Q3 2018 EMEA CIO Insights - db.com · emerging market hard currency bonds, particularly in Asia where economies remain dynamic and market technicals are improving. The diversity of

CIO Insights

Q3 2018 EMEA

Carefully does it Stay invested but hedge

Deutsche Bank

Six months ago, we launched our 10 Themes for 2018. The first of these was “Forewarned is forearmed” – in other words, investors should be prepared for an increase in volatility after the abnormally low levels prevailing for much of 2017.

Volatility has indeed increased and this can be associated with a range of recent developments – for example, global trade tensions and political uncertainty in the Eurozone. But increased volatility also reflects the fact that we are late in the economic cycle – with the current period of U.S. expansion close to being the longest on record. Investment approaches, portfolio positioning and security selection must be appropriate for the higher levels of volatility typical of late cycle periods.

The good news is that the global economy is still growing fast, despite these political uncertainties – as our second theme put it, “Growth gazumps geopolitics”. The U.S. economy continues to expand rapidly and we think that the chance of a recession in the next 12 months is very small. Moreover, continued economic growth, combined with still low levels of inflation, is making the process of monetary policy normalization (as our third theme put it, “Central banks in transition”) rather easier so far than it might have been. We are now approaching the 10th anniversary of the Lehman Brothers bankruptcy filing (September 15, 2008). Policy normalization is still moving forward here, as shown by the timeline on page 8.

We should also remember that historically a late-cycle environment has often delivered higher returns – as well as higher volatility. So this is a time to stay invested, but hedge – with “hedge” used in its broadest sense. Protecting your investment may have some immediate costs – but it makes sense to safeguard longer-term returns in volatile markets where we could see large temporary reversals.

Risk management in portfolios can have many forms, from different sources of hedging through to diversification, selectivity and active management. Our other themes for 2018 show how important these factors can be. We suggested that you “Flashlight fixed income” (i.e. be selective) and this is still highly relevant. There are opportunities here, but also risks, as we have seen from recent moves in high yield and emerging market bonds. Developed market government bonds are definitely not a “safe haven“ any more. Forecast market gains means that there is “Still some oxygen for

Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Readers should refer to disclosures and risk warnings at the end of this document. Produced in July 2018.

CIO InsightsLetter to Investors2

Carefully does it Letter to Investors

Christian NoltingGlobal CIO

Historically a late-cycle environment has often delivered higher returns – as well as higher volatility. So this is a time to stay invested, but hedge – with “hedge” used in its broadest sense.

Christian NoltingGlobal CIO

Diversification must be another key portfolio aim and we would suggest that you “Explore investment alternatives” (another of our 2018 themes) as a possible way of achieving this. Some liquid or illiquid alternative investments may have a valuable role to play in portfolios, due to their correlation characteristics in potentially difficult market environments. Rather counterintuitively, their use in portfolios may follow the shape of a rather skewed bell curve (and not a straight line or an even distribution), with balanced strategies benefiting from a bigger

equities”, another of our 2018 themes, but stock and sector selection along with continued active management will be important as dispersion returns to more normal levels. This late cycle phase could continue for some time and, while we have probably seen the peak in corporate earnings growth for this cycle, the absolute peak in earnings could still be some way in the future – helping pull equity markets higher. We also continue to see long-term positives in “The ‘New’ EM Asia equity market”, despite its recent choppy ride – thanks to the region’s continued economic dynamism.

allocation to alternatives than higher-risk, equities-driven approaches or strategies at the lower end of the risk spectrum. Structured products could also be used to improve a portfolio’s risk return profile.

Market relationships are also evolving. Our theme “Dynamic FX drivers” focuses on the range of factors that have supported our successful stronger USD call. We still expect oil prices to slide back towards previous lower levels as production increases: this will be a case of “Oil déja vu”. And we continue to think that investors should consider longer-term ideas based on social, demographic and technological change: “Tomorrow’s themes today”. We provide updates on all these themes on page 5.

The next six months could be productive for portfolios. However, as we noted above, asset class gains are likely to be accompanied by late-cycle volatility. So stay invested, but hedge.

Diversification must be a key portfolio aim and we would suggest that you “Explore investment alternatives” as a possible way of achieving this.


CIO InsightsLetter to Investors3

Instant Insights: Letter to Investors

o Late-cycle environment is associated with increased volatility.

o But late cycle returns can be good, so stay invested but hedge.

o Risk management and diversification will remain key themes.

Contents

Inside the cover

The investment world will present plenty of opportunities, but increased late-cycle volatility will present challenges. So stay invested, but hedge – make sure your investments are wrapped up well to guard against a bumpy road ahead.


5

8

11

13

15

17

19

20

21

22

Ten Themes

Ten Themes for 2018: Update

Macroeconomics

Chugging along

Multi Asset

Moving into late cycle

Equities

Still some oxygen

Fixed income and foreign exchange

Two steps forward, one step back

Alternatives

Hedge funds

Data tables

Macroeconomic forecasts

Data tables

Asset class forecasts

Glossary

Disclaimer

CIO InsightsContents4

As expected, the Fed has been leading the gradual shift in central bank policy towards a less

accommodative stance this year, thanks to continued U.S. economic growth. We predict three more rate hikes by the Fed by the end of June 2019. The ECB is unlikely to raise interest rates before the second half of 2019 but has announced its intention to wind down the current

We thought that economic growth would remain strong, despite all the geopolitical uncertainties. This has

proved to be the case, with four out of five economies forecast to grow by above 2% this year. Strong Q1 growth in the U.S. seems likely to have continued into Q2, with key employment and output indicators pointing to a robust economy. GDP growth in the U.S. is estimated to have averaged over 2.5% on an annualized

At the beginning of the year we predicted that the unusually low volatility witnessed in 2017 would give

way to more unsettled markets, and urged investors to be prepared. The length of the current recovery (the U.S. expansion is currently the second longest in history) is encouraging late-cycle volatility – exacerbated by concerns around tightening monetary policy, ongoing trade

disputes and geopolitics. Year-to-date, the S&P 500 index has experienced 36 days with a price move of more than 1%, compared to eight days for the whole of 2017, and the VIX volatility index closed above 18 on 39 occasions, something that never happened last year at all. We expect volatility to remain high for the rest of the year, with trade an obvious trigger.

CIO InsightsTen Themes5

Ten Themes for 2018: Update

Ten Themes


The charts compare our degree of conviction at the start of this year (circled grey dot) and currently (green dot).

Late-cycle volatility

Economic advance continues

01

02

Forewarned is forearmed

Growth gazumps geopolitics

Current

9/10Start 2018

9/10

Start 2018

9/10Current

8/10

basis in H1 2018, and we predict it to reach 2.7% for the whole year, boosted by the tax reform, deregulation and increased fiscal spending. European data has been improving and purchasing manager indices suggest further expansion. The Japanese economy is benefiting from strong employment growth and sustained Chinese domestic consumption helps keep growth levels high, despite deleveraging and trade concerns.

Slow normalization

03

Central banks in transition

Start 2018

9/10Current

9/10

quantitative easing programme at the end of this year. The Bank of England could have to raise rates rather sooner. Only the Bank of Japan will maintain its current highly accommodative stance.

Please use the QR code to see a video of Christian Nolting discussing our investment outlook and our 10 Themes for 2018.

