This month we buy the European Stoxx 600 Banks sector into our portfolio with 5% weight. …..
If geopolitical risks come increasingly into the focus, European banks could even outperform the overall European equity market .
With this step we marginally increase the net equity weight in our portfolio to a low level of 5%.
The start of the Q4 reporting in mid January could bring a reacceleration of earnings downgrades. We continue to see currency diversification as key for a Global Cross Asset portfolio in the current fragile environment and hold 20% of our assets in USD and 5% in JPY. The Euro has fallen to a 15-month low vs. US-Dollar and the derivative market prices a 10% chance of Euro-Dollar parity in 12 months which would mean another 28% decline of the Euro vs. the US-Dollar. Our absolute return cross asset portfolio generated a return of 2.1% in 2011 after 10.3% in 2010 and 12.0% in 2009 (see page 10). We have gradually reduced our equity weight in H1/2011 and from increased our Non-Euro currency exposure in H2.
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
5.0% DJ EURO STOXX 50 SHORT
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.
10.0% MSCI Emerging Market Short Daily Index
Our EM strategist expects Emerging markets to underperform developed markets again in 2012. Emerging market equities look expensive on cash flow multiples and we expect cash flow to come under increasing pressure within GEM, given the greater degree of cyclical exposure and prevailing corporate governance structures. Key GEM markets are vulnerable to re-distribution from capital. GEM companies are vulnerable to attempts by the state to mitigate the impact of a more difficult economic environment on the broader population through higher taxation, price restrictions and pressure to maintain operational and capital expenditure at levels.
10.0% 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.
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.
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.
Source: January 2012: Absolute Return Index indices portfolio – Deutsche Bank AG