The Key 2013 — Deutsche Bank Presenation — Larry Adam

Deutsche Asset
& Wealth Management

4Q13 Market Outlook
k
October 2013

Larry Adam, U.S. Chief Investment Strategist
Managing Director
410-895-4135
larry.v.adam@db.com

4Q13 Economic and Financial Market Outlook
Questions and Key Topics for Discussion

1

The Market Message of 2013, Thus Far
g
,

2

Living in a Fair Market Environment

3

Are the Stars Aligning for an Economic Rebound?

4

QE Means “Quite Easy” Monetary Policy

5

Normalization in Yields to Continue

6

Credit Fair Valued; Looking for Opportunities

7

And the Bull Rally Marches On

8

Selectivity Important in Fair Valued World

9

Will the Dollar Be King?

10

Commodities to Be Challenged

Deutsche Asset
& Wealth Management

4th Quarter Market Outlook

016437.10.02.13

1

The Market Message of 2013, Thus Far

1

What Have the Markets Told Us?
3Q13 Performance by Asset Class/Sector QTD
35%
25%

Commodities:
Broad gains; Agriculture
struggles

Year to Date Total
Return (colors vary)

Fixed income:
Modest gains, long term
Treasuries fall

3Q13 Total Return
(colors vary)

15%
5%
-5%
S&P 500 sectors:
Rotation into select
cyclicals; interest rate
sensitive, telecom, lags.
Growth outperforms value

-15%
-25%

Equities:
All regions except India
positive, Europe rebounds

FX: Dollar Falls;
Euro/GBP rally

EuroStoxx 50
Fr
rance CAC 40
Hang Seng
B
Brazil Bovespa
G
German DAX
Nikkei
S&P 500
FTSE 100
India Nifty 50
S&P/Citi
igroup Growth
S&P/C
Citigroup Value
Materials
Industrials
Cons. Discretionary
Healthcare
Info Tech
Energy
Financials
C
Cons. Staples
Utilities
Telecom
U
U.S. High Yield
Emerging Mark Local Govt
ket
Emerging Market
Europe Credit
Euro Sovereign
ope
U.S. Invst Grade Credit
t
10-Y
Year Treasury
GBP
EUR
JPY
CNY
BRL
Dollar Index
Copper
Gold
Oil
DJ UBS
Corn

-35%
35%

Footnotes: Sorted by 3Q13 returns. Data as of September 30, 2013
Data Source: FactSet, Bloomberg Finance LP.

Deutsche Asset
& Wealth Management


016437.10.02.13

2

2

Living in a Fair Market Envir
ronment

Equities and Commodities Approaching Fair Value

S&P 500 P/E Fair Valued

Oil in the Fair Value Zone

24x

$160
$140
$120

Fair Value

16x

12x

C
Crude Oil Price ($/bbl)

20x

$100

Fair Value

$80
$60
$40
$20
$0
65

8x
'04

'05
'06
'07
'08
S&P 500 Trailing P/E
(AVG) S&P 500 Trailing P/E

'09
'10
'11
'12
'13
Recession Periods - United States

— The trailing P/E of the S&P 500 (15.7x LTM) is trading relatively
close to its 10-year average (15.8x LTM).

70

75

80

85

90

95

Global Crude Oil Consumption (million barrels per day)

With 2014 demand expected to rise above 90 million barrels
per day, the fair value of oil appears to be between $ and
$90
$100/barrel.

—

Deutsche Asset
& Wealth Management

The price of oil is highly correlated with demand. As demand
increases, the price of oil increases.

—

Data Source: FactSet.

—

With oil consumption increasing, demand appears to be more
inelastic.

Footnotes: Time period reflects 1Q91 to 2Q13.
Data Source: U.S. Energy Information Agency, FactSet.


016437.10.02.13

3

Living in a Fair Market Environm
ment
Fixed Income Testing Fair Value

Ten Year Treasury on Normalization Process

High Yield Spreads Below Historical Average

20%

2,500

15%

2,000

10%

1,500

Fair Value
5%

1,000

Fair Value
500

0%

0

-5%
'78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
(% 1 YR) Nomi nal GDP - Uni te d Sta te s
US Be nchm ark Bon d - 10 Yea r Yi el d

— The rise in yields since May has resulted in a normalization of
interest rates to a relatively fair value level in relation to GDP.
GDP

Deutsche Asset
& Wealth Management

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

Barcl ays Ca pital U.S. High Yi eld Spread (to 5 year T reasu ry Yi el d) i n bps
(AVG) Ba rcl ays Capi tal U.S. Hi gh Yiel d Spread (to 5 ye ar T re asury Yi eld ) in bp s
Recessi on Peri od s - Uni ted States

Recessio n Perio ds - Uni ted States

— Historically, the 10 year Treasury yield closely tracks the year
over year change in nominal GDP.


'99

— After credit spreads reached record highs in the depths of the
“Great Recession,” spreads have normalized and remain below
their 15 year average.



016437.10.02.13

4

3

Are the Stars Aligning for an Economic Rebound?
n

Economic Recovery Weak in Historical Context

U.S. Economic Recovery Still Weak in Historical Context

The Root of Economic Disappointment

150
145
140
135

1953-1954
1960-1961
1973-1975
1981-1982
2001

1957-1958
1969-1970
1980
1990-1991
2007-2009

Weaker New
Global Growth
Paradigm

130
125

Fiscal Drag

Disappointing
Corporate
Spending

Challenged
Confidence

120
115
110
105
Current recovery

100

-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

95
Quarters
Q arters Leading Up to and After Recessions

— Even 17 quarters after the end of the “Great Recession,” the U.S.
economic recovery has still been the weakest in a historical
context of all the recessions since the 1950s.

Footnotes: Time period reflects 1950-2013. Zero marks the end of each recession

Deutsche Asset
& Wealth Management


016437.10.02.13

5

Are the Stars Aligning for an Ec
conomic Rebound?
The Formula – From Grinding for Growth to Procuring Economic Pr
rosperity

Global
Growth
Acceleration

+

Business
Spending

=

Deutsche Asset
& Wealth Management

+

Consu
umer:
Positiv Net
ve
Wealth Effect
h

+

Improving
Labor Market

+

Ease of
Fiscal Drag

+2.5-3
3.5%
U.S. GDP Growth
P


016437.10.02.13

6

conomic Rebound?
Signs that Global Economic Rebound is Ahead

U.S. Economic Growth Expected to Accelerate
3.5%

Fiscal Drag on U.S. Growth Expected to Ease in 2014

Estimates

3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
%
0.0%
1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

U.S. GDP Estimate

— Economic growth should accelerate in 2H13 and 2014, based
on an increase in business spending, exports and productivity.
In addition, the waning impact from the fiscal drag should
p
further complement the resilient consumer demand.

