Ben Pace, Deutsche Bank


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Chief Investment Officer Ben Pace of Deutsche Bank presents on the state of the world economy and how it will effect luxury real estate prices in 2012 and beyond. From The Key 2012, luxury real estate conference by Concierge Auctions.

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Ben Pace, Deutsche Bank

  1. 1. Contents 1 Global economy 2 Fixed income 3 Equities 4 FX and commodities 5 Investment forecasts 6 Important notesDeutsche Bank 1Private Wealth Management
  2. 2. Global economyDeutsche BankPrivate Wealth Management
  3. 3. The global economy A tenuous and uneven recovery World growth slowing ―  The outlook for the world economy hasContribution to growth, selected countries, % % change year over year deteriorated and we now expect 2.9% growth this year and 3.1% in 2013, down almost half a percent from previous estimates. Our 2014 global growth estimate is 3.8%. ―  A slow recovery in the U.S., and the prospect of the “fiscal cliff” at the end of 2012, brings our GDP growth estimates 2.1% for this year and 1.9% for next year. ―  We expect the Eurozone to bottom out in the fourth quarter, but the outlook remains poor. ―  Most emerging markets are likely to slow because of weaker exports to developed economies. ―  With central banks redoubling their efforts to Source: Haver Analytics; IMP; The Economist Estimates based on 52 countries representing support growth, we do not expect any interest As of 10/9/2012 90% of world GDP. Weighted by GDP at purchasing power parity rate rises in the U.S. or Europe until 2015 at the earliest. Deutsche Bank 3 Private Wealth Management
  4. 4. U.S. growth intact, but fragile Data surprise indicator: ―  The U.S. is in a stronger position than other The downward trend has reverted developed economies, but the looming fiscal cliff 0.4 could stop the economy dead in its tracks. Our expectation is that Congress will find a way to avoid this scenario, but not without some near-term 0.2 turmoil. ―  While unemployment remains stubbornly high, the 0.0 7.9% number in the November 6 report was at least psychologically important and may support already rising consumer confidence. -0.2 ―  The housing market continues to improve and we -0.4 are seeing the end of consumer deleveraging. -0.6 Jan 10 Sep 10 May 11 Jan 12 Sep 12DB Macro Pulse Indicator (MPI) measures data surprises positive (negative) readings indicate data has been better (worse) than expected. Source: BLS, Deutsche Bank CIB Research.Deutsche Bank 4Private Wealth Management
  5. 5. The fiscal cliff remains a key uncertaintyWe expect a compromise to reduce the impact ―  If nothing is done to avert this crisis, the fiscal adjustment in 2013 would be approximately 750of the fiscal cliff to 1.5% of GDP billion, or around 5% of GDP. ―  We do expect that there will be a deal after the election that reduces the impact to 1.5% of GDP. ―  Risks include a recession in the first half of 2013 if a deal does not materialize and a potential credit downgrade if the spending cuts are not put into place.Deutsche Bank 5Private Wealth Management
  6. 6. The Eurozone should resume modest growth in 2013We expect Eurozone GDP to bottom out in Q4 with a ―  The economic outlook remains very weak in themodest rebound beginning Q1 2013 Eurozone with limited signs of a meaningful recovery. % qoq ―  PMIs surprised to the downside in September with a substantial drop in services, but a moderate rise in manufacturing. ―  There is considerable divergence between countries: –  Germany PMIs rose to the highest level in five months –  France weakened sharply –  The periphery weakened furtherSource: Haver Analytics, Deutsche Bank ResearchDeutsche Bank 6Private Wealth Management
