Long US equities vs. Short Eurozone equities . …
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Eight reasons for the US to outperform the Eurozone are, in our view:
1) The GDP growth gap between the US and Eurozone is expected to reach a 20- year record high of 2.8 pp in 2012E: US GDP growth 2012E of +2.3% compared to -0.5% for the Eurozone.
2) The Eurozone crisis has continuously escalated over the last two years despite huge political efforts and could continue to do so in 2012, in our view, until we see a clear trigger for a turnaround. High expectations have been priced into Eurozone equities ahead of the current EU summit and may start to fade now.
3) The fiscal policy will be much less restrictive in the US vs. the Eurozone in 2012.
4) The US presidential election in Sep 2012 could be a positive for US equities. In the last 19 presidential election years the S&P 500 rose 6.2% on average.
5) Recent economic data have surprised on the positive side for the US and on the negative side for the Eurozone.
6) The earnings downgrade momentum in the Eurozone is clearly stronger than in the US: Stoxx600 -2.8% over the last month vs. -0.7% for S&P500.
7) Our FX strategists expect the Euro to weaken vs. the US Dollar over the next 3 months to 1.30 and over 6 months to 1.25. They have also raised the question of whether China could start to sell Euros (see FX Daily, 9 December 2011).
8) West European equity funds have seen continuing outflows over the last weeks while US equity funds have seen more neutral flows.
Otherwise, we stick to our low net equity weight of 0% in our portfolio.
We also keep our Short IBOXX Euro Sovereign Eurozone TR Index with 15% weight, Gold with 10% weight and MSCI Japan with 5% weight.
Our absolute rereturn portfolio has held up well with 1.9% YTD and 0.1% over the last month.
5% – S&P 500 Index
5% – DJ EURO STOXX 50 SHORT
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 +2.3% compared to -0.5% for the Eurozone,
2) a less restrictive fiscal policy in the US,
3) better economic data recently from the US than from the Eurozone and 4) the expectation of our FX strategists that the Euro should weaken vs. the US-Dollar over the next 3 months to 1.30 and over 6 months to 1.25.
10% – MSCI Emerging Market Short Daily Index
Our EM strategist expects Emerging markets to underperform developed markets again in 2012. Emerging market equities look expensive on cashflow multiples and we expect cashflow to come under increasing pressure within GEM, given the greater degree of cyclical exposure. Key GEM markets are vulnerable to re-distribution from capital. GEM companies are vulnerable to attempts by the state to mitigate the impact of a more difficult economic environment on the broader population through higher taxation, price restrictions and pressure to maintain operational and capital expenditure at levels, which are sub-optimal for shareholder returns.
5 % – Fed Funds Effective Rate Total Return Index
We expect the single biggest factor driving exchange rates in 2012 will again be the eurozone sovereign debt crisis. We expect the Euro to decline vs. the US-Dollar to 1.30 by year end and to 1.25 in 2012. Given the elevated risk levels in the Eurozone we also think currency diversification outside the Euro is important.
5 % iTRAXX Crossover 5-Year TR Index
We think the expected current default risk is too high in historical comparison. We foresee a normalisation of expected default risk in the longer term.
10% Emerging Markets Liquid Eurobond Index
The main reason for the buy was the attractive coupon. EM sovereign CDS spreads have mostly returned to their pre-crisis levels, indicating that fiscal policy makers there have weathered the financial storm relatively well.
15% EONIA TR Index
In light of the high volatility in the last months, we think a high cash position is appropriate and principal protection is key.
10% 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.
5% Stoxx 600 Utilities TRN Index
Utilities performance has strongly suffered over the last years and we see rising chances of a recovery. Utilities earnings could benefit from rising power prices. The P/E valuation of the Utilities sector looks attractive in historic comparison and broadly in line with the overall equity market.
15% 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% 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. Gold can have a strong diversification effect in a portfolio as it is likely to move up if risk aversion continues to increase and equities continue to decline. Recently, public sector activity by central banks in the gold market may be becoming a more supportive force.
5% 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.
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Source: 9 dicembre 2011: Absolute Return Index indices portfolio – Deutsche Bank AG