Nautilus Allocator Dec2010

Download Nautilus Allocator Dec2010

Post on 04-Jul-2015




3 download

Embed Size (px)


Our monthly newsletter showing detailed allocation of all asset classes. It also goes in detail on the economic environment as we see it today


<ul><li> 1. A sset A llocation over last 3 monthsContent C ashF ixed Inco m e 100.0%EquitiesPage 175.0%The current economic environment50.0%70.1%29.9% 74.5% 25.5%59.0% 40.4% 0.0%0.0% 0.7%25.0%Page 2 0.0%Okt 10N o v 10D ez 10Asset class analysisPage 3Current asset allocationContagion : Made in Germany Looking at the global economic dynamics and its The macro-economic environment is clearly regional evolution one of the most extreme casesdominating investors`mood. Most bad newsPage 4 of divergence is taking place in the European seems to be in the market already. We believe Monetary Union. As much as the system is athat the European central bank will be eventuallyPerfomance analysispolitical union, there are extreme contrasts in its mandated by Germany to resolve the market economic reality. Germany just announced that stress in a consistent way for all the members and the unemployment rate sank to an 18 year low. Atmarkets will look at the fundamentals once again. the same time the total unemployment in the European Union increased to a 10 year high. Due The inflation level in both the US and Europe is at to the Euro weakness, the export driven Germana level that allows (and even begs) for more economy is on a roll. As such, a cynic may call the stimulus in the short to medium term. The core behavior of Germany towards the PIIGS as self-CPI in the US hit historic record lows. All the fears Our opinion benefitting. After Greece, which was more of aabout inflation risks because of quantitative credibility crisis, Ireland now faces a banking easing seem to be unfounded at the moment. The crisis. language from the central bankers has movedDue to forced buying of PIIGStowards more inflationary measures. As much asbonds, the ECB will have toThis crisis has been sped up by the political the investors were blaming them for taking theprint sooner or later. Thisretorics of German chancelor Angela Merkel andwrong decisions by launching QE2, thecould make the EUR dropher French counterpart Sarkozy. Her remarks innumbers are evidence to the opposite.even further.late October, that as of 2011 investors in sovereign bonds would have to bear part of theIn the meantime, at the start of a global economicCorporate bonds yielding lessrisk, sent the risk premium for these bonds pick-up, the Asian countries are braking down thethan government bonds is not upwards in a dynamic that caused many speed of their growth due to inflationarya normal situation.countries in a direction of having to accept help.pressures. If these economies are already in What happened in effect is that the only buyer of auto-feeding modus, this should be fine. WeGerman economicGreek and Irish bonds was the ECB. This was a believe this is not fully the case yet and could slowcolonisation of Europe willposition the Central Bank did not want to be in asdown the demand for western goods goingcome to an end once German they already wanted to fade out bond purchases. forward. This could be offset by the better mood ofbanks show full PIIGSThe ECB strategy of monetary immunisation isthe US consumer who has started to spendexposure on their balancenot sustainable because the purchased assetsagain. This could not come at a better momentsheets.(mainly Greek and Irish bonds) are decliningwith the crucial end of year sales season ahead. rapidly in value, deteriorating the ECB`s balanceGerman banks are verysheet. This has a braking effect on the economyexposed towards the PIIGS. unless it is compensated with new money.Given that they need toEFSF :European Financial Stability Facility is a special purpose vehicle agreed by the 27 member states of the European Union on 9 Mayrefinance 30% of their bonds2010, aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty. The Facility isnext year, this could cause headquartered in Luxembourg City, and the European Investment Bank provides treasury management services and administrativesome friction at the to it through a service level contract. The Facility may be combined with loans up to 60 billion from the European FinancialStabilisation Mechanism (reliant on funds raised by the European Commission using the EU budget as collateral) and up to 250 billionfrom the International Monetary Fund (IMF) to obtain a financial safety net up to 750 billion.ESM: European Stability Mechanism. The permanent rescue facility that is to replace the EFSF after its expiration in June 2013. The ESMshould make the EFSF permanent, with the difference that ESM loans will be senior to sovereign bonds, while EFSF loans are not. As afirst step to providing support a debt sustainability analysis will be conducted by the commission, the IMF and the ECB. If consideredinsolvent, it will have to negotiate a restructuring plan with its creditors. A system of collective action clauses (CACs) will allow a qualifiedmajority of creditors to make a proposed debt restructuring legally binding to all. An aggregation clause will be introduced so that alloutstanding government bonds are included in the negociations. After the sustainability analysis a unanimous decision of the Eurogroupministers will be needed to