DWS chief investment officer outlines funds’ stance on eurozone

As his country’s politicians vote on expanding the €440bn eurozone bailout fund today, the chief investment officer of DWS Investment says Greece is likely to receive more aid rubberstamped by the EU, IMF and ECB next month, but the aftermath of the current crisis will haunt markets for months to come.

Amid the uncertainty, DWS is retaining what Asoka Woehrmann called a “reserved” stance to equity and fixed income markets.

He noted a rapid loss of trust in the ability of politicians to fix their mess, and concerns over a further economic downturn are “holding Europe‘s equity markets firmly in their grip”.

European stocks are “oversold”. Germany’s Dax index has only traded further below its 200-day moving average than its current level twice in the past 50 years – once in 2003 and again after Lehman Brothers’ collapse.

European shares fell 22% this year, compared to 2% falls by US equities, leading to “attractive multiples [of] a P/E ratio of 7 in the Dax, 12 months forward, and a P/E of 11 for US stocks, that marks a low of the past decade.” Woehrmann noted Europe‘s dividend yield of 6.5%, or about 5% after “the uncertain dividends of the financial sector” are excluded.

But while markets remain uncertain, DWS remains cautious.

“Step­ping in aggressively is not in the cards for now, especially not in the financial industry, because volatility will remain high as long as the uncertainty persists,” Woehrmann said. He is watching early indicators, such as the US transportation in­dex, emerging markets and the upcoming earnings season “which will bring more clarity”.

DWS’s fixed income funds are “generally avoid­ing bonds of Greek origin and Spanish and Italian government bonds for now [and] won‘t change [that] any time soon.” Woehrmann added caution was also important in regards bonds of high-grade sovereign issuers, “which are overbought and have become rather pricy by now”.

DWS remains bearish on the euro versus other major currencies, so is short versus the US and Canadian dollars and sterling.

“Covered bonds are still in our favor as they are widely consid­ered as safe and fundamentally attrac­tive investments. Credit markets are also showing signs of improvement, but given the tremendous uncertainty in the market, we will add risk only through the new issue pipeline,” he said.

“Mean­while, subordinated financials contin­ued their sell-off – tier-1 paper already dropped by more than 30% – and become increasingly appealing.”

DWS’s exposure to French financial sector is “very short, typically with legal final maturities be­low one year [and] in our money market funds, cash positions are at elevated levels.”

On the macroeconomic front Woehrmann said Greece is “broke and depends on external help”, while “even the financial prowess of Germany and France is increasingly put into question. Despoits at the ECB seem to become the only safe refuge”.

He added Europe is “growing more impatient of the drawn-out implementation of austerity and consolidation measures”. He cited the example of promises that €1.7bn would come from privatsising Greece’s state-owned enterprises by the end of September, versus the fact nothing has yet appeared.

Overall, Woehrmann said, “if a major de­fault can be avoided, Europe as a whole should avoid a recession”.

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