to add risk to their portfolios as imminent tail risks related to funding and liquidity issues have decreased (for now).
Consequently, we adjust our index portfolio by taking out the Stoxx Europe 600 Industrials Short (5% weight), getting rid of our (tail-risk hedging) Short IBOXX Euro Sovereign Eurozone position (15% weight) and shifting the freed-up money into 1) Corporate HY credit (buying the iTraxx Crossover 5Y TR with 10% weight) and 2) the MSCI EM Eastern Europe 10/40 equity index (5% weight), which we consider one of the most under-owned equity indices given relatively low expectations on earnings growth.
We add the remaining 5% to our Gold Euro Hedged position. We prefer to add risk to our portfolio overproportionally via the bond market relative to the equity market as inflow momentum related to bond funds and specifically related to high yield credit funds continues to exceed flow momentum related to total equity funds .
Bond positions in our portfolio now account for a combined index weight of 50% (up from last month’s 25%) versus the 35% weight related to equity positions (up from 25% one month ago).
With more and more central bank intervention globally, currency diversification remains a key element to our global cross asset portfolio (now more than ever). We hold on to our cash position in the EONIA and the Singapore Dollar (5% each), we stick to our MSCI Japan, MSCI India and China CSI Healthcare positions on the equity side (5% each) and to our Emerging Market Liquid Eurobond positions (15%) in the fixed income section.
Portfolio Position Rationale
5.0% MSCI JAPAN TRN Index
Japan had the second highest trade surplus of all countries globally in 2010 and high earnings growth for 2011 of 20% and for 2012E of 25% partly due to recovering earnings after the earthquake. The MSCI Japan also provides 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 suffered over the last years and we see rising chances of a recovery. We see the sector as relatively immune to current key risks for the overall European equity market. Further arguments for Utilities include 1) 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% MSCI EM Eeurope TRN Index
EM Eastern Europe Equity index continues to be one of the most under-owned given low earnings growth expectations.
5.0% CSI 300 Healthcare Index
Our case for the China Health Care sector is based on the following key arguments: The sector’s strong volume growth profile continues to be driven by a combination of urbanization, the age-related increase in chronic diseases, exceptionally high government investment in healthcare infrastructure, broader provision of healthcare insurance along with increasing reimbursement and an increasingly wealthy middle class benefitting from growing disposable income per capita along with increasing affordability of medication.
5.0% MSCI India TRN Index
Valuations look attractive with India trading at near 20-year lows on EV/EBITDA and on EV/Sales; also, a turn in leading economic indicators is seen. Admittedly, this is a contrarian call with almost unanimous pessimism among investors.
5.0% EURO-STOXX 50 Implied Volatility ETF
Implied volatility is close to a 12-month low, and E-STOXX 50 implied volatility is low versus European corporate credit default swap levels. Also with expected ECB intervention, the Euro should strengthen, in our view.
5.0% Iboxx Eur Liquid Corporate 100 Non- Financial Index
Investment grade corporates have lowered debt significantly, are cash rich and appear to be in a sweet spot to invest again, which, in turn, is positive for future earnings quality.
15.0% Emerging Markets Liquid Eurobond Index
The main reason for the buy: the attractive coupon. We acknowledge that this is a high-risk investment. It offers some degree 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 rising oil and commodity prices.
10.0% iTRAXX Crossover 5- Year TR Index
We prefer to add risk to our portfolio over-proportionally via the bond market relative to the equity market as inflow momentum related to bond funds and specifically related to high yield credit funds continues to exceed flow momentum related to total equity funds.
15.0% DB Physical Gold Euro HE
We see the desire for protection from tail events, such as 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 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 the Singapore dollar because currency diversification is important for Euro investors due to increasing problems in Spain and uncertainties related to Greece.
5.0% EONIA TR Index
In light of the high volatility in the last months, we think a cash position is appropriate and principal protection is key.
Source: 17 September 2012: Absolute Return Index portfolio – Deutsche Bank AG
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