Deutsche Asset Europe, Middle East & Africa Edition ...mb.cision.com/Main/7293/9766662/374537.pdf · Deutsche Asset & Wealth Management Europe, Middle East & Africa Edition May 2015

Asian giantsEconomic models in contest

Deutsche Asset& Wealth Management

Europe, Middle East & Africa EditionMay 2015

Marketing Material

CIO View

2 CIO View | Europe, Middle East & Africa Edition | May 2015

Nine positions

Focus

The big picture

Investment traffic lights

Portfolio

High-conviction ideas

Nine positions Our key forecasts

*Deutsche AWM forecast as of 3/12/15

6.8%*

7.5


%*

2015: 3.4%

2016: 3.7%*


*Estimated likelihood of first steps to exit the Eurozone; Deutsche AWM forecast as of 4/15/15

%*40 - 50

%

*Chapter 11 is the bankruptcy process typically used by U.S. corporations to restructure their business

Chapter

11*

10.0%10.0%10.0%

47.0%47.0%47.0%

40.0%40.0%40.0%10.0%10.0%10.0%

47.0%47.0%47.0%

40.0%40.0%40.0%10.0%

47.0%

40.0%

Commodities Alternatives

Fixed income

Equities

3.0%

China’s export plunge points to weaker growth.

India’s economy is set to outgrow China’s this year.

The global economy keeps on growing.

No progress on reforms could result in a Greek exit from the Eurozone.

The European Central Bank (ECB) reassures the financial markets.

ECB and Bank of Japan quantitative easing (QE) keeps interest rates low.

Low default risks support high-yield bonds.

In tactical terms, we currently see limited return potential in equities.

Asset allocation of our balanced model portfolio:

Important terms are explained in our glossary.Past performance is not indicative of future returns. No assurance can be given that any forecast, investment objectives and/or expected returns will be achieved. Allocations are subject to change without notice. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect.Source: Deutsche Asset & Wealth Management Investment GmbH, as of 4/22/15

CIO View | Europe, Middle East & Africa Edition | May 2015 3

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The central banks dominated the markets in April. An interest-rate hike in the United States appears unlikely before September, while the ECB is ensuring negative yields even on 10-year government bonds. Besides these topics, we also look at the two Asian giants in this issue. China does not need any more tutoring on the subject of capitalism. The stock markets there follow current western logic as a matter of routine: good economic figures are good, but bad figures are good too because they promise a more caring central bank.

In the first quarter, China’s economy grew at its slowest pace since 2008, 7%. Even this figure is hard to square with the quarterly figures of Chinese companies. But anyone who approaches Chinese stock markets on the basis of fundamental analysis has lost already. And has ceded the field to those domestic private investors who in March alone opened more than four million new securities portfolios and whose securities purchases on credit already account for 1.8% of gross domestic product (GDP).1 Their buying frenzy has caused the Shanghai A Share Index to double in price in nine months and has recently spread to the better-established Hong Kong Stock Exchange. This can be interpreted as a catchup process, since China’s stocks were valued with a price-to-earnings (P/E) ratio of 102 as recently as mid-2014. Now it is 20, commensurate with the emerging-economy average. Nevertheless, this aggregate view obscures the fact that 36% of the index is allotted to the financial sector,

which has a P/E ratio of only 12, which in turn means a P/E ratio of 36 for the industrial sector. Hopes for Chinese monetary and fiscal stimuli in the second half of the year are the main

reason why investors are pouncing on these stocks despite generally bearish macro figures.

India’s stock market is profiting from advance praise too. Prime Minister Narendra Modi, who has been in office since

May 2014, is expected to advance structural improvements in the land of eternal hope – through labor-market, common-law and tax-system reforms. The aim is also to improve the infrastructure that up to now has prevented India from challenging China as the workbench of the world. While both countries are profiting from cheap oil and the scope for easing monetary policy, India has several advantages over its rival: a significantly younger population, better debt ratios3 and a lesser dependence on the global economy (with an export ratio of 15% vs. 22.4% for China). In 2015, it could grow faster than China for the first time. These are all reasons why we currently favor Indian stocks even more than Chinese.

India is likely to outpace China in 2015. That could be the trend reversal.

Letter to investors

India is making China look oldThe stock markets in India and China both still have potential. But arguments for investing in India are currently more convincing.

Asoka Wöhrmann, Chief Investment Officer and Member of the Deutsche AWM Executive Committee

1 Source: Bloomberg Finance L.P., Deutsche AWM calculations, as of 4/20/152 Source: Bloomberg Finance L.P., P/E ratio based on profits in the past 12 months, as of 4/16/153 Source and exact figures: see Focus article in this issue

Past performance is not indicative of future returns. No assurance can be given that any forecast, investment objectives and/or expected returns will be achieved. Allocations are subject to change without notice. It is not possible to invest directly in an index. F = forecast. Forecasts are based on assumptions, estimates, opinions and hypothetical models or analyses that may prove to be incorrect.


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Focus

Giants competeIn Asia, China’s high growth rates have impressed for several decades. However, India is now attracting attention as it starts to play “catchup”.

China and India – both countries have populations of more than a billion people and want to catch up with industrialized countries in both industrial and technological terms. Their objectives are identical but the development models that the two countries are pursuing differ enormously. There are historical reasons for this.

Before World War II, China had descended into anarchy, followed by a civil war in which the Communist Party prevailed in 1949 and imposed a centrally planned economy. The all-dominant state focused on state-prescribed industrialization. The shift toward a more avowedly market-based economy from 1978 onward did not mean that the Communist Party relinquished any of its power. Admittedly, private companies have been permitted since then; however, the state-dominated banking sector ensures the Communist Party still has considerable influence over them. Major state-owned enterprises still shape important sectors such as telecommunications, transportation and energy.