Recent market volatility and relatively modest expectations in equities and fixed income have

strengthened the case for investments that do not correlate strongly with the main asset classes in times of difficult market conditions – and that can therefore help diversify a portfolio. These include opportunities in liquid and illiquid alternative investments. The former

Emerging equity markets have experienced an unsettled first half of the year, not least because

of concerns around the implications of rising U.S. interest rates and brewing trade disputes. But we think that emerging Asian markets remain attractive given expected strong regional economic growth and double-digit earnings growth. Moreover, technology

Continued strong economic growth in major markets and an expected further rise in corporate earnings should

be beneficial for global equity markets. But our key message is that sector and intra-sector dispersion has increased sharply – underlining the need for selection and active management. Late-cycle risks remain, but we would remain overweight to cyclical sectors. Even if the

We continue to see opportunities in fixed income, but you need to be selective. With rates rising,

developed market government bonds are not a safe haven. Within investment grade corporate debt, fundamentals appear reasonably solid for now, but the technical backdrop in Europe could become less supportive, due to the end of QE purchases. In high yield,



Stay selective

Earnings expectations key

Growth case defies recent turbulence

04

05

06

“Flashlight” fixed income

Still some oxygen for equities

The “New” EM Asia equity market

Current

9/10Start 2018

8/10

Current

9/10Start 2018

8/10

Current

9/10Start 2018

8/10

increased volatility in other asset classes has already led to a degree of spread widening, although default rates are likely to remain low. We remain keen on emerging market hard currency bonds, particularly in Asia where economies remain dynamic and market technicals are improving. The diversity of issuers should be supportive, but you do need to be aware of country-specific risks.

rate of growth in earnings moderates, ‘peak earnings’ are still some years away. But markets will be volatile and regional preferences will shift over time: for the moment, U.S. equities look better placed to weather any trouble than their European peers. We also continue to like emerging market equities in Asia, despite their recent rocky ride.

accounts for almost one-third of the MSCI Asia ex Japan index and earnings here are expected to be strong in 2018. A strong U.S. dollar will create headwinds for some economies, but they can be overcome. Asian emerging markets will keep a close eye on the evolution of the U.S./China trade dispute, but we think this is containable.

A means of diversification

07

Explore investment alternatives

Current

9/10Start 2018

8/10

group might include floating rate notes (one of the best-performing sectors year-to-date) and convertibles with a high exposure to tech. We explain our hedge fund views and preferences on page 17. Higher market dispersion helps many strategy types.

As we enter the second half of the year, we reiterate once more our long-term themes, with an additional focus on

smart mobility and artificial intelligence this year, adding to existing themes of cyber security, infrastructure and global aging. Smart mobility considers the impact of technological advances in transportation; artificial intelligence will have an impact on multiple sectors as we

The price of crude oil rose sharply in the first half of the year, driven by increasing demand on the one hand

and supply concerns on the other. Supply concerns have resulted from OPEC’s ability to hold to production targets, falling output in Venezuela and elsewhere, and Middle East tensions, in particular the renewal of sanctions against Iran. But oil prices fell back

After going through a weak patch in the first quarter of 2018, the dollar has strengthened as expected,

thanks in part to interest rate differentials with the other developed markets, strong U.S. economic growth and catalysts from U.S. tax reform. Most of the U.S dollar’s gains may now be behind us, and we expect limited further appreciation over the next 12 months. We forecast

“intelligently” automate a range of tasks and learn to correctly anticipate human actions. In the current context of higher volatility, these themes are not immune to short-term market movements. However, we remain convinced that over the longer term these themes will become increasingly important and increasingly part of the investment mainstream.

Start 2018

9/10Current

9/10



Enduring dollar strength

Limited potential

Technology to the fore

08

09

10

Dynamic FX drivers

Oil déjà vu

Tomorrow’s themes today

Current

9/10Start 2018

8/10

Start 2018

9/10Current

7/10

Instant Insights: Ten Themes for 2018

o Themes anticipated a mix of volatility and growth.

o Intra-asset class selectivity is a common factor.

o Recent U.S. dollar strength supports FX theme.

a EUR/USD exchange rate of 1.15 by end-June 2019. But keep an eye on other currency drivers too, for example the impact on the euro of trade war concerns or possible Italian tensions with the European Union. Markets will continue to look for clues from a range of political, policy and economic indicators, leading to bouts of volatility.

sharply in early July, as Libyan ports reopened, and we think that further increases in U.S. production will exert continued downward pressure on the price. Moreover, net longs are near the highest level on record, setting the stage for a reversal. This is a case of oil déjà vu, with rises in U.S. output keeping abreast of increases in demand. Our 12-month forecast (WTI) remains at USD60/b.

Chugging alongMacroeconomics

household and business conditions, a healthy financial environment and fiscal stimulus. The current period of economic expansion will become the longest ever in summer 2019. But, with labour market slack largely used up, does employment pose a medium-term threat to growth? The base case must be that any future acceleration in labour costs will be moderate, given a flattish Phillips curve (so higher employment levels do not necessarily presage high inflation). But the risk of a labour market overshoot continues and this would make a Fed-engineered “soft landing” more difficult to achieve.

Eurozone growth continues but trade is a concern

In the Eurozone, slightly weaker growth in Q1 2018 has been blamed on cold

Global GDP growth is forecast at 3.9% in 2018 and 2019. As Figure 2 shows, we expect slight slowdowns in U.S. growth (2.7% in 2018 to 2.4% in 2019), Eurozone expansion (2.2% to 1.9%), and Japan (1.5% to 1%). Overall emerging markets growth remains solid, at 5.3% in both 2018 and 2019, despite a further slight slowdown in Chinese GDP expansion.

Although these forecast rates of growth are modest by historical standards, we do not appear to be facing an imminent recession in any of the developed markets. However, growth dynamics may prove increasingly divergent between regions.

U.S. labour market unlikely to spoil the party

In the U.S., underlying momentum is still strong and is underpinned by solid


CIO InsightsMacroeconomics8

weather, a difficult flu season and geopolitics. On the positive side, most labour market signals are still positive with the impetus to consumption given by wage increases only slightly offset by the impact of higher oil prices. With capacity utilization high, surveys already indicate that investment should also remain a growth driver. A rather more flexible approach to fiscal policy could also help prop up government spending. But concerns over trade (particularly exports to the U.S.) could start to reduce net exports’ contribution to growth.

Within the Eurozone, German growth looks set to remain solid, but slightly down on the levels achieved in 2017. In fact, French growth will be higher than German growth in 2019, driven mainly by investment. Italian growth might be weighed down by political uncertainty, despite a solid contribution from private

Figure 1: Timeline - Ten years since the bankruptcy of Lehman Brothers: regulation, quantitative easing and the S&P 500 index. Source: Bloomberg Finance LP, Deutsche Bank AG. Data as of 11 July 2018.

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DEC 2007Fed establishes first liquidity facility and first currency swap lines with other central banks

JUL 2010Dodd-Frank Act signed into law.TARP investment authority reduced and limited to existing programmes.

OCT 2008TARP financial stabilization package enacted

FEB 2009Financial Stability Plan announced.Recovery Act signed.

MAR 2009TALF programme launched to help revive credit markets.PPIP programme announced to help revive mortgage finance market.

APR 2009G-20 finance ministers announce coordinated response to global financial crisis.

SEP 2008Lehman Bros.

bankruptcyAIG stabilization effort

Treasury guarantees money market mutual

funds.

