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14 June 2012: Reducing risk when global growth is in question

ASSET ALL

Reducing risk when global growth is in question
 

Global growth has come increasingly into question over the last weeks and therefore we reduce the risk in our portfolio. This month we sell our position in the S&P500 index with 5% weight and our Brent Crude Oil Booster index with 5% weight. Instead, we buy the “Stoxx600 Industrial Goods & Services SHORT” with 5% weight and the Singapore Dollar Cash index with 5% weight.

Over the last weeks our economists have cut GDP growth forecasts for the key economies like US, for China and for the Eurozone which could turn into a negative downward spiral for global growth. The global manufacturing PMI has fallen to a level of 50.6, only marginally above the Dec 2011 level. Global leading indicators suggest global growth may slow to 2% in the latter half of 2012.

The oil price decline of 21% over the last two months was the strongest decline since Q4/2008 and reflects the risk of slowing global growth. Oil may have priced in the slow down faster than other asset classes, in our view. The latest statement of SKF indicates that weaker markets are visible on the company level. A cautious risk-off mode has become increasingly consensus among investors over the last weeks, but we think currently it is too early to take a contrarian position.

With the steps flagged above we reduce the net equity weight in our portFolio from 20% to 10%.

We stick to our positions in Healthcare and Utilities, two sectors less affected from a global slow down.

We also stick to the Basic Resources sector because of the attractive valuation and despite the dependency on global growth. Currency diversification remains extremely important, in our view, for Euro investors ahead of the elections in Greece and in the light of the escalation of the crisis in Spain. Therefore we buy the Singapore Dollar Cash index with 5% weight. Our portfolio has fallen by 0.6% over the last month and has now a YTD performance of +0.1% .

Portfolio Position Rational

Weight Open Positions 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. Especially, in times of risk aversion the Japanese Yen should benefit.

10.0% Stoxx 600 Utilities TRN Index

Utilities performance has strongly suffered over the last years and we see rising chances of a recovery. Utilities sector is relatively immune to current key risks for the overall European equity market. Further arguments for Utilities include 1) the potential improvement of the supply/demand situation, if loss making generation capacity is closed, 2) the negative impact of the gas-to-oil spread should continue to fade by 2013, 3) a high dividend yield.

5.0% Stoxx 600 Industrials Short Index

Global growth is increasingly coming into question. Our Chinese economist has cut China GDP forecast and also SKF has indicated weakness in Asia and Europe

5.0% Stoxx 600 Basic Resources Index

The gap between Eurozone economic momentum and global momentum is increasing. Basic Resources could benefit from improving economic data particularly of China while EuroStoxx50 could suffer due to escalation of ongoing Euro crisis

10.0% DJ EURO STOXX 50 SHORT

5.0% Stoxx 600 Health Care Index

According to our CROCI team analysis Healthcare is the only deep value sector on a global basis. The Healthcare sector allows investors to buy a much more stable earnings stream compared to the Stoxx600 without paying significant P/E premium.

15.0% 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.

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 possibile 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.

5.0% DB SORA Total Return Index

We buy exposure to Singapore Dollar because Currency diversification is important for Euro investors due to increasing problems in Spain and also the upcoming Greek election

5.0% Fed Funds Effective Rate Total Return Index

The risks for the Euro remain elevated after the recent elections, in our view. This US-Dollar position gives us downside protection in case of strong negative surprises in the Eurozone. We think currency diversification outside the Euro is important. 

14062012


 

Source: 13 June  2012:  Absolute Return Index portfolio – Deutsche Bank AG

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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
benchmark.

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