By contrast, democracy put down firm roots in India after independence in 1947. Multiple political parties and changes in power have limited the control of individual governments. At the start, the country focused on a centrally planned economy in order to achieve its goal of industrialization. Political victory by P.V. Narasimha Rao in 1991 initiated a turnaround. He declared the centrally planned economy a failure and introduced moves toward a market economy. Apart from the financial sector, private companies dominate in India today.

View of development

China’s economy grew by an average of 9.5% annually from 1999 to 2014. By contrast, India’s economy grew by 6.9% on average. As a result, the Middle Kingdom’s state-dominated growth model has been held up by some economists as more promising. Per-capita income based on purchasing power parity is 2.3 times higher in China than in India.1 And China’s literacy rate of approximately 95% is some 32 percentage points higher than India’s.2

However, when making this comparison, one should not ignore the fact that, on average, Chinese investment in that period was equivalent to 43.5% of gross domestic product (GDP), while India’s was only 31.9%. In other words, China grew faster while India committed its investment efficiently and cautiously. Because this investment was partly funded by loans, there are also major differences in the two countries’ debt levels. Efficient use of borrowing in India has meant that since 2000 debt and economic output have been increasing virtually in parallel. Indebtedness has changed little. If loans are less efficiently used, the level of indebtedness increases disproportionately. This has been the case in China since 2008.

When Xi Jinping’s government came to power in China in November 2012 it recognized that the existing growth model of high investment and increasing debt was unsustainable. China’s government therefore decided to introduce economic reforms, such as authorizing more privately owned companies, eliminating monopolies and permitting greater freedom to state-owned enterprises. In addition, the financial sector should be opened up more to private and foreign financial services providers.

In India, the state, companies and private households are all much less indebted relative to GDP. This gives the Narendra Modi government, in power since May 2014, scope for urgently required investment in the crumbling infrastructure that is inhibiting growth. In addition, the government plans to reform taxation, bureaucracy and the financial system. A combination of higher investment and free market reforms should pave the way for India outstripping China in terms of growth this year and next.

Past performance is not indicative of future returns. No assurance can be given that any forecast, investment objectives and/or expected returns will be achieved. Allocations are subject to change without notice. It is not possible to invest directly in an index. F = forecast. Forecasts are based on assumptions, estimates, opinions and hypothetical models or analyses that may prove to be incorrect.

1 Source: IMF: World Economic Outlook Database, as of 10/20142 Source: World Bank, "Literacy rate of people ages 15 and above", as of 4/2015


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GDP growth and investment rates

0

5

10

15

20

25

30

20

25

30

35

40

45

50

1999 2001 2003 2005 2007 2009 2011 2013

year-on-year change in %in % of GDP

Growth in China (right axis)

Growth in India (right axis)

Investment rate in China (left axis)

Investment rate in India (left axis)

Sources: IMF, World Bank, DB Research, Deutsche Asset & Wealth Management Investment GmbH, as of 4/2015

Debt development in China and India

Sources: McKinsey & Company: “Debt and (Not Much) Deleveraging“, as of 2/2015; McKinsey & Company: “Debt and Deleveraging: The Global Credit Bubble and Its Economic Consequences”, as of 1/2010

in % of GDP

0

50

100

150

200

250

20142008

China

200020142008

India

2000

Corporates

Government

Households

Efficient use of capital

From 2000 to 2014, China grew faster than India. A high investment rate, defined as a rapid buildup of capital stock, underpinned this success. As Indian companies used their funds for capital investments more efficiently than their Chinese counterparts, Chinese GDP outgrew the Indian one not to the extent one would expect from its higher investment rate.

Higher credit resources

Using credit to finance investment with limited growth potential has led to increased debt levels in China. With more efficient deployment of credit-funded investment, India has low debt relative to GDP. This gives the country more room for maneuver in terms of investment and consequently should allow faster growth.

India (GDP growth in %)

Free market economic reforms and the modernization of infrastructure support an acceleration in growth.

7.5 % (2015*)


China (GDP growth in %)

The transition from a centrally planned model to a market economy model initially dampens growth.

6.8 % (2015*)


We want stronger economic growth and more jobs for our youths. We want world-class industry and infrastructure.

Narenda Modi, Prime Minister of India;

speech at the opening of Cebit in Hanover on April 12

Past performance is not indicative of future returns. It is not possible to invest directly in an index. No assurance can be given that any forecast or target will be reached. F = forecast. Forecasts are based on assumptions, estimates, opinions and hypothetical models or analyses that may prove to be incorrect.


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Mr. Wöhrmann, the Nikkei 225, S&P 500 Index, DAX, Sensex and Shanghai A Share Index reached new record levels or approached old ones in April. Going by the old rule of thumb that says the stock market precedes economic developments by about nine months, does this mean that by year-end the economy will be humming as sweetly as a Christmas carol singer?That is not how I would interpret it. Admittedly, we expect global growth to accelerate to 3.4% in 2015. That is modest in historical terms, but not bad, all things considered. The recovery is gaining momentum, but so gently that no overheating and thus no headwinds from interest-rate shocks are looming. This fundamentally positive backdrop can help explain investor euphoria. But it is clear that it is not just the stock markets that are on a drip feed from central banks.

The Fed is the first major central bank that wants to turn down the drip. That is why people like to talk about a diverging interest-rate environment. But 10-year sovereign rates of all major currency regions have not broken out of their long-term downward trend. Rates are diverging only because those in the Eurozone have fallen even further. Do you still believe in an interest-rate turnaround in the United States?

