DB House View by Institutional Insider

Deutsche Bank Research

Deutsche Bank Research The House View

17 March 2014

DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.

The House View – 17 March 2014 Three factors have clouded the outlook for the global economy in recent weeks: a run of mixed global economic data, renewed concern over fragilities in China’s financial system, and a sharp rise in geopolitical tensions between the West and Russia over Ukraine. All have weighed on risk assets Mixed global economic data was in part down to one-off factors such as the Chinese New Year and extremely cold US weather. While this has led to a modest reduction in our global growth outlook, the underlying momentum of the world economy remains strong and an acceleration can be expected over the coming months In China, weaker data and the country’s first ever onshore domestic bond default have spurred growing fears that the rapid rise of credit in recent years will turn into a full-blown financial crisis. We think these concerns are overdone and that China has sufficient policy flexibility and control over credit flow to prevent an economic ‘hard landing’

In Ukraine we see little chance of a military confrontation but expect prolonged diplomatic maneuvering that could drag on for years. Tit-for-tat economic sanctions between the West and Russia are a risk, but not our base case, and we expect the market impact to remain mostly concentrated on Russia and Ukraine assets. Beyond these, EM assets should continue to see differentiation based on fundamentals The evolution of the three above factors will be closely tracked by markets. Beyond any near-term volatility, we maintain our long-term views. Equities remain attractive, bonds look expensive and the US recovery will see earlier and faster rate hikes than the market currently expects, supporting dollar strength

David Folkerts-Landau, Group Chief Economist The views in this publication are informed by Deutsche Bank’s Global Strategy Group, which advises management and clients on broad market risks and global economic and financial developments. The views and forecasts of the group, which consists of senior research staff, may occasionally differ from those disseminated by their research colleagues Deutsche Bank Research

The House View – 17 March 2014, TheHouseView@list.db.com, +44 207 545 8465

Editors: Raj Hindocha, Marcos Arana, Wolf von Rotberg, Sahil Mahtani, Erin Urquhart 2

We continue to expect growth to accelerate throughout 2014. Mixed data in the US and China is temporary in our view Economic outlook  Bullish view on global growth of 3.5% in 2014, 3.9% in 2015 – with growth accelerating from 2.8% in 2013  US growth of 3.2% in 2014, 3.8% in 2015. View above consensus on labour market recovery, lower fiscal drag, stronger capex and residential investment growth  Eurozone growth of 1.1% in 2014, 1.4% in 2015, as consensus. Recovery on track, with growth supported by domestic demand, export traction, lower fiscal drag  EM growth of 5.1% in 2014 and 5.4% in 2015. Expect cyclical recovery to be supported by exports to DM as US, Europe economies accelerate

Central bank watch  Fed: gradual taper and end of QE by end-2014; do not expect deviation from taper path despite mixed data. Expect policy shift in H2 with signal of faster rate hikes  ECB: on hold as inflation is bottoming. Further easing (e.g., QE) possible if inflation stays low, growth is weak, euro strengthens further  BoJ: further easing in H2 only if warranted by data  BoE: on hold, no rate hikes even if u/e continues to fall  PBoC: on hold. No tightening, given inflation is low  EM: mostly on hold, with tightening bias to respond to FX pressure if needed

Key risks to our view

Views on key themes  US, China data have been mixed, not weak in recent months. We expect this to be temporary, with growth accelerating in the coming quarters  Monetary policy to remain broadly supportive. Major CBs to add nearly USD 1tn extra liquidity in 2014. More policy differentiation with Fed ending QE as first step towards rate hikes while ECB, BoJ on hold / easing  No crisis in EM despite tensions in Ukraine and other well-known weak countries. No material spillover, markets to differentiate between ‘good EM’ & ‘bad EM’ Deutsche Bank Research

 Disorderly market sell-off : repricing of monetary policy M  M M  M  L

expectations stokes market volatility China crisis: financial crisis / hard landing as China attempts to rebalance its economy Geopolitical risk: West / Russia escalation, e.g., tit-fortat economic sanctions Crisis in EM: increase in capital outflows amid continued turmoil or China slowdown hurts EM growth Deflation risk: slowdown in US or Eurozone growth, China RMB devaluation results in import disinflation

Note: H / M / L indicates estimated probability of risk (High, Medium, Low).

The House View – 17 March 2014, TheHouseView@list.db.com, +44 207 545 8465

While the risk of a global growth slowdown or EM crisis have risen marginally, falling bond yields have been supportive Downside risks

Severe Significant

1 5

Disorderly market sell-off : stronger growth prompts pricing of earlier / faster rate hikes and stokes market volatility

China crisis: financial crisis / hard landing as China attempts to rebalance its economy

Geopolitical risk: West / Russia escalation, e.g., tit-for-tat economic sanctions

Crisis in EM: increase in capital outflows amid continued turmoil or China slowdown hurts EM growth

Deflation risk: slowdown in US or Eurozone growth, China RMB devaluation results in import disinflation

Crisis returns to Europe: slowing reform momentum undermines potential growth, AQR impedes credit provision to the real economy; rise of fringe parties in the May European elections