  7. 7. Economic cycles in developed and emerging marketsbecoming increasingly coupledCorrelation of growth cycles in the developed and ―  Weakness in Europe and the U.S. has spilled over to emerging markets during 2012, leading usemerging markets to mark down our growth forecasts for 2012 and 2013. ―  Over the last decade emerging and developed market economic cycles have become increasingly coupled. ―  Globalization, and the opening up of several emerging countries to international trade, has seen increased interdependence. ―  Going forward, we expect growth in the emerging markets to continue to outpace that of developed markets. However, we expect growth rates lower than those experienced in the previous decade.Deutsche Bank 7Private Wealth Management
  8. 8. Fixed incomeDeutsche BankPrivate Wealth Management
  9. 9. Credit should continue to outperform TreasuriesReal yields on Treasuries are negative ―  Treasury yields are likely to remain capped, while credit should continue to outperform as yield-oriented investors are increasingly willing to assume more credit risk. ―  As the Fed absorbs an increasing share of the mortgage and Treasury markets, investors will be effectively forced to move into higher-yielding spread product. ―  Additionally, we believe they will continue to migrate into foreign markets, both developed and emerging, looking for foreign currency gains and higher-yielding bond markets. 10-Year Barclays Barclays Capital Merrill Lynch Credit Suisse JP Morgan U.S. Capital U.S. Credit/ BBB Leveraged Domestic Treasury U.S. Corporate Municipal Loan High Aggregate Investment Bond Index Index* Yield Index Bond Index Grade Bond Index*Implied yield calculated by adding the index option-adjusted spread to d-month LIBOR rate. Source: Barclays Capital, FactSet, Credit Suisse and JPMorgan 8/31/12. CPI as of 7/31/12.Deutsche Bank 9Private Wealth Management
  10. 10. Are high yield bonds compensating investors for theadditional risk? Spreads on high yield bonds have come down ―  Investors have been large buyers of high yield bonds, driving prices up and yields to more normal levels below 7%. 2,000 1,800 ―  The spread between the yield on junk bonds 1,600 and those on Treasuries is currently 5.61 percentage points, below its 15-year 1,400 average.1 1,200 1,000 ―  However, with the Federal Reserve buying 800 bonds and pushing down yields on all fixed income investments, high yield might 600 continue to do well, even if the opportunity for 400 price appreciation is limited. 200 0 Sep-97 Mar-00 Sep-02 Mar-05 Sep-07 Mar-10 Sep-12 U.S. High Yield Spreads (OAS) (15 YR Avg) U.S. High Yield Spreads (OAS)1Bloomberg Finance LP 10/11/2012. Chart source: Factset as of 10/16/12.Deutsche Bank 10Private Wealth Management
  11. 11. Emerging market bonds remain attractiveUSD denominated versus local currency ―  Emerging market bond markets remaindenominated emerging market bonds attractive, even after strong performance year-to-date. ―  The major driver of EM local bond markets in the first half of this year, declining interest rates, is gradually fading. We expect currency appreciation versus the USD to be the larger contributor to returns for the remainder of the year. ―  However, even with no further interest rate cuts, EM local bonds offer yields 4% higher than U.S. Treasuries, with improving credit quality.Source: Thomson Reuters Datastream, JP Morgan Indices. Data as of 10/3/12.Deutsche Bank 11Private Wealth Management
  12. 12. EquitiesDeutsche BankPrivate Wealth Management
  13. 13. U.S. equities: what is the appropriate P/E multipleEconomic growth and the impact on P/Es P/E versus “real” interest rates 25 18 Average P/E Given GDP 16.2 Average P/E Given Real 10 Year 16.0 16 Scenario Treasury Yields 19.9 20 18.4 13.9 14 13.4 13.1 17.0 12.3 12 14.5 15 Average P/E 12.9 12.0 Average P/E 10 10.9 8 10 6 4 5 2 0 0 Less than 0-1% 1-2% 2-3% 3-4% 4-5% 5% or Less than - -2% to 0% 0% to 2% 2% to 4% 4% - 6% 6% or More 2% 0% More Real GDP (YoY) Real 10 Year Treasury Yield Footnotes: Time period reflects 1Q48 to 2Q12. Footnotes: Time period reflects 1Q62 to 3Q12 using PCE Deflator. Data Source: FactSet, Bureau of Economic Analysis Data Source: Bloomberg Finance LP, FactSet ―  Historically, growth in the range of 0-2% suggests a P/ ―  With 10-year Treasury yields hovering near negative E of 14x. Using this multiple, we have set out year-end territory, history would suggest that there is limited target for the S&P at 1425. In order to see meaningful room for P/E expansion. P/E expansion, growth would have to be between 2-6%.Deutsche Bank 13Private Wealth Management