Past performance is not indicative of future returns. It is not possible to invest directly in an index. No assurance can be given that any forecast or target will be reached. Forecasts are based on assumptions, estimates, opinions and hypotheti-cal models or analyses that may prove to be incorrect. Investments come with risk. The value of an investment can fall as well as rise and your capital may be at risk. You might not get back the amount originally invested at any point in time.

Interview

The big pictureThe effects of low interest rates can be as paralyzing in the long term as they are invigorating in the short term.

The most recent statements from the Fed, as well as U.S. macro data, give us grounds to adhere to our forecast: an interest-rate hike in September. If it is not then, it is more likely to be later than sooner. We forecast a very restrained interest-rate cycle with amplitude that remains below historical levels.

Will the interest-rate turnaround shake up the markets, as the IMF1 has warned?I do not assume that. The interest-rate turnaround will naturally lead to shifts within and between asset classes. But probably no other event with relevance for the capital markets has been discussed as intensively and anticipated as widely. In addition, the European and Japanese central banks will provide further liquidity.

Is it unfortunate that this low-interest period must come to an end?Any enthusiasm about low interest rates should be restrained and we should be even more wary of negative rates. Rising stock and bond prices and easier refinancing conditions are a positive, but the list of negative side effects from low interest rates is a long one. Companies’ pension liabilities become much more difficult to meet, life insurers also struggle to meet guarantees and many people’s savings, if they are dependent on interest rates, dwindle away. When you set these problems against the price increases in

The inflation issue should not be written off any time soon.

1 Source: Financial Times, 4/15/15: “Super Taper Tantrum Ahead, Warns IMF”


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stocks and real estate, you quickly come to the conclusion that the fruits of central-bank policy are distributed very unevenly. The big corporations are indirectly contributing to this too. They are being very free with their money because of loose monetary policy propping up profits. But they are not spending it on creating new capacity or on research – either of which would increase employment – but on dividends, share buybacks and takeovers, the last of which rarely creates new jobs in the short term. Of course, that is making a lot of shareholders very happy – but perhaps not for very long, because this allocation of resources is not sustainable. In addition, the resulting concentration of supply will be reflected in rising prices in the medium term. Those on lower incomes suffer disproportionately from this too.

Is inflation still really an issue?I think that anyone who sees inflation as a problem of the past either underestimates the complexity of this issue or overestimates the power of the central banks. Of course inflation is subject to structural changes – I only have to remind you of China’s effect on moderating other countries’ wages, globalization, liberalization or population aging. But announcing the death of inflation would be premature and would fail to recognize the ongoing disruption of the credit transmission mechanism. Inflation is also a more imprecise concept than you might imagine. Inflation figures are regularly distorted, consciously or unconsciously. To name just a few measurement problems: market-basket composition, incorporation of consumer behavior changes (for example, higher demand for services in aging societies) and owner’s equivalent rent (OER, one-

fourth of the U.S. market basket). You also have to work out how to deal with houses, watches or cars that are becoming increasingly sophisticated technologically, if not necessarily aesthetically. In short: The inflation issue will be with us for some time yet.

Such concerns seem rather distant from current stock-market euphoria.We have a constructive view on the markets for this year, partly because of low interest rates. But the effects of the low-interest-rate-induced market distortions will stay with us for many years, casting a cloud over long-term prospects.

Past performance is not indicative of future returns. It is not possible to invest directly in an index. No assurance can be given that any forecast or target will be reached. Forecasts are based on assumptions, estimates, opinions and hypotheti-cal models or analyses that may prove to be incorrect. Investments come with risk. The value of an investment can fall as well as rise and your capital may be at risk. You might not get back the amount originally invested at any point in time.

Into the unknown with the central banks

The global stock markets (as represented by the MSCI World Index) scaled new record heights in April. An acceleration in GDP growth is one reason for this, but the low-interest-rate environment is a more important factor. Because of the overriding importance of interest rates for all other asset-class valuations, the current elation about their positive effects should be tempered. The resulting market distortions will preoccupy us for some time to come.

Asoka Wöhrmann


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Equities*

Regions

United States

Europe

Eurozone

Germany

United Kingdom

Japan

Emerging markets

Asia ex Japan

Latin America

Sectors

Consumer staples

Healthcare

Telecommunications

Utilities

Consumer discretionary

Energy

Financials

Industrials

Information technology

Materials

Style

Small and mid cap

Investment traffic lightsOur tactical and strategic view

U.S. Treasuries (30 year)

We upgrade the 30-year tactically to outperform as the long end of the U.S. Treasury market looks more attractive at these levels, given that the Fed is very unlikely to hike rates in June due to recent weak economic data in the United States.

EUR high yield

We keep our positive view of Euro high-yield bonds. The asset class has benefitted from stabilizing oil prices, favorable monetary policy, corporate credit statistics, low refinancing needs in 2015 and decent demand from the investor side. Short-term technical concerns about negative implications from the QE program have ceased.

U.S. mortgage-backed securities

We are upgrading U.S. mortgage-backed securities tactically to outperform as the technical picture in the second quarter looks favorable. The Fed, banks and money managers are all showing increased demand for this highly liquid asset class that offers some spread to U.S. Treasuries.

Past performance is not indicative of future returns. No assurance can be given that any forecast, investment objectives and/or expected returns will be achieved. Allocations are subject to change without notice. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. Investments come with risk. The value of an investment can fall as well as rise and your capital may be at risk. You might not get back the amount originally invested at any point in time.