approve assistance. A final decision on the mechanism should be taken at the EU council meeting onDecember 16th, 2010. Page 1 of 4Decem ber-2010</li></ul> <p> 2. General Market Returns (November 2010)Asset Allocation (December 2010) Market Month-to-dateYear-to-date Cash (0.6%,+0.6%):small allocation increase. The short term yieldsare beginning to pick up in yield. PerformancePerformance 3M Treasury Bill 0.0%0.1%Bonds (59%, -15%): As the impact of QE2 (Quantitative Easing) Barclays US Treasury 1-3Y Index-0.2% 2.6%seems to be fading out after the announcement of the US to start up Barclays US Treasury 7-10Y Index -0.8% 13.3% another 600 billion, the allocation to bonds have been reduced Barclays US Treasury +20Y Index1.3%- 13.6% substantially. In the allocation we increased the 1-3 years by 5% andthe 20+ years by 18%. The 7-10 years has been reduced by 11% and Barclays Corp.Inv.Grade Index -0.8%10.0%the corporate bonds have been liquidated. We believe that the sell-off Dow Jones World Index-1.9% 5.4%on the long end has been overdone and that the QE, which is stillongoing and might even start in Europe, will also focus on longer Top 5 perform ing sectorsduration bonds, where most of the economic stimulus can beSectorReturn (Nov 2010) Allocation (Nov 2010) delivered. This is a dynamic reweighting and needs to be seen in the Energy1.35%0.00% light of the reduction of the fixed income allocation by 15%. Basic Materials 0.56% 11.23% Industrial0.30%0.00%The duration in the model increased from 9 to 10.5 this month. Consumer Services-0.57%5.88% Equity (40%, +15%): Most of the bad macro-economic news from theConsumer Goods-0.75%1.62% sovereign side in Europe seems to be in the markets. The Emergingmarkets saw a serious correction in November and so did the Flop 5 perform ing sectors developed countries, with Europe suffering the most. With the earning SectorReturn (Nov 2010) Allocation (Nov 2010)season behind us, it is clear that the companies are in good shape, Technology -1.44% 6.06%with plenty of cash and EBITDA margins not seen in over a decade. Healthcare -3.37% 0.00%This has not really shown up in the equity prices which were dominatedFinancials-5.07% 0.00%by macro themes. We continue to have little exposure to the financialsector (banks and insurances) which is clearly carrying the biggest riskTelecoms-5.52% 0.40%in the sovereign crisis.Utilities -5.63% 0.00%European CDS spreads and EUR/USD (Oct-Nov 2010) Sector Allocation B ilateral agreement between M erkel and Sarko zy saying 1.44 500 that private secto r sho uld be invo lved in risk sharing. The main overweights and underweights of last month remain or wereincreased: Basic materials (11.3%, -0.6%), consumer goods (10%,1.42+8.3%) and consumer services (7%, +1.5%.) Biggest underweights are 400in Oil&amp;Gas (0.7%, +0.7%), financials (2.6%, +2.5%) and utilities (0.9%1.4 +0.9%). The weight in Technology was reduced by -4.2% to 1.9%.CDS Spread (% points) EUR/USD rate1.38The biggest overweight we have is in the basic materials. There is a 300large wave of consolidation taking place in the sector. There seems to be1.36more and more resilience in commodities versus the evolution of theUSD. Once this decoupling becomes clearer, there could be a second 2001.34bull wave in the commodity sector.1.32Geographical Allocation 1001.3A clear increase in the allocation to Japan, which at 16.9% is the biggestgeographical exposure. Japan did very well in the previous month andhas room to recover as it has underperformed this year. furthermore the0 1.2801 0.1 08.10 1 05.122.1029.10 05.111 12.1 1 1 9.1 26.11recent weakening of the Yen versus its main trading partners will help. AllP o rtugal Spain Italy B elgium GermanyEUR/USD (right scale)other countries are underweight versus the index, except for a neutralSo urce : B lo o mberg, Nautilusweight to the United States which will continue to benefit from QE.The above graph illustrates the European misery made in Germany. It Europe, Latin America and Asia Pacific remain underweight due toshows the market reaction to the bilateral talks between Germany andmacro-economical factors such as sovereign debt and capital flowFrance that the bondmarket should carry the pain of countries intaxing. The exposure to Europe would change for the positive once adistress being bailed out. This was seen as very negative by thenew QE is introduced in Europe and a more inflationary stance would bemarket and made investors focus on other countries than Greece andtaken by the ECB. This will most probably happen in the months toIreland. Even the core countries (such as Belgium) saw their spreadscome.against Germany increasing fast. This statement has been revised inthe meantime, but the damage has been done...Euro lower will makethe German economy even stronger.Nautilus Capital AGLandstrasse 60 FL-9490 Vaduz Liechtenstein www.nautilusag.comT +423 232 1540 info@nautilusag.comPage 2 of 4 Decem ber-2010 3. Current Asset Allocation Asset Allocation Historical Asset AllocationsCash Cash(Last 5 years)Fixed Inco me 80.0% Fixed Inco meEquity Equity 100.0% 60.0%75.0% 40.0%50.0% 20.0%25.0% 0.7% 59.0%40.4% 0.0% 0.0%Dez 05 Dez 06 Dez 07 Dez 08 Dez 09Dez 10 A sset Classes Fixed Income Allocation: SectorFixed Income Allocation: Duration 40.0% 40.0% 30.0% 30.0% 20.0% 20.0% 10.0%10.0% 2.9% 35.6% 20.5%0.0%2.9%35.6% 20.5%0.0%0.0% UST 1 Year UST 7-1 Year UST 20+ Year-3 0US Co rp.Inv</p>