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February 2012: Buying Oil and Emerging market Eurobonds

ASSET ALL

This month we buy the index “db Brent Crude Oil booster” with 5% weight and increase the position of our Emerging market liquid Eurobond index from 10% to 15%. We sell our MSCI Emerging market short index with 10% weight.     

 

reason for buying Oil into our portfolio is to protect the portfolio against an escalation of developments in the Middle East and Iran. In our view, this is one of the major downside risks for capital markets over the coming months. Stronger than expected global GDP growth would also be supportive for the Oil price. Very cold weather in Europe, escalating geopolitical tensions in Iran, and unexpected outages in Nigeria and the North Sea have already tightened the Brent oil price recently.
Over the last weeks equity markets have seen a strong rally and have surprised many investors including us. In our view, the momentum could continue slightly longer, but we also see increasing downside risks for equities. Admittedly, the global economic recovery is better on track than we had expected and we close our Emerging market short position. Emerging markets had a good start in 2012 and our Asian strategists expect Asia to outperform Developed Markets in 2012.

European Banks which we had bought into our portfolio last month have strongly performed and we keep them in our portfolio for now. Especially for the Eurozone economy we still see significant downside risks due to the Euro crisis and the drag from austerity measures and therefore we also stick to our Long US equities vs.

Short Eurozone for now. Currency diversification remains extremely important for Cross Asset investors and we keep positions in Japanese YEN and in US-Dollar in our portfolio. Our absolute return cross asset portfolio generated a return of 0.7%YTD after 2.1% in 2011, 10.3% in 2010 and 12.0% in 2009.

Portfolio Position 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.

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 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.

5.0% DJ EURO STOXX 50 SHORT

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.

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.

5.0% DB Brent Crude Oil Booster
Escalation of geo-political tensions in Middle East and Iran is a major risk for capital markets and we protect our portfolio against this risk. Very cold weather in Europe, escalating geopolitical tensions in Iran, and unexpected outages in Nigeria and the North Sea have tightened Brent oil market recently. We expect the oil prices to remain firm given our expectation of 2012 world GDP growth above 3%

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.

trading_idea_20022012_1

Source: 13 February 2012:  Absolute Return Index portfolio – Deutsche Bank AG


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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.

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