IDEA of the month: Buy ETF “MSCI USA”
We buy the ETF “db x-trackers MSCI USA TRN” with 20% weight for three reasons:
Our economists expect an ongoing strong recovery of the US economy.
Our US equity strategist expects a continuing performance of US equities. Our FX……
strategists expect a recovery of the US-Dollar on a 12-month view. The combination of these events would be very positive for a Euro investor buying the “MSCI USA TRN”. Admittedly, it is a hard to call to buy an index after a 6 month performance of 42%, although from the perspective of a Euro investor the 6-performance has been “only” 25%.
On the US economy Bernanke recently stated that the recession “is very likely over” after US retail sales data rose in August at 2.7% mom. This is the strongest growth in more than three years and much stronger than in each of the last 6 months. Also most other US economic data came in strongly over the last weeks. The August industrial production rose a larger than expected 0.8%. Motor vehicles (+5.5%) have contributed to the growth, supported by the “Cash for clunkers” scheme. Industrial production was also supported by a weather-related increase in electrical usage (like air conditioning). US Capex is projected to grow 5% to 10% in Q3 by our US economist, who now expects a Q3 GDP growth of +4%. The US economy appears to growing respectably in Q3 without any serious inflation pressure.
US Sales and production generally move synchronously. But since the start of the crisis production fell far in excess of sales which have been stable for some time, and production is now turning up . This gap could bring the potential of a strong bounce back of US industrial production. Also the US housing sector seems to have bottomed and that it will begin to modestly add to real GDP going forward. This is supported by improving builder sentiment, stabilizing home prices , strengthening home sales and less severe tightening in lending standards. Also Global GDP growth is expected to remain strong until at least the middle of next year due to a turn in the inventory cycle, easing in credit conditions, further fiscal stimulus and sustained low interest rates, according to our economists.
As a consequence of the strong economic US data the US equity strategists have published a positive note on US equity markets “Playing the production bounce”, 11 September 2009 where they discuss the chances of a production bounce and specifically list US companies which could benefit from the production bounce.
The S&P 500 is trading at 13.6x 2010E EPS, below what our US strategists see as a current fair value multiple of 16.4x as well as below the historical average of 15.3x. This suggests that the market is not pricing in the potential upside from the production bounce. The trailing multiple at 19.1x depressed LTM earnings has risen in anticipation of a recovery, but forward multiples that are below average levels imply that the market is not currently expecting material upside to consensus estimates.
Our scorecard for regional equities gives US a total score of +1 and no other region has a higher score: In particular positive are the earnings revision score, the CROCI valuation score and the bottom-up score . US earnings have been upgraded by 3.8% over the last month. Our US strategists see chances for upgrades of consensus estimates.
The shift from a negative to a positive growth environment beginning in Q3 implies more potential for top-line growth. US Margins are still relatively low and operating leverage to top line growth implies significant potential upside .
On August 21 we closed our position of the ETF “DJ Stoxx Banks short” and shifted the money back into the EONIA benchmark index. The “Banks short” position has been a significant drag to the outperformance of our ETF portfolio as Banks have performed strongly in the last three months. We close the position in order to limit our losses in this position. We see now a higher chance of a continuing performance of the Banking sector or at least just a small risk of a significant underperformance of the banking sector.
The Euro/US-Dollar rate
The US-Dollar has weakened by 13% over the last 7 months and it is currently just 9% above its 5-year low and 9% below its 5-year average. A recovery of the US-Dollar would be clearly positive for a Euro investor buying the MSCI US TRN index which is denominated in USDollar.
Our FX strategists expect the Dollar to recover to Euro 1.33 over the next three months and to 1.21 Euro over the next 12 months. The US-Dollar looks attractive on Purchasing power parity measures. Main drivers of the Euro Dollar rate are the oil price, risk (measured as equity volatility VIX, implied volatility of S&P 500 index options) and rate differentials between Fed and ECB. Of these three, the 3m correlation of changes with oil prices is the highest, followed by the VIX and is lowest with rate differentials. But our FX strategists expect that rate differentials will re-emerge as a key driver of the dollar and that a gradual global recovery will continue to push rate differentials in favour of the dollar. On the FX scorecard the US dollar has a very positive score on valuation, but admitted a negative score on momentum .
Main risks for buying the ETF “MSCI USA TRN” are a weakening of the US-Dollar, negative news flow from the US economy, major earnings downgrades for US companies and declining US equity markets.
“DJ Stoxx Global select dividend 100” ETF 10% weight
We own the ETF “DJ Stoxx Global select dividend 100” with 10% weight. The “DJ Stoxx Global select dividend 100” ETF includes 100 stocks with high dividend yield from US (40 stocks), Europe (30 stocks) and Asia (30 stocks). Companies must have a non-negative historical five-year dividend-per-share growth rate and a payout ratio (dividend to earningsper-share ratio) of less than or equal to 60% in Europe and the Americas and 80% in Asia/Pacific. This restriction is reasonable to ensure that the earnings base is sufficient to underpin the dividend payments. Dividend yields for the overall markets look currently high relative to bond yields in the US as well as in Europe.
“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, Japanese Yen 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 or the Japanese YEN .
Trading portfolio
We increase the “db x-trackers iBoxx Euro Sovereigns Eurozone 15+ TR Index” from 15% weight to 25% and keep the “IBOXX Euro Sovereigns Eurozone short” at 25% weight. 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 benchmark index. The risks to these two positions are relatively low, in our view. 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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