“Risk-on” remains the dominant headline among the financial press across asset classes at the beginning of this year while central bank policies around the globe remain loose and fiscal deficit spending continuous. Negative real yields could force investors out of “safe-haven” assets, thereby continuously fuelling the hunt for any asset offering significant yield above DM government bonds (e.g. EM bonds, Corporate HY debt)…..
Therefore, we continue to feel well positioned with our EM debt and Eastern Europe equity positions. This trend is well reflected in fund flow data (see top right chart) and confirmed by our cross asset scorecards where the gap between positive momentum for Equities stands out vs. much weaker momentum for Bonds (see middle right table).
Consequently, we further increase our portfolio risk this month as we 1) close out our S&P500 Inverse position (-2.5% weight) and 2) shift the vacant portfolio weight into our long Stoxx600 position (+2.5%). 3) As our “Idea of the Month”, we further include a US TREASURIES SHORT position (+10% weight) and fund this trade out of our Gold (-5% weight) and EONIA cash position (-5% weight).
Our Fixed Income strategists expect UST 10-year yields to reach 2.75% by 2013 year-end on back of 1) expectations towards a mild sell-off on a resolution of the fiscal negotiations as the Fed easing is now all but priced in and 2) an accelerated housing recovery in the US which would greatly bolster the household balance sheet with likely non-linear effects on final demand.
The better macro developments could in turn lead the market to review the expected duration of QE, which would then add supply/demand factors that could push real yields higher (see middle right chart, pages 4-6 for details).
We stick to our positions in the Dax, MSCI Japan, CSI Healthcare, MSCI EM Eastern Europe, MSCI India to capture a balanced risk position within Equities. Within Fixed Income, the “big picture” (as outlined above) suggests holding on to our iTRAXX and EM debt positions. However, our score cards became more cautious on EM debt recently and we put this position on our “watch list”
Portfolio Position Rationale
5.0% MSCI JAPAN TRN Index
Japan had the second highest trade surplus of all countries globally in 2010 and high earnings growth for 2011 of 20% and for 2012E of 25% partly due to recovering earnings after the earthquake. The MSCI Japan also provides Yen exposure and thereby currency diversification outside the Euro. Especially in times of risk aversion, the Japanese Yen should benefit.
10.0% DAX Index
The export-oriented German economy strongly benefited from EM growth over the past decade and Dax30 companies managed to increase earnings in excess of other major equity indices over the past years. We believe the underlying strength and comparative advantages of the German economy will enable Dax30 companies to continue to benefit over-proportionally.
5.0% MSCI EM EEurop 10/40 TRN Index
EM Eastern Europe Equity index continues to be one of the most under-owned given low earnings growth expectations.
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, exceptionally high 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.
5.0% MSCI India TRN Index
Valuations look attractive with India trading at near 20-year lows on EV/EBITDA and on EV/Sales; also, a turn in leading economic indicators is seen. Admittedly, this is a contrarian call with almost unanimous pessimism among investors.
5.0% DJ Stoxx 600
The peak of European austerity might have reached in 2012 and also credit impulse suggests recovery for Europe in coming months
5.0% Iboxx Eur Liquid Corporate 100 Non- Financial Index
Investment grade corporates have lowered debt significantly, are cash rich and appear to be in a sweet spot to invest again, which, in turn, is positive for future earnings quality.
15.0% Emerging Markets Liquid Eurobond Index
The main reason for the buy: the attractive coupon. We acknowledge that this is a high-risk investment. It offers some degree 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 rising oil and commodity prices.
10.0% DB US Treasuries Short Daily Index
Our Fixed Income strategists expect UST 10-year yields to reach 2.75% by 2013 year-end on back of 1) expectations towards a mild sell-off on a resolution of the fiscal negotiations as the Fed easing is now all but priced in and 2) an accelerated housing recovery in the US which would greatly bolster the household balance sheet with likely non-linear effects on final demand. The better macro developments could in turn lead the market to review the expected duration of QE, which would then add supply/demand factors that could push real yields higher
10.0% iTRAXX Crossover 5- Year TR Index
We prefer to add risk to our portfolio over-proportionally via the bond market relative to the equity market as inflow momentum related to bond funds and specifically related to high yield credit funds continues to exceed flow momentum related to total equity funds.
10.0% DB Physical Gold Euro HE
We see the desire for protection from tail events, such as 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 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 the Singapore dollar because currency diversification is important for Euro investors due to increasing problems in Spain and uncertainties related to Greece.
Source: 10 January 2013: Absolute Return Index portfolio – Deutsche Bank AG
The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively «Deutsche Bank»). The information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Deutsche Bank makes no representation as to the accuracy or completeness of such information. Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, including strategists and sales staff, may take a view that is inconsistent with that taken in this research report. Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Prices and availability of financial instruments are subject to change without notice. This report is provided for informational purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst judgement.
As a result of Deutsche Bank’s recent acquisition of BHF-Bank AG, a security may be covered by more than one analyst within the Deutsche Bank group. Each of these analysts may use differing methodologies to value the security; as a result, the recommendations may differ and the price targets and estimates of each may vary widely.
Deutsche Bank has instituted a new policy whereby analysts may choose not to set or maintain a target price of certain issuers under coverage with a Hold rating. In particular, this will typically occur for «Hold» rated stocks having a market cap smaller than most other companies in its sector or region. We believe that such policy will allow us to make best use of our resources. Please visit our website at http://gm.db.com to determine the target price of any stock.
The financial instruments discussed in this report may not be suitable for all investors and investors must make their own informed investment decisions. Stock transactions can lead to losses as a result of price fluctuations and other factors. If a financial instrument is denominated in currency other than an investor’s currency, a change in exchange rates may adversely affect the investment. Past performance is not necessarily indicative of future results. Deutsche Bank may with respect to securities covered by this report, sell to or buy from customers on a principal basis, and consider this report in deciding to trade on a proprietary basis.
Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor’s home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany this report is approved and/or communicated by Deutsche Bank AG Frankfurt authorized by the BaFin. In the United Kingdom this report is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange and regulated by the Financial Services Authority for the conduct of investment business in the UK and authorized by the BaFin.
This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. This report is distributed in Singapore by Deutsche Bank AG, Singapore Branch, and recipients in Singapore of this report are to contact Deutsche Bank AG, Singapore Branch in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations), Deutsche Bank AG, Singapore Branch accepts legal responsibility to such person for the contents of this report. In Japan this report is approved and/or distributed by Deutsche Securities Inc. The information contained in this report does not constitute the provision of investment advice. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10). Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank’s prior written consent. Please cite source when quoting.