Moderate

4 7

Upside risks

Localised

Impact on our base case

The House View - Risk Matrix

Global growth upside surprise: lower fiscal drag in the US and Europe, incident-free elections across EM, effective policy stimulus in Japan support faster-than-expected global growth

Lower oil price boosts growth: geopolitical calm and stronger supply see oil prices stabilise ~10-15% lower than current prices

Tail risks Low

Medium

High

Tail Risk Unpredictable

Geopolitical tensions escalate and push up oil prices and /or slow economic activity, e.g., escalation of Syria conflict

Probability * Moves represent change in risk outlook over previous month

Deutsche Bank Research

The House View â&#x20AC;&#x201C; 17 March 2014, TheHouseView@list.db.com, +44 207 545 8465

2014 so far has seen broad dispersion within and between asset classes. Gold, peripheral equities and bonds have outperformed

Total returns 2014 YTD %

Equities

15.8

Sovereign debt

Corporate Credit

Commodities 13.6

8.6

8.8 6.9 5.0 4.4

3.3 1.1

2.6 2.4

2.7

2.6

3.4 1.9

0.3

0 -0.6 -1.0

1.5

0.6

1.3

0.4

0.0

0.9

2.1

-3.1 -0.5

-1.9

-5

1.4 -2.5

-4.6 -5.6

-3.8 -5.8

-10 -10.1

-9.0

Copper

Brent Oil

Commodity Index

Silver

Gold

UAH

Dollar Index

RUB

BRL

TRY

GBP

ZAR

AUD

INR

JPY

EUR

IDR

Germany

Italy

Spain

US High Yield

EU IG

-10 -3 -20 -2 -16 46 58 44 139 78

US IG

Brazil Bovespa

41 10 -16 18

Japan Nikkei

-4

MSCI EM

German DAX 30

-12.0

2 146 122 127 22 56 49 125 27 27 23 24 16 78

Shanghai Composite

UK FTSE 100

FrenchCAC 40

Europe Stoxx 600

93 165 93 201 146 106 127

US S&P 500

Italy MIB

Spain IBEX 35

Greece Athex

Return since crisis low 9 March 2009 (%)

India Nifty

-15 -20

-11.6

-11.8

Note: Total return accounts for both income (interest or dividends) and capital appreciation. Source: Bloomberg Finance LP, Deutsche Bank Research. Prices as of 10 Mar 2014, COB

Deutsche Bank Research

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Despite weather-related weakness in Q1, the global economy remains healthy and should accelerate over the coming months Composite PMI: Eurozone recovery in full swing while the expansion in the US and China has decelerated over the last few months 60

Index

Eurozone

China

50 Positive momentum in Europe, negative in US and China

45 Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Source: Haver Analytics, Deutsche Bank Research

Jan-14

 US: Data firmed after weather-related weakness − Payrolls recovered to +175k in February after a sharp drop in January − Maintain our 3%+ GDP forecast for 2014

 Europe: Strong PMIs driven by Germany and Italy − Eurozone composite PMI at highest since 2011 − Germany 2015 GDP growth upgraded to 2% from 1.4%

We expect growth to accelerate over the course of 2014 10 9 8 7 6 5 4 3 2 1 0

% qoq, saar Q1 2014

Q2 2014

Q3 2014

 China: Weak data due to Chinese New Year − Manufacturing PMI dropped to 48.5 in February, the weakest in 6 months − Q1 growth could surprise to the downside but underlying momentum remains intact

Q4 2014

Weak data suggests China Q1 growth could surprise to the downside

Eurozone

China

Source: Haver Analytics, Bloomberg Finance LP, Deutsche Bank Research

Deutsche Bank Research

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Mixed data have raised concerns over the US economy, but the recovery remains intact and we expect growth to accelerate  US macro data have been mixed over recent months, in part due to very cold weather − Weakening ISM series, soft retail sales − Several weak housing indicators, notably housing starts, existing home sales − Soft payrolls, though rebounded in February − Meanwhile, consumer confidence remains high, inflation is turning

Mixed data, e.g., retail sales softness have raised concerns over the health of the US economy 8%

qoq saar

6% 4% 2% 0% -2%

2010

2011

2012

2013

2014

Source: Bloomberg Finance LP, Deutsche Bank Research

 No reason for alarm yet – Q1 was expected to be relatively weaker inventory due to destocking US macro surprise index: US data continue to surprise to the downside, but the trend is improving

 We remain confident in the US recovery and expect an acceleration in growth over the coming months − End of Q1 inventory destocking − Positive payback after weather-related weakness − Underlying fundamentals intact, e.g., firming labour market, healthier household balance sheets, housing recovery, lower fiscal drag Deutsche Bank Research