Footnotes: Estimates as of October 18, 2013.
Data Source: DEAWM, Bloomberg Finance LP.

Deutsche Asset
& Wealth Management

— In terms of the fiscal drag on growth, DB Global Markets
estimates that after peaking this year, the impact on GDP from
austerity measures will fall by 1.6% in 2014 (from 2.3% to 0.7%)
and decline further in 2015.

Data Source: Deutsche Bank Global Markets


016437.10.02.13

7

conomic Rebound?
Acceleration in Global Growth Leads to Pickup in Exports

European Growth to Pick up in 2H13 and 2014

Exports Turning Slightly Positive

2.0%

50%
estimate

1.5%

40%

1.0%

30%

0.5%

20%

0.0%

10%
0%

-0.5%

-10%

-1.0%

-20%

-1.5%
1.5%

-30%
-2.0%
-40%
Jan-07

-2.5%

Dec-07

Nov-08

Oct-09

Sep-10

Aug-11

Jul-12

Jun-13

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14
Euroland GDP (QoQ Ann%)

— Europe has emerged from the longest economic recession on
record.
— While growth may modestly slow from 2Q13 in the coming
q
quarters, we expect g
,
p
growth to accelerate in 2014.

U.S. Exports to EM

U.S. Exports to EU

U.S. Exports to Japan

— In fact, we have started to see signs of a recovery in export
activity to some of our largest trading partners within the
developed economies and the emerging markets.

— This should help to boost U.S. economic growth through
increased export activity.

Footnotes: Estimates as of September 2013.

Deutsche Asset
& Wealth Management

Footnotes: EM sums Brazil, Mexico, China, Russia, India, Korea, Taiwan.
Data Source: Bloomberg Finance LP. As of July 2013.


016437.10.02.13

8

conomic Rebound?
Acceleration of Capex Spending

Business Outlook for Capex Improving

S&P 500 Spending on Capital Expenditures
80

40
30

70

20

60

+71%

+55%

10
50

+84%

0
40

-10

30

20
-20
-30
Aug-00

Oct-02

Dec-04

Feb-07

Apr-09

Jun-11

Aug-13

20
Dec-90

Capex Spending Outlook Richmond Fed & Philadelphia Fed (Avg)

— Capex spending has been slow to materialize in the economic
recovery but is a foundation of our economic outlook.
— There has been signs of optimism as the capex spending
g
y
g
g
outlook in some of the regional surveys is reaching its highest
level since 2000.

Oct-93

Aug-96

Jun-99

Apr-02

Feb-05

Dec-07

Oct-10

Aug-13

S&P 500 Capital Expenditures

— If you use history as a guide, companies in the S&P 500 tend to
increase capex spending by 78%, on average, in a business
recovery.
— However, companies in the current cycle have only increased
,
p
y
y
capex spending by 55%.
— This illustrates how underinvested companies remain after the
“Great Recession.”

Data Source: Bloomberg Finance LP

Deutsche Asset
& Wealth Management

Footnotes: Data is an Index and uses the trailing 12 months capex spending.
Data Source: Bloomberg Finance LP


016437.10.02.13

9

conomic Rebound?
Near Term Risk More About Confidence Than Structural Decelera
ation

Limited Damage from Federal Government Furloughs

Ultimate Impact Dependent Upon Confidence Turnaround
90

Largest decline in over two years

85
80
75
70
65
60
55
50
2008

2009

2010

2011

2012

2013

U. of Mich. Consumer Sentiment - 3-Month Moving Average

— Despite ~800K government workers furloughed at the start of
the shutdown (~25% of federal employees), 350K were
reclassified as “essential” employees so that they could return
to work and the deal made by Congress is set to pay
furloughed workers retroactively.

Data Source: Deutsche Bank Global Markets.

Deutsche Asset
& Wealth Management

— Consumer confidence was hampered by the government
impasse with the three month moving average of consumer
sentiment falling at the fastest pace in more than two years in
October.
— New deadlines from the deal will be in focus but hopefully
confidence will be restored. In the absence of a fiscal policy
“shock” we expect the combination of lower gas prices, falling
mortgage rates, rising equity prices and the end of the
shutdown should bolster sentiment.
.


016437.10.02.13

10

4

QE Means “Quite Easy” Mon
netary Policy

“Easy” Policy Globally

Global Balance Sheets

Rates to Remain Accommodative

$4,500

60%

Only 50% chance of rate hike by Jan 2015

$4,000
50%

$3,500
in billion
ns

$3,000

40%

$2,500
30%

$2,000
$1,500

20%

$1,000
10%

$500
$0
Aug-00

Oct-02

Dec-04

Fed Balance Sheet

Feb-07

Apr-09

Jun-11

Aug-13

0%
Oct-13 Dec-13 Jan-14 Mar-14 Apr-14 Jun-14 Jul-14 Sep-14 Oct-14 Dec-14 Jan-15

Bank of Japan Balance Sheet (in USD)

Probability of Rate Hike (as of August 20, 2013)

ECB Balance Sheet (in USD)

Probability of Rate Hike (as of Sept 27, 2013)

— Despite the talk of “taper,” the Fed is still expected to increase its
balance sheet over the next 6-12 months, just at a slower pace.

— Within the U.S., even if the Fed begins the gradual removal of
QE, interest rates should remain low until 2015, at the earliest.
— In fact, the probability of a rate hike in January 2015 has fallen
from 51% to 46% in a month
month.

Data Source: Bloomberg Finance LP.

Deutsche Asset
& Wealth Management



016437.10.02.13

11

QE Tapering Postponement

“Mixed” Employment Perspectives
Mixed
10.0%

Potential Timing for Tapering

Weak payroll gains remain a
concern for the Fed

9.5%

250
225

FOMC
Oct 29-30

200
9.0%

Taper?

Comment



 Fed not more comfortable now than in Sep

175
150

8.5%

Dec 17-18

?

Jan 28-29

?

125
8.0%

100
75

7.5%

7% remains one threshold we believe needs
to be reached before the Fed “tapers” QE
p

7.0%
6.5%
Sep-2010

Mar-2011

Sep-2011

Mar-2012

Sep-2012

Mar-2013

50
25
0
Sep-2013

Mar 18-19

Unemployment Rate (% LHS)
Nonfarm Payroll Change 6-Month Moving Average (thousands, RHS)

 Possible, but “burden of proof” for data
high, e.g.,
high e g payrolls above +200k
 Chances of real long-term fiscal resolution
by December have risen
 Possible; data will be stronger, political
uncertainty likely reduced
 Last meeting under Bernanke



 Fed publishes new forecasts, Chair holds
press conference – making it easy to
Market
explain / justify taper
pricing*

—

Labor market improvements remain in focus for the Fed as they
assess future policy. While the unemployment rate fell (to 7.2%)
to its lowest level since November 2008 in September, underlying
trends continue to reflect a tepid environment.

