Capital Markets Outlook 2008 The World in Transition Ben Pace, U.S. Chief Investment Officer New York, December 6, 2007

Capital Markets Outlook 2008The World in Transition

Ben Pace, U.S. Chief Investment OfficerNew York, December 6, 2007

Page 2

Agenda

The World in Transition 2

Growing Recession Fears1

Investment Philosophy: Broad asset class diversification4

Outlook 2008: World Economy and Asset Classes3

Growing Recession Fears

Page 4

U.S.: Growing recession fears

Rate hike cycle Financial crisis Economy

1970 Penn Central (Jan) Recession

1974 Franklin National (May) Recession

1980 First Penn (Feb) Recession

1982 Latin America (Jul) Recession

1984 Continental Illinois (Jul) Slowdown

1987 Black Monday (Oct) Slowdown

1990 Savings & Loan (Apr) Recession

1995 Mexico (Feb) Slowdown

1997 Pac Rim (Aug) Slowdown

1998 Russia / LTCM (Oct) Slowdown

2000 Nasdaq Bubble (Oct) Recession

2007 Subprime (Aug) ?Source: ISI

Every rate hike cycle of the Fed ended with a financial crisis

Page 5

How has the Fed reacted in a recession scenario?

Year Crisis Length S&P 500 Loss Rate Cut

1987 Black Monday / Stop Loss 6 months - 35% -70 bps

1990 Savings & Loan 7 months - 20% -680 bps

1998 Russia / LTCM 4 months - 20% -75 bps

2007 Subprime So far 4 months - 10% So far -75 bps

Source: ISI

Page 6

Never fight the Fed

Never underestimate the U.S. consumer

Low bond yields

External demand and low USD

Stable labor market

Profit margins and Corporate America in good shape

Never fight the Fed

Never underestimate the U.S. consumer

Low bond yields

External demand and low USD

Stable labor market

Profit margins and Corporate America in good shape

Subprime and housing crisis

Decelerating U.S. consumption triggered by the housing market

Crisis of confidence in U.S. financial markets

Rising financing costs – swap and credit spreads strongly widened

Rising oil prices

High leverage of U.S. consumers

Growing inflationary fears caused by USD weakness may keep Fed from easing

Subprime and housing crisis

Decelerating U.S. consumption triggered by the housing market

Crisis of confidence in U.S. financial markets

Rising financing costs – swap and credit spreads strongly widened

Rising oil prices

High leverage of U.S. consumers

Growing inflationary fears caused by USD weakness may keep Fed from easing

Negative FactorsNegative Factors Positive FactorsPositive Factors

Probability of a U.S. recession: One thirdBaseline scenario: A growth dip in the winter half-year, recovery thereafter

Probability of a U.S. recession: One thirdBaseline scenario: A growth dip in the winter half-year, recovery thereafter

Likelihood of a U.S. recession

Page 7

U.S.: Never underestimate the U.S. consumer

Record:

62 consecutive

quarters with

positive real

consumer

expenditure since

1991

Only 13 negative

quarters since

1960

U.S. real private consumer expenditureU.S. real private consumer expenditure

Sources: T.F. Datastream, Deutsche Bank Private Asset Management

QoQ, seasonally adjusted, projected for the whole year in %

-10

-5

0

5

10

15

60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08

The World in Transition

Page 9

Extreme price volatilities (I)

Oil price: Rising from 25 to 90 USD/barrel since 2002 Oil price: Rising from 25 to 90 USD/barrel since 2002

Source: T.F. Datastream, Deutsche Bank Private Asset Management

USD/Barrel (WTI)

USD/EUR: Euro on new record highUSD/EUR: Euro on new record high


USD/EUR

Will the U.S. dollar continue to depreciate at this pace?