MAR 2008Bear Stearns collapses.Fed establishes Primary Dealer Credit Facility.

MAY 2009Large bank stress test results released.

JUN 2009First large banks repay TARP funds.GM and Chrysler complete restructuring.

SEP 2008The Dow falls

778 points.

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OCT 2017FED starts to reduce its balance sheet (QT)

DEC 2015Fed starts the process of policy normalization with a first rate hike

DEC 2018PLANNED END OF ECB QUANTITATIVE EASING


consumption, but Spain is expected to maintain economic momentum in 2018 and 2019. Outside of the Eurozone, recent UK GDP data and sentiment indicators suggest a further slowdown is possible and investment is likely to decline as Brexit uncertainty weighs more heavily.

Japan, China and the emerging markets

Japanese growth was below expectations in Q1, but should recover in the remainder of the year. Moderate growth in consumption should continue for a few more quarters; however labour market conditions will remain tight, but an increasingly mixed global environment will add to concerns.

Inflation: largely under controlConsumer price inflation expectations remain subdued in the U.S., despite the further tightening of the labour market and more evidence that wages are edging upwards. Inflation is likely to gravitate back towards the Fed’s 2% target, but a surge looks unlikely: we forecast rates of 1.9% in 2018 and 2.0% in 2020. In the Eurozone, core inflation is expected to move slowly upwards, with consumer inflation expectations moving up again; headline inflation will remain sensitive to FX and oil and food price moves, and should average 1.5% in 2017 and 1.7% in 2019. In Japan, it is more difficult to see any structural trend driving inflation higher and the government’s 2% target is still way out of reach. China is forecast to have only modest inflation in 2018 (2%) and the general emerging market trend is for a slight increase, but rates in some other emerging markets (for example Argentina and Turkey) could go higher.

Instant Insights: Macroeconomics

o U.S. growth unlikely to hit labour market constraint for now.

o Eurozone growth overshadowed by trade concerns.

o Domestic consumption to underpin Chinese growth.

In China, domestic consumption will remain the key driver and ensure only a gentle slowdown in GDP growth in 2018 and 2019. Deleveraging and financial regulation will ease some debt and other financial problems, although serious difficulties will remain. State-owned enterprise (SOE) reform will continue and overcapacity appears to be falling already.

The majority of other emerging market economies should be resilient to tighter U.S. monetary policy – we forecast continued strong growth in India and ASEAN, for example. But another group of EM economies (Russia and Brazil) will continue to register much more modest rates of growth and any policy errors (particularly on inflation control) could land some economies in hot water.

TARGET INFLATION

GDP growth (%)2017

1.0

1.51.5

2.3

2.5

6.76.5

6.3

1.7

1.4

2.2

1.9

2018 2019

1.6

Consumer price inflation (% yoy)2017

1.4

1.0

0.7

1.5

1.5

1.9

2.0

2.2

2.62.5

1.5

1.7

1.9

2.0

2018 2019

2.0

2.7

2.4


Figure 2: Key growth and inflation forecasts Source: Deutsche Bank AG. Forecasts are as of June 21, 2018. Further forecasts can be found in the Macroeconomic forecasts tables on page 19.

U.S. Eurozone UK Japan China

Recommendation “be invested”Recommendation “buy” Recommendation “sell”Recommendation “stay invested, but hedge”

Economicrecovery

Slowdown after boom conditions

Economic downturn,recession

Bonds (government bonds, focus on “safety”)

Equities (cyclical stocks)bonds (corporates)

Equities (defensive stance, hedging)

Bonds (short duration government bonds, cash)

-20%

30%

20%

10%

0%

-10%

Brent Energyvs Mkt

Fins.vs Mkt

Disc.vs Mkt

Telco.vs Mkt

S&P GSCI

MSCIEurope

FTSE100

MSCIEM

MSCIACWI

AUDUSD

TOPIX DXY Gold EMFXS&P500

– Strong economic fundamentals and little signs of “excess” suggest the current bull market should continue gaining steam.

– There is still some oxygen in the equity market. Historically, the equity markets have peaked on average seven months ahead of a recession. We are not there yet and investors would give up a lot of potential by not being invested.

– However, beside rising rates, rising equity volatility is a typical symptom of the later stage of the cycle.

– Asset class correlations are still low and offer diversification benefits. A moderate increase in volatility does usually not lead to significantly higher correlations, a fact that supports multi asset investments. Only sudden spikes in volatility tend to come along with a temporary increase in cross-assets correlation.

– It is not unusual at this stage of the cycle for markets become increasingly vulnerable to bull market corrections. We therefore suggest considering downside protection. Especially as option pricing may make hedging implementation very attractive.



Figure 3:Schematic diagram of the economic cycle and preferred asset classesSource: Deutsche Bank AG.

Figure 4: U.S. average nominal quarterly asset class returns since 1975All asset classes have delivered positive nominal average returns in previous late cyclesSource: JPMorgan Chase & Co., Deutsche Bank AG.

Figure 5: Average 1-year equity return during a late economic cycleIn equities, energy, financials and European stocks historically outperform late in the economic cycleSource: Morgan Stanley, Deutsche Bank AG.

Credit (US HY)Cash (3M)

Commodities (S&P GSCI)Bonds (Treasuries)

USD trade-weightedEquities (S&P 500)

Perspective on the late economic cycle

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Early Mid Late Recession

0Jul 98 Jul 00 Jul 02 Jul 04 Jul 06 Jul 08 Jul 10 Jul 12 Jul 14 Jul 16

60

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Elevated volatility

Range generally defined as "normal"

Goldilocks

CIO InsightsMulti Asset11

Moving into late cycle Multi Asset

The underlying macroeconomic and policy story is a familiar one: we expect continued global economic growth to be accompanied by gradual monetary policy tightening from most major developed market central banks and a modest upturn in inflation. But despite this still generally positive macroeconomic outlook, a number of issues (e.g. trade tensions, Eurozone stresses) are increasingly unsettling markets in this late-cycle environment and volatility is returning to more normal levels after the “Goldilocks” period of unusually low volatility in 2017. Multi asset portfolios must reflect this increase in volatility.

Multi asset portfolios need to prepare for a late-cycle environment. Effective diversification and risk management are important to safeguard portfolios against volatility.


Equities and fixed income

Within equities, we would tend to favour U.S. equities, believing that they could prove relatively resilient to trade and other concerns. We also remain positive on emerging market equities, which offer opportunities after recent market falls, particularly in Asia. We are more cautious around European equities, which could be vulnerable to tariff concerns, and Japanese equities.

On the fixed income side, we continue to be cautious about sovereigns in an environment of rising rates, and are also

Figure 6: Volatility back to normal Source: Bloomberg Finance LP, DWS, Deutsche Bank AG. Data as of June 2018.

CBOE Market Volatility Index - Price Index

Stéphane JunodCIO EMEA and Head of Discretionary Portfolio Management EMEA

CIO InsightsMulti Asset12

slightly wary on high yield, given tail risks from Fed tightening and the ECB exit from QE, as well as tight spreads and the mature economic cycle. We are keener on investment grade, and believe that emerging market hard currency debt will continue to offer opportunities after a mixed start to 2018. One option might be a "barbell" strategy that matches this with cash in order to gain from higher EM carry and slightly lower interest rate sensitivity. With regards to interest rate sensitivity, we are slightly short duration.

