as the Fed easing is now all but priced in and 2) an accelerated housing recovery in the US which would greatly bolster the household balance sheet with likely non-linear effects on final demand.
The better macro developments could in turn lead the market to review the expected duration of QE, which would then add supply/demand factors that could push real yields higher (see middle right chart, pages 4-6 for details).
We stick to our positions in the Dax, MSCI Japan, CSI Healthcare, MSCI EM Eastern Europe, MSCI India to capture a balanced risk position within Equities. Within Fixed Income, the “big picture” (as outlined above) suggests holding on to our iTRAXX and EM debt positions. However, our score cards became more cautious on EM debt recently and we put this position on our “watch list”
Portfolio Position Rationale
5.0% MSCI JAPAN TRN Index
Japan had the second highest trade surplus of all countries globally in 2010 and high earnings growth for 2011 of 20% and for 2012E of 25% partly due to recovering earnings after the earthquake. The MSCI Japan also provides Yen exposure and thereby currency diversification outside the Euro. Especially in times of risk aversion, the Japanese Yen should benefit.
10.0% DAX Index
The export-oriented German economy strongly benefited from EM growth over the past decade and Dax30 companies managed to increase earnings in excess of other major equity indices over the past years. We believe the underlying strength and comparative advantages of the German economy will enable Dax30 companies to continue to benefit over-proportionally.
5.0% MSCI EM EEurop 10/40 TRN Index
EM Eastern Europe Equity index continues to be one of the most under-owned given low earnings growth expectations.
5.0% CSI 300 Healthcare Index
Our case for the China Health Care sector is based on the following key arguments: The sector’s strong volume growth profile continues to be driven by a combination of urbanization, the age-related increase in chronic diseases, exceptionally high government investment in healthcare infrastructure, broader provision of healthcare insurance along with increasing reimbursement and an increasingly wealthy middle class benefitting from growing disposable income per capita along with increasing affordability of medication.
5.0% MSCI India TRN Index
Valuations look attractive with India trading at near 20-year lows on EV/EBITDA and on EV/Sales; also, a turn in leading economic indicators is seen. Admittedly, this is a contrarian call with almost unanimous pessimism among investors.
5.0% DJ Stoxx 600
The peak of European austerity might have reached in 2012 and also credit impulse suggests recovery for Europe in coming months
5.0% Iboxx Eur Liquid Corporate 100 Non- Financial Index
Investment grade corporates have lowered debt significantly, are cash rich and appear to be in a sweet spot to invest again, which, in turn, is positive for future earnings quality.
15.0% Emerging Markets Liquid Eurobond Index
The main reason for the buy: the attractive coupon. We acknowledge that this is a high-risk investment. It offers some degree 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 rising oil and commodity prices.
10.0% DB US Treasuries Short Daily Index
Our Fixed Income strategists expect UST 10-year yields to reach 2.75% by 2013 year-end on back of 1) expectations towards a mild sell-off on a resolution of the fiscal negotiations as the Fed easing is now all but priced in and 2) an accelerated housing recovery in the US which would greatly bolster the household balance sheet with likely non-linear effects on final demand. The better macro developments could in turn lead the market to review the expected duration of QE, which would then add supply/demand factors that could push real yields higher
10.0% iTRAXX Crossover 5- Year TR Index
We prefer to add risk to our portfolio over-proportionally via the bond market relative to the equity market as inflow momentum related to bond funds and specifically related to high yield credit funds continues to exceed flow momentum related to total equity funds.
10.0% DB Physical Gold Euro HE
We see the desire for protection from tail events, such as 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 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 SORA Total Return Index
We buy exposure to the Singapore dollar because currency diversification is important for Euro investors due to increasing problems in Spain and uncertainties related to Greece.
Source: 10 January 2013: Absolute Return Index portfolio – Deutsche Bank AG
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