—

Janet Yellen will likely take a similar “dovish” stance as Bernanke
did with the focus on the labor market as a gauge for future QE.
Labor participation remains at the lowest level since 1978 and the
total number of people employed is still below pre-crisis levels.

—

In addition to the six-month moving average of payroll gains
six month
declining in recent months, uncertainty surrounding the actual
impacts from the government shutdown will be closely watched.

—

In terms of taper timing, the odds of a December announcement
p
g,
are falling given the Fed’s data dependent approach. If monthly
payroll gains can move back above 200K and a long-term fiscal
resolution is achieved by lawmakers, December remains in play.

—

With the March meeting including new Fed forecasts and Yellen’s
first press conference, it could be an opportunity to be more
transparent in explaining th path and j tifi ti of t
t
ti
l i i the th d justification f tapering.
i

Data Source: FactSet

Deutsche Asset
& Wealth Management



016437.10.02.13

12

QE Means “Quite Easy” Moneta Policy
ary
Taking a “Taper” Breather…For Now
Fed Economic Checklist

More Room to Go

Improvement

Checklist

Confidence

Employment

Prices
Pi

Economy

Government

Factor

Level to Look for

Last Time Level
Reached

Current Level

Level May 2013

x
x

Consumer Confidence

>90

October 2007

80

74

Small Business Optimism

>100

October 2006

94

94

x
x

Nonfarm Payrolls (6 Mo

>210K

April 2006

160K

203K

Unemployment Rate

<7.0%

November 2008

7.3%

7.6%

x

x

Housing Prices (S&P Case

>165

December 2008

162

152

1693

1669

x

x

Moving Average)

Shiller Index)

(initial "taper" talk)

Equity Prices (S&P 500)

1585

Inflation (PCE Deflator)

2.0%

February 2012

1.4%

1.1%

GDP

>2.3% (
(YoY) (sustain for
two/three co
onsecutive quarters)

2010

1.6% (2Q13)

1.3% (1Q13)

Interest Rates (10YR)

<3.1%

July 2011

2.62%

1.93%

Budget and Debt Ceiling

Agreement Between Both
Parties

December 2012

No Budget/Debt
Ceiling at Risk

Footnotes: Treasury yields and S&P 500 level for May is as of May 21, 2013. All other data as of O
October 2, 2013.

Deutsche Asset
& Wealth Management


016437.10.02.13

13

Fed Becoming More Hawkish?

Fed Composition 2013

Fed Composition 2014

2014 FOMC Voting Members

2013 FOMC Voting Members
Member Name
Ben S. Bernanke

FOMC Member Role
Chairman - Board of Governors

1

Member Name

FOMC Member Role

Rating

Janet Yellen (Favorite)

Chairman - Board of Governors

1

Vice Chair of FOMC - New York

1

Rating

William C D dl
Willi
C. Dudley

Vice Chair f
Vi Ch i of FOMC - N Y k
New York

1

William C Dudley
C.

Janet Yellen

Vice Chair Board of Governors

1

TBD

Vice Chair Board of Governors

Charles L. Evans*

Chicago Fed President

1

TBD*

Cleveland Fed President

Eric S. Rosengren*

Boston Fed President

1

TBD

Board of Governors

Elizabeth A. Duke

Board of Governors

2

TBD

Board of Governors

Sarah Bloom R ki
S h Bl
Raskin

Board f Governors
B d of G

2

Daniel K. Tarullo
D i l K T ll

Board f G
B d of Governors

2

Daniel K. Tarullo

Board of Governors

2

Jeremy C. Stein

Board of Governors

2

Jeremy C. Stein

Board of Governors

2

Jerome H. Powell

?

Board of Governors

3

Minneapolis Fed President

3

Jerome H. Powell

Board of Governors

3

Narayana Kocherlakota*

James Bullard*

St. Louis Fed President

3

Richard Fisher*

Dallas Fed President

4

Kansas Cit F d President
K
City Fed P
id t

4

Charles Pl
Ch l Plosser*
*

Philadelphia F d P
Phil d l hi Fed President
id t

5

Esther L G
E th L. George*
*

Average "Dove-Hawk" Rating (Dove =1, Hawk = 5)

1.9

Average "Dove-Hawk" Rating (Dove =1, Hawk = 5)

2.6

— Janet Yellen remains the favorite to replace Ben Bernanke in 2014. H
However, a new Vice Chairman will need to be appointed and with Fed
Governor Duke having stepped down at the end of August, Fed Gov
vernor Raskin set to be deputy Treasury secretary and Sandra Pianalto
resigning,
resigning the unfilled spots are likely to cause some uncertainty regarding majority views in the year ahead.
ahead
— In terms of the four regional Fed Presidents, the “dovish” Evans and Rosengren will be rotating out along with the more neutral Bullard and
e
“hawkish” George. In their place, Kocherlakota (leans “hawk”) will be joined by two of the Fed’s most “hawkish” members (Fisher and Plosser).
— Using the “dove-hawk” scale (1 = dove, 5 = hawk), the average of the known (assuming Yellen is Chairman) members saw a much more
“hawkish” tilt (2.6) relative to 2013 (1.9). Obama will need to determine if a more balanced or “hawkish” Fed is appropriate.
Footnotes:*Represents a regional Fed President that is a voting member for one year. Ranked based on the “Dove-Hawk” scale (Dove = 1, Hawk = 5).
Data Source: FRB, Bloomberg Finance LP, Wall Street Journal, DB U.S. Investment Strategy Group, DB Global Markets

Deutsche Asset
& Wealth Management


016437.10.02.13

14

5


Acceleration in Growth Supports High Yields

Economic Outlook Still Points to Higher Yields
16.0%

Interest Rate Break-Out
Break Out
5.5%

US Benchmark Bond - 10 Year - Yield

5.0%

14.0%

4.5%

12.0%

4.0%

10.0%

3.5%

8.0%

3.0%
2.5%

6.0%
4.0%

DB Year End 2014 Target
~4.0% 10-Year Treasury Yield
End of
3Q13

1.5%

2.0%
0.0%
-4.0%

2.0%

1.0%
'07

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

(% 1YR) Nominal GDP (YoY %) - United States

— Using the year over year level of nominal GDP, interest rates
should continue to mover higher over the next 12 months (~4%).

Footnotes: Time period reflects 30 years through 2Q13.