Eurozone (equities)

Eurozone equities have been the main beneficiaries of lower interest rates and a weakening euro, which has resulted in strong equity markets since the start of the year. We take some risk out tactically in view of high expectations, high valuations and some remaining risks (e.g. Ukraine, Greece).

Utilities (equities)

Utilities are downgraded to underweight. Unregulated electricity producers continue to suffer from low commodity prices (coal, gas) which set the price at the margin in many areas. Furthermore, weak economic activity and the impact of energy-saving measures continue to dampen electricity demand.

Energy (equities)

We upgrade the sector tactically to neutral. Negative earnings revisions and spot oil-price levels seem to be bottoming out. Increasing evidence for the latter is coming from recent U.S. oil inventory data and rapidly declining U.S. oil rig counts.

Industrials (equities)

We remain cautious on industrials and keep the sector on neutral despite our positive view of the world economy. With many states still undergoing “austerity” programs and listed companies preferring to spend money on dividends, mergers and acquisitions (M&A), and stock buybacks, the investment cycle stays downbeat.

U.S. Treasuries (2 year)

After a long string of positive news from the U.S. labor market, data published in late March and April was rather soft. U.S. 2-year yields are now trading at the lower end of a slowly moving upward range. We downgrade to underperform.

1 to

3 m

onth

sup

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6

02/2014 04/2015

02/2014 04/2015

02/2014 04/2015

02/2014 04/2015

02/2014 04/2015

02/2014 04/2015

02/2014 04/2015

02/2014 04/2015

*as of 4/17/15


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Fixed income**

Rates

U.S. Treasuries (2-year)



U.K. Gilts (10-year)

Eurozone periphery

German Bunds (2-year)

German Bunds (10-year)

Japanese government bonds (2-year)

Japanese government bonds (10-year)

Corporates

U.S. investment grade

U.S. high yield

EUR investment grade

EUR high yield

Asia credit

Emerging-market credit

Securitized /specialties

Covered bonds

U.S. municipal bonds

U.S. mortgage-backed securities

Currencies

EUR vs. USD

USD vs. JPY

EUR vs. GBP

EUR vs. JPY

GBP vs. USD

Emerging markets

Emerging-market sovereign

USD vs. JPY

We downgrade the U.S. dollar vs. the Japanese yen tactically to neutral as the Japanese government’s desire for a weaker yen is clearly waning. The yen has devalued strongly against the U.S. dollar since 2012 – it has lost a third of its value - meaning it is now seen as the most undervalued currency on purchasing power parity (PPP) levels.

Infrastructure

We upgrade our rating on infrastructure to outperform. Valuation metrics have become more attractive in several regions as a result of improved economic conditions, which bodes well for the income streams of infrastructure projects. The interest-rate environment remains favorable for this asset class. Geographic and sector selection remain key.

Alternatives**

Infrastructure

Commodities

Real estate (listed)

Real estate (non-listed)

Hedge funds

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The tactical view (one to three months) Equity indices: positive view neutral view negative view

Fixed income and exchange rates: The fixed-income sector or the exchange rate is expected to perform well We expect to see a sideways trend We anticipate a decline in prices in the fixed-income sector or in the exchange rate

The traffic lights’ history is shown in the small graphs.

A circled traffic light indicates that there is a commentary on the topic.

The strategic view up to March 2016 Equity indices, exchange rates and alternative investments:The arrows signal whether we expect to see an upward trend ( ), a sideways trend ( ) or a downward trend ( ) for the particular equity index, exchange rate or alternative asset class. Fixed income:For sovereign bonds, denotes rising yields, unchanged yields and falling yields. For corporates, securitized /specialties and emerging-market bonds, the arrows depict the option-adjusted spread over sovereigns for each respective region. depicts an expected widening of the spread, a sideways spread trend and a spread reduction.

The arrows’ colors illustrate the return opportunities forlong-only investors.

positive return potential for long-only investors limited return opportunity as well as downside risk high downside risk for long-only investors

Further explanations can be found in the glossary.

02/2014 04/2015

02/2014 04/2015

**as of 4/23/15

Source: Deutsche Asset & Wealth Management Investment GmbH


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PortfolioOur asset-class allocation in a balanced portfolio1

Europe, Middle East & Africa

EquitiesThe U.S. equities “bull” market may soon become the third longest ever. As a result, U.S. valuations have reached high levels and sector selectivity is needed, particularly given uncertainty over future corporate earnings growth. Valuations in some other developed markets may look more attractive. Japan is benefiting from upwards revisions to earnings estimates. After their rally European shares have closed their valuation gap to the United States and trade at historically high valuation levels. Within the emerging markets, we continue to favor Asia over Latin America and EMEA (Europe, the Middle East and Africa) and would suggest staying focused on markets showing solid economic fundamentals.

Fixed incomeThe divergence between U.S. Treasury yields and German bund yields is set to continue. The ECB’s QE program is smaller than the Fed’s in relation to GDP, but much larger in relation to net bond issuance, and this is reflected in negative yields for shorter maturities in several Eurozone economies, not just Germany. As regards corporate bonds, history suggests that high yield spreads tend to narrow after a Fed rate-hiking cycle begins. Opportunities will also exist in emerging-market bonds, although these will vary between hard currency and local markets and according to the investor’s home currency.