Diversification and liquid alternatives

Diversification will be important in this late cycle environment and alternative investments may be able to spread portfolio risk. As regards liquid alternatives, we continue to have a neutral position on the overall allocation. Within the allocation, we now have a positive view on Discretionary Macro, a neutral/positive view on CTA, Event Driven and Equity Market Neutral, a neutral view on Credit Long/Short and Equity Long/Short. Higher levels of market volatility and increased dispersion within sectors and markets are creating an environment that could be more supportive of some non-traditional investment strategies, although the continued low levels of bankruptcies create problems for Distressed strategies, where we have a neutral/negative view.


Instant Insights: Multi Asset

o Portfolios need to reflect increased volatility.

o Diversification is important in late-cycle environment.

o Increased dispersion requires a selective approach.

Figure 7: Asset allocation (balanced portfolio, as of June 26, 2018)

Footnote: Asset allocation as of June 26, 2018. 1 Alternative investments are not suitable for and may not be available to all investors. Restrictions apply. Sources: EMEA Regional Investment Committee, Deutsche Bank AG. This allocation may not be suitable for all investors. 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 may 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. Readers should refer to disclaimers and risk warnings at the end of this document.

Equity

Fixed Income

Cash

Commodities

Alternatives

Developed Markets

Credit

Sovereigns

Emerging Markets

Emerging Markets

7.0%

3.0%

12.0%

33.0%

12.0%

18.0%

6.0%

9.0%

Equity Developed Markets

Equity Emerging Markets

Fixed Income CreditFixed Income Sovereigns

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CIO InsightsEquities13

Still some oxygenEquities

Increased levels of volatility could go hand-in-hand with decent 12-month returns. Risks include prolonged trade tensions and a sharper-than-expected rise in U.S. interest rates.


The late economic cycle that we described in our last CIO Insights is still very much with us. Still solid macroeconomic data and robust company earnings, accompanied by increased volatility, bear this out. Indeed, far from calling the end of the cycle, we expect most equity markets to have an upside potential of 6-8% over the next 12 months.

U.S. target raised

In the U.S., we have raised our 12-month target for the S&P 500 index from 2,850 to 2,900 and our 12-month earnings forecast to $166. In line with this late-cycle outlook, we still favour growth over value, and technology remains a preferred sector, along with financials and health care. We would also tend to favour large-cap over small-cap stocks.

Risks to U.S. equities include valuations and inflation/bond market risks.

Muted optimism on Europe

This favourable view of the equity market extends to Europe, even though rising political uncertainty in the Eurozone and concerns surrounding European financials, as well as risks stemming from the current trade dispute with the U.S., cloud an otherwise benign picture to some extent. For this reason we have slightly reduced our 12-month target for the Eurostoxx 50 index from 3,640 to 3,550, but have left our target for the Stoxx600 unchanged at 390. However, the worst of the drag on European corporate earnings from a strong euro should now be behind us. At a sectoral level, we like financials, materials/chemicals and consumer discretionary.

Japan ambivalent

At a fundamental level, Japanese equities remain supported by solid earnings growth and strong corporate balance sheets. However, a stronger Yen (relative to other trading partners’ currencies) and signs of an end to the economic recovery cycle suggest a degree of caution would be appropriate.

Emerging markets still appeal

Emerging market equities have been buffeted by a strengthening U.S. dollar, but will mostly benefit from strong underlying economic fundamentals (particularly in Asia), and we expect solid earnings growth in 2018. However, we have lowered our emerging market index targets because of currency and trade concerns. We have reduced our 12-month target for the MSCI EM index from 1,280 to 1,150, for the MSCI Asia ex Japan from 790 to 740 and for the MSCI Latam index from 3,200 to 2,500. Even so, we continue to have a generally positive view of emerging market equities, with a continuing preference for Asia. In fact for the MSCI Asia ex Japan index we expect an upside of around 11% from current levels, the highest expected total return in the indices we forecast. Risks centre around the possible impact of a sharp further rise in U.S. rates or the U.S. dollar (which we do not expect), or prolonged international trade tensions, which might lead us to reassess our currently positive view on Chinese equities. Within Latin America, political developments in Brazil will be watched closely as the election scheduled for October approaches. Our sector views are summarized in Figure 9 on the next page.

Figure 8:Equity market forecasts and year-to-date index change by regionSource: Bloomberg Finance LP, Deutsche Bank AG. Data and forecasts are as of July 3, 2018. All returns are YTD.

UK (FTSE 100)Index change YTD (GBP):

1.1%End-Jun 2019 forecast:

7,800

United States (S&P 500)Index change YTD (USD):

2.5% End-Jun 2019 forecast:

2900

Eurozone (Eurostoxx 50)Index change YTD (EUR):

-0.2%End-Jun 2019 forecast:

3,550

Asia ex. Japan (MSCI Asia ex Japan)Index change YTD (USD):

-6.0%End-Jun 2019 forecast:

790

Japan (MSCI Japan)Index change YTD (JPY): -5.4%End-Jun 2019 forecast: 1,080Latam (MSCI Latam)

Index change YTD (USD): -11.5%End-Jun 2019 forecast: 3,200

Switzerland (SMI)Index change YTD (CHF): -5.0%End-Jun 2019 forecast: 8,850

Instant Insights: Equities

o Further gains expected on a 12-month horizon.

o But expect further volatility in this late-cycle environment.

o Technology is still a favoured sector.

Figure 9: Equity views by sector Source: Deutsche Bank AG. Data as of July, 2018.

CIO InsightsEquities14


POSITIVES NEGATIVES REGIONAL PREFERENCE

SECTOR

Overweight Neutral Underweight

Health CareVIEW

– Enough product innovation to find equities with superior growth outlook

– Pharma and large cap biotech are still attractively valued. U.S. tax reform has a positive effect on M&A

– Mid and small cap companies could benefit from acquisition by mature companies keen to bolster pipelines

– Continued pricing pressure in competitive indication areas

– Large cap pharma and biotech face growth challenges

– U.S. mid-term elections could cause some noise around drug pricing

Pharma

Biotech

Medtech

Services & facilities

IndustrialsVIEW

– Q2 comments from firms supportive – Energy and materials capital expenditure is

improving – Aerospace shows solid growth rates

– High expectations of extended upcycle make positive surprises hard to achieve

– FX trends obscure underlying upgrades for European companies

– Risks from protectionism and tariffs on end products, input costs and supply chain

Conglomerates

Oil and gas and mining capex plays

Aerospace & defence

Information TechnologyVIEW

– Diverse sector with clear market leaders in subsectors, strong margin profiles and substantial barriers to entry

– Growth potential from innovation and disruption of other industries

– Solid balance sheets and strong free cash flow generation

– Short product cycles can potentially disrupt business models

– Smartphone penetration, previously a key growth driver, has now entered saturation phase

– IT now a well-owned sector and susceptible to volatility, particularly around regulation and trade war fears

Software & service

Hardware

Semiconductors

MaterialsVIEW

– China supply constraints over summer should help offset a weak demand period

– Paper/packaging and pulp helped by good economic backdrop

– Earnings from chemicals have been largely positive, particularly within commodity chemicals

– Trade war would hit European flat steel producers particularly

– Specialty chemicals hit by raw materials prices – Iron ore price impacted by curtailed Chinese

steel production

Chemicals

Metals & mining

VIEW

Telecom Services

– Mobile service revenues are improving – Data consumption trends still strong and

rising – Valuations back to more attractive “pre-

M&A” levels

– Prospect of rising yields reduces attraction of sector

– Content costs still elevated in many markets – Penetration rates in U.S. close to saturation

Telecom

UtilitiesVIEW

– In Europe, bad weather has helped boost consumption

– FX currently a drag for European firms but could turn and boost earnings per share

– Recent German merger and asset swap transaction supports our constructive view on European utilities sector

– Interest rate environment is becoming less supportive

– UK government is asking the regulator to impose a price cap on energy tariffs

– Some pricing pressure in the wind sector

Utilities

U.S

.