Oil price driven by rising geopolitical risks in the Middle East

Oil prices remain highly volatile

11/12/07

82 84 86 88 90 92 94 96 98 00 02 04 06 0810

20

30

40

50

60

70

80

90

100

10

20

30

40

50

60

70

80

90

100

11/12/07

82 84 86 88 90 92 94 96 98 00 02 04 06 080.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

Page 10

Extreme price volatilities (II)

Gold: Price boosted by growing wealth, demand for luxury goods and the search for safety

Gold: Price has doubled in 25 years (on USD basis)Gold: Price has doubled in 25 years (on USD basis)


USD/ounce

82 84 86 88 90 92 94 96 98 00 02 04 06 08200

300

400

500

600

700

800

200

300

400

500

600

700

800

Page 11

High money supply growth in the last few years and the corresponding liquidity has contributed to

excessive pricing in many asset classes

Money and loan growth in China undampened by rate hikes

Money supply growth undampenedMoney supply growth undampened

Markets driven by money supply and liquidity

China: Money and loan growthChina: Money and loan growth

% %

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008-2

0

2

4

6

8

10

12

14

16

Euroland USA JapanUnited Kingdom

-2

0

2

4

6

8

10

12

14

16

%, yoy %, yoy


1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20088

10

12

14

16

18

20

22

24

26

China: M1 (yoy chg)

China:M2 (yoy chg)

RMB loan growth(yoy chg)

8

10

12

14

16

18

20

22

24

26


Page 12

Sources: Bloomberg, Angus Madison “Historical Statistics for the World Economy: 1-2003 AD”, DB GMR

There is a shift in the share of local global economic performanceThere is a shift in the share of local global economic performance

GDP from 1-2003 AD, shares by countries and regions in %

China India Europe / North America Japan Rest of the world

0%

20%

40%

60%

80%

100%

1 201 401 601 801 1001 1201 1401 1601 1801 2003year

World economy: A historical turning point?

China and India

gaining

significance in the

wake of

globalization

However, both are

still well off the

heights of historic

economic powers

Page 13

New investor pools gaining importance

Petrodollar investments have grown most

Assets under management for new investors are estimated at USD 15 to 20 trillion by 2012**

Traditional Investors

Pension Funds: USD 21.6trn***

Investment Funds: USD 19.3trn***

Insurance: USD 18.5trn***

***Year end 2006

New investors: Sharp rise of assets under management in the last six yearsNew investors: Sharp rise of assets under management in the last six years

Sources: McKinsey Global Institute, **Hedge Fund Research, Venture Economics, PE Analyst; International Financial Services, Deutsche Bank Private Asset Management

*Growth rate calculated on data reported to IMF (USD 2.5trn excl. UAE and Qatar)

USD trn

0.7

3.6

8.9

3.1

1.5

Petrodollar

assets

Asian central

banks

Hedge funds Private equity New investors

total amount

+ 19%*

+ 20%

+ 20%

+ 19%

20%

Outlook 2008: World Economy and Asset Classes

Page 15

Global Investment Committee Forecasts as of December 1, 2007Economy and Fixed Income Currencies

GDP 3M Forecast 12M Forecast

2007 2008 EUR/USD 1.52 1.40

World 5.1% 4.3% USD/JPY 110 120

USA 2.4% 1.8% EUR/CHF 1.65 1.60

Euroland 2.6% 1.8% GBP/USD 1.95 1.85

Japan 1.8% 1.4% EUR/GBP 0.78 0.76

Asia ex-Japan 9.3% 8.0% Commodities

Latin America 4.9% 4.0% Oil (WTI) (in USD) $80.00 $85.00

Inflation (Core CPI) Gold (in USD) $800.00 $850.00

USA 2.9% 2.4% Equities

Euroland 2.0% 2.2% USA (S&P 500) -3% - +5% +7% – +12%

Japan 0.0% 0.5% Euroland (Euro STOXX) -3% - +5% +6% – +11%

Asia ex-Japan 4.3% 3.5% UK (FTSE) -3% - +5% +6% – +11%

Latin America 5.2% 5.0% Japan (TOPIX) -5% - +2% +5% – +10%

Central Bank Rates Asia ex-Japan (MSCI) -3% - +8% +10% – +15%

3 Months 12 Months Latin America (MSCI) -3% - +8% +10% – +15%

USA (Fed funds) 4.00% 3.00% Long-term returns (5-year view)