Deutsche Asset
& Wealth Management

'08
'09
'10
'11
'12
US Benchmark Bond - 10 Year - Yield
(MOV 50D) US Benchmark Bond - 10 Year - Yield
(MOV 200D) US Benchmark Bond - 10 Year - Yield

'13

— While rates have moved modestly lower with the political risks in
Washington, long term yields have broken through their long
term bull market trend.



016437.10.02.13

15

Supply/Demand Dynamic Likely To Become More Difficult
Retail Outflows to Continue?

Net Issuance Will Remain Healthy
2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

$450

2023

0.0%

$400

-0.5%

$350

-1.0%

$300
-2.1%

-2.0%
-2.5%

3 2%
-3.2%

-3.0%
-3.5%

-2.3%

-2.4% -2.5%
-2.7%

-3.8%
-3.7%

-4.0%

-2.3% -2.5%
-2.9%
2 9%
-2.9%

-3.2%

-3.1% -3.2%
-3.5%

-3.4% -3.3%

-3.6% -3.8%

-3.8%

-4.5%
-5.0%
-5.5%

bil
llions

-1.5%

$250
$200
$150
$100
$50

-5.3%

$0
Dec 07
Dec-07
U.S. Budget Deficit Projection - September 2013 (% of GDP)
U.S. Budget Deficit Projection - February 2013 (% of GDP)

May 09
May-09

Oct 10
Oct-10

Mar 12
Mar-12

Aug 13
Aug-13

12 Month Rolling Flow into Bond Mutual Funds
Data Source: ICI

Net Unrealized Gains/Losses for Commercial Banks
— Treasuries should continue to face headwinds from supply as the
deficit is
d fi it i expected t get worse from 2015 and b
t d to t
f
d beyond.
d
— In addition, ongoing fund outflows and regulations may present
risks to bond investors.

The 100 bps sell off in interest rates in May-June resulted
in a $40 billion reduction in tier-1 capital and cut tier-1
capital by 0.3%.

Data Source: Congressional Budget Office

Deutsche Asset
& Wealth Management

Data Source: Treasury Borrowing Advisory Committee, Federal Reserve


016437.10.02.13

16

Duration Risk Unlikely To Produce Recent Returns

Risk Reward: Don’t Expect Easy Returns Going Forward
Don t

Duration Risk
200

10.0%

180

9.0%
1
10 Year Annalized Re
eturn

10.0

188

High Yield

9.0

160

Emerging Market

8.0

Convertibles

8.0%

S&P 500

140

7.0

99

7.0%
120

6.0

100

5.0

6.0%
5.0%

3.0
36

40
Cash

34

20

1.0%
0.0%
0.0%

4.0

60

3.0%
2.0%
2 0%

71

80

Treasuries

4.0%

1.0

0
2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

10 Year Standard Deviation

2.0

0.0
High Yield

Emerging
Market Debt

Invt Grade

5YR Treasury 10YR Treasury

Change in Basis Points to Result in Negative Total Return (1YR Time Frame) (LHS)
Duration (RHS)

— Treasuries have offered lower returns over the past 10 years
compared to other higher yield fixed income investments (e.g.
convertibles, emerging market debt and high yield).

— With interest rates expected to rise, investors should focus on
investments that offer lower duration and less interest rate
sensitivity.

years,
— With the rally in credit in recent years selectivity will be important
within “carry” investments.

— For example given the attractive “carry ” the yield on high yield
example,
carry,
debt would need to rise 188 bps in order for an investor to see
negative returns.
— In contrast, investors holding 10 year Treasuries would only need
to see yields rise 34 bps.

Footnotes: Time period reflects trailing 10 years as of September 30, 2013.

Deutsche Asset
& Wealth Management

Footnotes: Data as of October 2, 2013.


016437.10.02.13

17

Credit Fair Valued; Looking for Opportunity

6

Most Credit Fair Valued
Investment Grade — Fair Valued
700
600
500

High Yield Spreads Below Average
2500

Barclays US Agg Invt Grade Credit Spread
(OAS)

Barclays Capital U.S. High Yield Spread (to 5 year
Treasury Yield) in bps

(AVG) Barclays US Agg Invt Grade Credit
Spread (OAS)

2000

(AVG ex 2008-2009) Barclays US Agg Invt
Grade Credit Spread (OAS)

1500

400
300

(AVG) Barclays Capital U.S. High Yield Spread (to 5
year Treasury Yield) in bps
(AVG ex 2008-2009) Barclays US Agg Invt Grade
Credit Spread (OAS)

1000

200
500
100
0
Oct-93

Aug-96

Jun-99

Apr-02

Feb-05

Dec-07

Oct-10

Aug-13

— Investment grade spreads look fair valued in relation to history.
Even if you strip out the elevated levels seen during the financial
crisis, spreads are close to fair value.
— The historical average spread for investment grade debt (20
years) has been 142 bps while the average spread ex 2008-2009
has been 120 bps
bps.

0
Oct-93

Aug-96

Jun-99

Apr-02

Feb-05

Dec-07

Oct-10

Aug-13

— In addition, high yield spreads look fair valued in relation to
history.
— The historical average spread for high yield debt (20 years) has
been 571 bps while the average spread ex 2008-2009 has been
515 bps.
— Th f
Therefore, spreads at ~480 b h
d
480 bps have li i d room f narrowing.
limited
for
i

— Therefore, spreads at ~140 bps have limited room for narrowing.


Deutsche Asset
& Wealth Management



016437.10.02.13

18

Credit Fair Valued; Looking For Opportunity
r
Convertibles Can Produce Attractive Returns Despite Rising Rates

Credit Performance in Rising Rate Environment

High Yield versus Convertibles in Rising Rate Environment
50%

40%

40%

BofA Merrill Lynch Co
onvertibles

60%

50%

BofA Merrill Lynch Co
onvertibles

60%

30%

R2=

20%

0.73

10%
0%
-10%
-20%

30%
20%
10%
0%
-10%
-20%
-30%
30%

-30%
-40%
-40%

R2= 0.05

-20%

0%
20%
40%
U.S. Barclays High Yield

60%

80%

-40%
-40%

-30%

-20%

-10%
0%
10%
U.S. Barclays High Yield

20%

30%

40%

— Convertibles have significantly outperformed high yield as equities h
have continued to rally and the default environment has remained
low. We believe convertibles continue to present an attractive opport
tunity for several reasons.
— Correlated to Equities: Historically, (10 years) convertibles are highly correlated to the S&P 500 (0.90). Therefore, given our constructive
y
bias towards equities, convertibles may benefit.
— Drastic Spread Narrowing Likely Over: High y
p
g
y
g yield has benefited from low spreads but g g forward we believe the bulk of the spread
m
p
going
p
compression is behind us. Returns going forward are likely to be mo muted than the robust returns over the past 10 years (9% ann).
ore
— Convertibles Outperform in Rising Rate Environment: Historically, du to the strong correlation to equities, convertibles generally
ue
outperform high yield in a period of rising rates and positive economic growth.