0.5

Macro surprise index

0.0

-0.5 2011

2012

2013

2014

Source: Bloomberg Finance LP, Deutsche Bank Research

The House View – 17 March 2014, TheHouseView@list.db.com, +44 207 545 8465

Labour market improvement and resulting wage inflation should lead the Fed to signal a change in policy in H2  Despite mixed signals in recent months, the labour market recovery is real − In February, payrolls at 175k (6m, 12m averages also at ~175k), unemployment at 6.7% − Wage inflation is firmly trending up, suggesting less ‘spare capacity’ in the labour market

Average hourly earnings (total private industries): US wages are trending up – pointing to a firmer job market than anticipated

 If this trend continues, unemployment could be close to equilibrium (5.5-5.75%) by end-2015

2.0

4.5

% yoy

3.5 3.0 2.5 1.5 1.0 1986

 In normal times, Fed policy rate would need to be close to neutral (3.5-4%) at that point − We can expect the Fed to allow lower rates this time around to sustain the recovery – but not as low as current Fed forecasts or market pricing

Wages are trending up, and once wage inflation takes hold it continues for 45 years

4.0

1990

1994

1998

2002

2006

2010

2014

Source: BLS, Haver Analytics, Deutsche Bank Research. Note: grey areas denote recessions

% of companies planning to hire and raise wages near 2006 levels 20

% Pre-crisis level

15 10

 We expect the labour market improvement and rising inflation will lead the Fed to signal earlier and faster rate hikes

5 Increase Employment

0 Raise Worker Compensation

-5 -10 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: NFIB, Haver Analytics, Deutsche Bank Research

Deutsche Bank Research

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What would it take to beget more hawkish Fed forward guidance? 13 Feb 14 8

The Eurozone recovery is on track, and inflation shows signs of bottoming – prompting the ECB to stay on hold Composite PMIs: Eurozone economies are expanding and with positive momentum; France is the notable exception 60

Eurozone

Feb-2014

Non-Eurozone

Germany

Acceleration

UK Eurozone Spain

55 Italy

Brazil

India

China

Global Japan EM US ISM Russia

Deceleration

France

45 45

60 Prev. 3m avg.

Source: Haver Analytics, Deutsche Bank Research

Eurozone core inflation has been rising since December while an increasing number of components show rising prices 1.8

% yoy

1.6

Potential turning point, but exposed to EUR appreciation

1.4 1.2

0 -10 -20

1.0

Core Inflation

-30

0.8

Number of rising components - falling components (3mma), RHS

-40

0.6 Jan-12

-50 May-12

Sep-12

Jan-13

Source: Haver Analytics, Deutsche Bank Research

Deutsche Bank Research

May-13

Sep-13

Jan-14

 The Eurozone recovery is on track − PMIs at 2.5 year highs, suggesting upside potential to our Q1 growth forecast of 0.2% qoq …Eurozone Composite PMI at 53.3 is the highest since Jun-2011 …Region and key economies are accelerating and in expansion – with France the exception − Signs of a turnaround in unemployment − Positive growth in Q4 in the seven largest countries for the first time since 2011  Deflationary pressures are weakening − Headline inflation unchanged at 0.8% since Dec − Core inflation has accelerated to 1% in February from a low of 0.7% in December − Number of components with falling prices declining, potentially marking a turning point  Expect recovery to continue and the ECB to stay on hold, unless data worsens or if EUR surges further

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Mind the (Structural) gap! 7th Mar 14

Euro strength is among the key risks to the Eurozone recovery, though we see limited further upside to the currency Portfolio inflows and a current account surplus have supported euro strength 1.55 1.50 1.45 1.40 1.35 1.30 1.25 1.20 Feb-09

% of GDP

EURUSD Basic balance*, RHS

4% 3% 2% 1%

0% Feb-10

Feb-11

Feb-12

-1% Feb-14

Feb-13

Note: (*) Basic balance = Current Account Balance + Foreign Direct Investment + Portfolio Flows Source: ECB, Deutsche Bank Research

Sustained euro strength would threaten the recovery; Italian and French exporters already affected at current levels 1.60

Germany

1.50

1.30

France

1.20 Italy

Jul-11

Jan-12

Jul-12

Jan-13

Horizontal bands denote “pain thresholds” above which euro starts denting growth Source: Bloomberg Finance LP, Deutsche Bank Research

Deutsche Bank Research

 Several factors have acted in support of the euro − Rising capital inflows as breakup fears have faded, a stabilising periphery, less attractive EM − Eurozone current account surplus at record high − Market no longer expects ECB rate cut

 Euro above current levels threatens the recovery − Sustained euro strength makes exports more expensive and reduces competitiveness − “Pain thresholds” differ by country; France, Italy already exposed at current levels − As a whole, the Eurozone suffers above EURUSD of ~1.40

Eurozone

1.40

1.10 Jan-11

 EURUSD is at its highest in 2.5 years − +8% vs. USD, +5% trade-weighted since Apr-13

Jul-13

Jan-14

 Further upside for the euro is limited − ECB likely to react if a strong euro increases deflationary pressure …Mario Draghi: “[Euro] increasingly relevant in our assessment of price stability” − EUR/USD to fall below 1.30 by year-end

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Get real on euro - 26th Feb 14 10

