Equity markets have started to recover over the last weeks. The current recovery is mainly driven by the announced government growth stimulus programs, central bank action like quantitative easing, very conservative positioning of many investors and some positive earnings surprises in the Q1 reporting. This recovery could.…
well continue for some time, in our view, but we see also significant risk of a major sell-off in H2/2009.
Against this background we buy as ‘Idea of the month’ the ETF “db-xtrackers MSCI AC Asia ex Japan TRN” for our Trading portfolio. In our view, companies from the Asian emerging economies should cope with the crisis better than the developed world and could well outperform. Admittedly, Asian countries suffer from the strong decline in exports. In China March exports have declined by 17 % compared to 1 year ago, in South Korea by 21%. But the export declines in the developed world are even more pronounced: German export has declined by 23% yoy (February data), Japan by more than 50% and US by 17%. The main emerging Asian countries benefit from massive stimulus programs, especially China.
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.
In recent weeks equity markets performed very favourably, mainly driven by sectors with a strong government support. Especially the banking sector benefited from strong government support and favourable corporate news flow. On the other hand Basic resources have been driven by the hope that the strong fiscal packages in Asia will lift the demand for commodities, which is also visible in the recent rise of base metal prices. At the same time the strong performance of corporate bonds continued. Thus, obviously the rally in equity and corporate bond markets has reduced the risk aversion of investors markedly.
In our view the rise in investors’ risk appetite has also been driven by strong reduction of central bank rates and the support for government bond markets which brought down bond yields and thus risk free return close to zero. Additionally the world wide growth support packages started to leave it trace in sentiment indicators and real economic indicators and it seems as the major economies bottomed in Q1 2009. The improved economic outlook and the ongoing strong government support should lead to a continuation of the favourable equity market performance. Especially high beta sectors should benefit in the current environment, while defensives are expected to underperform in the next weeks. Accordingly commodities are expected to continue with its recent favourable performance. On the other hand government bond markets seems to be relative vulnerable. However, as long as the central banks support the government bond markets a marked and sustainable sell-off seems too unlikely. But fixed income market is expected to underperform the corporate related assets considerably in the near future.
Trading Portfolio
In addition to the new ETF “db x-trackers MSCI AC Asia ex Japan TRN index”, we increase the weight of the ETF “db x-trackers DJ Stoxx Basic Resources” from 15% to 25% and for the ETF on the Commodity index “db x-trackers DBLCI –OY balanced” also from 15% to 25%. The highest weight in this Commodity index is Oil with 47% and Gold with 16%. So in total 50% of our portfolio is invested in commodity related assets. In our view, commodity stocks could continue the strong performance from the last weeks for some time and should continue to be supported by stronger economic data from emerging markets, especially China and from the implementation of stimulus packages.
Our scorecard has turned quite negative for the Basic Resources sector due to the strong recent performance, but in our view the positive momentum should continue. Main risk to commodities prices and the performance of the Basic Resources sector is that recession lasts longer than expected and that the Emerging Markets, especially China, slow down stronger than expected. More details on the commodity calls can be found our note “ETF: Ideas and Flows” from 18 March 2009.
We also keep the “db x-trackers iTraxx Crossover 5Yr TR Index ETF” in our portfolio. Credit spreads are still cheap in our view and it seems that the credit market has already priced in a deep recession more than appropriately and we continue to expect a normalisation of credit spreads in the longer term. For details on the iTraxx Crossover 5Yr TR Index see our note “ETF: Ideas and Flows” from 8 December 2008. The trading portfolio below reflects the changes discussed above. The portfolio targets absolute return and has the EONIA index as benchmark. Risks to the performance of iTraxx Crossover 5Yr TR Index include a longer than expected recession and a higher than expected number of major company defaults, especially of companies included the Crossover index portfolio.
Source: Trading Ideas ETF: Ideas and Flows – Deutsche Bank AG
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