IDEA of the month: Further Risk Reduction
Two weeks ago we had already reduced the equity weight in our index portfolio from 30% to 10%. With this note we further reduce the equity weight and the risk in our index portfolio. We sell the 7.5% Utilities stake and sell the 5% stake in the …..
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LPX Major Market Private equity Total Return index. Instead, we buy Eurostoxx50 short with 5% and put the remaining 7.5% back into the EONIA benchmark. The European equity market has fallen by 4% over the last week as a reaction to the unrest in Libya and the Arab region. News of potential Saudi Arabian protests was one key catalyst for the market weakness yesterday because of the importance of Saudi Arabia for the oil price. The Brent Oil price has moved up by 23% YTD. Our commodity strategists argue that US-$120/bbl (for WTI) is the level where global growth could come under pressure. Major protests against rising Food prices have been observed in India and efforts to organize protests have been observed in China. Rising commodity prices and rising inflation are a key risk to the economy.
Many Investors have the Commodity price spike from 2008 in mind. Our economists argue that the world could relatively fast return to the 5%-6% global inflation rates of 2008. Back then, the big financial crisis and the subsequent Great Recession stopped inflation in its tracks. They also think there is good reason to expect that this time will be different.
In the current geo-political environment we see more downside risks than upside chances for equity markets in the short term and therefore reduce our equity weight from 10% to -2.5% due to our short positions. In addition, the Q4 reporting is half through and has not been a positive trigger. Sales number came in strongly, but company margins in Q4 suffered already from higher input costs. We keep our relative trade Long commodities vs. Short EM equities. The long held correlation of commodities to equity and FX markets has recently broken down as the commodity market has shifted focus to physical drivers.
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Source: Trading Ideas ETF: Ideas and Flows – Deutsche Bank AG