EU

RO

PE

EM

ER

GIN

GM

AR

KE

TS

Consumer DiscretionaryVIEW

– Consumer confidence rises further in the U.S., supported by low unemployment and tax cuts

– Consumer spending also rising in Europe, Japan and China

– Moderate increase in inflation could be a positive driver of margins

– Emerging markets benefit from urbanization and welfare effects

– Further U.S. rate hikes could unsettle consumers

– Tariff tit-for-tat would raise goods prices – Weak consumer sentiment post-Brexit in

the UK – Slower Chinese investment and continued

deleveraging initiatives.

Auto & components

Durable & apparel

Consumer service

Media

Retail

Consumer StaplesVIEW

– Staples are a prime beneficiary of emerging market improvements, through both macro/consumption and FX

– More reasonable valuations – Still good conditions for M&A (strong

balance sheets, low funding costs, need for growth)

– Q1 earnings reports confirm underlying business trends still tough and some short-term emerging market problems

– Input costs on the rise while firms have only limited pricing power

– Use of sector as some form of bond proxy is a headwind in a rising rates environment

– Progress in e-commerce is a double edged sword for many fast-moving consumer goods (FMCG)

Food retail

Beverages

Food products

Tobacco

Household & personal products

EnergyVIEW

– Oil markets appear to have found a broad equilibrium

– U.S. onshore producers are now acting more rationally as marginal suppliers

– Oil majors are reaping the benefit of rising free cash flows

– OPEC has no exit strategy from its current approach

– There is an upside risk to 2019 and 2020 capital expenditure estimates

– Fracking as the marginal producer may cap upside for oil prices

Equipment & services

Integrated

Exploration & production

Refining & marketing

FinancialsVIEW

– Turning U.S. interest rate cycle and tax reform

– Rising dividends and share buybacks – Possibility of multiple expansion due to

rising return on equity in a low growth environment

– Low yield environment still hurting margins and investment income outside the U.S.

– Regulation likely to weigh on banking activities

Banks

Insurance

Diverse financials

-1

4

3

2

1

0

2012 2013 2014 2015 2016 2017 2018

CIO InsightsFixed income and foreign exchange15

Two steps forward, one step back

Fixed income and foreign exchange


Several central banks are slowly tightening policy, with the Fed in the vanguard. Government bonds of developed countries could still be a good way to diversify a portfolio, however. Investment grade and emerging market debt still appeals, but we are more cautious on high yield.

track will not be smooth. Market volatility has been increasing and the use of core government bonds as safe havens could temporarily push down yields – hence two steps forward, one step back.

U.S. yield curve flattening

We have left our 12-month forecast for U.S. 10-year government bond yields (Treasuries) unchanged from last quarter at 3.25%; however we have upgraded our 2-year Treasury yield target from 2.80% to 3.00%. In other words, we predict a further flattening of the yield

The Federal Reserve is likely to raise rates three more times over the next 12 months and this is going hand-in-hand with a steady reduction of the Fed’s balance sheet – the cumulative reduction will approach USD 700bn by mid-2019. In Europe, the ECB has announced that QE asset purchases will stop at the end of this year, although official rates are not likely to rise until the second half of 2019. The Bank of England may have to raise rates much sooner. Only in Japan will stated monetary policy remain so highly accommodative. Against this background, government bond yields are likely to continue to edge up, but their upward

curve – although we do not think that this presages an economic recession.

U.S. investment grade (IG) credit will be a beneficiary of the still accelerating economic growth, the low likelihood of a recession, the repatriation of foreign earnings and strong company balance sheets. We expect IG spreads to narrow slightly over the next 12 months to 100 bps. U.S. high yield has recently experienced investor outflows and spreads are forecast to increase slightly to 370 bps by the end of June 2019. However, the default rate is expected to increase only marginally and there will be some areas of opportunity.

Low Bund yields but Italy overshadows

Our 12-month forecast for German government bond yields (Bunds) has been left unchanged at 1.00% for the 10-year maturity, significantly above the current level of 0.34%, with the gradual winding down of bond purchases by the ECB helping curb demand. But Bunds’ “safe haven” role will discourage a rise in yields beyond this level, as investors are likely to continue to seek refuge in safe assets due to political uncertainties and trade tensions. The spread between 10-year Bunds and Treasuries – already at historical highs, as shown in Figure 10 – is therefore likely to widen further.

Contrary to the U.S., we don’t expect the yield curve to flatten for the Eurozone, hence we have kept our 2-year Bund yield

Figure 10:Spread between 10-year Bunds and U.S. TreasuriesSource: Bloomberg Finance LP, DWS, Deutsche Bank AG. Data as of June 2018.

Spread 10y Bund 10y U.S. Treasury

1.14

1.26

1.24

1.22

1.20

1.18

1.16

Nov 2017 Dec 2017 Jan 2018 Feb 2018 Mar 2018 Apr 2018 May 2018 Jun 2018 Jul 2018

forecast at 0.10%. Concerns around Italy lead us to forecast a spread over Bunds of 200bps on a 12-month horizon, but spreads for Spain will be much lower, with it trading like a “semi-core” European country.

Within European fixed income, we remain constructive on investment grade credit thanks to attractive valuations. However, we have raised our 12-month spread target from 75 to 95 bps. European high yield remains attractive, benefiting from a stable economic outlook and currently raised levels of spreads. But selectivity will be crucial here, given potentially large price moves on bad news.

Elsewhere in Europe, UK 10-year yields are likely to trend higher with the BoE expected to hike rates at least once in the next 12 months.

Japan in no hurry to change policy

The Bank of Japan is in no hurry to change monetary policy soon, although the “around Y80 trillion” target for annual JGB purchases is currently running at around Y50 trillion, and seems likely to stay in a Y40-60 trillion range. There seems likely to be an adjustment in the yield target before

CIO InsightsFixed income and foreign exchange16

The still mighty dollarOur long-standing (and against consensus) long U.S. dollar call has come true in recent months, with sustained appreciation in Q2, driven primarily by strong interest rate and growth differentials between the U.S. and other developed economies. As we argued in our last CIO Insights, some potential negative U.S. dollar drivers – for example China selling out of U.S. Treasuries – have probably been overstated.

So where does it go from here? Our 12-month forecast for EUR/USD remains at 1.15, implying only small further gains from current levels. In the interim, the USD may well temporarily overshoot this target, of course, driven by the momentum of U.S. economic growth and hawkish views at the Federal Reserve,

Instant Insights: Fixed Income and FX

o U.S. yield curve flattening but no recession.

o Rise in European yields limited by Bunds’ “safe haven” role.

o Strong dollar call vindicated, limited further gains likely.

any upwards move in policy rates – and no move is likely this year. Higher inflation or a weaker Yen might be needed to force a reassessment and neither looks likely soon.