Despite some weak recent data, Abenomics is on track to help Japan shake off two decades of deflation Contrary to expectations, consumer confidence has actually fallen in recent months 55

Consumer confidence

50 45 40 35 30 25 2000

2002

2004

2006

2008

2010

2012

2014

Source: Cabinet Office, Deutsche Bank Research. Note: Seasonally adjusted diffusion index

However, Abenomics is increasing inflation expectations, as measured by breakeven rates (5Y bond – 5Y inflation-linked bond) 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 2009

2010

2011

Source: Bloomberg Finance LP, Deutsche Bank Research *Excluding consumption tax effect

Deutsche Bank Research

2012

2013

 Some recent data in Japan have been weak − Q4 GDP only grew by an annualised 0.7% qoq − External trade was weak as higher energy imports turned historic surpluses into deficits − Domestic spending not picking up as much as expected ahead of consumption tax increase in Apr-2014  However, PM Abe’s reflationary policies are working − After falling for 15 years, prices have stopped falling and are expected to rise by 1.2% in 2014* − 2013 trends of a falling yen, rising earnings and asset prices should continue in 2014 − 5Y inflation expectations are above 2%, from negative as recently as late 2011 − Impact of the consumption tax rise will be temporary and growth will recover in 2014  This has important implications for asset prices − Nikkei to rise to 19,000 by end-2014 (+28%), with exporters benefiting from a weaker yen (end-2014 target of 115)

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Abenomics is working...so far 7 Feb 14

China growth is key to our outlook for 2014-15, but concerns are again rising over the country’s growth prospects  China is the second largest, and fastest growing major economy in the world − China to contribute 1/3 of global 2014-15 growth

China is expected to deliver more than one-third of global growth in 2014 and 2015 % contribution to global growth, 2014-15 avg. 40% 34% 30%

 Over the last few years, there have been several false alarms over a hard landing − A China hard landing (i.e., growth below 6% yoy) or even growth below consensus (7.5%) poses substantial risks to the world economy

20% 20%

20% 14% 7%

10%

0% China

EM Asia EM LatAm & Other DM (Other) EMEA

Eurozone

Note: based on IMF 2010-12 avg. PPP GDP weights. Source: Deutsche Bank Research

 Concerns are rising again about China’s ability to sustain its current pace of growth − Mixed macro data over recent months − Years of rapid credit growth, especially in the shadow banking sector, have led to concerns over NPLs* and defaults − China’s attempts to rebalance its economy from an investment- and export-led model, to a consumption-led growth model could lead to a structural slowdown

China’s growth has slowed-down relative to 2010-11, with many observers seeing a structural slowdown 13

% yoy

12 11 10 9 8 7 6 2010

2011

2012

2013

Source: Haver Analytics, Deutsche Bank Research

Deutsche Bank Research

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Note: (*) NPL = Non-performing loans

Rapid credit growth and the rise of shadow banking have raised fears over the health of China’s financial system  Non-traditional and shadow banking have contributed to a sharp rise in credit growth

China credit flow: years of high credit growth, sustained by rise of non-traditional lending and shadow banking 2500

 These new forms of lending developed to circumvent limitations of the traditional financial system − PBoC’ limits interest rates on deposits, in order to channel cheap credit to local governments and SOEs* − As a result, savers seeking higher interest rates and the credit-starved private sector are pushed outside the traditional banking system via trust and wealth management products (WMPs)  Sustained levels of credit growth have raised fears over NPLs, defaults and a systemic financial crisis − Subsidised loans to the public sector have financed poor investments, leading to bad debts − Less regulated trust products, WMPs could lead to losses, including for retail investors …Restructuring of a WMP in January …First-ever corporate bond default in March Deutsche Bank Research

2000

CNY bn (3mma)

1500

Non-traditional & shadow banking RMB loans TSF

1000 500 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 TSF = total social financing, a measure of total credit to the economy Source: Bloomberg Finance LP, Deutsche Bank Research

Description of key shadow banking products

Wealth management products (WMP)

 Widespread savings products for private investors  Offer higher returns than traditional deposits  Investors wrongly perceive them as guaranteed by commercial banks

Trust loans

 Direct form of financing  Offer funding to credit-starved private sector  Client funds (wealthy individuals, cash-rich corporates) used to finance loans to the real economy or invested in financial assets  Also offer higher returns than traditional deposits

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Note: (*) SOE = State-owned enterprises

In our view these concerns are overdone and we do not expect a systemic credit crisis similar to the US subprime crisis  Further restructurings and defaults in China’s trusts and WMPs are very likely, and are not unwelcome as they help prevent speculative flows and credit

Credit-starved private sector to see funding costs come down, as the subsidy to the public sector gets removed Private sector is ~2/3 of GDP, but receives less 1/5 of credit

32%

 But concerns over a credit freeze and systemic financial crisis are overdone − Credit fundamentals of trust products are actually improving – e.g., lower share of risky borrowers − PBoC stands ready to inject liquidity if needed − Financial risks are being addressed by reforms  Authorities are managing an orderly default process – as investors ‘learn’ to price credit risk, default recovery ratios will gradually be allowed to fall  While average borrowing costs will rise, only the less efficient public sector / SOEs will suffer – while private sector funding costs fall  Reforms should enable sustained credit growth while improving overall financial stability Deutsche Bank Research

