cio insights - the perils of patterns€¦ · the perils of patterns assessing today’s investment...

Deutsche Bank Wealth Management

CIO Insights

Q3 2017 EMEA

The perils of patterns Assessing today’s investment reality

CIO InsightsLetter to Investors2

LETTER TO INVESTORS

The perils of patterns

Our cover image is that of an old-fashioned kaleidoscope. This device, patented exactly two hundred years ago this year by the Scottish Enlightenment scientist, Sir David Brewster (but derived from a principle understood by the ancient Greeks), includes two or more reflectors. As a result, if you look through one end of the device, then the reality of an irregular pile of coloured glass is transformed into the illusion of an endless, beautiful symmetrical mosaic pattern. Hence the Greek derivation of the word: καλός (beauty), εϊδος (seen as a form, shape) and σκοπέω (examine).

When we look at the investment environment today we may think that we should see such attractive patterns: improving global economic indicators matched by apparently still robust markets, stable and in apparent harmony. But are these patterns illusory or real? To some extent, the distinction does not matter in the short term: if markets want to see a pattern, than they will act on it.

Illusion vs. reality does matter, however, when it comes to sustainability. And the second characteristic of a kaleidoscope image is that it is not stable. A twist of the barrel and the existing pattern is destroyed – to be replaced by something different but possibly equally appealing.

Our assessment of the current investment environment is made vulnerable to such illusion by the fact that we still live in a highly abnormal policy environment. The bright picture of moderate but stable GDP growth, accompanied by low rates of inflation – often referred to as the “Goldilocks scenario” for risky assets – still depends on considerable amounts of monetary policy support.

Implicit realisation of the artificiality of the current situation makes investment assessments susceptible to sudden change: the kaleidoscope might twist unexpectedly. Take for example the rapidly changing assessment of the prospects for the euro. A few months ago the accepted pattern was for U.S. dollar strength, on the basis of the stronger U.S. growth and rising U.S. interest rates. But now, on the back of better European economic data and some better political news (most notably in France), markets have rekindled their enthusiasm for the euro. Particularly for exchange rates, we need do disentangle longer-term factors from the patterns that are prominent in the kaleidoscope right now: the picture here may be more complex than first appears. Different trends could also reassert themselves, as the kaleidoscope twists again.

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 2017.

CIO InsightsLetter to Investors3

Christian NoltingGlobal CIO

It is also important to realize that in this “Goldilocks” world, some asset classes are in fact running rather hotter than others. We are clearly in a late cycle environment with stretched valuations regarding both equity and credit and some discrepancy between these two asset classes at this stage. This leaves us in a position where developed market equities are probably to be preferred over developed market bonds, even given the risk of temporary equity market reversals.

The patterns within these asset classes are also changing and in a way that appears likely to be sustained. Lower-risk fixed income appears to be facing very low total return forecasts (although may still have portfolio diversification benefits), and the cycle for high yield appears mature, reducing its appeal. In the U.S., net new cash flow into high yield mutual funds is near its highest level in three years; in Europe, the yield on high yield credit has fallen below

the dividend yield on the EuroStoxx 50. Emerging market hard currency debt could offer some more interesting opportunities in future. Regarding equities, the focus seems to have shifted across from the U.S. to Europe and emerging market Asia. European equities certainly appear to have some catch-up potential, particularly given how (unlike in the U.S.) their performance has lagged government bonds over the last 10 years.

For me, the important factor to realize is that whilst pretty patterns will always appeal, there is always a need to distinguish between what looks good now and what is likely to keep looking good in future. Ultimately, a kaleidoscope is just a distraction and not a scientific instrument: a microscope is more useful.

Regarding equities, the focus seems to have shifted across from the U.S. to Europe and emerging market Asia. European equities certainly appear to have some catch-up potential.


CIO InsightsContents4

Contents

Inside the coverA kaleidoscope can create beautiful patterns but these are by their nature unstable. An assessment of today's investment environment needs to distinguish between sustainable patterns and those that are temporary or illusory.

7 MACROECONOMICS

Still stuck with cyclical healing

9 MULTI ASSET

Enjoy it while it lasts

15ALTERNATIVES

Focus on valuations in a crowded private equity sector

16 DATA TABLES

Macroeconomic forecasts

5 TEN THEMES

Ten Themes for 2017: Update

11EQUITIES

High altitude flying

17 DATA TABLES

Asset class forecasts

19GLOSSARY

21 DISCLAIMER

26 CONTACTS

13 FIXED INCOME AND FX

A long uphill road


CIO InsightsTen Themes5

Ten Themes for 2017: Update

TEN THEMES

As the first half of the year has come and gone, we take a fresh look at our 10 themes for 2017 and analyze them in light of recent economic and market developments.

Ten Themes Views as of June 30, 2017. 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 2017.

While the Fed will continue to be the only major central bank raising rates, the ECB and BoJ’s ultra- accommodative

policy will likely become less pronounced as the former begins reducing (tapering) their asset purchases and the latter moves to a more neutral policy stance,

As we expected, President Trump’s trade policy has been less combative than his campaign rhetoric

suggested. The renegotiation of trade agreements with countries like Mexico, appears likelier than major disruptions in commercial relations.

Declining interest rates since the start of this year contradict the realities of improving global growth.

An accelerating, synchronous global economic growth backdrop, combined with the tightening cycle of the Fed and less accommodative monetary policies

Within the fixed income market, credit has been the clear outperformer in the first half of the year as credit

spreads across the globe have continued to narrow. Although we still consider these sectors to have a generally positive return profile over the next twelve

respectively. The U.S. administration's inability to pass major tax reform or infrastructure programs will likely delay the fiscal stimulus until late 2017 or early 2018, at the earliest.

We expect incremental, rather than monumental changes ahead. As a result, fading protectionistic rhetoric is more supportive of our positive view on Emerging Market equities.

by the ECB and the BoJ should push interest rates up in the second half of the year.

months, their overall return potential has diminished. However, the one sector that provides the most upside, thanks to a modest further spread narrowing from current levels, is emerging market bonds.

Policy divergence could narrow

Trade reality softer than rhetoric

Moving on up!

Return potential positive but diminished

MULTI-DIMENSIONAL DIVERGENCE

POP-UP PROTECTIONISM

GET “REAL” ON INTEREST RATES

GIVE CREDIT TO THE BOND MARKET

01

02

03

04

CIO InsightsTen Themes6

Ten Themes Views as of June 30, 2017. 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 2017.

Technology has been our favorite sector and despite the ~20% rally we have seen since the start of the

year, we see no need to alter that view. Technology is a growth sector that continues to deliver above average earnings growth. The visibility in tech

As we had forecast, increased production by non-OPEC producers, particularly the United States, has led to

increased inventories and placed a “lid” on the price of oil. As a result of excess supply, we have decreased our 12-month price target from $58 to $50/barrel.

