IDEA of the month: Shorting Emerging markets, taking profits on the Dax
This month we buy the Emerging market equity short index with 10% weight and take profits on the Dax by selling our 10% stake. With this step we significantly reduce the equity weight of our index portfolio by 20 percentage points from 30% to 10%. The Dax is …….
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close to a 3-year high and is close to our 2011 year-end target of 7410. Therefore, the short term risk-return relation has become less attractive, in our view and equities have become less attractive on our score card. We focus the equity positions in our portfolio on European sectors Banks, Utilities and Healthcare and high dividend stocks via the Eurostoxx Select Dividend 30 Index. All three sectors have underperformed in 2010 and have a more attractive valuation /risk profile than the Dax or MSCI Emerging markets. We also keep our Short Food & Beverages, the weakest European sector YTD.
We stick to our commodities position as the strengthening of the US economy and rising Industrial production in China support higher commodity prices. YTD commodities have clearly outperformed EM equities. The long held correlation of commodities to equity and FX markets has recently broken down as the commodity market has shifted focus to physical drivers. We expect supply constraints will play an increasingly important role in driving commodity returns
higher. Therefore, the outperformance trend YTD could well continue and support our relative trade Long commodities vs. Short EM equities, in our view. In particular, higher Food prices triggered by adverse weather conditions in various global regions have a high impact for EM inflation and could become a burden for Emerging market economies and EM equities market. We also stick to our Short IBoxx Euro Sovereign Eurozone TR index as we continue to expect rising interest rates. Our portfolio has posted a performance of 3.1% YTD.
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Source: Trading Ideas ETF: Ideas and Flows – Deutsche Bank AG