Euroland (Refi rate) 4.00% 3.50% Global Equities

Japan (Money Market rate) 0.50% 0.75% Global Bonds

10-Year Bond Yields Hedge Funds

USA 3.65% - 4.15% 4.50% - 5.00%

Euroland 3.75% - 4.25% 4.25% - 4.75%

Japan 1.35% - 1.85% 1.35% - 1.85%

+8% - +11%

+4% - +6%

+7% - +9%

Page 16

Outlook as of December 2007

Slowdown in U.S. economic growth. Final quarter of 2007 and first half of 2008 should be below trend due to the effects of the housing recession.

Clear shift in international growth: Higher growth contribution by emerging markets; potential rates of growth in the G3 countries converge.

While food and energy prices remain volatile, and are impacted by strong world growth and supply disruptions, core inflation has eased and the disinflationary impact of globalization continues.

U.S. dollar depreciation continues, but the majority of the depreciation will occur against emerging market and commodity currencies.

Tightening in the developed economies has ended while tightening continues in the high-growth Asian and Latin American economies. The Federal Reserve began its easing cycle with a 50 bps cut in September, followed by a 25 bps cut in October. We are forecasting a 3.0% Fed funds rate by year-end 2008.

We continue to favor emerging market debt, especially local currency-denominated markets. Investment grade and high yield corporate debt spreads have widened to rather attractive levels.

Diversification benefits of funds of hedge funds most pronounced in volatile markets.

In commodities, we are most bullish towards grains complex and gold.

Real estate continues to be an important asset class, but should be viewed in a global context.

While equities will remain volatile, we still find valuation levels attractive, especially in an environment of monetary easing.

Equities should benefit from both positive profit growth and low interest rates.

Inflation & currencies Monetary policy & bond markets

Alternative investments

Equity marketsWorld economy

Page 17

Global growth: Remains solid, with good prospects

Global Economy: Growth rates around 4.5% set to continue into the next decadeGlobal Economy: Growth rates around 4.5% set to continue into the next decade

World economic growth (in % compared to last year)

5-year average

Source: IMF, Deutsche Bank Private Asset Management

Page 18

Emerging markets as drivers of the world economy

Labor force has increased fourfold worldwide over the past two decades

Productivity rising strongly in emerging markets

Global economy increasingly less dependent on U.S. than in the 1980s and 1990s

Labor force is growing, especially in Asia Labor force is growing, especially in Asia

Index, 1980 = 100 in %, yoy

Source: IMF, Deutsche Bank Private Asset Management* Measured as real GDP divided by working-age populationSource: IMF, Deutsche Bank Private Asset Management

Emerging markets leading global productivity trend *Emerging markets leading global productivity trend *

0

200

400

600

800

1000

1980 1985 1990 1995 2000 2005

Advanced economiesEast AsiaSouth AsiaCentral and Eastern Europe and Commonwealth of Independent StatesOther developing countries

-2

0

2

4

6

8

10

12

14

1990 1992 1994 1996 1998 2000 2002 2004 2006WorldAdvanced economiesEmerging markets and developing countriesChina

Page 19

China: Inflation driven by food prices, supply reaction should relieve the strain on some goods in 2008

U.S. and Euroland: Sharp rise of inflation rates due to drastically higher oil prices

Euroland inflation again close to 2% in the medium term, core inflation remains at roughly 2%:

Economy slows down Strong trade-weighted euro revaluation No wage price spiral yet

Reemergence of inflation...