Several factors have led us to temper our strong dollar forecast and forgo our parity call for the dollar versus the

euro. First, delays in the pro-growth Trump administration’s policies have not bolstered growth and in fact, the delay has led to disappointments in

That the VIX (volatility index) is currently at historically low levels should not mask our expectation that volatility is

likely to increase on the back of major “headline” risk. In the U.S., continued confrontation over the expectation and reality of President Donald Trump’s policy

The fundamentals driving our longer term secular themes continue to come to the forefront and are becoming

closer and closer to portfolio “staples” for investors. The four long term themes: cyber security, millennials, global aging and infrastructure are all positive YTD.

earnings is apparent given the multiple dimensions that tech is being deployed in all of our lives, from computers to healthcare to financial transactions. And we do not see that momentum slowing: in fact, we see it continuing with the advent of robots and artificial intelligence.

However, it is important to note that on the other side, we believe there is a floor for oil around the $40-$50 level as producers find it unprofitable to pump oil at these low levels, thus reducing supply.

the U.S. growth trajectory. In contrast, we have upgraded European growth twice this year. In addition, a likely less accommodative ECB, combined with increased economic confidence in Europe continues to support the euro. Our new 12-month euro target versus the dollar is 1.10.

agenda is likely to get ratcheted up as the Congressional calendar quickly closes. In the UK, Brexit negotiations are set to intensify, particularly after the German elections this fall. In addition, geopolitical concerns, from the Middle East to North Korea to Russia, show no signs of dissipating.

Fund flows to these themes should remain supportive as awareness of these powerful trends becomes more mainstream.

Moving robotically higher

Lowering the lid

Parity pushed aside

Volatility likely to increase

Tomorrow is now today

NEXTGEN TECH

TOPPED-OFF OIL MARKETS

MAKING THE DOLLAR GREAT AGAIN!

NAVIGATING HEADLINE HYSTERIA

TOMORROW’S THEMES TODAY

06

07

08

09

10

Equities have enjoyed a generally good first half of the year with the MSCI All Country World notching

more than 25 record highs YTD. Despite the slight increase in price/earnings ratios, earnings growth has been the prominent driver of the rally

this year. While earnings in the U.S. and Japan have been strong, they have been overshadowed by the earnings growth and upward revisions seen in the Eurozone and emerging markets. As a result, our preference has shifted to these markets.

Eurozone and emerging markets winning the race

ALL EYES ON EARNINGS05

CIO InsightsMacroeconomics7

Still stuck with cyclical healing MACROECONOMICS

One of the peculiarities of recent years is that – against a background of radical monetary policy intervention, political upset and technological change – recovery continues to rely on a gradual process of cyclical healing. Governments, for good or ill, have been largely unable so far to deliver structural change.

The U.S. economy provides an example of this. U.S. growth – which could run very slightly above potential1 rates in the coming year or so, with calendar year forecasts of 2.1% in 2017 and 2.3% in 2018 – will depend on a gradual revival of business confidence, supporting financial conditions and still solid household finances and confidence. Consumers and investors may take heart from the assumption that the economy is not harbouring major excesses or imbalances and that a modest fiscal boost still appears likely, even if much of President Trump’s tax reform plans (one example

of structural change) may only have a positive effect in the medium term.

In the Eurozone, growth is also likely to remain above potential (at 1.8% in 2017 and 1.6% in 2018) and a similar pattern of modest improvement prevails. Business sentiment indicators such as purchasing manager indices (PMIs) or consumer confidence remain positive, as does a range of other “hard” (actual) data. Information about employment, wages and credit growth also suggests that above potential growth is possible. Consumption is likely to be a key driver of growth in the Eurozone, helped by gently improving labour markets, followed by government expenditure. Government expenditure should primarily rise due to a slower winding back of government budget deficits. Investment could be a smaller contributor to GDP growth, as capacity utilization is already high.

Japanese economic growth has been encouraging in recent quarters, with corporate sentiment reasonably resilient to the changing value of the Japanese yen. Japanese corporates have benefited from an apparent pick up in emerging markets growth, but the focus must now turn to domestic consumption. Wages could rise more as the growth outlook improves, with a still-tight labour market, which should permit some increase in consumption. But, with structural reforms always elusive, we don't expect GDP growth to go much above 1% in the next two years.

Chinese growth slows only slightlyMeanwhile, after three years of adjustment and policy change, the Chinese economy might appear to have achieved a new “steady state” with GDP growth around 6-7% and fixed asset investment growth of around 6%. But after four years of outperforming GDP, private consumption growth could now

Figure 1:Our key current macroeconomic forecasts

Sources: Bloomberg Finance L. P., Deutsche Bank Wealth Management; as of June 22, 2017.* For the U.S., GDP measure is calendar year but inflation measure is core PCE Dec to Dec %. Forecast for U.S. Headline PCE (Dec/Dec) is 1.6% in 2017 and 1.9% in 2018. U.S. GDP Q4/Q4 growth is 2.1% in 2017 and 2.3% in 2018

U.S.* Eurozone UK Japan China

GDP growth (% yoy)

2016 2017 2018

Consumer price inflation (% yoy)

2016 2017 2018

2.0

6.7

1.7

1.0

1.8

1.7

2.0

0.2

–0.1

0.72.3

6.36.5

2.11.8

1.61.1

1.61.51.3

1.9

2.52.4

1.7

1.6

2.7

0.7

1.4

1.0

2.5

1 Potential growth is the highest level of GDP growth that is thought to be sustainable.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 2017.

CIO InsightsMacroeconomics8

moderate slightly. Moreover, the People’s Bank of China (PBoC) has in effect started tapering, raising rates to tighten short-term liquidity. The result will be a slight further deceleration in Chinese GDP growth to 6.5% in 2017 and 6.3% in 2018.

Emerging markets appear to be in a good state to cope with a slight slowdown in Chinese growth. Out of the 21 top emerging market economies that report quarterly GDP data, growth in 14 is picking up, with expansion felt in higher levels of both consumption and investment. Post global financial crisis adjustments – particularly around the taper tantrum of 2013 and the fall in commodity prices in 2014 – appear to encourage many emerging markets to reconsider growth models based on loose monetary and fiscal policy and focus more on productivity.

Policy, politics and pricesWhat could upset this process of cyclical healing? Over the past few years, the focus has been on potential monetary policy mistakes or on unexpected communication, as exemplified by the 2013 “taper tantrum”. The major central banks have built up much experience in monetary policy easing over the last few years, and all seem committed to a cautious approach. There remains a possibility of a mistake – for example too rapid policy “tapering” by the ECB, perhaps encouraged by a scarcity of bonds – but this seems unlikely. Uncertainty around some various upcoming Fed appointments, including a potential replacement for Janet Yellen herself, could however prove unsettling.