Footnotes: Time period reflects August 1994-August 2013 and exclude outliers above 40% for high yield returns
h

Deutsche Asset
& Wealth Management


016437.10.02.13

19

And the Bull Rally Marches On…

7

The Current “Bull Market” Rally Remains the Most Robust on Record at Its Current Duration
Despite uncertainty around the potential path of QE “tapering” and f
fiscal policy, U.S. equities have remained resilient and the S&P 500
“bull market” rally that began March 9, 2009 has remained intact.
— Relative to other historical “bull market” rallies, the S&P 500 current ra is now 4.5 years in duration and at its current juncture, it is the second
ally
most robust rally (~+151%) on record.
— At the 4.5 year mark versus other “bull market” rallies that have lasted this long without a 20% correction or greater, the trailing 12-month P/E
d
(15.7x) is above average (13.9x) despite the growth environment (trail
ling 4-quarter average real GDP: +1.6%) being less robust than the
average “bull market” rally (+3.7%).
— The S&P 500 continued higher in September, one of the most season
nally weak months of the year, and is now up ~26% in 2013 on an
annualized basis. Dating back to the S&P 500 Index inception (1930 w the first full year), the S&P 500 is on pace for the 16th strongest
was
annual return on record.
— Of all years, that would put this years S&P 500 rally in the top quartile of annual returns when annualizing year-to-date performance. It would
also be the strongest annual rally since 1998 (+26.7%).
( 26.7%).

S&P 500 Top “Bull Market” Rallies at Current Duration

“Bull Market” Rally Strongest at Current Duration
550

S&P 500 Top Bull Market Rallies

2009
2002
1987
1982
1974
1957
1949
1942

Rallies at Current Duration (4.5 Years)

350
300

Total Rally
Length
(Years)

S&P 500
Cumulative
Gain

S&P 500
Trailing 1212
Month P/E

S&P 500
Dividend
Yield

U.S. Real
GDP Prior 4Quarter
Average

Aug-1982

Aug-1987

5.0

156%

15.8

3.35%

3.0%

Mar-2009

Sep-2013

4.5

151%

15.7

2.01%

1.6%

Oct-2002

Oct-2007

5.0

93%

15.8

1.86%

1.9%

Aug-1956

7.1

84%

9.4

N/A

5.6%

Jul-1998

10.6

74%

18.6

3.15%

2.9%

Oct-1974

400

Maintaining record pace

S&P 500
Peak Date

Dec-1987

450

S&P 500
Trough Date

Jun-1949

500

Nov-1980

6.2

63%

7.9

5.27%

7.1%

Average of Bull Market
Rallies

6.4

104%

13.9

3.13%

3.7%

250
200
150
100
1

2

3

5
6
4
Number of Years

Footnotes: Returns are price only. As of October 2, 2013.

Deutsche Asset
& Wealth Management

7

8

9

10

Footnotes: Returns are price only. As of October 2, 2013.


016437.10.02.13

20

The Current “Bull Market” Rally Remains the Most Robust on Record at Its Current Duration

Ranking Annual S&P 500 Index Returns – 2013 (Annualized) Top Q
g
(
) p Quartile and Best Since 1998
50%

Top Quartile

Bottom Quartile

40%
30%
20%
10%
0%
2013 = ~26%
(annualized, 16th
Best Year)

-10%
-20%
-30%
-40%
S&P 500 Annual Returns (Price Only)

1931
1937
2008
1974
1930
2002
1941
1973
1940
1932
1957
1966
2001
1929
1946
1962
1977
1969
2000
1981
1953
1990
1934
1939
1960
1994
1948
1970
2011
1947
1978
1984
1987
1956
2005
2007
1992
1993
1968
1959
2004
1965
1949
1971
1952
1979
1988
1942
2010
1964
2012
2006
1944
1986
1982
1972
1951
1983
1963
1976
1943
1999
1967
1996
1950
1961
2009
1938
1980
2013
1991
1985
2003
1955
1998
1989
1936
1945
1997
1975
1995
1958
1935
1954
1933

-50%

Footnotes: Returns are price only since the S&P 500 Index inception and data is as of October 2, 2013.

Deutsche Asset
& Wealth Management


016437.10.02.13

21

Broad Equities Fair Valued

S&P 500 Price to Earnings Ratio

S&P 500 P/E Pricing in Expected Economic Environment

24x

17
Average P/E Given
GDP Scenario

16

16.0

16.2

15.2

15

20x

Average P/E

14

16x

12x

13

13.4
13 4

13.1
12.3

12
11
10
9

8x
'04

'05
'06
'07
'08
S&P 500 Trailing P/E
(AVG) S&P 500 Trailing P/E

'09
'10
'11
'12
'13
Recession Periods - United States

8
Less than - -2% to 0%
2%

0% to 2%

2% to 4%

4% - 6%

6% or More

Real GDP (YoY)
(
)

— The trailing P/E of the S&P 500 is trading (15.7x) on the 10 year
average (15.8x).


Deutsche Asset
& Wealth Management

— In addition, when using history as a guide, the P/E is likely
reflecting the outlook for growth (2-4%).

Footnotes: Time period reflects 1Q48 – 2Q13.


016437.10.02.13

22

Earnings Growth Will Need to Support Higher Prices

Earnings Growth Slowing but Expected to Accelerate

Earnings Troughing and Reaccelerating
60.0%

14%
estimates

Year-over-Year Grow (%)
wth

12%

50.0%
40.0%

10%

2014/4c

2014/3c

2014/2c

2014/1c

-10.0%

2013/4c

0%
2013/3c

0.0%
%

2013/2c

2%

2013/1c

10.0%

2012/4C

4%

2012/3C

20.0%

2012/2C

6%

2012/1C

30.0%

2011/4C

8%

4Q09

— The earnings environment is expected to improve as economic
growth improves.
— While we think some of the estimates may be overly optimistic,
we believe earnings growth of 5-7% in 2014 can support higher
equity prices.

Data Source: FactSet, FirstCall.

Deutsche Asset
& Wealth Management

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

Quarterly Earnings Estimate (YoY %)

1Q10

1Q13

2Q13

3Q13

— If you look at the past quarters since the end of the “Great
Recession,” earnings tend to be lowered going into earnings
season and then typically improve throughout earnings season.

Footnotes: Change in earnings estimates from 12 weeks prior to 12 weeks after earnings
season.


016437.10.02.13

23

8

Selectivity Important in a Fa Valued World
air

Searching for Value Within Sectors

Finding Value at Sector Level

2014 Earnings Achievability

30%
Consensus 2014
Earnings Growth Est.