USA: Rising oil causes temporary inflationary pushUSA: Rising oil causes temporary inflationary push

Euroland: Towards 3% at year-end?Euroland: Towards 3% at year-end?China: Inflation driven by food pricesChina: Inflation driven by food prices

Sources: T.F. Datastream, Deutsche Bank Private Asset Management Sources: T.F. Datastream, Deutsche Bank Private Asset Management


Inflation rate, in % yoy

Inflation rate, in % yoyInflation rate, in % yoy

-15-10

-505

101520

Nov03

Feb04

May04

Aug04

Nov04

Feb05

May05

Aug05

Nov05

Feb06

May06

Aug06

Nov06

Feb07

May07

Aug07

Total inflation rate Food Services

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Apr 06 Aug 06 Dec 06 Apr 07 Aug 07 Dec 07 Apr 08 Aug 08 Dec 08

Inflation rate Core rate

0.00

1.00

2.00

3.00

4.00

5.00

Feb

06

Apr

06

Jun

06

Aug

06

Oct

06

Dec

06

Feb

07

Apr

07

Jun

07

Aug

07

Oct

07

Dec

07

Inflation rate Core rate (ex-energy & food)

Forecast

Forecast

Page 20

…is only an interlude

…but U.S. core inflation under 3% since 1998…but U.S. core inflation under 3% since 1998

…and USD heading further downwards...…and USD heading further downwards...Strongly rising oil prices…Strongly rising oil prices…

U.S. inflation around 2% although oil prices have

increased ninefold since 1998 and the USD has

fallen by over 20% since 2002

Strong disinflationary forces: Globalization of the markets for goods, services,

capital and labor Deregulations and political reforms IT revolution and quadrupling of the world’s

effective labor force since 1990



82 84 86 88 90 92 94 96 98 00 02 04 06 0810

20

30

40

50

60

70

80

90

100

10

20

30

40

50

60

70

80

90

100

74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 0870

80

90

100

110

120

130

140

150

70

80

90

100

110

120

130

140

150

98 99 00 01 02 03 04 05 06 07 081.001.201.401.601.802.002.202.402.602.803.00

1.001.201.401.601.802.002.202.402.602.803.00

%, yoy

USD/Barrel (WTI) 1990=100, trade-weighted U.S. dollar index

Page 21

Currencies: Interest rate differential turning, yen remaining volatile

Yen continues to be dominated by carry tradesYen continues to be dominated by carry trades

…between euro and USD is turning…between euro and USD is turningBond yields: The yield gap…Bond yields: The yield gap…

Yields on 10Y government bonds, in % Yields on 2Y government bonds, in %



2006 20073.00

3.50

4.00

4.50

5.00

5.50

Euroland USA

3.00

3.50

4.00

4.50

5.00

5.50

2006 20072.50

3.00

3.50

4.00

4.50

5.00

5.50

2.50

3.00

3.50

4.00

4.50

5.00

5.50

Euroland USA

2006 20071200

1250

1300

1350

1400

1450

1500

1550

1600

105

110

115

120

125

130

YEN/USD (RS) S&P 500

Index points YEN/USD

Rate expectations support the euro

Dollar remains weak, yen volatile, euro at

record levels

Page 22

Monetary policy: Fed caught between inflation concerns and a slowing economy

Further rate cuts expected in the U.S.

ECB remains on hold for now but the probability of rate cuts in 2008 has risen

In Japan, rates are normalizing very slowly: Key rates expected at 1% in 12 months


in %

Official rates: Global upwards trend overOfficial rates: Global upwards trend over

2001 2002 2003 2004 2005 2006 2007 20080

1

2

3

4

5

6

7

Euroland USA Japan UK

0

1

2

3

4

5

6

7

in %

11/12/07

Page 23

10-year government bonds: spread narrows10-year government bonds: spread narrows Yield spread widens: 10-year government bonds vs. 2-year government bondsYield spread widens: 10-year government bonds vs. 2-year government bonds

Bonds continue to be relatively unattractive

Bond yields should pick up again in the medium term as the global capital markets normalize

(subprime crisis overcome)

The trend towards steeper yield curves should continue, especially if the Fed continues with rate cuts


in % in %-pts.in % in %-pts.