Some degree of policy non-delivery, for example by the current U.S. presidential administration, looks likely. Our U.S. growth forecasts for the moment do not assume much fiscal stimulus is delivered, but repeated failures to agree on policy (and thus structural change) would depress consumer and business sentiment.

Politics could also have a direct negative impact. The intensification of political turmoil in the U.S. would probably have only transitory economic effects, via both confidence and market jitters. Political uncertainty around Brexit could deliver


longer-lasting damage, if the UK’s current domestic political incoherence hinders efforts to avoid economic slowdown.

Prices – in the broadest sense – could also disrupt economic recovery. One problem is very low levels of inflation in certain markets, most obviously Japan; a recent decline in U.S. personal consumer expenditure (PCE), has also caused the Fed some concern, although its effects are likely to be transitory. In the UK, however, the Bank of England is confronted by the consequences of last year's sudden interest rate cut that was meant to pre-empt a presumed Brexit-induced economic slowdown that has still to materialize. As a consequence,

sterling depreciated while the economy kept growing at full speed, igniting inflation. Reversing last year's rate cut now, when the economy may be slowing, would pose an obvious danger.

Figure 2:Inflation: different countries, different problems

Source: Deutsche Bank Wealth Management.Data as of June 22, 2017.

Fed’s TargetGoods Inflation Y/Y%Service Inflation Y/Y%

Headline Inflation Y/Y%

4

–3

Jan 08 Dec 08 Nov 09 Oct 10 Sep 11 Aug 12 Jul 13 Jun 14 May 15 Apr 16 Mar 17

–2

–1

0

1

3

2

While external price pressures cause problems for the BoE

In the U.S., the issue is that core inflation is still below the Fed's target

Domestic price pressure

External pricepressure

Total Core Fed’s Target

4.5

–1.5

Jan 08 Dec 08 Nov 09 Oct 10 Sep 11 Aug 12 Jul 13 Jun 14 May 15 Apr 16 Mar 17

–0.5

0.5

1.5

2.5

3.5

12-mo % chg

CIO InsightsMulti Asset9

Enjoy it while it lastsMULTI ASSET

We have a generally constructive view of the different asset classes on a 12-month horizon. The advanced state of the investment cycle continues to spoil investors with many of the ingredients often described as comprising a “Goldilocks” scenario: economic growth that is neither too fast nor too slow, low inflation, and still very capital market-friendly central banks. In addition, we are benefiting from rising corporate profits, high sentiment indicators and still-keen stock investors.

Some potential party spoilersBut there are also some factors that make us cautious. Record low levels

of volatility in many risk asset classes have led to many risk-based strategies increasing the share of more risky assets in their asset mix. In the event of a marked market correction, this could quickly lead to self-reinforcing downward dynamics. Also, not all economic risk indicators are as positive, and this has led to a decline in our surprise indicator, one of our four risk indicators. A low oil price could also create dangers, especially for the U.S. high-yield segment. A further flattening of the U.S. interest rate curve may not help, as interest rate rises push up short-term bond yields, while long-term yields are held down by low inflation


Figure 3:After nine years of U.S. outperformance, European and emerging market equities seem well-positioned for gains

Source: Deutsche Bank Wealth Management, FactSet. Data as of June 22, 2017.

Rel. performance Europe vs. USA Rel. performance Emerging Markets vs. USA Recession Periods – United States

20

40

60

80

100

120

140

160

180

1997 1998 2000 2002 2004 2006 2008 2010 2012 2014 20161999 2001 2003 2005 2007 2009 2011 2013 2015 2017 201860

80

70

90

100

110

120

130

140

150

Stéphane JunodCIO EMEA and Head of Wealth Discretionary EMEA

CIO InsightsMulti Asset10

and growth expectations. Moreover, the combination of S&P 500 gains this year and only a minimal maximum drawdown still looks very odd in a historical context. And this is before we even consider possible political surprises, from Washington, London or elsewhere.

So there are many factors that could interrupt, if not end, the capital market party. So we would want to hold back some “dry powder” for this risk, as we would consider using a correction from today’s market levels to rebuild risk positions. This argues for some continued holdings in cash and short-dated bonds, gold and U.S. Treasuries, although this should not be the main thrust of a multi asset strategy.

Instead, the focus should remain on achieving a return through effective

asset allocation in the current market environment. As regards equities, we now prefer Europe and emerging markets for equities over the U.S. After nine years of U.S. equity outperformance, there now seems scope for Europe and emerging markets to run ahead for a while, particularly given European earnings upgrades and emerging market earnings per share growth heading towards the high “teens” level. But expect periods of equity volatility, across all markets.

Credit opportunities in emerging marketsAnd while we continue to see some possibilities in high yield and investment grade bonds, spread compression means that there may be more opportunities in emerging market bonds. Both U.S. and European high yield spreads are currently not just well below their 15-year averages, but also below levels recorded

during the so-called Great Recession after the global financial crisis.

We stay generally cautious on commodities in a multi asset context, forecasting an oil price (WTI) of $50/barrel at end-June 2018 and don’t expect a sustained gain in gold prices – although, as noted above, gold could have other uses in a portfolio.

Changing currency dynamicsAny multi asset strategy also needs to pay attention to rather different currency dynamics. Over the last few months we have seen at least a temporary pause to a long period of dollar strength. Further bouts of dollar weakness are possible later this year, with the euro a likely beneficiary, although we do not foresee a sharp and sustained fall in the greenback into next year.


Equity

Developed Markets 33.0%

Emerging Markets 9.0%

Fixed Income

Credit 15.0%

Sovereigns 18.0%

Emerging Markets 6.0%

Cash 7.0%

Commodities 3.0%

Alternatives 9.0%

Figure 4:Asset allocation (balanced portfolio as of June 27, 2017).

Cash

Fixed Income

Commodities

Alternatives1

Fixed Income

Credit

Fixed Income Emerging MarketsFixed Income Sovereigns

Equity

Equity Developed Markets

Equity Emerging Markets

Footnote: Asset allocation as of June 27, 2017. 1 Alternative investments are not suitable for and may not be available to all investors. Restrictions apply. Sources: U.S. Regional Investment Committee, Deutsche Bank Wealth Management. 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.

CIO InsightsEquities11

High altitude flyingEQUITIES

Around the world, corporations are investing, hiring and, on average, generating healthy cash flows – a proportion of which will eventually be returned to shareholders. Given the expected increase in earnings, we have raised our 12-month forecasts for most stock indexes.

However, such expectations seem already largely discounted. This is

reflected by high valuation levels, particularly in the U.S., and low volatility. In effect, equities are already flying at a high altitude and could be buffeted by temporary setbacks, potentially providing buying opportunities.

