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Trading Ideas: 4 May 2011: Buying Utilities

IDEA of the month:   WE buy the Stoxx Utilities Index with 5% weight and take the  money from the EONIA position.……


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The Utilities sector has been among the weakest  performers over the last 12 months and has suffered from declining spreads  between electricity prices and input costs (gas and coal prices) over the last years.  

This trend may have come to an end and the Utilities valuation looks attractive in  historical comparison. Our portfolio has posted a performance of 1.4% YTD .

In April our  portfolio missed the strong equity performance due to low equity weight. We  remain cautious on the sustainability of the recent equity rally and  marginally  increase our equity weight in the defensive Utilities sector. Our EM strategist  continues to expect EM equities to  underperform DM equities. One of his  arguments is that high commodity prices will have a more negative impact on EM  economies than on DM economies. We keep our EM equity short position which  additionally suffered from the declining US-Dollar. We keep our equity position in  the Stoxx Healthcare index. We also keep our 10% weight in the Commodity  index. Commodities can continue to benefit from a trend towards real assets,  strong EM growth and as a hedge against tail events like a strong rise in the oil price.

We also keep our Short IBOXX Euro Sovereign Eurozone Index and continue  to expect rising 10Y bond yields supported by further rate hikes. Our economists  expect the next ECB rate hike in July.

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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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