  14. 14. An improved outlook for European equitiesEuropean equity valuations ―  The outlook for European equities is improving as Eurozone fears are receding and risks appear largely priced in. MSCI Europe ex-UK P/E (NTM) ―  Government bonds of core countries offer negative real yields so the impetus to rotate into stocks in Europe, as the outlook stabilizes, should be supportive. ―  Doubts over issues such as a slowdown in economic growth in China and the political situation in the United States would prompt investors to stay cautious on Europe near term, but the longer-term outlook remains somewhat positive. .Source: FactSet 10/23/12Deutsche Bank 14Private Wealth Management
  15. 15. Chinese equities becoming more attractiveInflation pressure in China remains in check ―  The Chinese economy appears to be heading toward a soft landing. With the possibility for additional monetary policy easing and further CPI YoY% stimulus, we expect a rebound as we head into 2013. ―  Inflation levels remained above 2% since February 2010 and peaked in July 2011 at 6.5%. ―  China’s equity markets lagged broad emerging and developed markets through 3Q12. Improved growth and policy easing have made China more attractive from an investment perspective.Source: FactSetDeutsche Bank 15Private Wealth Management
  16. 16. FX and CommoditiesDeutsche BankPrivate Wealth Management
  17. 17. Is China a currency manipulator?U.S. dollar / Yuan 2004-2012 ―  A number of economists have questioned Yuan is pegged whether Chinas exchange rate policies versus 8.5 at 8.3 the U.S. and its use of U.S. dollar reserves per dollar can be considered "predatory"—designed to 8 depress the value of the Yuan and push cheap Yuan Chinese goods into U.S. markets. depegged / 7.5 +/- 0.3% trading band ―  Many U.S. policymakers have called for China to wean itself off export dependence and build 7 up domestic consumption to correct the global Trading band widened to +/- imbalances that drew so many U.S. dollars to 6.5 0.5% China in the first place. Trading band 6 widened to +/- 1.0% 5.5 Oct-04 Oct-06 Oct-08 Oct-10 Oct-12Source: Deutsche Bank Global MarketsDeutsche Bank 17Private Wealth Management
  18. 18. Precious metals should continue to perform wellGlobal gold mine supply by country (2011) ―  We expect gold prices to strengthen further. Extreme monetary ease in the developed economies should provide strong support. ―  In addition, we expect inflows into physically backed ETFs to accelerate again as the U.S. dollar tends to display seasonal weakness in December. ―  Supply constraints are becoming a larger issue for the gold mining industry, particularly given the labor disruptions which have been growing in South Africa. As of the end of Q3 2012, the country had closed down approximately 39% of its gold mines.Source: Deutsche Bank Global MarketsDeutsche Bank 18Private Wealth Management
  19. 19. Economic and asset class forecastsDeutsche BankPrivate Wealth Management
  20. 20. Global Investment Committee Forecastsas of December 2012* GDP Growth Key Interest Rates Current* 3-Month 12-Month 2012 2013 2014 in % Forecast Forecast World 2.9% 3.1% 3.8% USA (Fed funds) 0.25% 0.25% 0.25% USA 2.1% 1.9% 3.1% Euroland (Refi rate) 0.75% 0.50% 0.50% Euroland -0.4% -0.2% 1.1% UK (Repo rate) 0.50% 0.50% 0.50% UK -0.3% 1.0% 1.8% Japan (Money market rate) 0.10% 0.10% 0.10% Japan 1.6% 0.2% 0.3% Asia ex Japan 6.1% 6.7% 6.9% Latin America 2.9% 3.9% 4.0% Currencies Current* 3-Month 12-Month EMEA 3.0% 3.6% 4.0% Forecast Forecast EUR/USD 1.30 1.32 1.25 Inflation (CPI) USD/JPY 82.12 