U.S. equities and tax reform One major question is to what extent the U.S. market is already factoring in U.S. tax reform. Our assumption is that corporate tax reform is passed in 2018, resulting in a 25% corporate tax rate. If it is not passed, then we calculate that the negative impact on U.S. equities could be around 3-7%, or possibly more if other policy reforms also appear likely to be derailed. Our base case for U.S. equities, assuming corporate tax reform is agreed to, is for earnings per share (EPS, next twelve months) of USD140 and a target price earnings (P/E) ratio of 17.50, taking the S&P 500 to 2,450 by end-June 2018. The S&P 500’s last 12 months earnings (LTM) ratio remains well above its long-term average, but U.S. equities still do not appear expensive relative to current bond yields.

In addition to price/earnings valuations, developed equity markets remain sensitive to movements in the oil price and exchange rate expectations.

European equities on the up We are now rather more positive about Europe, due to further signs of economic improvement, strong earnings growth (along with positive earnings revisions) and positive flows. Within Europe, Germany appears attractive, with reasonable valuations, further earnings growth expected and record dividend pay-outs. Within the DAX, you might want to have exposure to equities that could benefit from positive European consumer sentiment: note however the wide spread in current price/earnings multiples.


Figure 5:Impact of U.S. policy assumptions on U.S. equities

Source: Deutsche Bank Wealth Management. Data as of June 14, 2017.

Initiatives Our base case Impact on U.S. equities

Financial deregulation

Border adjustment tax

Corporatetax reform

Repatriationbill

Infrastructureprogram

Health carereform

Will pass

Will pass eventually

No meaningful initiative

Will not pass

Will pass in 2018;corporate tax rateof 25%

Reduction in FederalMedicaid subsidies, nomeaningful drug pricereduction

Positive for U.S. banks: higher cash returns, lower capital requirements.

Higher buy-backs with up to 1.5% EPS accretion.

A 10% tax reduction add USD10 to earnings per share (EPS), but part of this will be passed on. So assume a USD5 EPS accretion.

None

None

None

CIO InsightsEquities12


One underlying regional issue here is the impact of ECB tapering, when it finally happens, on European equities. This is difficult to quantify, but could be a slight positive if tapering (by its very existence) lifts regional GDP growth expectations. Higher nominal Eurozone interest rates would help European financials, but be a negative for real estate and regulated utilities stocks.

Japanese corporates generally appear in good shape and a tight labour market may support stronger consumption and also a degree of reflation. Inflation should remain relatively low and keep

Bank of Japan in easing mode for some time. The central bank is expected to put more emphasis on its yield curve control measures than on its asset purchase program and accept a weaker currency.

Emerging markets appeal For emerging market equities overall, the rather less buoyant outlook for the USD should remove a potential headwind. And, at a local level, we are seeing positive earnings revisions and recovering return on equity. EM equities’ valuations still appear attractive relative to global valuations and, despite increasing interest, international

investors still appear underinvested in them.

At a global sectoral level, we have an overweight on global financials, believing that it will benefit from the turning U.S. rate cycle, rising dividends, share buybacks, cost-cutting and capital management in individual institutions. We also have an overweight on health care and information technology. Underweights include telecommunication services and utilities.

Figure 6:Equity market forecasts and 2017 first half index changes by region

United States (S&P 500)Index change ytd (USD): +9.3%

End-Jun 2018 forecast: 2,450

UK (FTSE 100)Index change ytd (GBP): +4.7%


Eurozone (Eurostoxx 50)Index change ytd (EUR): +7.3%


Latam (MSCI Latam)Index change ytd (USD): +10.3%End-Jun 2018 forecast: 2,550

Switzerland (SMI)Index change ytd (CHF): +11.8%End-Jun 2018 forecast: 8,750

Asia ex. Japan (MSCI Asia ex. Japan)

Index change ytd (USD): +20.1%End-Jun 2018 forecast: 660

Japan (MSCI Japan)Index change ytd (JPY): +6.0%End-Jun 2018 forecast: 970

Data as of June 30, 2017: forecasts as of June 22, 2017. All returns are year to date (YTD). Source: Bloomberg Finance L.P., Deutsche Bank Wealth Management.

CIO InsightsFixed Income13

A long uphill roadFIXED INCOME

The U.S. marches aheadWith three interest rate rises now under its belt – and two of them in the last three months – the Fed is now some way along the road to policy normalization. But much still remains to be done, particularly as regards reducing the Fed’s balance sheet, inflated by years of quantitative easing. The Fed is likely to start slowing the pace of reinvestment of proceeds from repaid bonds, possibly from later this year, and we expect an active discussion within the Fed about how this is to be achieved. It will probably want to get the process comfortably underway before its possible leadership change in February 2018.

The European Central Bank (ECB) remains some way behind the Fed on the road to normalization, with official interest rates likely to remain negative for some time to come. More likely is a cautious reduction in the rate of monthly asset purchases over time, possibly with modification of the purchase program’s conditions as the ECB reaches the limit of what is possible in its current format. Given this, and likely low levels of inflation, Eurozone bond yields will remain low. We forecast 10-year Bund yields at 0.8% on a 10-year horizon, although the spread between 10-years and 30-years seems likely to rise, with tapering affecting the long-end of the curve disproportionately. In the Eurozone periphery, the focus is currently on Italy, where we take a rather more positive view than the markets at present, as we assume a pro-European government after the elections. If the ECB is forced to change its QE program rules, this could also be a positive for the periphery.

Japan is even further back, and shows few signs of minding. Its approach to yield curve control (widening the spread between short and longer-term

bonds) appears to have been relatively successful, with the mere presence of the Bank of Japan (BoJ) having usually been sufficient on its own to bring markets back into line – it has only been forced to intervene a couple of times. It now has a rather more flexible target for monthly asset purchases – “about” JPY 80 trillion a month – which could allow the BoJ to indulge in some unofficial tapering but any formal communication about exiting from QE still seems a very long way off. We would not assume, however, that the Bank of Japan's current monetary policy approach will be kept indefinitely.

Out of the developed market central banks, the Bank of England (BoE) is currently the odd one out. It faces a unique set of policy challenges, with a


weaker pound pushing up inflation and a potential economic slowdown against a background of political uncertainty and acerbic Brexit negotiations. We believe that the BoE will not want to raise rates to support the pound, for fear of slowing private consumption even more sharply. 10-year Gilts are forecast to rise slightly to 1.40% over the next 12 months.

Investment grade and high yield Credit markets may adapt to these diverging central bank policies in different ways. In general, we remain positive on global investment grade credit markets, believing that fundamentals are still acceptable. Technical factors will likely particularly support European investment grade, given that the ECB’s bond purchase plan could well be extended beyond early 2018. U.S. technicals are

Figure 7:European government bond yields struggle to turn positive

Source: Deutsche Bank Wealth Management. Data as of July 7, 2017.

