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April 2012: Buying Healthcare sector and increasing the equity weight

 This month we buy the Stoxx600 Healthcare index with 5% weight. 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

 

 


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earnings stream compared to the Stoxx600 without paying significant P/E premium .

With this step our portfolio still has a low 20% net equity weight and thereof 15 percentage points in defensive sectors Utilities and Healthcare. The equity market has been on the weaker side in the last weeks on the back of weaker economic data, from the US as well as the Eurozone. European Banks have been among the weakest sectors over the last month as the Euro sovereign debt crisis has come into the focus again. So it was beneficial for our portfolio that we had sold the Stoxx 600 Banks index one month ago. In our view, the pressure on the equity market could well continue in the coming weeks.

We stick to our positions in the MSCI Japan, in Gold and in Oil. The MSCI Japan also gives Yen exposure and the YEN tends to appreciate in times of risk aversion and gives currency diversification outside the Euro. Gold should give the portfolio some downside protection, if central banks surprise the market with more easing monetary policy measures. Oil price has held up well relative to news flow on the economic slow down.

We stick to our Crude Oil position as protection against political risk and supply side disruptions. We also stick to our Short IBoxx Euro sovereign position with 15% weight. We see more risks of rising yields than a continuing decline.

We find the risk/return profile of the EM Liquid Eurobond index more attractive than Eurozone sovereigns.

Our absolute return cross asset portfolio earned a a return of 1.0% YTD after 2.1% in 2011, 10.3% in 2010 and 12.0% in 2009 .

Portfolio Position 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% S&P 500 Index

Reasons for the US to outperform the Eurozone are: 1) the GDP growth gap which is expected to reach a 20 year record high of 2.8 pp in 2012E: US GDP growth 2012E of +2.7% compared to -0.2% for the Eurozone, 2) a less restrictive fiscal policy in the US, 3) better economic data recently from the US than from the Eurozone.

5.0% DJ EURO STOXX 50 SHORT

Admittedly, the recent economic data in the US also came in on the weaker side.

5.0% Stoxx 600 HealthCare 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 payingsignificant 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 possible 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 Brent Crude Oil Booster

Escalation of geo-political tensions in Middle East and Iran remains a major risk for capital markets and we protect our portfolio against this risk. Also unexpected outages in Nigeria and the North Sea could keep tightened Brent oil market. We expect the oil prices to remain firm given our expectation of 2012 world GDP growth above 3%.

10.0% EONIA TR Index

We think a high cash position is appropriate as risks are higher than implied volatility suggests.

5.0% Fed Funds Effective Rate Total Return Index

Despite the Greek PSA being the risks for the Euro remain elevated, 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.
 levels in the Eurozone we also think currency diversification outside the Euro is important.

16-04-2012

Source: 10 April 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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