General outlook The strong performance of the global equity markets continued in April. In our view…
the uptrend has been driven by a recovery of global leading indicators, a short bias in the market and low interest rates and yields. In terms of sectors, basic resources, banking and automotive contributed much to the rise in equity markets.
The banking and automotive sectors benefited from strong government support and favourable corporate news flow. Basic resources, in contrast, were driven by the hope that the large-scale fiscal packages in Asia will lift demand for commodities, as evidenced by the recent rise in base metal prices.
However, after their late, favourable performance commodities have become relatively expensive in comparison to the fixed-income and equity markets, but also against the background of the fundamental environment.
The equity markets seem to have already priced much of the expected economic upswing. Overall, it seems that the equity and commodity markets have already incorporated most of the possible stabilisation of the global economy.
Moreover, the fixed-income market seems too expensive, given the strong supply of government bonds. However, as long as central banks support the government bond market a strong sell-off in fixed income is unlikely. Overall, money markets therefore seem to be the most attractive asset class, but due to the very low interest rates this asset class is relatively unattractive as well.
For that reason we prefer the short end of the yield curve.
Trading portfolio
Besides buying the ETF “db x-trackers Stoxx600 Banks short” we also buy the “db x-trackers IBOXX Euro Sovereigns Eurozone 1-3 years”. The current yield of the EONIA benchmark index is very low and in our view could well remain low for some time. Therefore we find it not attractive to shift money back into the EONIA index and instead we buy the “IBOXX Euro Sovereigns Eurozone 1-3 years”. This time horizon looks most attractive on our bonds score card (see page 14). The risk to this position is relatively low, in our view, but the main risk is an outperformance of the bond indices with longer duration.
On the selling side, we sell the ETF “db x-trackers DJ Stoxx 600 Basic Resources”. Basic Resources has performed 49% since its low in the beginning of March and the recovery hopes are now well reflected in the share price in our view. We keep the ETF on the Commodity index “db x-trackers DBLCI –OY balanced” with 25% weight. The highest weight in this Commodity index is Oil with 47% and Gold with 16%. We also sell the “db x-trackers iTraxx Crossover 5Yr TR Index ETF”. We fear that the number of corporate defaults could well increase over the next months and that this could put pressure on the Crossover Index. So we significantly reduce the Beta of our portfolio after the strong performance of the last weeks.
We keep the ETF “db x-trackers MSCI AC Asia ex Japan TRN” index”. In our view, companies from the Asian emerging economies should cope with the crisis better than the developed world and could well outperform. The main emerging Asian countries benefit from massive stimulus programs, especially China. The Chinese stimulus program with a volume of 18% of GDP over 2 years is immense and South Korea has a stimulus package with a total volume of 10 % over 2 years. Main risks for the MSCI AC Asia ex Japan include that the support of the stimulus programs is lower than expected, a sustainable strong decline of exports, a deterioration of Asian currencies and a decline of global equity markets.
The trading portfolio below reflects the changes discussed above. The portfolio targets absolute return and has the EONIA index as benchmark.
Source: Trading Ideas ETF: Ideas and Flows – Deutsche Bank AG
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