Switzerland

Germany

Finland

Netherlands

Austria

Belgium

France

Italy

Spain

Maturity in years 1 2 3 4 5 6 7 8 9 10

Negative yields Positive yields

CIO InsightsFixed Income 14

also strong but less consistent, with the markets more risk-sensitive. Some idiosyncratic risk remains from mergers and acquisitions activity but this is not a widespread risk for the market.

We remain cautiously constructive on the U.S. and European high yield markets. European HY has seen significant issuance so far this year, but redemptions and “rising star” upgrades mean that the overall size of the market is declining, allowing significant spread tightening. In the U.S., the default rate is expected to decline.

In recent months, the euro has been rising again against the dollar, after a long period of weakness. There are a number of possible reasons for this: better European economic data, U.S. economic policy disappointments, positive European political developments and longer-term structural issues. Against this background, the euro has also gained recently from hints of European policy shift, rising sharply after a speech by the ECB President, Mario Draghi, in late June.

We think the euro vs. U.S. dollar exchange rate could remain volatile in the remainder of 2017 and the euro could temporarily break out of the top of its 2-year 1.05-1.15 trading range. However we do not expect a further large and sustained appreciation of the euro: our end-June 2018 forecast is 1.10. There are a number of reasons for our caution. First, we think that there is a danger that markets are expecting too much, too quickly from the euro and still think that there are lingering political and policy risks in Europe. Second, although interest rate differentials are an imperfect predictor of currency moves, once markets have digested any news of a future ECB tightening, their attention is likely to shift back to the fact that the U.S. is significantly ahead on the

policy “normalization” path, with further balance sheet reduction and further U.S. rate hikes expected in 2018. Third, we think that economic and policy news flow could be less supportive for the euro in future, with U.S. economic growth

forecast to exceed the Eurozone’s. Finally, the U.S. dollar cycle is not yet long in the tooth, in terms of duration and size of movement. So this is not the time to completely lose faith in the U.S. dollar.

The resurgent euro

Emerging markets prove resilient Emerging markets (EM) external debt continues to benefit from carry, a good economic outlook at low supply. Many investment grade EM issuers are benefiting from an improving domestic economic outlook and sound debt indicators and some high yield issuers have benefited from stable commodity prices. Some much discussed “risk factors” (e.g. U.S. rate rises and Chinese growth slowdown) have yet to have an impact, although geopolitical events do still pose a risk.


Yen as safe haven currencyThe euro may well appreciate against the GBP and the JPY. The Yen will keep playing an important role in the stabilization of our portfolios if volatility increases in other markets. Japan has the highest net assets in the world, followed by China. Therefore, the Yen can be used to reduce risk and as a hedge against volatility in other developed markets.

EUR nominal effective exchange rate (lhs) EURUSD (rhs)

Source: Deutsche Bank Wealth Management. Data as of June 14, 2017.

Figure 8:Euro nominal effective exchange rate suggests room for further gains

90

95

100

105

110

1.0

1.1

1.2

1.3

1.4

1.5

2013 2014 2015 2016 2017

CIO Insights Alternatives15

Focus on valuations in a crowded private equity sector

ALTERNATIVES

The first quarter of the year has seen a generalized decrease in private equity activity across the board.

Quarterly global private equity fundraising volume decreased from $89.7bn in the fourth quarter of 2016 to $85.6bn in the first quarter of 2017. Callable capital reserves (‘dry powder‘) of global buyout funds also decreased slightly, from $534.8bn in Q4 2016 to $532.2bn in Q1 2017. Similarly, quarterly global private equity investment deal volume decreased from $108.2bn in Q4 2016 to $70.0bn in Q1 2017. Average equity contributions by sponsors for U.S. leveraged buyouts decreased to 41.3% and for European leveraged buyouts to 48.1% in Q1 2017. Finally, quarterly global private equity exit volume decreased from $93.1bn to $47.9bn. The number of exits decreased from 410 to 392

In the following, we take a look at five key strategies within private equity in order to analyze each one's prospects for the second half of the year.

U.S. Buyout/Growth While fund raising has remained strong in the first quarter of the year with growth of 21% year on year, we expect a mild slowdown for the second half of the year. Valuations are likely to remain high, given the ample reserves of capital waiting on the sidelines to be invested. A continuation of rising interest rates could have an adverse impact on leverage, and consequently on pricing and volumes in the future. Early proposals by the U.S. adminstration for more favorable taxes and regulations already appear to have a positive impact on the outlook for companies targeted by private equity investors.

European Buyout/ Growth The fundraising piepline for small and mid-sized companies coming to market over the coming months still looks very strong. However, the fundraising boom seen in 2016 is unlikely to be repeated. Pricing and debt levels remain high, especially at the larger end of the market.

Asian Private Equity As investors concentrate increasingly on the larger, best-known managers and the average fund size increases, the risk of valuation excesses and hence return compression at the top end of the market needs to be watched very carefully. A significant amount of new capital is expected to be put to work in China, as the scale of the available opportunities continues to attract investors, despite slowing growth fears over corporate debt and high valutations. As competitive pressure mounts, a differentiated approach to sourcing and value creation will be increasingly critical in order to generate a return premium.

Venture Capital The recovery in investment flows in the first quarter of the year bodes well for traditional venture capital funding in 2017. More capital is chasing higher-earning yields. Investment activity and pricing should remain at a high level due to the existence of a sizeable amount of capital ready to be invested, the potential further opening of the IPO window and finally the increasing involvement of corporates in venture capital. Mergers and acquisitions activity is expected to keep being buoyant due to less regulation in the U.S. and large corporate cash reserves.

Alternative investments are not suitable for and may not be available to all investors. Restrictions apply.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 2017.

Secondaries The pricing for secondaries is expected to remain strong in 2017, driven by successful fundraising actitiy in the secodaries space, a lack of large portfolio sales, a drop in perceived economic uncertainty and the increased use of leverage. The average age of funds sold plateaued in 2016 and it is anticipated that the volume of post-crisis vintage funds, from 2010 or newer, being taken to market will increase. We expect infrastrucutre and energy secondary activity to increase thaks to the new secondary funds currently being raised.

Conclusion Looking 12 months into the future we assign a moderate overweight to U.S. and European Buyout / Growth, a neutral stance to Venture Capital and Secondaries and a moderate underweight to Asian Private Equity.

