Deutsche Bank’s Tactical Asset Allocation Relative Strength Signal (TAARSS) monthly research update is designed to give readers some idea of investors’ level of risk appetite by using flows data from 14 asset classes that are relevant to the anatomy of a risk-on or risk-off trade.
Asset classes more likely to receive inflows during a risk-off environment are assigned a negative risk factor while on the other hand, asset classes more likely to receive inflows during a risk on trade are assigned a positive risk factor.
The least risky asset classes, which are more likely to receive inflows during a risk-off environment are US Treasuries, gold, corporate investment grade bonds and senior secured loans. At the risk-on end of the spectrum, inflows into emerging market equities, US small caps, and global cyclicals are believed to signal a risk-on market.
Add risky assets
The TAARSS model is currently indicating a risk-on attitude among investors. Consistent inflows across most segments following Brexit have helped push the model’s Risk-o-Meter steadily into risk-on territory, bleeding Deutsche Bank’s analysts to conclude that investors should be adding to risky assets during August to take advantage of increased risk appetite.
However, while risk appetite has generally increased among investors during the past month or so, commodity ETP flow trends slowed in July. Agriculture and gold flow trends were positive but lacked any consistency while energy flows suggested weakness. With this being the case, the TAARSS model recommends taking some commodity profits or sitting on the sidelines during August.
On the equity front, for the month of July equity ETF flow trends were dominated by emerging market equities. Inflows into emerging market equity funds recorded a significant and consistent trend in the last two weeks of July. Emerging market flows eclipsed flows into developed market ETFs. US equity ETFs fared better than most international markets. Europe continues to experience significant and consistent outflows in July suggesting that negative sentiments towards the region remains. ETF flows continue to benefit North American equities over other regions.
In credit, emerging market debt and MBS ETFs experienced the strongest flows last month while US Treasuries experienced relative weakness and selling pressure. Based on last month’s ETP flows Deutsche’s analysts prefer emerging market debt and investment-grade debt over Treasuries for August.
Deutsche’s full recommendations based on the TAARSS model:
“Within Global equities we prefer a mix of US and EM equities on the back of consistent flows and strong trend, respectively; while we would prefer to avoid equities in Intl DM markets, which face significant headwinds flow-wise, particularly Europe. Indeed, Europe continued to experience significant and consistent outflows in July, suggesting that negative sentiment towards the region hasn’t tapered, despite the relief rally following the Brexit vote. Within US equities we recommend broad exposure, or Real Estate based on healthy flows support.
Within Fixed Income we prefer Credit over Rates, particularly EM Debt and IG Corporate Debt; while avoiding US Treasuries in August.
Given the recent slowdown in commodity flow trends, we recommend taking some profits or sitting on the sidelines in August.
Top recommendations for August: EM Debt, EM Equities, US Equities, IG Corp Debt, and US Real Estate.”