Deutsche Bank WM repositions post-Brexit

Added 4th July 2016

Despite Brexit, the global head of discretionary portfolio management still sees upside potential for equities in the UK and Europe.

Deutsche Bank WM repositions post-Brexit

For UK equities, the firm reduced the return target to 5-10% in the coming 12 months. It also forecast the average earnings per share to come down by 3-5%.

“It’s a decent return compared to the bond side, but it will come with much higher volatility,” said Christian Nolting, global chief investment officer and global head of discretionary portfolio management at Deutsche Bank Wealth Management at a Hong Kong briefing.

The fall of sterling could benefit some sectors, such as exporting sectors or the tourism industry, he noted.

On the contrary, UK's financial sector is expected to hit the most due to loss of "passport rights", he said. "The passport rights used to allow British banks to trade across Europe. They have to renegotiate to get the rights given the UK is not a member of the EU."

UK's export industries such as manufactured goods, mineral fuels, and machinary and transport equipment, which have 53%, 77% and 41% of exports to EU, respectively, will also be negatively impacted by the Brexit, he added.

For European equities, he expects a 7-11% return over the next 12 months, with roughly 4% of that coming from dividend payouts.

“Currency movements are likely to play a significant role in determining the direction of individual equity indices, as well as investor return across markets," he noted in the CIO insights report in June.

Nolting said there’s a need to add more risks to the portfolio, as equities are expected to outperform other asset classes despite higher volatilities, while "pure safe haven asset class is very expensive."

In terms of fixed income, the firm is positive on euro investment grade credit.

“Although prices have been under pressure in May as a result of high supply, the ongoing economic stabilisation, continuing low default rates, as well as the start of the European Central Bank’s corporate-bond buying programme should well support this asset class,” the report noted.


Suggested weighting of asset classes in a balanced portfolio based on its forecast in May:

 Equities   46% 
 - Developed Markets   US   16.5%
   Europe   10%
   Japan  9%
 - Emerging Markets  Asia ex-Japan   10.5% 
   Latin American   0%
 Fixed income  39.5%
 - Credit   19.5%
 - Sovereigns    13%
 - Emerging markets    6.5%
 - Cash    0.5%
 Commodities   4.5%
 Alternatives   10%

Source: Deutsche Bank Wealth Management

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