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Investment traffic lights

Our tactical and strategic view

Equities*

  Regions 1 to 3 months up to March 2016

United States

United States

Institutional investors have been reallocating funds from the United States to the Eurozone since the beginning of the year, reacting to the strengthening U.S. dollar and diverging central-bank policies. We remain neutral.

Europe

Eurozone

Germany

Germany

The DAX has risen by a quarter since the start of the year. Being a highly export-driven index with no direct exposure to the oil sector, it is the major beneficiary of the weak euro, low interest rates and cheap oil. Market setbacks can be used to build positions.

United Kingdom

Japan

Emerging markets

Asia ex Japan

Latin America

Sectors

Consumer staples

Healthcare

Telecommunications

Utilities

Consumer discretionary

Consumer discretionary

Consumer discretionaries are enjoying tailwinds in all regions. Europe’s consumers are profiting from a better macroeconomic environment, cheaper oil and low inflation, while U.S. consumers’ purchasing power benefits from lower unemployment and a stronger U.S. dollar.

Energy

Financials

Financials

Although the United States’ March stress test revealed the relative strength of local banks’ balance sheets, we prefer the European sector. Their equity ratios have improved, the return on equity is increasing and they may profit from the economic upswing in Europe.

Industrials

Information technology

Materials

Style

Small and mid cap

Fixed income**

  Rates 1 to 3 months up to March 2016

U.S. Treasuries (2-year)

U.S. Treasuries (10-year)

U.S. Treasuries

As a result of higher yields compared to the Eurozone, demand for 10-year U.S. Treasuries should remain high. Because of the rally after the cautious Fed statement of March 18, however, we are downgrading this asset to neutral from a tactical viewpoint.

U.S. Treasuries (30-year)

U.K. Gilts (10-year)

Eurozone periphery

German Bunds (2-year)

German Bunds (10-year)

Japanese government bonds (2-year)

Japanese government bonds (10-year)

Corporates

U.S. investment grade

U.S. high yield

U.S. high yield

This segment has suffered from the renewed oil-price weakness and the anticipation of the Fed statement’s new wording, which led to outflows in high-yield funds in mid-March. Since the beginning of the year inflows have dominated, however. The relatively high spread combined with low default rates lets us put this sector on overweight.

EUR investment grade

EUR investment grade

In the midterm, euro investment-grade bonds are profiting from improving economic data and the ECB’s QE. While heavy issuance of new paper has put pressure on the primary market in March, the situation should improve after Easter.

EUR high yield

Asia credit

Emerging-market credit

Securitized /specialties

Covered bonds

U.S. municipal bonds

U.S. municipal bonds

After six months of munis underperforming U.S. Treasuries, we expect this trend to revise. Munis have a relatively steep yield curve: we prefer the 15- to 20-year range. Mutual funds investing in munis have witnessed strong inflows recently.

U.S. mortgage-backed securities

Currencies

EUR vs. USD

USD vs. JPY

USD vs. JPY

From a tactical point of view we expect a further strengthening of the U.S. dollar against the yen. A rate hike in Japan seems unlikely due to the lack of inflation, while the Fed has not yet stated that it is too concerned about a strong U.S. dollar.

EUR vs. GBP

EUR vs. JPY

GBP vs. USD

Emerging markets

Emerging-market sovereign

Alternatives**

Infrastructure

Commodities

Real estate (listed)

Real estate (non-listed)

Hedge funds

Hedge funds

In a generally benign yet increasingly volatile market environment, we believe that hedge funds can generate excess returns. Our preferred strategies are equity market neutral, equity long/short and discretionary macro. In light of improving macroeconomic data we are less optimistic for the prospects for distressed strategies.

*as of March 12, 2015

**as of March 19, 2015

Source: Deutsche Asset & Wealth Management Investment GmbH

The tactical view (one to three months)

Equity indices:

  • positive view

  • neutral view

  • negative view

Fixed income and exchange rates:

  • The fixed-income sector or the exchange rate is expected to perform well

  • We expect to see a sideways trend

  • We anticipate a decline in prices in the fixed-income sector or in the exchange rate

  • A circled traffic light indicates that there is a commentary on the topic.

The traffic lights’ history is shown in the small graphs.

The strategic view up to March 2016

Equity indices, exchange rates and alternative investments:

The arrows signal whether we expect to see an upward trend ( ), a sideways trend ( ) or a downward trend ( ) for the particular equity index, exchange rate or alternative asset class.

Fixed income:

For sovereign bonds, denotes rising yields, unchanged yields and falling yields. For corporates, securitized /specialties and emerging-market bonds, the arrows depict the option-adjusted spread over sovereigns for each respective region. depicts an expected widening of the spread, a sideways spread trend and a spread reduction.

The arrows’ colors illustrate the return opportunities for long-only investors.

  • positive return potential for long-only investors

  • limited return opportunity as well as downside risk

  • high downside risk for long-only investors

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