Reduce risk, short sovereign debt and increase cash level We reduce equity weight by selling the Dax.
We short sovereign debt.
We reduce Euro exposure and increase currency diversification…
GDP growth which is likely to come under pressure. We increase our “Short IBOXX Euro Sovereigns Eurozone TR Index” from 10% to 15%. In our view, the sovereign bonds of the Eurozone countries currently don’t have an attractive risk return profile in comparison to smaller non-Euro DM bond issuing countries or some EM countries (see page 6). We increase our cash position and reduce Euro exposure by buying the FED Funds Effective Rate TR Index with 5% weight.
We reduce the portfolio risk because of the elevated risks for the economy and financial markets, in particular in the Eurozone: The crisis has reached a systemic dimension according to the ECB president and sovereign default risks are elevated. The Eurozone crisis has continuously escalated over the last two years and is likely to escalate further, in our view. The contagion risk to other countries beyond Greece remains elevated. The European banking system is fragile and in need of a major recapitalisation. The Eurozone financial markets strongly depend upon political and central bank intervention. In addition, economic sentiment indicators signal a slow down and uncertainty for 2012E GDP growth is very high.
For the coming two quarters our economists forecast a mild recession for the Eurozone and expect Chinese GDP growth to decelerate significantly. The number of company profit warnings in Europe may well increase over the next weeks and companies are likely to give cautious outlook statements for 2012E.
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