In fixed income portfolios DBAM, unlike many others in the marketplace, favours dollar block bonds over European bonds.
The reasoning is that the US economy should slow down considerably over the coming quarters. The principal reason is that borrowing costs in the real economy have risen, as has the dollar. Debt burdens are high and rising, the banks are tightening credit availability to consumers and slowing profits are bringing down growth in investment spending. Efforts to improve the public sector budget continue. Inflation remains under control, the labour market not being as tight as generally perceived. Although Alan Greenspan may feel obliged to restrain the stock market with more interest ratehikes, this economic backdrop makes dollar bonds, with their middle-of-the-range yields, attractive.
In comparison, the European economy, especially that of Germany, is going in the opposite direction. Central banks have stimulated their economies with lower interest rates, bond yields adding to lower borrowing costs across Europe. The rise in the dollar should help too.
Within Europe, DBAM does not pretend to know the outcome of the French election, so it has no major bet between core and peripheral markets (taken together). The French socialists' demands would prove unacceptable to Germany and so could contribute to a delay in EMU, threatening the whole periphery. Markets seem complacent about this possibility.
Japanese yields remain very low. This situation is artificially created by the authorities to sustain the banking system and kick-start demand for funds. Tentative signs that they may no longer be pushing on a string" come from the slight pick-up in bank lending (adjusting for write-offs). Additionally, the market's view on the economy has become fixated by the spring tax rises, ignoring the solid growth overlay. Long term, the outlook for the yen is still poor, and DBAM maintains its underweight position.
The outlook for UK assets has improved considerably since the election of New Labour. DBAM is long both the bond and the currency.
Martin Harrison is chief strategist at Deutsche Bank Asset Management in Frankfurt"