This month we buy the European Stoxx 600 Banks sector into our portfolio with 5% weight. …..
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If geopolitical risks come increasingly into the focus, European banks could even outperform the overall European equity market .
With this step we marginally increase the net equity weight in our portfolio to a low level of 5%.
The start of the Q4 reporting in mid January could bring a reacceleration of earnings downgrades. We continue to see currency diversification as key for a Global Cross Asset portfolio in the current fragile environment and hold 20% of our assets in USD and 5% in JPY. The Euro has fallen to a 15-month low vs. US-Dollar and the derivative market prices a 10% chance of Euro-Dollar parity in 12 months which would mean another 28% decline of the Euro vs. the US-Dollar. Our absolute return cross asset portfolio generated a return of 2.1% in 2011 after 10.3% in 2010 and 12.0% in 2009 (see page 10). We have gradually reduced our equity weight in H1/2011 and from increased our Non-Euro currency exposure in H2.
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.
5.0% 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. Utilities earnings are less affected from an overall economic slow down and therefore a Utilities position can serve well as diversification.
5.0% Stoxx 600 Banks TRN Index
Reasons for our positive view include the reduced funding risks after the ECB action. This is clearly a strongly contrarian call. To underweight Banks has been consensus in 2011 Key risks to this call include an escalation of the sovereign debt crisis in Europe
5.0% S&P 500 Index
5.0% 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.
10.0% 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 cash flow multiples and we expect cash flow to come under increasing pressure within GEM, given the greater degree of cyclical exposure and prevailing corporate governance structures. 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.
10.0% 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.
5.0% 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.
10.0% 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 and equities continue to decline.
10.0% 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.
5.0% 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.
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Source: January 2012: Absolute Return Index indices portfolio – Deutsche Bank AG