CommoditiesWe are a little more optimistic on commodities as we expect to see some stabilization in prices around current low levels. However, while commodities have in the past outperformed during periods of rising inflation and/or interest rates, both oil and gold prices continue to face headwinds. For oil, the problem remains essentially one of oversupply. Reductions in U.S. rig count have not translated into falling output, and U.S. oil inventories have continued to rise. As a result, any further recovery in oil prices is likely to be gentle. Gold prices are likely to be range-bound for the next quarter or so, but could benefit later in 2015 from any evidence that a stronger U.S. dollar is depressing U.S. growth.

Traditional asset classesWithin the core part of our balanced portfolio, we cover traditional liquid assets such as equities, fixed income and commodities. The chart shows how we would currently design a balanced portfolio, including alternative asset classes.2

Equities

Commodities

United States 16.0 %

Developed markets 32.0 %

Emerging markets 8.0 %

Europe 12.0 %

Japan 4.0 %

Asia ex-Japan 7.0 %

Latin America 1.0 %

Fixed income

Credit 14.5 %

Sovereigns 21.5 %

Emerging markets 8.5 %

Cash

Commodities

2.5 %

3.0 %

Alternatives

Alternatives 10.0 %

suggested weight

10.0%

47.0%

40.0% Equities

Fixed income

Commodities Alternatives3.0 %

21.5 %

16.0 %

12.0 %

14.5 %

7.0 %

8.5 %

2.5 %

4.0 %

1.0 %

Source: Regional Investment Committee (RIC), Deutsche Asset & Wealth Management Investment GmbH, Deutsche Bank (Suisse) SA, as of 4/20/15

1 This portfolio may not be suitable for all investors.2 Alternative investments are dealt with separately in the next chapter.


Suggested allocation for USD-based investors. This allocation may not be suitable for all investors.


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Will the Fed take a cautious approach to raising rates?LONG We still think that the Fed is most likely to start raising rates in September 2015. With inflation not a problem, the focus will be on further increases in employment. The upward trajectory is likely to be gentle, with the federal funds rate target range increasing from 0% to 0.25% now to 0.5% to 0.75% by the end of 2015 and 1.75% to 2% by the end of 2016.1

Can ECB QE be fully implemented? LONG When the ECB launched its quantitative easing (QE) program, some worried that it would be unable to buy the required volume of bonds. So far, these concerns look unfounded and we believe that the program can be fully implemented, if needed. Conversely, were Eurozone growth to pick up faster than expected, then tapering would be possible, perhaps from late 2015 or early 2016.

Still keen on U.S. consumer-linked stocks? LONG With continued growth in employment levels and consumer confidence, as well as the benefits of lower oil prices, the U.S. consumer still looks in a good place. We already have evidence of increased spending on travel and leisure and believe that overall retail sales data is now likely to improve.

Could European and Japanese equities go higher still?LONG Prices have continued to increase, and the longer-term positives are still in place. European stocks may benefit further from low interest rates, stronger Eurozone growth, a weakening euro and a turnaround in corporate earnings. Here banks should see the biggest recovery. In the short term, we are more cautious, given the strong year-to-date performance and as the Greek situation is not yet resolved. Japanese equities are likely to be supported by a new focus on corporate governance, boosting share buybacks.

Are there opportunities in emerging-market bonds?LONG The likelihood of a U.S. rate rise later this year must cast a shadow here. But emerging-market hard-currency bonds, on a selective basis, still offer an attractive risk-reward combination over a longer time horizon and attractive spreads currently. Some local bond markets may appeal to euro-based investors.

Are oil prices likely to pick up sharply?SHORT Our central forecast is for a gradual pickup in global growth and this should provide a positive backdrop for oil prices. But the market remains in a state of serious oversupply, with both U.S. and Saudi Arabian output at high levels. Rectifying this imbalance will take some time, meaning that future price rises are likely to be modest.

Long or short, Stéphane Junod?Six market views from our regional Chief Investment Officer for Wealth Management in Europe, the Middle East and Africa

LONG represents a positive answer

SHORT represents a negative answer

Past performance is not indicative of future returns. No assurance can be given that any forecast, investment objectives and/or expected returns will be achieved. Allocations are subject to change without notice. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. Investments come with risk. The value of an investment can fall as well as rise and your capital may be at risk. You might not get back the amount originally invested at any point in time.1 Deutsche AWM forecast as of 4/16/15


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PortfolioOur view of non-traditional asset classes

Liquid alternatives

Equity long/shortWith interest rates expected to rise in the United States this year, we expect share buybacks and dividends to continue to move the market forward. Only narrow difference in relative price-to-earnings (P/E) valuations between U.S. sectors will create opportunities for stock-pickers.

Macro/commodity trading advisor (CTA)Diverging Eurozone and U.S. monetary policy is likely to result in increased volatility. We see the most significant opportunities as being in foreign-exchange (FX) trading in the near term, in fixed-income trading in the near and medium term, and, for macro managers, in equity relative-value trading over all time frames.

CreditLow absolute yields/carry across most components of credit markets steer us towards favoring relative-value approaches that are more focused on capital-structure arbitrage than traditional long/short methods.

Event-driven/relative valueWe expect the number of deals announced – within both unfriendly and friendly frameworks – to remain above the historical average. This will create opportunities, although given the high velocity of capital, accessible spreads for risk arbitrage specialists remain tight.

Alternatives portfoliosDue to their unique characteristics, we are taking a differentiated look at liquid and illiquid alternative investments1.

Illiquid alternatives2

Private equityPrivate-equity markets in Europe have performed strongly but valuations are now looking rather high in the United States. Strong capital inflows are likely to fuel robust investment in Asia going forward.

Real estateThe German real-estate recovery will continue and further gains are also likely in southern Europe. The U.S. outlook remains favorable, with employment growth and limited new construction bolstering net operating income (NOI).