Macroeconomic forecasts

CIO InsightsData Tables16

DB WM 2017 Forecast

DB WM 2018 Forecast

GDP growth (%)

U.S.* 2.1 2.3

Eurozone (of which) 1.8 1.6

Germany 1.7 1.5

France 1.2 1.4

Italy 1.2 1.2

UK 1.6 1.3

Japan 1.1 1.5

China 6.5 6.3

India 7.2 7.6

Russia 1.5 2.0

Brazil 0.3 1.8

World 3.5 3.7

Consumer price inflation (%)

U.S.* 1.7 1.9

Eurozone 1.6 1.4

UK 2.7 2.5

Japan 0.7 1.0

China 2.4 2.5

Current account balance (% of GDP)

U.S. –2.9 –3.1

Eurozone 2.9 2.7

UK –3.5 –3.5

Japan 3.2 3.2

China 2.2 2.4

Fiscal balance (% of GDP)

U.S. –3.2 –3.4

Eurozone –1.5 –1.5

UK –3.3 –3.5

Japan –5.2 –5.0

China –3.4 –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 calendar year but inflation measure is core PCE Dec to Dec %. Forecast for U.S. Headline PCE (Dec/Dec) is 1.6% in 2017 and 1.9% in 2018. U.S. GDP Q4/Q4 growth is 2.1% in 2017 and 2.3% in 2018.Source: Deutsche Bank Wealth Management. As of June 22, 2017.

DEUTSCHE BANK WEALTH MANAGEMENT

CIO Insights Data Tables17

Asset class forecasts

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 Wealth Management. As of June 22, 2017.

DEUTSCHE BANK WEALTH MANAGEMENT

Benchmark interest rates Official rate End-Jun 2018F

United States Fed fund rates 1.50–1.75%

Eurozone Refi rate 0%

United Kingdom Repo rate 0.25%

Japan Overnight call rate 0%

FX End-Jun 2018F

EUR vs USD EUR/USD 1.10

USD vs JPY USD/JPY 115

EUR vs JPY EUR/JPY 126.5

EUR vs GBP EUR/GBP 0.89

GBP vs USD GBP/USD 1.23

USD vs CNY USD/CNY 6.9

Equities Market Index End-Jun 2018F

U.S. S&P 500 2,450

Germany DAX 13,400

Eurozone Eurostoxx 50 3,650

Europe Stoxx 600 400

Japan MSCI Japan 970

Switzerland SMI 8,750

United Kingdom FTSE 100 7,500

Emerging Markets MSCI EM 1,050

Asia ex Japan MSCI Asia ex Japan 660

Latam MSCI Latam 2,550

Commodities End-Jun 2018F

Gold Gold spot 1,200

Oil WTI spot 50

CIO Insights Data Tables18

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 Wealth Management. As of June 22, 2017.

Fixed Income Market Index End-Jun 2018F

U.S.

UST 2yr U.S. 2y yield 1.85%



U.S. IG Corp BarCap U.S. Credit 100bp

U.S. HY Barclays U.S. HY 380bp

Europe

Schatz 2yr GER 2y yield –0.40%

Bund 10yr GER 10y yield 0.80%

Bund 30yr GER 30y yield 1.70%

Gilt 10yr UK 10y yield 1.40%

EUR IG Corp iBoxx Eur Corp all 100bp

EUR HYML EUR Non-Fin HY Constr. Index

290bp

Asia Pacific

JGB 2yr JPN 2y yield –0.10%

JGB 10yr JPN 10y yield 0.10%

Asia Credit JACI Index 225bp

Global

EM Sovereign EMBIG Div 285bp

EM Credit CEMBI 280bp

CIO Insights Glossary19

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

Brexit is a combination of the words “Britain” and “Exit” and describes the possible exit of the United Kingdom of the European Union.

Bunds are longer-term bonds issued by the German government.

Congress is the bicameral federal legislature of the United States.

The current account balance is the balance of trade, net primary income or factor income and net cash transfers.

The DAX is a blue-chip stock-market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange.

Dividends are payments made by a company to its shareholders.

Earnings per share are calculated as a companies’ net income minus dividends of preferred stock all divided by the total number of shares outstanding.

An emerging market (EM) is a country that has some characteristics of a developed market in terms of market efficiency, liquidity and other factors, but does not meet standards to be a developed market.

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

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

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.

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.

High yield (HY) bonds are high-paying bonds with a lower credit rating than investment-grade corporate bonds, Treasury bonds and municipal bonds.

JPY is the currency code for the Japanese yen, the Japanese currency.

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

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

A nominal rate or value does not make adjustments to reflect factors such as seasonality or inflation.

The Organization of the Petroleum Exporting Countries (OPEC) is an international organization with the mandate to “coordinate and unify the petroleum policies” of its 12 members.

Price/earnings (P/E) ratios measure a company’s current share price relative to its per-share earnings. In this context, LTM refers to last twelve months’ earnings.

Protectionism refers to policies due to limit trade between economies, through tariffs, quotas or other means.

Purchasing manager indices (PMI) provide an indicator of the economic health of the manufacturing sector and are based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The composite PMI includes both manufacturing and services sectors. They can be published by public sector or private agencies (e.g. Caixin, Nikkei).

Quantitative easing (QE) is an unconventional monetary policy tool, in which a central bank conducts a 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.

Glossary

CIO Insights Glossary20

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.

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

West Texas Intermediate (WTI) is a grade of crude oil used as a benchmark in oil pricing.

The yield curve shows the different rates for bonds of differing maturities but the same credit quality.

CIO Insights Disclaimer21

Disclaimer

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 are subject to investment risk, including market fluctuations, regulatory change, possible delays in repayment and loss of income and principal invested. Investments come with risk. The value of investments can fall as well as rise and you might not get back the amount originally invested at any point in time.

Investments in Foreign Countries – Such investments may be in countries that prove to be politically or economically unstable. Furthermore, in the case of investments in foreign securities or other assets, any fluctuations in currency exchange rates will affect the value of the investments and any restrictions imposed to prevent capital flight may make it difficult or impossible to exchange or repatriate foreign currency.

Macroeconomics Risk – Such investments may be in countries that prove to be politically or economically unstable. Furthermore, in the case of investments in foreign securities or other assets, any fluctuations in currency exchange rates will affect the value of the investments and any restrictions imposed to prevent capital flight may make it difficult or impossible to exchange or repatriate foreign currency.

Equity Market Risk – Risks in equity markets are linked to the change of spot and forward prices of equities on the relevant stock exchanges. These changes can be specifically influenced by, among others, the relevant companies’ financial health, dividend yields, repurchase rates and other macroeconomic factors.

Fixed Income Risk – The values of the fixed income instruments will fluctuate and may lose value, as bond values decline as interest rates rise. Certain bonds and fixed income instruments may be callable. If called, the investor will experience a shorter maturity than anticipated. Bonds referenced herein are exposed to credit risk, or the risk that the bond will be downgraded, and inflation risk, or the risk that the rate of the bond’s yield will not provide a positive return over the rate of inflation. Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond’s maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Alternative investments – (such Hedge Funds, Private Equity, Non Traded REITs) may be speculative and involve significant risks including illiquidity, heightened potential for loss and lack of transparency. Alternatives are not suitable for all clients.