1999 2000 2001 2002 2003 2004 2005 2006 2007 20083.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

Euroland USA

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

2006 2007-0.40

-0.20

0

0.20

0.40

0.60

0.80

1.00

Euroland USA

-0.40

-0.20

0

0.20

0.40

0.60

0.80

1.00

Page 24

Equity markets

Equity markets: conflicting forces

Weaker U.S. growth

Robust world economy, particularly in the emerging markets

Profit growth has peakedRising credit costs

Fed rate cuts

LiquidityLiquidity

Page 25

Valuations in 2007 are significantly lower than in 2000

Valuations remain attractive compared to bonds

Long and medium-term outlook for equity markets is constructive

Sources: T.F. Datastream; T.F. I/B/E/S; Private Asset Management

Investment region Index Price earnings ratio

Nov. 23, 2007

Long term average*

Price earnings ratio

March 2000

U.S. S&P 500 13.9 15.0 25.8

Europe MSCI Europe 11.9 13.9 25.7

Germany DAX 11.8 15.5 30.8

Japan TOPIX 13.9 34.5 46.4

Emerging Markets MSCI Emerging Markets 14.0 16.4** 23.9

World MSCI World 13.4 16.2 27.2

* since 1980; ** since 1990

Page 26

In the past, there has been a

significant correlation between

short rates and valuation

The Fed is at the start of a rate-

cutting cycle

Past experience is that rate cuts

lead to rising P/E’s

U.S.: Price earnings expansion driven by rate cuts

Fed rate cuts cause valuation levels to riseFed rate cuts cause valuation levels to rise


0

5

10

15

20

25

30

35

40

45

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06-30

-20

-10

0

10

20

30

40

50% PER

Fed rate (lhs) S&P500 trailing PE ratio (rhs)

Falling Fed rate periods

Page 27

Rally of the BRIC*markets in 2007Rally of the BRIC*markets in 2007

Performance of Chinese and Indian equities

recalls the bubble in Japan in the 1980s

BRIC story increasingly priced in

01.01.2007 = 100, * RTS Russia, Hang Seng China Enterprise, Brazil Bovespa, India BSE30


TEXT aus HH-Präsentation HKJapan of the 1980s as a model?Japan of the 1980s as a model?


End-of-month values (incl. last available value of November 2007)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov80

100

120

140

160

180

200

China

Russia

India

Brazil

80

100

120

140

160

180

200

0

200

400

600

800

1000

1200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0

200

400

600

800

1000

1200

TOPIX in USD since 12/31/1979; rebased on 12/31/1999 = 100

Sensex since 12/31/1998; rebased on 12/31/1999 = 100

Chinese H-shares since 12/31/1999; rebased on 100

Emerging markets: Some valuations very high - danger of a bubble?

Page 28

Hedge Funds: Good performance expected for 2007

Hedge funds managed to close a difficult third quarter in positive territory

Performance year-to-date remains on a competitive level

Hedge funds: Strong performance continuesHedge funds: Strong performance continues

Sources: Bloomberg, Edhec, $-performance, Deutsche Bank Private Asset Management

15.3% 15.5%

13.7%

5.2%

11.2%11.2%11.8%

7.4%7.5%

18.8%

7.5%5.9%

12.3%

13.1%12.8%

9.3%

6.3%

4.1%

6.6%

12.4%

22.2%

10.6% 11.1%

7.9%

0%

5%

10%

15%

20%

25%

Conve

rtible

Arb

itrag

e

CTA Glob

al

Distre

ssed

Sec

uritie

s

Emer

ging

Mar

kets

Equity

Mar

ket N

eutra

l

Event

Driv

en

Fixed

Inco

me

Arbitr

age

Global

Mac

ro

Long

/Sho

rt Equ

ity

Mer

ger A

rbitr

age

Funds

of h

edge

fund

s

Cash

(1M

USD L

ibor)

$

2006 Year-to-date (as of end of October)

Page 29

Energy Oil prices are expected to trade in a range around the current level.

Crude oil price near-term forecast: USD 85 (12m horizon).

Base MetalsSupply bottlenecks are overcome for most base metals. Industrial metals especially are sensitive to a downturn in world economic growth.

Precious MetalsGold is likely to benefit from renewed USD weakness and falling

U.S. real interest rates on a 12M horizon.

AgricultureValuation of corn and wheat still low with further upside potential. Reasons: Increased demand for protein in Asia, rising ethanol production and further decline in inventories.