InfrastructurePortfolios should be focused on companies benefiting from improving economic fundamentals and organic opportunities. North American rail companies appear well placed for growth. Policy risk remains in many Eurozone peripherals. The short-term outlook for many emerging markets is choppy.

llliquid hedge fundsLonger-term strategies within activism, certain components of structured credit, insurance-linked assets, secondaries and direct lending could provide opportunities.

1 These portfolios may not be suitable for all investors.2 Not available in discretionary portfolios. Hedge funds and other investments classified as non-mainstream pooled invest-ments are not considered as suitable investments for retail clients in the United Kingdom. Illiquid investments may be diffi-cult to acquire or dispose of. The product’s ability to respond to market conditions may be impaired and investors may experi-ence adverse price movements on liquidation.

Source: Deutsche Asset & Wealth Management Investment GmbH, Deutsche Bank AG Filiale London, as of 4/17/15This allocation may not be suitable for all investors. In our balanced model portfolio, we currently allocate 10% to alternative investments (see “Portfolio”).

35.0%

12.5% 22.5%

30.0%Equitylong/short

Macro/CTA

Event-driven/ relative value

Credit

Liquid alternatives

20.0%

20.0%

30.0%

30.0%Privateequity

Real estate

Illiquidhedgefunds

Infra-structure

Illiquid alternatives

Past performance is not indicative of future returns. No assurance can be given that any forecast, investment objectives and/or expected returns will be achieved. Allocations are subject to change without notice. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect.


Nine positions

Focus

The big picture


Portfolio


Long or short, Andreas Schmidt?The Global Head of Primary Private Equity identifies investment opportunities, focusing this month on Germany

Is there room for further growth in the German private-equity market?LONG We experienced strong growth in the German market last year, but I believe that further expansion is likely over the medium term. Succession issues within small and medium-sized companies – where new leadership cannot be found within the controlling family – will create many opportunities. Private equity is also becoming part of the corporate landscape in Germany, with industrial sellers increasingly likely to consider it for corporate spin-offs.

Can small and medium-sized private-equity firms offer significant advantages?LONG Such firms can manage to make some very attractive deals based on their expertise in certain areas and access to local business networks – in Germany, for example, by building on personal relationships with small and medium-sized company owners. But large private-equity firms can have advantages in bigger transactions, particularly when the sale of a firm’s subsidiary companies adds to a deal’s complexity.

Does Berlin have potential as a venture-capital hub?LONG Although there remain some big gaps in venture-capital funding in Europe – and in particular in Germany – Berlin‘s "Silicon Allee" is emerging as one of the major European venture-capital hubs. Its low-cost environment, when compared to London or Paris, its creative sector and its well-qualified workforce are key in attracting established German and international funds.


Offers and sales of alternative investments are subject to regulatory requirements and such investments may be available only to investors who are “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. Alternative investments may be speculative and involve significant risks including illiquidity, heightened potential for loss and lack of transparency.

Are German institutional investors interested in co-investment?LONG We have noticed a strong increase in German institutional investors’ demand for co-investment opportunities, particularly in small and medium-sized companies. These investors recognize the general benefits of co-investments (e.g., higher capital efficiency) and also, given their often risk-averse nature, like investing in local businesses that are perceived as solid and reliable.

Do you assess fund managers simply on their last deal? SHORT No, quite the reverse – we are looking for managers with significant investment experience, ideally built up through managing multiple generations of funds. In our experience, managers who have generated attractive returns in their earlier funds tend to deliver them in their new funds as well. Of course, such a precondition reduces the available pool of specialized managers, but we think that this is a price worth paying.

LONG represents a positive answer

SHORT represents a negative answer

Hedge funds and other investments classified as non-mainstream pooled investments are not considered as suitable investments for retail clients in the United Kingdom. Illiquid investments may be difficult to acquire or dispose of. The product’s ability to respond to market conditions may be impaired and investors may experience adverse price movements on liquidation.


Nine positions

Focus

The big picture


Portfolio


High-conviction ideasSelected investment ideas to complement wealth-management clients’ portfolios

Indian equities U.S. leisure and entertainment

German housing High-yield debt

Idea initiated

May 1, 2015Idea initiated

April 1, 2015Idea initiated

April 1, 2015Idea initiated

February 24, 2015

We believe that Indian equities could enjoy further prices gains over the medium and long term. GDP growth looks set to remain strong and could benefit from further interest-rate cuts in 2015, assuming that recent crop-damaging rainfall does not threaten to push up inflation. Longer term, growth should also benefit from a number of planned reforms, including a long-awaited goods and service tax (GST). The Indian rupee has also proven resilient to U.S.-dollar strength when compared to other emerging-market currencies.

U.S. employment continues to grow and wages have increased modestly. Low gasoline prices will further add to U.S. consumer confidence. Spending in restaurants has been strong and the number of global airline passengers is at its highest in many years. Despite higher consensus earnings expectations for the leisure and entertainment sector, it is still lagging the S&P 500 Index, providing the opportunity for outperformance in this relative-return idea.

Eurozone monetary policy needs to be supportive to aid recovery in the region overall, but this means that it is too expansionary for an already robust German economy. This is encouraging a recovery in house prices after two decades or more of stagnation. However, German construction activity and the volume of mortgage debt are increasing only modestly. These two indicators provide some reassurance that the recent rise in German housing prices is not leading to an unsustainable real-estate "bubble”.

We believe that high-yield debt – both in U.S. dollars and euros – could continue to outperform in 2015, supported by expectations of default rates remaining low and a modest pickup in oil prices. Investors’ search for yield continues and in the United States, new-issue volume has recovered. In Europe, strong fund inflows and a break in new issues have led to strong demand in the secondary market.