Our Base Case
2014 Earnings
Growth Est.

DifferenceBetween
Consensus and Base
Case

Telecom

11%

3%

-8%

Financials

8%

6%

-2%

Cons. Discret

18%

5%

-13%

Materials

18%

5%

-13%

Cons. Staples

10%

5%

-5%

Industrials

11%

7%

-4%

S&P 500

11%

6%

-5%

Energy

11%

8%

-3%

25%
20%
15%
10%
5%
0%
-5%
Relative to 10 year average (P/E, P/BV, P/S, PEG)

-10%

Cons. Discretionar
ry

Utilitie
es

Cons. Staple
es

Healthcar
re

Material
ls

Industrial
ls

S&P 50
00

Telecom. Service
es

Energ
gy

Financial
ls

Info Tec
ch

-15%

— When looking at the sector level, the majority of sectors are
either trading at a premium to their 10 year average.

Lower negative
revisions

— Info tech, financials and energy are the only sectors trading at a
discount.
di
t

9%

-2%

9%

7%

-2%

Utilities

Deutsche Asset
& Wealth Management

11%

Healthcare

Footnotes: Data as of October 2, 2013.

Info Tech

4%

3%

-1%

Footnotes: Consensus as of September 2013.


016437.10.02.13

24

Selectivity Important in a Fair V
Valued World
Favor Dividend Paying Investments Despite Rise in Interest Rates

Dividend Growth by Sector (Last 10 Years)

Interest Rate Sensitive Investments and Higher Yields

14

25.0%
# of Consecutive Years of Dividend Growth (LHS)

12

280

20.0%

10 YR Dividend Growth Rate (Ann) (RHS)

10

15.0%

8

10.0%

6

5.0%

4

0.0%

2

-5.0%

0

-10.0%
Cons. Discretionar
ry

Financials

Industrials

Materials

Healthcar
re

Telecom
m

Utilitie
es

Cons. Staples
s

Info Tec
ch

Energ
gy

230

180

130

80
Apr-03

Oct-03
Utilities

— We continue to favor dividend paying investments despite the
modest rise in interest rates.
— Energy and info tech have seen the highest dividend growth over
the past 10 years and have seen the highest number of
consecutive years with dividend growth
growth.

Footnotes: Annual growth through December 2012.

Deutsche Asset
& Wealth Management

Apr-04

Oct-04

Telecom

Apr-05

Oct-05

REITs

Apr-06

Oct-06

S&P 500

Apr-07
MLPs

— Despite the rise in interest rates, dividend paying investments
can still perform well. As long as the rise in rates is accompanied
by better economic growth some interest rate sensitive
investments should perform well.
— In fact, from the 2003-2007 period of rising rates utilities
fact
2003 2007
rates, utilities,
telecom, REITs and MLPs outperformed the S&P 500.

Footnotes: Rising rate period from 2003-2007.
Data Source: FactSet, Bloomberg Finance LP.


016437.10.02.13

25

Selectivity Important in a Fair V
Valued World
Searching for Value Within Global Regions

Finding Value at Regional Level
Monetary Policy

Valuations

Earnings

Earnings
Revisions

Technicals

Final Score

Japan

1.00

1.00

-1.00

1.00

1.00

1.00

4.00

Europe

0.75
0 75

0.75
0 75

0.00
0 00

1.00
1 00

-1 00
1.00

1.00
1 00

2.50
2 50

U.S.

1.00

1.00

0.00

1.00

-1.00

0.25

2.25

UK

0.75

0.75

0.00

0.00

-1.00

0.25

0.75

1.00
1 00

0.25
0 25

1.00
1 00

1.00
1 00

-1.00
1 00

1.00
1 00

3.25
3 25

Korea

0.25

0.00

1.00

1.00

-1.00

1.00

2.25

Russia

0.00

0.00

1.00

-1.00

1.00

1.00

2.00

Taiwan

1.00

0.00

0.00

1.00

-1.00

1.00

2.00
2 00

India

0.25

0.75

1.00

0.00

-1.00

0.75

1.75

Indonesia

1.00

1.00

-1.00

1.00

-1.00

0.75

1.75

Brazil

0.25

0.00

-1.00

0.00

-1.00

1.00

-0.75

Mexico

Emerging Econ
nomies

Macro
Fundamentals

China

Developed Ec
conomies

Country by
Ranking

0.00

0.00

-1.00

0.00

-1.00

0.75

-1.25

Footnotes: Valuation model factors attractiveness given levels of change in PMI (Macro Fundame
entals), change in real interest rates (Monetary policy), P/E discount/premium (Valuations),
earnings growth and interest rates (Earnings), three month earnings revisions (Earnings Revisions), 50 and 200 day moving average (Technicals).
Data Source: DEAM U.S. Investment Strategy Group, FactSet, Bloomberg Finance LP.

Deutsche Asset
& Wealth Management


016437.10.02.13

26

9

Will the Dollar Be “King”?

A New Cyclical Uptrend for the U.S. Dollar?

Key Factors Impacting the U.S. Dollar Outlook

Historical U.S. Dollar Cycles
150

Long Dated
Cycles

+

Historically, the U.S. dollar has gone through several multi-year cycles and
it appears the most recent downward cycle (9 years) ended in mid-2011

140
130

6 years,
-18%

6 years,
+67%
10 years,
-46%

120

7 years,
+43%

9 years,
-40%

110

Decoupling of
Monetary
Policy

+

The eventual "tapering" of QE by the Fed as the economy improves, as well
as further policy easing by the BOJ, ECB and BOE will likely lead to U.S.
dollar strength

???

100
90
80

Better
Economic
Growth
Prospects

+

Capital / Fund
Flows to U.S.

+

Increased capital inflows into the U.S. serves as a catalyst for the U S
US
U.S.
dollar strengthening

Geopolitical
Risks

+

Political risks in the Eurozone, Japan and the Middle East would increase
the "safe haven" status of the U.S. dollar

Export
Sensitivity

70
U.S. economic growth prospects are superior to other major developed
economies like Japan and the Eurozone

60
1973

1978

1983

1988

1993

1998

2003

2008

2013

Nominal U.S. Trade Weighted Dollar Index
Real U.S. Trade Weighted Dollar Index

—

Strength in the U.S. dollar could hamper export activity and as a result, U.S.
economic growth

Data Source: Deutsche Asset & Wealth Management Investment Strategy Group.