Deutsche Bank AG, Deutsche Bank Wealth Management, as of July, 2017


Important information

Deutsche Bank Wealth Management offers wealth management solutions for wealthy individuals, their families and select institutions worldwide. Deutsche Bank Wealth Management, through Deutsche Bank AG, its affiliated companies and its officers and employees (collectively “Deutsche Bank”) are communicating this document in good faith and on the following basis.

This document has been prepared without consideration of the investment needs, objectives or financial circumstances of any investor. Before making an investment decision, investors need to consider, with or without the assistance of an investment adviser, whether the investments and strategies described or provided by Deutsche Bank, are appropriate in light of their particular investment needs, objectives and financial circumstances. Furthermore, this document is for information/discussion purposes only and does not constitute an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice.

Deutsche Bank does not give tax or legal advice. Investors should seek advice from their own tax experts and lawyers, in considering investments and strategies suggested by Deutsche Bank. Investments with Deutsche Bank are not guaranteed, unless specified. Unless notified to the contrary in a particular case, investment instruments are not insured by the Federal Deposit Insurance Corporation (“FDIC”) or any other governmental entity, and are not guaranteed by or obligations of Deutsche Bank AG or its affiliates.

Although information in this document has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon as such. All opinions and estimates herein, including forecast returns, reflect our judgment on the date of this report and are subject to change without notice and involve a number of assumptions which may not prove valid.

Investments are subject to various risks, including market fluctuations, regulatory change, counterparty risk, possible delays in repayment and loss of income and principal invested. The value of investments can fall as well as rise and you may not recover the amount originally invested at any point in time. Furthermore, substantial fluctuations of the value of the investment are possible even over short periods of time.

This publication contains forward-looking statements. Forward-looking statements include, but are not limited to assumptions, estimates, projections, opinions, models and hypothetical performance analysis. The forward-looking statements expressed constitute the author’s judgment as of the date of this material. Forward-looking statements involve significant elements of subjective judgments and analyses and changes thereto and/or consideration of different or additional factors could have a material impact on the results indicated. Therefore, actual results may vary, perhaps materially, from the results contained herein. No representation or warranty is made by Deutsche Bank as to the reasonableness or completeness of such forward-looking statements or to any other financial information contained herein. The terms of any investment will be exclusively subject to the detailed provisions, including risk considerations, contained in the Offering Documents. When making an investment decision, you should rely on the final documentation relating to the transaction and not the summary contained herein.

This document may not be reproduced or circulated without our written authority. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, including the United States, where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Deutsche Bank to any registration or licensing requirement within such jurisdiction not currently met within such jurisdiction. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions.

Past performance is no guarantee of future results; nothing contained herein shall constitute any representation or warranty as to future performance. Further information is available upon investor’s request.

This document may not be distributed in Canada, Japan, the United States of America, or to any U.S. person.

© 2017 Deutsche Bank AG


Important information

Kingdom of BahrainFor Residents of the Kingdom of Bahrain: This document does not constitute an offer for sale of, or participation in, securities, derivatives or funds marketed in Bahrain within the meaning of Bahrain Monetary Agency Regulations. All applications for investment should be received and any allotments should be made, in each case from outside of Bahrain. This document has been prepared for private information purposes of intended investors only who will be institutions. No invitation shall be made to the public in the Kingdom of Bahrain and this document will not be issued, passed to, or made available to the public generally. The Central Bank (CBB) has not reviewed, nor has it approved, this document or the marketing of such securities, derivatives or funds in the Kingdom of Bahrain. Accordingly, the securities, derivatives or funds may not be offered or sold in Bahrain or to residents thereof except as permitted by Bahrain law. The CBB is not responsible for performance of the securities, derivatives or funds.

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Important disclosures

In the U.K. this publication is considered a financial promotion and is approved by Deutsche Asset Management (UK) Limited on behalf of all entities trading as Deutsche Bank Wealth Management in the U.K.

Deutsche Bank Wealth Management (DBWM) offers wealth management solutions for wealthy individuals, their families and select institutions worldwide and is part of the Deutsche Bank Group. DBWM is communicating this document in good faith and on the following basis.

This document is a financial promotion and is for general information purposes only and consequently may not be complete or accurate for your specific purposes. It is not intended to be an offer or solicitation, advice or recommendation, or the basis for any contract to purchase or sell any security, or other instrument, or for Deutsche Bank to enter into or arrange any type of transaction as a consequence of any information contained herein. It has been prepared without consideration of the investment needs, objectives or financial circumstances of any investor. This document does not identify all the risks (direct and indirect) or other considerations which might be material to you when entering into a transaction. Before making an investment decision, investors need to consider, with or without the assistance of an investment adviser, whether the investments and strategies described or provided by Deutsche Bank, are suitability and appropriate, in light of their particular investment needs, objectives and financial circumstances. We assume no responsibility to advise the recipients of this document with regard to changes in our views.

Past performance is no guarantee of future results.

The products mentioned in this document may be subject to investment risk including market fluctuations, regulatory change, counterparty risk, possible delays in repayment and loss of income and principal invested. Additionally, investments denominated in an alternative currency will be subject to currency risk, changes in exchange rates which may have an adverse effect on the value, price or income of the investment. The value of an investment can fall as well as rise and you might not get back the amount originally invested at any point in time. We have gathered the information contained in this document from sources we believe to be reliable; but we do not guarantee the accuracy, completeness or fairness of such information and it should not be relied on as such. Deutsche Bank has no obligation to update, modify or amend this document or to otherwise notify the recipient in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

Deutsche Bank does not give taxation or legal advice. Prospective investors should seek advice from their own taxation agents and lawyers regarding the tax consequences on the purchase, ownership, disposal, redemption or transfer of the investments and strategies suggested by Deutsche Bank. The relevant tax laws or regulations of the tax authorities may change at any time. Deutsche Bank is not responsible for and has no obligation with respect to any tax implications on the investment suggested.

This document may not be reproduced or circulated without our written authority. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, including the United States, where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Deutsche Bank to any registration or licensing requirement within such jurisdiction not currently met within such jurisdiction. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions.

This document contains forward-looking statements. Forward-looking statements include, but are not limited to assumptions, estimates, projections, opinions, models and hypothetical performance analysis. The forward-looking statements expressed constitute the author‘s judgement as of the date of this material. Forward-looking statements involve significant elements of subjective judgments and analyses and changes thereto and/or consideration of different or additional factors could have a material impact on the results indicated. Therefore, actual results may vary, perhaps materially, from the results contained herein. No representation or warranty is made by Deutsche Bank as to the reasonableness or completeness of such forward-looking statements or to any other financial information contained in this document.

Deutsche Bank conducts its business according to the principle that it must manage conflicts of interest fairly, both between itself and its clients and between one client and another.