Reference measure Reference measureReference measure Reference measure

Performance since initiation

n/a

PowerShares Dynamic Leisure and Entertainment Portfolio vs. S&P 500 Index**


n/a (Index only published quarterly)

Average of Barclays U.S. High Yield and Barclays Euro High Yield indices, weighted according to market size, in U.S. dollars vs. cash*

CNX Nifty Index vs. cash*

Investment horizon3 - 12+ months

Dallas Fed International House Price Index Database for Germany vs. cash*

Investment horizon24+ months

Investment horizon3 - 12 months




New

Indian equities

Past performance is not indicative of future returns. No assurance can be given that any forecast, investment objectives and/or expected returns will be achieved. Investments come with risk. The value of an investment can fall as well as rise and your capital may be at risk. You might not get back the amount originally invested at any point in time.


Nine positions

Focus

The big picture


Portfolio


European banksHigher GBP/USD volatility

U.S. consumer discretionary

Idea initiated

February 24, 2015Idea initiated

February 24, 2015Idea initiated

September 19, 2014

Helped by the early stages of a Eurozone economic recovery, the European banking sector is now getting back on its feet. Equity tier 1 ratios have increased and there is room to raise payout ratios (with a clear focus on dividends). Return on equity is increasing, if slowly, and valuations appear quite attractive. European banks seem likely to offer superior earnings growth to other regions, being well geared to the European macro recovery through improving loan growth and falling loan-loss provisions.

The United Kingdom’s May 7 general election is drawing closer and the outcome remains extremely uncertain. There are questions around the formation and composition of the future government and the potential for disruptive policy changes. Investor concerns about the United Kingdom’s political outlook have already increased sterling volatility and such concerns are unlikely to dissipate in election’s immediate aftermath, particularly if coalition negotiations are prolonged.

We believe there are several reasons why the U.S. consumer discretionary sector is likely to outperform in this absolute-return idea. Crude oil is down more than 50% from its recent peak and a generally accepted rule of thumb is that every $0.01 fall in gasoline prices adds $1 billion in consumer spending power per year. As previously noted, U.S. job creation has been strong and U.S. consumer confidence is now back to pre-crisis levels.

High-conviction ideas key indicates gain indicates loss

Reference measureReference measure Reference measure

MSCI Europe Banks Index vs. MSCI AC World Financials Index**

CBOE/CME FX British Pound Volatility Index vs. cash*

S&P 500 Consumer Discretionary Index vs. cash*

* Total-return idea where per-formance is measured by the gain/loss in the performance measure in U.S. dollars. Stated performance is from given entry date to 4/13/15.

Source: Deutsche Asset & Wealth Management Investment GmbH, Deutsche Bank (Suisse) SA, as of 4/13/15

Investment horizon3+ months




Investment horizon3 - 12+ months


High-conviction ideas may not be suitable for all investors. Investments come with risk. The value of an investment can fall as well as rise and your capital may be at risk. You might not get back the amount originally invested at any point in time. Some investments may not be suitable for all investors and investors should seek professional advice before investing. The examples above are shown for illustrative purposes only and should not be considered to be an offer or solicitation, advice or recommendation.

** Relative-return idea, based on the relative performance of the two measures in U.S. dollars. Stated performance is from given entry date to 4/13/15.

Past performance is not indicative of future returns. No assurance can be given that any forecast, investment objectives and/or expected returns will be achieved. Investments come with risk. The value of an investment can fall as well as rise and your capital may be at risk. You might not get back the amount originally invested at any point in time.


GlossaryHere we explain the main terms from the CIO View

Activism is obtaining a major stake in a company with the aim of making major changes (such as taking it private).

The Barclays High Yield Index captures the performance of high-yield debt securities.

One basis point equals 1/100 of a percentage point.

The BofA Merrill Lynch Emerging Markets Corporate Plus Index is designed to track euro- and U.S.-dollar-based debt of corporate issuers primarily doing business in emerging-market countries.

The BofA Merrill Lynch European High-Yield Bond Index is a European high-yield index that has both euro and pound sterling currency components.

The BofA Merrill Lynch US High Yield Master II Index is a U.S. high-yield index that also includes zero-coupon bonds and payment in kind bonds.

The BSE Sensex, Sensex for short, is a market-capitalization-weighted index of India's 30 most important listed companies.

A bull market is a financial market where prices are rising – usually used in the context of equities markets.

Capital-structure arbitrage tries to exploit opportunities arising from the different risk and maturity profile of different companies' credit structure

The carry (of an asset) is the cost or benefit from holding the asset.

The CBOE/CME FX British Pound Volatility Index measures the market's expectation of 30-day currency-related volatility for the British pound.

The CNX Nifty Index is a market-capitalization-weighted index that tracks India's 50 most important listed companies.

Central banks' policies are transmitted via commercial banks to the broad economy through the credit transmission mechanism.

The Dallas Fed International House Price Index Database for Germany is a price index compiled by the Dallas Fed which includes German real estate.

The DAX tracks the performance of the 30 major German companies trading on the Frankfurt Stock Exchange.

Direct lending to corporates does not use an intermediary such as a broker or investment bank.

The European Central Bank (ECB) is the central bank for the euro. It administers the monetary policy of the Eurozone, which consists of 19 European Union member states.

The EURO STOXX 50 Index tracks the performance of blue-chip stocks in the eurozone.

Eligible securities / papers are those that the ECB is allowed to buy in its QE program.