80%

Public sector / SOEs

20%

Private sector

68%

GDP

Bank Credit

Source: Beijing University, CBRC, Hexun, Roadoor.com, Deutsche Bank Research

Reforms will reduce financial risk and improve financial stability

Municipal bond  Channels funding to municipalities other than via riskier LGFVs* market Securitisation of  Increases liquidity available to local governments local SOE  Reduces funding pressure assets Securitisation of  Increases transparency, including credit rating by rating agencies bank assets  More efficient allocation of risk, as different tranches offer different risk-return profiles Note: (*) LGFVs: local government financing vehicles

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Too much distrust in trust products -17th Feb 14

In the near term, export growth and the acceleration of domestic reforms should underpin growth in 2014  Mixed macro data in recent months, e.g., weak PMIs and IP, have stoked fears of a slowdown

China PMIs: momentum has slowed in recent months, even if part of the weakness can be explained by China New Year and US weather 60

3 month ma

Composite Manufacturing

 Strong export growth, led by the US and Europe, will support China’s export-led cyclical recovery − US-Europe combined to grow at 2.3% in 2014, up from 0.9% in 2013, providing external traction − Export growth at 17% qoq in H2 2013; expected to average 14% yoy for 2014, vs. 8% in 2013

Services

Loss of momentum, Manufacturing in contraction territory

56 54 52 50 48 2010

2011

2012

2013

2014

Source: Haver Analytics, Deutsche Bank Research

 China’s ambitious reform programme will also boost growth short term, as some reforms get accelerated − SOE reform and deregulation: opening up of sectors with massive under-capacity to private sector will drive investment* − Financial reform: interest rate liberalisation will provide cheaper credit to efficient private sector − Fiscal reform: allowing municipalities to issue bonds will alleviate funding pressure and help refinance loans, reducing systemic risk Asia's export engine revs up - 28 Feb 14 Deutsche Bank Research

China: growth and reform targets for 2014

China exports vs. US & Europe PMI new orders: Chinese exports should remain robust as US, Europe provide external traction 65

Index

%yoy

60 55

50 45

PMI new orders suggest export acceleration over next 6 months

PMIs (2Q lead) Exports (rhs)

40 35 2000

2002

2004

2006

2008

2010

2012

50 40 30 20 10 0 -10 -20 -30

2014

Note: PMI is the GDP-weighted new orders index for US ISM and Eurozone PMI Source: Haver Analytics, Bloomberg Finance LP, Deutsche Bank Research

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Note: (*) Overinvestment has disproportionately gone to public-sector related areas, i.e., infrastructure or sectors dominated by inefficient SOEs. In contrast, other sectors are materially underinvested

EM are faced with a lower growth differential vs. DM, prospects of higher US rates and lower liquidity, and increasing political risk Trend GDP growth among EM countries compared to DM is falling 7

% G7

Expectations of higher US rates have been a major driver of outflows from EM*

2.5

USD/EM Currencies (lhs, inverted) US 10y Yield (rhs)

1 0

97 1980 1986 1992 1998 2004 2010 2016

Source: IMF, Deutsche Bank Research

 After a decade of rising growth, EM growth is trending lower amid falling reform momentum, exhausted growth models (e.g., dependence on commodities)  At the same time, DM are seeing rising momentum

Jan-13

-4

-15

-10

-12

-13

2.0

-25 -25

-30 1.5

Apr-13

Jul-13

Oct-13

Jan-14

*JP Morgan EM Currency Index Source: Bloomberg Finance LP, Deutsche Bank Research

 In 2013, the Fed’s taper signal triggered a re-assessment of EM valuations and fundamentals  Rising rates meant yield-seeking in EM assets less attractive

 Therefore, the wider growth differential observed in the previous decade is shrinking Deutsche Bank Research

-5

-20

-10

3.0

Political risk has spurred FX drops in some major economies since Nov. 2013 (%)

The House View – 17 March 2014, TheHouseView@list.db.com, +44 207 545 8465

Source: Haver Analytics, Bloomberg Finance LP, Deutsche Bank Research

 Political risk has also been a major driver of EM outflows  Can involve political conflict, violence and economic mismanagement

 Ultimately, however, this is country-specific EM Monthly - Limiting Contagion -13th Mar14 16

Ukraine continues to be at the focus of major political and economic turbulence

Ukraine >75%

% of Russian speakers in Ukraine

25% - 74% 5% - 24%

Black sea

Russian naval base at Sevastopol

<5%

Key facts  Ukraine is a relatively new state (independent since 1991), though Ukrainian nationalism has been a political movement since the 19th century  Historically, Russia has considered it to be in its sphere of influence, resisting EU efforts to integrate Ukraine  Ukraine’s strong linguistic and cultural divide makes a quick resolution difficult − Nationalist, EU-facing West − Russian ethnic and speaking East Deutsche Bank Research