Emerging markets: potential rewards vs. risk

Emerging market debt has long been a favourite asset class, underpinned by

strong economic growth in many EM economies. However, the stronger U.S. dollar is making it increasingly more expensive for firms in the region to service hard currency debt. A potentially attractive return therefore has to be balanced against the risks posed by trade policies and depreciating local currencies, as well as idiosyncratic risk around individual currencies.


as well as the repatriation of foreign earnings by U.S. companies that take advantage of the recent tax reform. Another scenario which could result in a sharp rise in the U.S. dollar would be if the Powell Fed became subordinate to President Trump’s fiscal policies, fell behind the curve and then had to catch up by raising interest rates aggressively. We consider this scenario to be unlikely as well. A further possibility would be a major flare-up around Italy, bringing the euro under pressure and encouraging a flight to the U.S. dollar.

Currency forecasts are set out in full on page 20.

Figure 11:EUR/USD exchange rate over the past eight monthsSource: Bloomberg Finance LP, Deutsche Bank AG. Data as of 18 July 2018.

CIO InsightsAlternatives17

Hedge fundsAlternatives

Discretionary Macro POSITIVE

We take a positive view on discretionary macro hedge fund strategies because we see them benefiting from two overarching themes in this late economic cycle: divergence and uncertainty. Divergence is increasing between the U.S. and the Eurozone and within the Eurozone itself. Uncertainty remains high on a number of fronts, with the European trading bloc’s dependence on manufacturing exports one obvious source of uncertainty. Divergence and uncertainty should offer long and short opportunities for macro strategies, in particular for those that capitalize on relative rather than absolute market moves. We particularly favour trades like U.S. vs. the Eurozone in rates and equities, European core vs. periphery in rates, and global defensive vs. cyclical equities.


How strategy types could fare in the current environment and why.

Event Driven / Multi-Strategy NEUTRAL/POSITIVE

We are neutral/positive on Event Driven/Multi-Strategy hedge funds. Despite the broad market volatility, the opportunity set for the strategy looks encouraging. Companies are now embarking on corporate activity to maintain growth. In the first quarter, U.S. tax reform and global synchronized growth unleashed corporate deal making activity, with global M&A volume totalling USD 1.2 trillion in Q1 2018, an increase of 67% YoY, which represents the strongest start to a year on record. Looking at the activity, we observe that the average deal size is increasing. Market volatility was also a factor in deal spreads widening. In February and March we saw managers taking advantage of the volatility to add to their existing positions at wider spreads. Looking forward, we see the

Figure 12:Example strategy shares within a hedge fund allocation Source: DWS, Deutsche Bank AG. Data as of June 21, 2018.

combination of stock dispersion and increased corporate activity as being conducive for Event Driven. However, with heightened regulatory and deal complexity, manager selection is more critical than ever.

Equity Market Neutral NEUTRAL/POSITIVE

We are neutral/positive on Equity Market Neutral strategies. We have marginally upgraded our view this quarter (from neutral) as we believe dispersion and volatility offer increasing opportunities for this strategy. Examining markets from a micro perspective, we are encouraged by the increasing dispersion of performance across sectors and stocks, which is usually a positive driver of returns for market neutral stock picking strategies. We think that skilled long/short managers can navigate and take advantage of this environment and generate alpha without directional market exposure.

CTA NEUTRAL/POSITIVE

We maintain our view on CTA (Commodity Trading Advisor) strategies on the back of a macro environment that should be conducive to trending markets. We expect some trends in fixed income and currencies driven by macro policy divergence; additionally, commodities should present an improved opportunity set as inflation expectations increase. As expected, the equity sell-off earlier this year proved painful for CTA strategies and the extent of losses was dependent on two factors: size of the positions and the speed in reducing them. Looking

Equity Long/Short Discretionary Macro

Neutral

Neutral/Positive

Discretionary Macro 20.0%

CTA 15.0%

Event Driven 20.0%

Equity Market Neutral 20.0%

Credit Long/Short 7.5%

Equity Long/Short 17.5%

Positive

CTA

Event DrivenEquity M

arket N

eutr

alLo

ng/S

hort

Cre

dit

Instant Insights: Hedge Funds

o Market dispersion to aid several strategy types.

o Rising rates and trade frictions set strategy challenges.

o Distressed suffers from a lack of opportunities.

CIO InsightsAlternatives18

forward, CTA managers have now been “shaken out” of their long equity positions and present a much more balanced asset allocation. Portfolios are positioned to take advantage of rising rates in the U.S. and have some interesting macro trades in commodities and currencies: this positioning represents a good diversifier to other hedge fund strategies and should prove de-correlated in a risk-off scenario of protracted decline in traditional asset classes.

Equity Long/Short NEUTRAL

We are now neutral on Equity Long/Short, having downgraded our view to reflect what we believe to be a sentiment shift in equity markets that is here to stay. The global synchronized growth narrative is challenged by the prospect of increasing trade frictions and rising interest rates. We don’t consider the overall increase in volatility seen this year to be temporary; rather we see it as a normalization after years of unusually


calm market conditions. We therefore downgrade our market direction outlook, as politics and policies seem to be getting increasingly in the way of the solid macro backdrop we have witnessed so far, a state of affairs that we consider likely to continue over the next six to twelve months.

Credit NEUTRAL

On Credit Strategies we maintain our neutral outlook. Over the past few years, we have been cautious here, seeing positive performance and tightening spreads being driven primarily for investors’ search to yield in a low rates environment and thus not necessarily resilient to rising rates. However barriers to entry, higher spread premia and less exposure to duration, private credit should provide a degree of protection against both higher rates and defaults.

Distressed NEUTRAL/NEGATIVE

We are neutral/negative on Distressed Strategies because of the very low current default rates. Even though the default rate picked up during the first quarter, to 2.2% for high-yield and to 2.5% for loans, they are still well below the 3.0-3.5% long-term historical average. However, given the robust debt capital market, rising leverage and softening credit covenants, the next distressed cycle may be bountiful.

Figure 13:Our current hedge fund strategy viewsSource: DWS, Deutsche Bank AG. Data as of June 2018.

Figure 14:Strategy snapshot: key forecasts for the main hedge fund strategies Source: DWS, Deutsche Bank AG. Data as of 21 June 2018.

Strategy Outlook (Next 12 Months)

POSITIVE NEUTRAL NEGATIVE

Macro

CTA

Event Driven

Equity M/N

Credit L/S

Equity L/S

Distressed

Equity Long ShortMarket direction

Q2/17 Q2/18

Stock-picking environment

Discretionary MacroMarket volatility

Q2/17 Q2/18

Trending markets

Equity Market NeutralStock-pickingenvironment

Q2/17 Q2/18

Market volatility

CTATrending markets

Q2/17 Q2/18

CreditCredit spreads

Q2/17 Q2/18

Private credit

Event DrivenStock-picking environment

Q2/17 Q2/18

Announced deals

DistressedBankruptcies

Q2/17 Q2/18

Interest rates

Merger spreads

CIO InsightsData Tables19

Macroeconomic forecastsDeutsche Bank

DB 2018 Forecast DB 2019 Forecast

GDP growth (%)

U.S.* 2.7 2.4

Eurozone (of which) 2.2 1.9

Germany 2.1 1.8

France 2.0 2.0

Italy 1.3 1.1

UK 1.4 1.6

Japan 1.5 1.0

China 6.5 6.3

India 7.5 8.0

Russia 2.0 1.8

Brazil 1.5 2.5

World 3.9 3.9

Consumer price inflation (%)

