18 july 2012: Introducing China Health Care and IG EUR corporate credit to our portfolio

This month: we close out our pair trade based on the Stoxx600 Basic Resources (5% weight) and the EuroStoxx50 SHORT index (5% weight), we replace the Stoxx600 Health Care (5% weight) with ….  

the CSI 300 Health Care index, we add the Iboxx EUR Liquid Corporate 100 non-financial index (5% weight) and shift the residual 5% into cash (EONIA). 

Our European Health Care position (5% weight) has yielded +7.5% absolute returns since inception on 09 Apr 2012. We remain loyal to this theme in general, but are looking to optimize this position. The European Health Care sector has performed well over the past months but, in our view, the Chinese equivalent holds more upside potential from this point onwards underpinned by longer-term structural growth factors as well as short-term catalysts. The CSI 300 Healthcare index is further denominated in CNY allowing us to further diversify out of EUR denominated equity positions .

As European sovereigns suffer from high debt levels, low economic growth and potential austerity packages ahead, we suggest owning IG (investment grade) corporate credit alternatively. IG companies on aggregate (in contrast to sovereigns) managed to lower debt levels significantly over the past years, are cash rich and are in the sweet spot to invest again which is a positive for future earnings quality .

Considering the steps introduced above, we keep the net equity weight in our portfolio at 10%. Currency diversification remains extremely important, in our view. Therefore we stick to our positions in the Singapore Dollar Cash index and the US Fed Funds rate (the MSCI Japan also gives exposure to the JPY).

We keep our Gold position and hold on to our Short IBoxx Euro sovereign position (15% weight) as we continue seeing more risks of rising yields rather than a continuing decline. Our portfolio is up 0.5% since the last note and now has a year-to-date performance of +0.6% .

Portfolio Position Rational  

Weight Open Positions Rational 


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 chances 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% Stoxx 600 Industrials Short Index

Global growth is increasingly coming into question. Our Chinese economist has cut China GDP forecast and also SKF has indicated weakness in Asia and Europe

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, huge 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.


European sovereigns are suffering from high debt levels, low economic growth and potential austerity packages ahead. Euro Stoxx could be adversely affected due to escalation of ongoing Euro crisis.

5.0% Iboxx Eur Liquid Corporate 100 Non- Financial Index

Investment grade corporates have lowered debt significantly, are cash rich and are in a sweet spot to invest again, which, in turn, is a positive for future earnings quality.

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 SORA Total Return Index

We buy exposure to Singapore Dollar because Currency diversification is important for Euro investors due to increasing problems in Spain and also the upcoming Greek election

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.

5.0% EONIA TR Index

In light of the high volatility in the last months, we think a cash position is appropriate and principal protection is key.


Source: 13 July  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

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