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 ….
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
5.0% MSCI JAPAN TRN Index
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.
5.0% DJ EURO STOXX 50 SHORT
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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