U.S.* 1.9 2.0

Eurozone 1.5 1.7

UK 2.5 2.0

Japan 1.0 1.4

China 2.0 2.2

Current account balance (% of GDP)

U.S. –2.8 –3.0

Eurozone 3.0 2.9

UK –3.8 –4.0

Japan 3.8 3.8

China 1.5 1.2

Fiscal balance (% of GDP)

U.S. –4.1 –4.7

Eurozone –0.9 –0.8

UK –2.5 –2.7

Japan –4.0 –3.8

China –3.5 –3.2

Please see risk warnings for more information. Forecasts are based on assumptions, estimates, opinions and hypothetical models or analysis which may prove to be incorrect. No assurance can be given that any forecast or target will be achieved. Past performance is not indicative of future returns. * For the U.S., GDP measure is Q4 on Q4 and inflation measure is Core PCE Dec to Dec %. Forecast for U.S. Headline PCE (Dec/Dec) is 1.7% in 2018 and 1.8% in 2019. U.S. GDP calendar year growth is 2.8% in 2018 and 2.6% in 2019.Source: Deutsche Bank AG. As of June 21, 2018.

F = Forecasts. Please see risk warnings for more information. Forecasts are based on assumptions, estimates, opinions and hypothetical models or analysis which may prove to be incorrect. No assurance can be given that any forecast or target will be achieved. Past performance is not indicative of future returns. Source: Deutsche Bank AG. As of June 21, 2018.

CIO InsightsData Tables20

Asset class forecastsDeutsche Bank

Official rate End-Jun 2019FBenchmark interest ratesU.S. Fed fund rates 2.50-2.75%Eurozone Refi rate 0%UK Repo rate 0.75%Japan Overnight call rate 0%FXEUR vs USD EUR/USD 1.15USD vs JPY USD/JPY 111EUR vs JPY EUR/JPY 128EUR vs GBP EUR/GBP 0.90GBP vs USD GBP/USD 1.28USD vs CNY USD/CNY 6.5

Market Index End-Jun 2019FEquitiesU.S. S&P 500 2,900Germany DAX 13,500Eurozone Eurostoxx 50 3,550Europe Stoxx 600 390Japan MSCI Japan 1,080Switzerland SMI 8,850UK FTSE 100 7,800Emerging Markets MSCI EM 1,150Asia ex Japan MSCI Asia ex Japan 740Latam MSCI Latam 2,500CommoditiesGold Gold spot 1,290Oil WTI spot 60Fixed IncomeU.S.UST 2yr U.S. 2yr yield 3.00%UST 10yr U.S. 10yr yield 3.25%UST 30yr U.S. 30yr yield 3.45%U.S. IG CORP BarCap U.S. Credit 100bpU.S. HY Barclays U.S. HY 370bpEuropeSchatz 2yr GER 2y yield –0.10%Bund 10yr GER 10y yield 1.00%Bund 30yr GER 30y yield 1.60%Gilt 10yr UK 10y yield 1.75%EUR IG Corp iBoxx Eur Corp all 95bpEUR HY ML Eur Non-Fin HY Constr. Index 300bpAsia PacificJGB 2yr JPN 2y yield –0.10%JGB 10yr JPN 10y yield 0.10%Asia Credit JACI Index 255bpGlobalEM Sovereign EMBIG Div 350bpEM Credit CEMBI 330bp

The Association of Southeast Asian Nations (ASEAN) comprises Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Cambodia, Laos, Myanmar and Vietnam.

The Bank of England (BoE) is the UK central bank.

The Bank of Japan (BoJ) is the central bank of Japan.

Correlation is a statistical measure of how two securities (or other variables) move in relation to each other.

Credit strategies seek to exploit opportunities within different credit types from the same issuer, or between credit of similar quality from different issuers.

Cyclical stocks are affected by the business cycle, typically including goods and services the purchase of which is discretionary.

Discretionary macro strategies attempt to gain from macroeconomic, policy or political changes.

Distressed strategies look at securities from entities experiencing bankruptcy or other types of corporate distress.

Equity long/short strategies take long positions in securities that are expected to strengthen, and short positions in those that are expected to weaken.

Equity market neutral strategies aim to gain from opportunities within a particular market sector, geography or other categorisation.

The European Central Bank (ECB) is the central bank for the Eurozone.

The Euro Stoxx 50 Index tracks the performance of blue-chip stocks in the Eurozone; the Euro Stoxx 600 has a wider scope, taking in 600 companies across 18 European Union countries.

Event-driven hedge fund strategies seek to gain from specific corporate events (e.g. mergers)

The Federal Reserve is the central bank of the United States. Its Federal Open Market Committee (FOMC) meets to determine interest rate policy.

The FTSE 100 Index tracks the performance of the 100 major companies trading on the London Stock Exchange.

The Global Financial Crisis refers to the crisis of 2007-2008.

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period.

Hybrids include bonds that have range of conditions attached (including the possible suspension of future interest payments) and which are low-ranked for insolvency purposes.

JGB stands for Japanese Government Bonds.

Long positions in an asset suggest a market belief that its price will increase.

Millennials is a term used to refer to people born in the 1980s and 1990s, although this definition can vary.

The MSCI Asia ex Japan Index captures large- and mid-cap representation across 2 of 3 developed-market countries (excluding Japan) and 8 emerging-market countries in Asia.

The MSCI Japan Index is designed to measure the performance of the large- and mid-cap segments of the Japanese market.

The MSCI Latam Index includes large and mid-cap firms in five Latin American countries.

The MSCI EM Index captures large and mid-cap representation across 23 emerging markets countries.

The North American Free Trade Agreement (NAFTA) came into force in 1994 and covers the U.S., Mexico and Canada.

The Phillips Curve describes an inverse relationship between rates of unemployment and and rises in prices or wages.

Quantitative easing (QE) is an unconventional monetary policy tool, in which a central bank conducts broad-based asset purchases.

The S&P 500 Index includes 500 leading U.S. companies capturing approximately 80% coverage of available U.S. market capitalization.

The Swiss Market Index (SMI) includes 20 large and mid-cap stocks.

Treasuries are bonds issued by the U.S. government.

Valuation attempts to quantify the attractiveness of an asset, for example through looking at a firm's stock price in relation to its earnings.

The VIX Index is a measurement of volatility implied by S&P 500 Index options.

Volatility is the degree of variation of a trading-price series over time.

CIO InsightsGlossary21

Glossary

Important Note

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CIO InsightsDisclaimer22

Important Note

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United Kingdom In the United Kingdom (“UK”), this publication is considered a financial promotion and is approved by DB UK Bank Limited on behalf of all entities trading as Deutsche Bank Wealth Management in the UK. Deutsche Bank Wealth Management is a trading name of DB UK Bank Limited. Registered in England & Wales (No. 00315841). Registered Office: 23 Great Winchester Street, London EC2P 2AX. DB UK Bank Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and its Financial Services Registration Number is 140848. Deutsche Bank reserves the right to distribute this publication through any of its UK subsidiaries, and in any such case, this publication is considered a financial promotion and is approved by such subsidiary where it is authorised by the appropriate UK regulator (if such subsidiary is not so authorised, then this publication is approved by another UK member of the Deutsche Bank Wealth Management group that has the requisite authorisation to provide such approval).