Deutsche Asset
& Wealth Management

— The U S dollar has strengthened YTD and appears to be at an
U.S.
inflection point after trending lower since 2002. We expect an
upward cycle to occur as U.S. growth improves and the U.S.
deficit is reduced from recent fiscal reform.
— Over the last 40 years the U.S. dollar has seen five major
y
,
p
,
g g years in length.
g
cycles, both downward and upward, averaging 8 y
— While a strong dollar may benefit the fiscal health of the
economy and support fund flows, we are monitoring it closely as
U.S. corporate profits may be negatively impacted. Near-term,
dollar gains will likely pose downside risks for commodities and
hedging of foreign equity positions should be considered.
Footnotes: Data as of August 31, 2013.
Data Source: FactSet. As of August 31, 2013.


016437.10.02.13

27

U.S. Dollar Trends Derived from Global Monetary Policy

U.S. Dollar Moves Driven by Monetary Policy?
85

Bernanke
“dovish” in
NABE Speech

Anticipation
leading up to
Sep. 13 QE
announcement

84
83

Global Balance Sheet Expansion

Fed decides not to
“taper” at
September meeting
Japan’s
Abe takes
office

82
81
80

Bernanke outlines
Japan details QE
plans, growth reforms QE “tapering” path
Jun. 18

79
78
Jul-2012

Sep-2012 Nov-2012

Jan-2013 Mar-2013 May-2013

Jul-2013

Government
shutdown

Sep-2013

U.S. Trade-Weighted Dollar Index

—

Source: DB Global Markets.

Over the last year, global monetary policy has become a more
year
significant factor in U.S. dollar moves. Outside of Fed policy, we
have seen the U.S. dollar rally as a result of Japan’s aggressive
QE programs and more recently, the ECB and BOE’s forward
guidance on low rates for the foreseeable future.

—

The magnitude of the Bank of Japan s balance sheet expansion
Japan’s
relative to the Fed’s will continue to support U.S. dollar strength,
specifically against the Yen.

Footnotes: As of October 2, 2013.

Deutsche Asset
& Wealth Management



016437.10.02.13

28

Economic Catalysts for U.S. Dollar Strength

Global GDP Estimates – U.S. Relative Strength

Unemployment Rates – U.S. vs. Eurozone
12.5%
12.0%
11.5%
11.0%
10.5%
10.0%
10 0%
9.5%
9.0%
8.5%
8.0%
7.5%
7.0%
Jul-2010
J l 2010

3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
2013 est.
U.S. GDP

2014 est.
Japan GDP

Jan-2011
J 2011

Jul-2011
J l 2011

Jan-2012
J 2012

U.S. Unemployment Rate

Jul-2012
J l 2012

Jan-2013
J 2013

Jul-2013
J l 2013

Eurozone Unemployment Rate

Eurozone GDP

Inflation – Japan Deflation Persists
—

Superior growth prospects in the U.S. relative to Japan and the
Eurozone are supportive of U.S. dollar strength.

4.0%
4 0%
BoJ Inflation
Target = 2%

3.0%

—

We expect the U.S. to grow by 1.8% in 2013 before accelerating
to a growth level of 3.0% in 2014.

—

The U.S. unemployment rate has trended lower over the last
three years while the Eurozone unemployment rate has trended
higher and is now at a new record high (12.2%).

—

In terms of inflation on a year-ago basis, U.S. price levels
continue to grow while Japan has seen deflation for the last 12
months.

2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Japan Consumer Price Index (YoY %)
Data Source: FactSet, DB Global Investment Strategy Group.

Deutsche Asset
& Wealth Management



016437.10.02.13

29

Long Term Cyclical Dollar Trends Tend to See Short Term Counter Moves

EURUSD: All Long Trends Have Large Countertrend Moves

EURUSD Tied to EU & U.S. 2Yr Rate Differentials
1.38
1.37

5

Euro (lhs)
2y rate diff (bps, rhs)

1.36
1.35
1.34
1.33
1 33

-5
-10
-15

1.32
1.31
1.30
1.29
1.28
1.27
1 27
1.26
Oct-12

0

-20
-25
-30
-35
-40
Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Data Source: Deutsche Bank Global Markets.

—

All long term cycles for the U.S. dollar, specifically looking at the
p,
EURUSD relationship, have seen several “countertrend” moves
like we have seen with recent dollar weakness.

Foreign Buying of Europe Equities Over U.S. Overdone
-40%

—

—

We see recent Euro strength and dollar weakness as temporary.
The difference between 2-year sovereign yields in the EU and
U.S. have a close correlation to the EURUSD spot rate. We expect
a reversal in the recent upward trend as the Fed begins to “taper”
QE and the Eurozone recovery proves to be slow.
The Euro has also benefitted from a surge in demand for
European equities that has outpaced flows into U.S. markets in
recent months. However, we see the current level of demand as
unsustainable.


Deutsche Asset
& Wealth Management

-30%

Change i relative valuation of E
Ch
in l ti
l ti
f Euro stocks
t k
vs US (p/e ratios, lhs)
Foreign buying of Euro equities minus US
equities ($bn,rhs)

400
300
200

-20%

100

-10%

0

0%

-100

10%

-200
Euro stocks
-300
becoming
relatively
30%
-400
more expensive
40%
-500
500
00 01 02 03 04 05 06 07 08 09 10 11 12 13


20%

016437.10.02.13

30

10

Commodities to be Challeng
ged

Dollar Largest Challenge to Commodities

Key Factors Impacting Commodity Index

Dollar Challenge to Commodities
0.00

U.S. Dollar

—

Expectations for a multi-year Dollar appreciation.

-0.10
-0.20

Emerging
Market
Economies

/

Emerging market growth slowly recovering but still weak in
historical context.

-0 30
0.30
-0.40
-0.50

Developed
Market
Economies

+

Investment
Demand

—

Retail demand has weakened and institutions are unlikely to
further increase exposure due to disappointing performance

Supply Levels
pp y

—

U.S. crude oil and natural gas oversupply concerns have emerged
due to the U S energy "renaissance"
U.S.
renaissance

—

The modest "tailwind" from negative real interest rates has
dissipated and higher interest rates increase the "cost" of holding
commodities.

Real Interest
Rates

Developed market economies momentum gaining traction.

-0.60
-0.70

Geopolitical
Unrest

/

Geopolitical unrest is subsiding…for now.

W eather

/

-0.80
Energy

Softs

Grains

DJ UBS
Commodity
Index

Precious
Metals

Industrials
Metals

20 YR Correlation to U.S. Dollar

— Given the strong negative correlation between commodities and
the dollar we believe commodities will be challenged by a rise in
the dollar.
— Over the past 20 y
p
years, the commodity sectors most negatively
,
y
g
y
correlated to the dollar are precious metals and industrial metals.

Limited weather disruptions expected in the near term. Looking for
insights into winter weather season.

Footnotes: Time period reflects September 1993-September 2013.