 Major escalation in Ukraine tension in recent weeks − Pro-Russia leader deposed following months of protests resulting in new government that wants to integrate with EU − Russia has supported a separatist administration in Ukraine’s Crimea region, of mostly Russian-speaking population − Diplomatic tensions between Russia and the US and Europe have escalated  The West is threatening sanctions, although Europe’s closer economic ties and dependency on Russian energy make these less likely − 30% of Europe’s gas comes from Russia  Crimea referendum on independence on 16-Mar, while elections are due in Ukraine in May  We expect no military escalation but rather intense diplomatic maneuvering over the next few years  While unlikely, a tit-for-tat round of economic sanctions remains an important risk

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Bailing out Ukraine- 12th Mar 14

We do not expect contagion and a widespread ‘EM crisis’, but rather continued differentiation between countries EM weekly debt fund flows show increasing differentiation by asset class 0.8

USD bn

8 wk, rolling avg

0.6

0.4 0.2 0.0 Local currency Hard currency

-0.2 -0.4 -0.6 Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Source: Deutsche Bank Research; EPFR Global

EMFX is seeing increased differentiation within its constituent members – correlation between different currencies is falling

EMFX correlation

Perfect

None

0.0 Diversification Ratio 0.1 0.2 0.3 0.4 0.5 0.6 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14

Note: The diversification ratio looks at the volatility of the return on a basket of EM currencies 1= zero correlation between the currencies in the basket; 0 = perfect correlation between currencies Source: Deutsche Bank Research

Deutsche Bank Research

 EM debt fund outflows continue on weak sentiment − In the 8 weeks to 5-Feb, institutional EM mutual debt funds saw outflows of USD 2.9bn − EM Hard currency debt funds, however, actually saw inflows of USD 570m  However we do not expect contagion and a widespread ‘EM crisis’ and sell-off  Instead, differentiation should continue as markets penalise ‘bad EM’ and reward ‘good EM’ − Countries with current account deficits, failing to reform or where tensions are building up are under pressure – e.g., Ukraine, Venezuela, Thailand, Russia − Unlike during the Q2 2013 sell-off, good stories are now being rewarded – e.g., record USDdenominated bond sales in Indonesia, Slovenia, Mexico, Colombia in 2014  Risks remain for 2014, both idiosyncratic (e.g., elections, escalating tensions) and external − Systemic risks only if China or the US slows down materially, or if capital outflows become substantial and weaken country fundamentals

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Central Europe: A Good EM Story - 14th Mar 14 18

While EM equities could be tactically oversold, structural drivers remain negative Total returns in EM have lagged DM and US equities in USD terms over the last 12m 130

% US +25% DM +22%

120 110 100

EM -6%

90 80 Feb-13

May-13

Aug-13

Nov-13

Feb-14

Note: EM refers to MSCI EM index. DM is proxied using the MSCI World index. US refers to the MSCI US index. Source: Bloomberg Finance LP; Deutsche Bank Research

Widespread dispersion of value is evident across EM equity markets 4.0

P/BV (x) Indonesia

3.5

Higher valuations

Philippines Mexico

3.0

2.5 2.0

Egypt

Chile

Malaysia Taiwan Poland

1.5

Brazil

1.0

Korea

0.5 4

India South Africa

 EM equities continue to underperform in USD terms − Since Jan-2013, EM equities have returned -6% while DM equities have risen 22% and US 25%  EM equities could be tactically oversold, with some markets looking cheap on a price to book value level  However, underlying causes of the current sell-off in EM equities are structural, namely a rise in state intervention and a deterioration in corporate governance  EM outflows could stabilise in the short-term − A decisive move down in oil prices − Signs of improving exports

Thailand China

Lower valuations

Turkey Russia

RoE (%) 20

 But unlikely to be any decisive break-out in any direction until long-term outlook for China is cleared

Source: Bloomberg Finance LP, Deutsche Bank Research

Deutsche Bank Research

The House View – 17 March 2014, TheHouseView@list.db.com, +44 207 545 8465

GEM Equities Feb 2014

In the US, where high valuations offer limited upside, corporates can pursue various strategies to enhance shareholder value 2 Increase cash payouts: firms with strong dividend growth to

Optimise capital structure: raise net debt / market cap to take advantage of low rates and relatively high cost of equity %

outperform amid demand from income-starved investors %

Net Debt / Market Cap (non-financials)

Net debt to market cap at record low of 14% vs. 29% avg. since 1967 and 35-40% in the late 1980s

50 40 30 20 10 1968

1973

1978

1983

1988

1993

1998

2003

2008

2013

Source: Compustat , Deutsche Bank Research

Lower ROI targets on new investments: future rates are likely to 3 peak below pre-crisis levels suggesting firms 7 %

Fed Funds Rate

even with double digit dividend growth over 2014 and 2015, payout ratios will remain below long-term average

75 70 65 60 55 50 45 40 35 30 25 20

2014-15 Forecast 1960-07 Avg: 45%

1960

1966

1972

1978

1984

1990

Note: Shaded area represents recession Source: Bloomberg Finance L.P, Deutsche Bank Research