Important Note

Hong Kong This document and its contents are provided for information only. Nothing in this document is intended to be an offer of any investment or a solicitation or recommendation to buy or to sell an investment and should not be interpreted or construed as an offer, solicitation or recommendation.

To the extent that this document makes reference to any specific investment opportunity, its contents have not been reviewed. The contents of this document have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the investments contained herein. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has not been approved by the Securities and Futures Commission in Hong Kong nor has a copy of this document been registered by the Registrar of Companies in Hong Kong and, accordingly, (a) the investments (except for investments which are a “structured product”, as defined in the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (the “SFO”)) may not be offered or sold in Hong Kong by means of this document or any other document other than to “professional investors” within the meaning of the SFO and any rules made thereunder, or in other circumstances which do not result in the document being a “prospectus” as defined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32 of the Laws of Hong Kong) (“CO”) or which do not constitute an offer to the public within the meaning of the CO and (b) no person shall issue or possess for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the investments which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to the investments which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the SFO and any rules made thereunder.

Singapore The contents of this document have not been reviewed by the Monetary Authority of Singapore (“MAS”). The investments mentioned herein are not allowed to be made to the public or any members of the public in Singapore other than (i) to an institutional investor under Section 274 or 304 of the Securities and Futures Act (Cap 289) ("SFA"), as the case may be (as any such Section of the SFA may be amended, supplemented and/or replaced from time to time), (ii) to a relevant person (which includes an Accredited Investor) pursuant to Section 275 or 305 and in accordance with other conditions specified in Section 275 or 305 respectively of the SFA, as the case may be (as any such Section of the SFA may be amended, supplemented and/or replaced from time to time), (iii) to an institutional investor, an accredited investor, expert investor or overseas investor (each as defined under the Financial Advisers Regulations) (“FAR”) (as any such definition may be amended, supplemented and/or replaced from time to time) or (iv) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA or the FAR (as the same may be amended, supplemented and/or replaced from time to time).

United States In the United States, brokerage services are offered through Deutsche Bank Securities Inc., a broker-dealer and registered investment adviser, which conducts securities activities in the United States. Deutsche Bank Securities Inc. is a member of FINRA, NYSE and SIPC. Banking and lending services are offered through Deutsche Bank Trust Company Americas, member FDIC, and other members of the Deutsche Bank Group. In respect of the United States, see earlier statements made in this document. Deutsche Bank makes no representations or warranties that the information contained herein is appropriate or available for use in countries outside of the United States, or that services discussed in this document are available or appropriate for sale or use in all jurisdictions, or by all counterparties. Unless registered, licensed as otherwise may be permissible in accordance with applicable law, none of Deutsche Bank or its affiliates is offering any services in the United States or that are designed to attract US persons (as such term is defined under Regulation S of the United States Securities Act of 1933, as amended).

This United States-specific disclaimer will be governed by and construed in accordance with the laws of the State of Delaware, without regard to any conflicts of law provisions that would mandate the application of the law of another jurisdiction. Germany This document has been created by Deutsche Bank Wealth Management, acting through Deutsche Bank AG and has neither been presented to nor approved by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht). For certain of the investments referred to in this document, prospectuses have been approved by competent authorities and published. Investors are required to base their investment decision on such approved prospectuses including possible supplements. Further, this document does not constitute financial analysis within the meaning of the German Securities Trading Act (Wertpapierhandelsgesetz) and, thus, does not have to comply with the statutory requirements for financial analysis. Deutsche Bank AG is a stock corporation (“Aktiengesellschaft”) incorporated under the laws of the Federal Republic of Germany with principal office in Frankfurt am Main. It is registered with the district court (“Amtsgericht”) in Frankfurt am Main under No HRB 30 000 and licensed to carry on banking business and to provide financial services. Supervisory authorities: The European Central Bank (“ECB”), Sonnemannstrasse 22, 60314 Frankfurt am Main, Germany and the German Federal Financial Supervisory Authority (“Bundesanstalt für Finanzdienstleistungsaufsicht” or “BaFin”), Graurheindorfer Strasse 108, 53117 Bonn and Marie-Curie-Strasse 24-28, 60439 Frankfurt am Main, Germany.


Important Note

India The investments mentioned in this document are not being offered to the Indian public for sale or subscription. This document is not registered and/or approved by the Securities and Exchange Board of India, the Reserve Bank of India or any other governmental/ regulatory authority in India. This document is not and should not be deemed to be a “prospectus” as defined under the provisions of the Companies Act, 2013 (18 of 2013) and the same shall not be filed with any regulatory authority in India. Pursuant to the Foreign Exchange Management Act, 1999 and the regulations issued there under, any investor resident in India may be required to obtain prior special permission of the Reserve Bank of India before making investments outside of India including any investments mentioned in this document.

Italy This report is distributed in Italy by Deutsche Bank S.p.A., a bank incorporated and registered under Italian law subject to the supervision and control of Banca d’Italia and CONSOB.

Luxembourg This report is distributed in Luxembourg by Deutsche Bank Luxembourg S.A., a bank incorporated and registered under Luxembourg law subject to the supervision and control of the Commission de Surveillance du Secteur Financier.

Spain Deutsche Bank, Sociedad Anónima Española is a credit institution regulated by the Bank of Spain and the CNMV, and registered in their respective Official Registries under the Code 019. Deutsche Bank, Sociedad Anónima Española may only undertake the financial services and banking activities that fall within the scope of its existing license. The principal place of business in Spain is located in Paseo de la Castellana number 18, 28046 - Madrid. This information has been distributed by Deutsche Bank, Sociedad Anónima Española.

PortugalDeutsche Bank AG, Portugal Branch is a credit institution regulated by the Bank of Portugal and the Portuguese Securities Commission (“CMVM”), registered with numbers 43 and 349, respectively and with commercial registry number 980459079. Deutsche Bank AG, Portugal Branch may only undertake the financial services and banking activities that fall within the scope of its existing license. The registered address is Rua Castilho, 20, 1250-069 Lisbon, Portugal. This information has been distributed by Deutsche Bank AG, Portugal Branch.

AustriaThis document is distributed by Deutsche Bank Österreich AG, with its registered office in Vienna, Republic of Austria, registered with the companies' register of the Vienna Commercial Court under FN 276838s. It is supervised by the Austrian Financial Market Authority (Finanzmarktaufsicht or FMA), Otto-Wagner Platz 5, 1090 Vienna, and (as entity in the Deutsche Bank AG group) by the European Central Bank (“ECB”), Sonnemannstrasse 22, 60314 Frankfurt am Main, Germany. This document has neither been presented to nor been approved by any of the before-mentioned supervisory authorities. For certain of the investments referred to in this document, prospectuses may have been published. In such case, investment decisions should be made exclusively on the basis of the published prospectus including possible supplements. Only these documents are binding. This document constitutes marketing material, which has been provided exclusively for informational and advertising purposes, and is not the result of any financial analysis or research.

The NetherlandsThis document is distributed by Deutsche Bank AG, Amsterdam Branch, with registered address at De entree 195 (1101 HE) in Amsterdam, the Netherlands, and registered in the Netherlands trade register under number 33304583 and in the register within the meaning of Section 1:107 of the Netherlands Financial Supervision Act (Wet op het financieel toezicht). This register can be consulted through www.dnb.nl.

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