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Trading Ideas October 2010: Increasing the equity weight by buying dividends

ASSET ALL

IDEA of the month:  Increasing the equity weight by buying dividends

In this issue we increase the equity weight of our portfolio from 20% to 40%. Our more positive view on equities is backed by the index targets for Europe (Stoxx 600 target for …….

end 2010 270 (3% upside), for end 2011 315 (20% upside)) and our US equity strategists (S&P 500 target for end 2010 1275 (11% upside) and for end 2011 1550 (35% upside).
Also on our scorecard equity is clearly the most attractive asset class . Equity markets proved to be resilient over the last weeks despite the slow down in economic data, in particular in the US.
As a reaction to weaker US data, the Fed is now expected to undertake further quantitative easing measures.
The market duly took notice, with the curve bull-flattening, USD selling off, and risky assets being preferred. We increase the equity weight in our portfolio to 40% by selling the Eurostoxx50 Short index and the MSCI Japan (with 10% weight for each) and buying the Eurostoxx Select Dividend 30 with 20% weight. Bond yields are at record lows and it is attractive to replace bonds with high dividend stocks, even in a sideway equity market.
Gold has reached new record highs recently and should more countries aim for currency devaluation, then it could rise further. Our commodity analysts remain positive for the Gold outlook (see Commodities Special Report: Why The Gold Price Rally Will Continue, 20 September 2010). We had considered adding Gold to our index portfolio, but have finally not added it as we see more upside for equities in the shorter term. We keep our Dax position with 20% weight .

Trading portfolio
This month we buy the “Euro Stoxx Select Dividend 30 index” with 20% weight. We fund this purchase by selling 10% weight each in “Euro Stoxx 50 short index” and “MSCI Japan TRN index”. The portfolio targets absolute return and has the EONIA index as benchmark.

ti 30092010

Source: Trading Ideas ETF: Ideas and Flows – Deutsche Bank AG

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
benchmark.