January 2012: Buying European Banks


This month we buy the European Stoxx 600 Banks sector into our portfolio with  5% weight. …..  


Reasons for our positive view include the reduced funding risks after  the ECB has allotted Euro  489 billion in three-year loans to European banks in  December. After this ECB action, our banking analysts have upgraded their stance  on European Banks from negative to  neutral. To underweight Banks has been  consensus in 2011 as Banks have been the weakest sector in 2011 with –32% and  our call is clearly a contrarian call. Banks is also the weakest sector since 2004  with -60% and it had the weakest start into 2012 with -2%. Also in 2012, banks  performance will depend on the development of the Euro crisis and sovereign risk.  Key risks to this call include an escalation of the sovereign debt crisis in Europe.  Banks is a high Beta sector and we see an attractive risk return profile, with the  chance of a strong outperformance in case the sovereign debt crisis calms down.

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.

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.

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.


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Source: January 2012:  Absolute Return Index  indices portfolio – 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

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