1996 2002 2008 2014 S&P500 Div payout Ratio

4 Reduce pension risk: as full funding is reached, companies should

match remaining liabilities by switching into LT fixed income assets 400

USD 3m OIS*

strong equity and fixed income returns over recent year have helped companies plug their pension deficits

200

Overfunded

2010

2015

2020

Deutsche Bank Research

2025

2030

2035

2040

Funding Status ($bn, lhs)

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

-600

2013F

2005

*Market-implied ECB / Fed policy rate Source: Bloomberg Finance LP, Deutsche Bank Research

-400 1997

Underfunded

1996

2 0 2000

-200

Terminal rates to peak at lower levels compared to history enabling firms to lower hurdle rates for capex

1995

3 2 1 0 -1 -2 -3 -4

Funding Status % of Mkt cap (rhs)

Source: Worldscope, Compusat, Deutsche Bank Research

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S&P CFOs: Five things to do in 2014 -1st Mar14 20

Recent technology deals and stocks price moves have evoked memories of the early 2000s dotcom bubble Recent activity has captured the imagination of the public with signs that retail investors are once again interested in equities. Possibly a contrarian indicator 100

“We have a bubble”

Historical Peak = 100 Google searches for "Best Stock Broker"

Robert Shiller, Feb-2014

65 30

Source: Haver Analytics, Bloomberg Finance LP, Deutsche Bank Research

Tech stock returns since 1 Jan 2013: Outliers on both sides of the S&P 500 600 % 400

602 ‘Old’ tech stocks have not participated in the rally

200 0

-4

280 27

364 29

137 151

-200 Closing prices as of 13thMarch 2014 COB, Source: Bloomberg Finance LP, Deutsche Bank Research

Tech M&A value ytd* at highest since 2000 100 80 60

1500

$bn 90

Value

Volume WhatsApp, $19bn

40 20

27 10

30 10

1000

37 500 0

“A sceptic would have to be blind not to see bubbles inflating in [...] stock market valuations of fashionable companies like Netflix and Tesla” Seth Klarman, Baupost Group, Mar-2014

 The rally of some stocks evokes memories of the dot-com boom − After a 600% rally since Jan 2013, Tesla is now worth half of GM, which sells 400x as many cars − In China, internet stocks, like Tencent, have rallied strongly in a falling market − Netflix stock has almost quadrupled since 2013  Investors have also started to pile cash into tech firms since the beginning of the year − Tech debt issuance is at a record − Tech IPO volume is at the highest since 2004 − Tech M&A at the highest since 2000 …Facebook paid USD 19bn for WhatsApp, a company with 55 employees and USD 20m of revenues in 2013

* January-February Source: Dealogic, Deutsche Bank Research

Deutsche Bank Research

Note: Computer & Electronics M&A, announced

The House View – 17 March 2014, TheHouseView@list.db.com, +44 207 545 8465

We believe that Facebook’s takeover of WhatsApp (even at this price) was justified, but Tesla’s stock price seems too optimistic WhatsApp has grown its user base more quickly than any other social media platform during its first 5 years 500

Tesla is valued at USD 1.17m per vehicle sold right now $1.17

419m

1.2

400

Market-cap per vehicle sold (USD m)

1.0 0.8

300 200

145m 123m

100

54m 52m

0.6 0.4 0.2

$.01

$.02

$.04

0.0

0 1

Years since founded Source: Deutsche Bank Research

Source: Deutsche Bank Research

 Facebook’s acquisition of WhatsApp can help it solidify its position as the top company in mobile − FB paid $42 per user for WhatsApp vs. $33 for Instagram; current market valuations per user are $123 for Twitter and $170 for FB − $19bn is in line with revenue per user that other messaging models in Asia are able to generate − Also a defensive move: WhatsApp’s rapid growth could easily have cost FB future sales (up to the 8% of market cap it paid in stock)

 Tesla’s current valuation would require rapid growth with little disruption, a very optimistic scenario − Tesla is currently valued at $1.2m per vehicle, vs. $40k for BMW and $10k for GM − Tesla aims to produce 500k cars by 2020, implying production will surge by 55% p.a. − Tesla faces significant uncertainties over cost, future battery supply, its distribution network and competition from traditional manufacturers compressing margins

Deutsche Bank Research

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Tesla Motors - 20 Feb 14 Facebook - 20 Feb 14

Asset price views Asset Class

View

Rationale

 Bullish equities

 Preferred asset class for 2014, see ~10% total returns on stronger earnings and growth

 US: overweight

 2014 likely a year of normal EPS growth, PEs, total returns and volatility  Mixed recent macro data raises near-term uncertainty. S&P500 attractive below 1,750

 Europe: remain bullish

 Scope for outperformance, especially in the periphery, on upside surprise in credit growth  Expected acceleration in global growth should provide further support

 Japan: remain bullish

 Abenomics to fuel further gains. YTD underperformance provides attractive entry point