Deutsche Asset
& Wealth Management


016437.10.02.13

31

Commodities to be Challenged
Dynamics Driving Energy Prices Changing

Oil
O Less Sensitive to Geopolitical Unrest
S
G
US/EU Iran Sanctions

Arab Spring

$125

Non O C S
OPEC Supply to Expected to Rise
Libya Supply/Syria
Unrest

62.0%
61.5%

$115
61.0%
$105
60.5%
$95

60.0%

$85

59.5%

$75

59.0%

$65
Sep-2009

Sep-2010

Sep-2011

Brent Crude Oil Spot Price ($/bbl)

Sep-2012

Sep-2013

WTI Crude Oil Spot Price ($/bbl)

58.5%
58.0%
2009

2010

2011

2012

2013

2014

Total Non-OPEC Crude Oil Output as a % of Total Non-OPEC and OPEC
Output

—

Crude oil prices are becoming less sensitive to the disruptions
from the Middle East.

—

Part of the reason that Middle East tensions are having less of an
impact is due to the fact that Non Opec oil supply is rising.

—

Looking at the recent Libya supply disruptions and Syria unrest,
the price of crude oil did not spike as seen during past Middle East
conflicts.
conflicts

—

With big producers such as the U.S. and Mexico, Non Opec oil
supply should make up ~62% of total oil supply by 2015.


Deutsche Asset
& Wealth Management

Data Source: IEA


016437.10.02.13

32

Commodities to be Challenged
Gauging Investor Demand – Less Support from Retail and Institutio
onal Investors?
Speculative Retail Investors Flee the Gold Market

DJ-UBS Commodity Index Trailing Returns

85

12%

75

10%

-27%

65
8%
55
6%

45

4%

35

2%

25
Jun-08

0%
Sep-03

Dec-04

Mar-06

Jun-07

Sep-08

Dec-09

Mar-11

Jun-12

Sep-13

Dow Jones UBS Commodity Return (10YR Rolling Annualized)

—
—

Jul-09

Jul-10

Aug-11

Aug-12

Aug-13

Total Known ETF Holdings of Gold
Footnotes: Data as of September 27, 2013.

Institutional Commodities Exposure Levels Out in 2012

After correcting in 2013, the 10-year annualized return of the DJUBS Commodity Index fell to +0.5%.
C
dit I d f ll t 0 5%

9%

Gold is just one example of how investor demand can be “fickle,”
specifically in regards to speculative commodities trading. The
strong correction in gold reminds us that investments that become
inflated due to speculation as opposed to solid fundamentals are
sensitive to sharp corrections.
corrections

7%

8%

8%

2011

2012

8%
7%
6%

6%

6%
5%
4%

4%

4%
3%

3%

3%

—

Institutions have increased exposures to commodities over the
last decade and at current levels, they have little incentive to add
additional exposure given disappointing performance.

2%
2%
1%
0%
2003

Footnotes: Data as of September 27, 2013.

Deutsche Asset
& Wealth Management

2004

2005
2006
2007
2008
2009
2010
Commodities - Avg. Institutional Allocation

Data Source: NACUBO-Commonfund Endowment Studies (2003 to 2012), FactSet.


016437.10.02.13

33

Economic and Asset Class For
recasts
GDP Growth
in %
World
USA
Euroland
UK
Japan
China

2013

2014

3.1%
1.8%
-0.4%
1.2%
1.7%
7.5%

3.7%
3.0%
0.7%
1.8%
1.5%
7.5%

Key Interest Rates
USA (Fed funds)
Euroland (Refi rate)
UK (Repo rate)
( p
)
Japan (Money market rate)

Currencies
Inflation (CPI)

Current*

Year End
Forecast

12-Month
Forecast

0.25%
0.50%
0.50%
0.10%

0.25%
0.50%
0.50%
0.10%

0.25%
0.25%
0.50%
0.10%

Current*

Year End
Forecast

12-Month
Forecast

2013

2014

1.7%

2.5%

EUR/USD
USD/JPY

1.35
98.69

1.31
101.00

1.25
114.00

Euroland

1.6%

1.6%

EUR/CHF

1.23

1.25

1.25

UK
Japan
China

2.4%
0.1%
2.8%

2.2%
1.5%
3.1%

GBP/USD
USD/CNY

1.61
6.12

1.57
6.10

1.52
6.00

2013

2014

Commodities

Current*

Year End
Forecast

12-Month
Forecast

-2.7%
2.5%
-2.9%

-2.6%
2.7%
-2.6%

Oil (WTI) in USD
Gold in USD

103
1336

100
1300

100
1300

in %
USA

Current Account Balance
in % of GDP
USA
Euroland
UK
Japan

1.0%

1.8%

China

2.2%

2.0%

Fiscal Balance
in % of GDP
USA
Euroland
UK
Japan
China

2013

2014

-4.5%
-2.9%
-7.0%
-9.5%
-2.0%

-3.5%
-2.8%
-6.5%
-8.5%
-1.8%

Equities
USA (S&P 500)
Euroland (Euro Stoxx 50)
Germany (DAX)
UK (FTSE 100)
Japan (Nikkei)
Asia ex Japan (MSCI in USD)
Latin America (MSCI in USD)

Sovereign Rates
USA
Euroland (German Bund)
UK
Japan

Current*
1693
2927
8666
6552
14621
543
3387

Current*
2.63%
1.82%
2.57%
0.67%

Dividend Yield

P/E (LTM)**

Year End
Forecast

12-Month
Forecast

2.0%
3.6%
3.1%
3.5%
1.5%
2.4%
2.6%

15.7
13.1
12.4
12.9
19.5
12.7
14.3

1715
2925
8750
6600
14800
570
3550

1810
3185
9410
7000
16000
600
3650

Country CDS

Year End
Forecast

12-Month
Forecast

27.5
24.7
32.2
60.9

3.00%
2.10%
2.90%
0.80%

3.70%
2.30%
3.00%
1.25%

Data Source: FactSet, Bloomberg Finance LP, Deutsche Bank Global Investment Committee foreca
asts as of GIC meeting on September 24, 2013.
* As of September 25, 2013. **LTM stands for last 12 months.

Deutsche Asset
& Wealth Management


016437.10.02.13

34

Investment Strategy Group
Larry Adam, CFA®, CIMA®
Chief Investment Strategist
g
Telephone (410) 895-4135
Facsimile (410) 895-4250
larry.v.adam@db.com

Megan Horneman
Investment Strategist
g
Telephone (410) 895-4148
Facsimile (410) 895-4250
megan.horneman@db.com

Jon
nathan Rosner
Inve
estment Strategy Analyst
gy
y
Tele
ephone (410) 895-4282
Fac
csimile (410) 895-4250
jona
athan.rosner@db.com

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