As a global financial services provider, Deutsche Bank faces actual and potential Conflicts of Interest periodically. The Bank’s policy is to take all reasonable steps to maintain and operate effective organisational and administrative arrangements to identify and manage relevant conflicts. Senior management within the Bank are responsible for ensuring that the Bank’s systems, controls and procedures are adequate to identify and manage Conflicts of Interest.

This information is communicated by Deutsche Bank Wealth Management.Deutsche Bank Wealth Management is a trading name of Deutsche Asset Management (U.K.) Limited. Registered in England & Wales No 5233891.Registered Office: Winchester House, 1 Great Winchester Street, London EC2N 2DB. Deutsche Asset Management (U.K.) Limited is authorised and regulated by the Financial Conduct Authority. Financial Services Registration Number 429806.This document may not be distributed in Canada, Japan, the United States of America, or to any U.S. person.

© 2017 Deutsche Bank AG


Risk warnings

Investments are subject to investment risk, including market fluctuations, regulatory change, possible delays in repayment and loss of income and principal invested. The value of investments can fall as well as rise and you might not get back the amount originally invested at any point in time.

Investments in Foreign Countries – Such investments may be in countries that prove to be politically or economically unstable. Furthermore, in the case of investments in foreign securities or other assets, any fluctuations in currency exchange rates will affect the value of the investments and any restrictions imposed to prevent capital flight may make it difficult or impossible to exchange or repatriate foreign currency.

Foreign Exchange/Currency – Such transactions involve multiple risks, including currency risk and settlement risk. Economic or financial instability, lack of timely or reliable financial information or unfavorable political or legal developments may substantially and permanently alter the conditions, terms, marketability or price of a foreign currency. Profits and losses in transactions in foreign exchange will also be affected by fluctuations in currency where there is a need to convert the product’s denomination(s) to another currency. Time zone differences may cause several hours to elapse between a payment being made in one currency and an offsetting payment in another currency. Relevant movements in currencies during the settlement period may seriously erode potential profits or significantly increase any losses.

High Yield Fixed Income Securities – Investing in high yield bonds, which tend to be more volatile than investment grade fixed income securities, is speculative. These bonds are affected by interest rate changes and the creditworthiness of the issuers, and investing in high yield bonds poses additional credit risk, as well as greater risk of default.

Hedge Funds – An investment in hedge funds is speculative and involves a high degree of risk, and is suitable only for “Qualified Purchasers” as defined by the U.S. Investment Company Act of 1940 and “Accredited Investors” as defined in Regulation D of the 1933 Securities Act. No assurance can be given that a hedge fund’s investment objective will be achieved, or that investors will receive a return of all or part of their investment.

Commodities – The risk of loss in trading commodities can be substantial. The price of commodities (e.g., raw industrial materials such as gold, copper and aluminium) may be subject to substantial fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. Additionally, valuations of commodities may be susceptible to such adverse global economic, political or regulatory developments. Prospective investors must independently assess the appropriateness of an investment in commodities in light of their own financial condition and objectives. Not all affiliates or subsidiaries of Deutsche Bank Group offer commodities or commodities-related products and services.

Investment in private equity funds is speculative and involves significant risks including illiquidity, heightened potential for loss and lack of transparency. The environment for private equity investments is increasingly volatile and competitive, and an investor should only invest in the fund if the investor can withstand a total loss. In light of the fact that there are restrictions on withdrawals, transfers and redemptions, and the funds are not registered under the securities laws of any jurisdictions, an investment in the funds will be illiquid. Investors should be prepared to bear the financial risks of their investments for an indefinite period of time.

Investment in real estate may be or become nonperforming after acquisition for a wide variety of reasons. Nonperforming real estate investment may require substantial workout negotiations and/or restructuring.

Environmental liabilities may pose a risk such that the owner or operator of real estate may become liable for the costs of removal or remediation of certain hazardous substances released on, about, under, or in its property. Additionally, to the extent real estate investments are made in foreign countries, such countries may prove to be politically or economically unstable. Finally, exposure to fluctuations in currency exchange rates may affect the value of a real estate investment.

Structured solutions are not suitable for all investors due to potential illiquidity, optionality, time to redemption, and the payoff profile of the strategy. We or our affiliates or persons associated with us or such affiliates may: maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation. Calculations of returns on the instruments may be linked to a referenced index or interest rate. In such cases, the investments may not be suitable for persons unfamiliar with such index or interest rates, or unwilling or unable to bear the risks associated with the transaction. Products denominated in a currency, other than the investor’s home currency, will be subject to changes in exchange rates, which may have an adverse effect on the value, price or income return of the products. These products may not be readily realizable investments and are not traded on any regulated market.

Global Chief Investment OfficerChristian Nolting1

Global Chief Investment Officer (CIO)

Regional Chief Investment OfficerLarry V. Adam4

CIO Americas

Tuan Huynh6

CIO Asia

Stéphane Junod9

CIO EMEA

Johannes Müller1

CIO Germany

Strategy GroupLarry V. Adam4

Global Chief Strategist

Megan Horneman4

Senior Strategist Americas

Dr. Helmut Kaiser1

Chief Strategist Germany

Daniel Kunz8

Strategist EMEA

International locations1. Deutsche Bank AG

Mainzer Landstrasse 11-17 60329 Frankfurt am Main Germany

2. Deutsche Bank AG, London Zig Zag Building 70 Victoria Street, London SW1E 6SQ UK

3. Deutsche Bank Trust Company 345 Park Avenue 10154-0004 New York, NY United States

4. Deutsche Bank Securities 1 South Street 21202-3298 Baltimore, MD United States

5. Deutsche Bank Trust Company, National Association 5022 Gate Parkway, Suite 400 Jacksonville United States

6. Deutsche Bank AG, Singapore One Raffles Quay, South Tower 048583 Singapore Singapore

7. Deutsche Bank AG, Hong Kong 1 Austin Road West Hong Kong Hong Kong

8. Deutsche Bank (Switzerland) Ltd. Hardstrasse 201 8005 Zurich Switzerland

9. Deutsche Bank (Switzerland) Ltd. Place des Bergues 3 1211 Geneva 1 Switzerland

Contact us on [email protected]

Chief Investment OfficeMarkus Müller1

Global Head CIO Office

Sebastian Janker1

Head CIO Office Germany

Jürg Schmid8

Head CIO Office EMEA

Jeff Ng6

Head CIO Office Asia

Graham Richardson2

Financial Writer, CIO Office

Khoi Dang5

CIO Office Americas

Enrico Börger9

Financial Writer, CIO Office

Contacts CIO Wealth Management

CIO Insights Contacts26

Stéphane Junod9CIO EMEA

Larry V. Adam4CIO Americas & Global Chief Strategist

Christian Nolting1Global Chief Investment Officer (CIO)

Johannes Müller1CIO Germany

Tuan Huynh6CIO Asia

Markus Müller1Global Head CIO Office