Rates

 US rates to sell-off mildly

 Accelerating US growth while inflation remains subdued before normalising later in the year  Environment favourable for a mild rise in US rates, with front-end rates rising to close the gap with Fed own projections  Further rise only when data concerns are overcome, upward trend of inflation is confirmed

 Long USD

 Stronger US growth, Fed exit bias, and recovery in US equity inflows to support the USD

Equities

 Limited upside to EURUSD  Short AUDUSD – hedge against China slowdown

   

Euro supported by (low) real yields due to low inflation – but limited scope for lower yields While portfolio inflows have been supportive, M&A flows already point to a weaker euro Dollar bloc FX among most expensive; AUD has overshot commodities in recent weeks China slowdown would hurt Australia economy and AUD

Credit

 Constructive on credit overall

 US: value in short-duration / low quality and long-duration / high quality credit – widest sectors across the credit spectrum; also most underweight sectors going into 2014  Europe: long IG vs. HY on a levered / ratio basis, as HY has outperformed IG YTD and appears rich to IG on several metrics

 Expect continued differentiation

 Renewed bouts of pressure likely, as underlying difficulties in weak countries not resolved – but we don’t expect a generalised sell-off and instead should see continued differentiation

Commodities  Short crude oil

Deutsche Bank Research

 Rampant US oil supply growth and upside risks to Libyan and Iranian crude oil exports imply a bearish environment for crude oil in 2014. See drop of $10/bbl

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DB forecasts GDP growth (%) Global US Eurozone Germany Japan UK China India EM (Asia) EM (Lat Am) EM (CEEMEA) EM DM

Key market metrics 2012 3.0 2.8 -0.6 0.7 1.4 0.3 7.8 5.1 6.0 2.8 2.7 4.7 1.4

2013F 2.8 1.9 -0.4 0.4 1.5 1.8 7.7 3.9 5.9 2.3 2.3 4.5 1.1

2014F 3.5 3.2 1.1 1.5 0.4 2.7 8.6 5.5 6.8 2.1 2.0 5.1 2.2

2015F 3.9 3.8 1.4 2.0 1.4 2.0 8.2 6.0 6.8 2.9 3.2 5.4 2.6

CPI inflation, YoY* (%) US Eurozone Japan UK China India

* CEEMEA: LATAM:

2012 2.1 2.5 0.0 2.8 2.6 9.7

Q1-14 2.50 1.70 1.35 106

Q2-14 2.75 1.90 1.32 109

1190 95 100

1150 85 95

Q4-14 3.15 2.20 1.25 115 1850 375 1100 90 100

2013 0.125 0.25 0.10 0.50 3.00 7.75

2014 0.125 0.25 0.10 0.50 3.25 7.50

2015 1.750 0.75 0.10 0.75 3.25 7.50

Current prices as o f 13 M arch

Central Bank policy rate (%) 2013F 1.5 1.3 0.4 2.6 2.6 10.1

2014F 2.1 1.0 3.0 1.8 3.5 6.3

2015F 2.3 1.4 1.7 1.7 3.2 6.7

CPI (%) forecasts are period averages Czech Rep., Hungary, Poland, Russia, Turkey, South Africa, Israel, Romania, Kazakhstan, Ukraine, Egypt, Saudi Arabia and UAE Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela

Deutsche Bank Research

US 10Y yield (%) EUR 10Y yield (%) EUR/USD USD/JPY S&P 500 Stoxx 600 Gold (USD/oz) Oil WTI (USD/bbl) Oil Brent (USD/bbl)

Current 2.63 1.55 1.39 102 1,846 325 1,372 98 108

US Eurozone Japan UK China India

ASIA: DM:

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Current 0.125 0.25 0.10 0.50 3.00 8.00

China, HK, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Sri Lanka, Taiwan, Thailand, Vietnam US, Japan, Eurozone, UK, Denmark, Norway, Sweden, Canada, Australia, New Zealand, Switzerland

Appendix 1 Important Disclosures Additional Information Available upon Request For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.

Analyst Certification This report covers more than one security and was contributed to by more than one analyst. The views expressed in this report accurately reflect the views of each contributor to this compendium report. In addition, each contributor has not and will not receive any compensation for providing a specific recommendation or view in this compendium report. Raj Hindocha/Marcos Arana

Attribution The Author of this report wishes to acknowledge the contributions made by Shakun Guleria and Varun Narang, employees of Infosys Ltd., a third party provider to Deutsche bank offshore research support services.

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2. Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank’s existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

3. Country-Specific Disclosures Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Investment Advisers Association. This report is not meant to solicit the purchase of specific financial instruments or related services. We may charge commissions and fees for certain categories of investment advice, products and services. Recommended investment strategies, products and services carry the risk of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless "Japan" or "Nippon" is specifically designated in the name of the entity. Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in the securities referred to herein and may from time to time offer those securities for purchase or may have an interest to purchase such securities. Deutsche Bank may engage in transactions in a manner inconsistent with the views discussed herein. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.

Risks to Fixed Income Positions Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements. Deutsche Bank Research

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