IDEA of the month: Reducing the equity weight
Today we reduce the equity weight in our index portfolio from 50% to 20%. We sell the MSCI USA from 20% weight to 0% on the back of softening labour markets and a slowdown in GDP growth from its …….
initial surge. We also reduce the weight of the MSCI Japan from 20% to 10% (see portfolio below). We put those 30% weight back into the EONIA benchmark. The high equity weight of the portfolio was a negative in the weaker equity markets of the last days. The outperformance of our portfolio YTD is now 3.4% (see next page). Given the current volatility and uncertainty we reduce our risk exposure. A 20% equity weight for our portfolio with an EONIA benchmark reflects a mild positive stance on equities which we continue to play via Germany, given that export continues to be strong and recent order intake remain healthy.
We sell the MSCI USA because economic data in the US came in weaker in the last weeks. The US non-farm payroll numbers came in on the soft side as headline payrolls declined -125k. The June ISM dipped to 56.2 from 59.7, the US Consumer confidence fell hard to 52.9 in June compared to 62.7 previously, the US Pending home sales declined 30% in May. The V-shaped recovery seems to have become more fragile in the view of the market. Also China’s manufacturing PMI in June surprised on the downside recently with a level of 52.1, sharply lower than the May reading of 53.9. On the recent G20 meeting in Toronto there was no agreement on new stimulus measures. With this move we follow the scorecard which had became already more cautious on equities earlier . Japan reported recently the first decline in industrial production since February. Our Japanese strategist has also become more cautious recently . We keep our preference for Germany vs. Europe as we own the Dax with 20% weight vs. the Eurostoxx50 short with 10% weight. Germany and German exports still look well positioned as the German real machinery orders came in strong in the last days.
Source: Trading Ideas ETF: Ideas and Flows – Deutsche Bank AG