Emerging markets (EM) are those economies which are not yet fully developed in terms of market efficiency, liquidity, and other factors.

The equity tier 1 ratio relates a company's equity to its risk-weighted assets. It is an international standard measure for a bank's financial solvency.

The Eurozone is formed of 19 European Union member states that have adopted the euro as their common currency and sole legal tender.

The U.S. Federal Reserve Board (Fed) is the board of governors of the Federal Reserve; it implements U.S. monetary policy.

In a financial repression, wealth is slowly transferred from savers to banks and the state, such as when central banks create an environment where interest rates are below inflation.

GBP/USD is an abbreviation for the exchange rate of the British pound vs. the U.S. dollar.

Graccident (Greece + accident) was coined as an informal term to describe the process of Greece exiting the Eurozone accidently – for example, by not meeting reform or repayment deadlines.

Hard-currency bonds are bonds issued by legal entities in a hard currency such as the U.S. dollar, euro or Swiss franc.


High yield (HY) describes bonds which are sub-investment grade.

Insurance-linked assets are securities whose returns are based on re-insurance products.

Liquid alternatives are investments that offer exposure to hedge-fund strategies via liquid investment vehicles that are accessible to a broad range of client types.

Liquid assets can easily be bought and sold as enough securities are traded on average each day to provide market liquidity.

Liquidity refers to the ability to sell securities quickly without having to significantly reduce the price.

Loan-loss provisions are expenses set aside as an allowance for bad loans – for example, for customer defaults or renegotiated debt.

A market basket is a representative basket of goods used to measure consumer (or other) price inflation.

A mortgage loan is used to finance the purchase of real estate.

The MSCI AC World Financials Index captures large- and mid-cap representation across 45 developed- and emerging-market countries. All securities in the index are classified as in the financials sector per the Global Industry Classification Standard (GICS).

The MSCI Europe Banks Index captures large- and mid-cap representation across 13 developed-market countries in Europe. All securities in the index are classified in the banks industry group as per the Global Industry Classification Standard (GICS).

The MSCI World Index tracks the performance of stocks in select developed markets around the world, including the United States.

Net operating income (NOI) refers to rent and other revenues minus operating costs.

The Nikkei 225 is a price-weighted index of Japan's 225 most important listed companies.

Periphery countries (sometimes referred to as just the periphery) are those that are less developed than the core countries of a specific region (usually used to discuss the Eurozone).

The PowerShares Dynamic Leisure and Entertainment Portfolio is an ETF focused on the U.S. leisure, travel and entertainment sector.

The price-to-earnings (P/E) ratio or multiple compares a company’s current share price to its earnings per share.

Private equity is a direct or indirect investment by a financial investor in a substantial part of a company's equity. Usually the company invested in is not listed.

The Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector in a specific country or region.

Purchasing power parity (PPP) is a technique used to determine the relative value of currencies.

Quantitative easing (QE) refers to broad-based asset-purchase programs conducted by central banks; these assets can be government bonds, but also other assets like asset-backed securities.

Relative-value investing strategies seeks to take advantage of price differentials between financial instruments by simultaneously buying and selling the different securities, thereby allowing investors to potentially profit from the "relative value."

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders‘ equity.

Rig count is the number of oil rigs in operation.

Risk arbitrage is a possible strategy in an event-driven situation, playing on possible alternative share-price outcomes within a mergers and acquisitons (M&A) process.

The risk premium of an investment is determined by the expected return of this investment minus a risk-free rate.


Investment traffic lights (pages 8–9): comments regarding our tactical and strategic view

Tactical view:

—The focus of our tactical view for fixed income is on trends in bond prices, not yields.

Strategic view:

—The focus of our strategic view for corporate bonds is on yields, not trends in bond prices.

—For corporates and securitized/specialties bonds, the arrows depict the respective option-adjusted spread.

—For bonds not denominated in euros, the illustration depicts the spread in comparison with U.S. Treasuries. For bonds denominated in euros, the illustration depicts the spread in comparison with German Bunds.

—For EM sovereign bonds, the illustration depicts the spread in comparison with U.S. Treasuries.

—Both spread and yield trends influence the bond value. Investors who aim to profit only from spread trends must hedge against changing interest rates.

The S&P 500 Index tracks the performance of 500 leading U.S. stocks and is widely considered representative of the U.S. equity market.

The S&P 500 Consumer Discretionary Index tracks the performance of companies included in the S&P 500 Index that are classified as members of the GICS consumer discretionary sector.

Secondaries are securities or assets, which are directly purchased from other investors, rather than from the issuers themselves.

Shanghai A-shares represent the biggest and most liquid part of mainland China shares, and are generally only accessible to mainland investors.

A share buyback involves a company buying back its own shares.

Sovereign bonds (also referred to as "sovereigns") are bonds issued by governments.

Spread refers to the excess yield various bond sectors offer over other financial instruments with similar maturities (such as government bonds). When spreads widen, yield differences increase between bonds in the two sectors being compared.

A stock picker follows a bottom-up, rather than a macro-driven top-down strategy, focusing on the return potential of single stocks in his or her investment approach.

Structured credit refers to bundles of debt divided into securities offering different levels of risk.

In a swap transaction, two parties exchange the cash-flow streams of the different securities they keep on their books. To swap fixed for variable interest payments is a popular example.

Tapering is a slow, continuous reduction of the central bank’s asset purchases, used first in connection with the U.S. Federal Reserve.

Venture capital is part of the private-equity business. It refers to the temporary provision of money for early-business-stage firms with perceived long-term growth potential in order to potentially achieve above-average returns. It is an important source of funding for startups that have no access to capital markets.

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