Energy

Base

Metals

Precious

Metals

Agriculture

Source: Deutsche Bank Global Markets

Commodities: Greatest potential in agricultural sector

Investment Philosophy:Broad Asset Class Diversification

Page 31

Broad asset class diversification benefited clients in 2007

Performance of international equities and bonds augmented by currency appreciation

Returns in alternative asset classes, particularly commodities and funds of hedge funds

Strong implementation vehicle performance in key asset classes

Risk mitigation through uncorrelated asset classes

Page 32

Our investment approach

We employ a modern portfolio theory approach to investing through:

An optimal mix of asset classes driven by our quantitative analysis

Broad asset class diversification

Proprietary investment expertise for core asset classes

Top quartile external managers

We seek to broaden the diversification available to our clients by:

Exploring and implementing new asset classes

Utilizing Deutsche Bank’s Global Manager Research team to provide clients with open architecture solutions

Broadening client exposure to alternative asset classes, where appropriate

Page 33

Traditional AssetsU.S. equitiesInternational equitiesEmerging market equitiesU.S. bondsTIPSInternational bondsHigh yield bondsCash

Alternative AssetsHedge fundsPrivate equityLiquid real estateCommodities

A mixture of traditional and alternative assets can reduce risk and enhance performance

Availability of alternative investments, such as hedge funds, is subject to regulatory requirements, and is available only for “Qualified Purchasers” as defined by the U.S. Investment Company Act of 1940 and ”Accredited Investors,” as defined in Regulation D of the 1933 Securities Act.

Source: Deutsche Bank and Datastream, Inc. data for Jan 1990-Oct 2006.

Adding alternative investments improves risk-adjusted returns

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%

Historical Volatility (annualized)

His

toric

al R

etur

n (a

nnua

lized

)

Traditional Assets plus Alternative Assets

Traditional Assets

Source: Deutsche Bank and Datastream, Inc. data for Jan 1990-Oct 2006.

Adding alternative investments improves risk-adjusted returns

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%

Historical Volatility (annualized)

His

toric

al R

etur

n (a

nnua

lized

)

Traditional Assets plus Alternative Assets

Traditional Assets

Page 34

Benjamin A. Pace III

Benjamin Pace is a Managing Director and Chief Investment Officer of Deutsche Bank Private Wealth Management in the U.S. He sits on the PWM Global Investment Committee, providing input on the U.S. economy and capital markets. His primary responsibilities include chairing the U.S. Investment Committee which determines investment strategy and asset allocation for the U.S. discretionary portfolio management team. He also oversees the U.S. Equity Strategy, the Quantitative and Fixed Income groups along with the Performance Measurement team to ensure overall consistency with investment policy. Mr. Pace is a member of the PWM-U.S. Executive Committee.

Mr. Pace has more than 20 years of experience in investment management. Prior to joining Deutsche Bank in 1994, he managed equity income funds for two investment organizations. During his tenure with those institutions, he also served as a security analyst with particular emphasis on the financial services and healthcare industries.

Mr. Pace earned his B.A. in economics from Columbia University and M.B.A. in finance from New York University.

He can be reached at (212) 454-7815 or e-mailed at [email protected].

Chief Investment Officer, PWM-U.S.

Page 35

DisclaimerAll opinions and estimates, including forecast returns, reflect our judgment at the time of publication and are subject to change without notice. These opinions and analyses involve a number of assumptions that may not prove valid. The opinions are of the authors and do not necessarily reflect those of Deutsche Bank AG or any of its affiliates. Deutsche Bank makes no warranty or representation, express or implied, nor does it accept any liability with respect to the information and data set forth. The information in this document was obtained from sources we believe are reliable, but we do not guarantee its accuracy, completeness or fairness. All information should be verified and supplemented by professional advice before any action is taken. The sole purpose of this document is to inform, and it in no way constitutes a solicitation of orders to buy or sell securities or other instruments.

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Documents

Capital Markets Outlook 2008 The World in Transition Ben Pace, U.S. Chief Investment Officer New York, December 6, 2007