83.00 86.00 2012 2013 2014 in % EUR/CHF 1.20 1.20 1.20 USA 2.1% 2.4% 2.6% GBP/USD 1.60 1.60 1.57 Euroland 2.5% 1.8% 1.7% EUR/GBP 0.81 0.83 0.80 UK 2.8% 2.3% 1.9% Japan -0.1% -0.6% 1.7% Asia ex Japan 3.9% 4.0% 4.0% Commodities Current* 3-Month 12-Month Latin America 7.8% 7.8% 8.2% Forecast Forecast EMEA 5.2% 5.7% 5.2% Oil (WTI) in USD 88 100 100 Gold in USD 1750 1800 1900 Current Account Balance 2012 2013 2014 in % of GDP USA -3.2% -3.5% -3.6% Equities Current* Dividend P/E 3-Month 12-Month Euroland 0.4% 0.5% 0.7% Yield (LTM)** Forecast Forecast UK -2.3% -2.1% -1.8% USA (S&P 500) 1406 2.2% 13.0 1445 1500 Japan 1.0% 1.2% 1.6% Euroland (Euro Stoxx 50) 2543 4.4% 10.1 2550 2700 Asia ex Japan 1.7% 1.1% 0.7% Germany (DAX) 7292 3.5% 10.3 7350 8050 Latin America -1.1% -1.3% -1.4% UK (FTSE 100) 5787 3.8% 10.7 5930 6060 EMEA 1.8% 1.4% 0.4% Japan (Nikkei) 9389 2.0% 16.0 9400 10000 Asia ex Japan (MSCI in USD) 522 2.6% 11.0 535 595 Latin America (MSCI in USD) 3582 3.3% 11.8 3810 3960 Fiscal Balance 2012 2013 2014 in % of GDP Sovereign Rates Country 3-Month 12-Month Current* USA -7.2% -6.3% -5.3% CDS Forecast Forecast Euroland -3.2% -2.6% -2.0% USA 1.67% 38.9 1.75% 2.25% UK -7.1% -7.2% -5.4% Euroland (German Bund) 1.41% 54.7 1.60% 2.00% Japan -10.0% -9.8% -7.8% UK 1.84% 51.7 1.75% 2.40% Asia ex Japan -2.9% -2.8% -2.3% Japan 0.74% 79.5 0.75% 1.25% Latin America -2.2% -1.9% -1.9% EMEA -0.7% -0.7% -0.7%Data Source: FactSet, Bloomberg Finance LP, Deutsche Bank Global Investment Committee forecasts as of GIC meeting on November 26, 2012.*Current as of November 26, 2012. **LTM stands for last 12 months. 20
  21. 21. Benjamin A. Pace IIIManaging Director Benjamin Pace is Chief Investment Officer and Head of Global Investment Solutions for Deutsche Bank Private Wealth Management in the U.S. In his role as CIO, he sits on the PWM Global Investment Committee, providing input on the U.S. economy and capital markets. He oversees the investment strategy and asset allocation for PWM clients in the U.S. As Head of Global Investment Solutions, he brings together PWM’s capital markets and investment capabilities in an effort to provide an effective and consistent experience for clients. Mr. Pace is a member of the PWM – U.S. Executive Committee. Mr. Pace has more than 25 years of experience in investment management. Prior to joining Deutsche Bank in 1994, he managed equity income funds for two investment organizations. During his tenure with those institutions, he also served as a securities analyst with particular emphasis on the financial services and healthcare industries. Mr. Pace earned his B.A. in economics from Columbia University and M.B.A. in finance from New York University. He can be reached at (212) 454-7815 or e-mailed at Bank 21Private Wealth Management
  22. 22. Important notesThis document has been prepared for informational purposes only and is not an offer, or solicitation of an offer, to buy or sell any security, or a recommendation to enter into any transactionrelating to the products and services described herein. Before entering into any transaction, you should take steps to ensure that you understand and have made an independentassessment of the appropriateness of the transaction in light of your own particular financial, legal and tax situation, investment objectives and level of risk tolerance, and you should consultyour legal and tax advisers to determine how these products and/or services may affect you.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 securitiesor 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 toexchange or repatriate foreign currency.Emerging Markets - Such markets may be in transitional or formative stages and thus may be significantly less stable than developed markets. Changes in emerging markets governmentstructures or other political instability may result in nationalization, expropriation, ad hoc regulation, or foreign investment restrictions. Emerging market investments are at risk for currencydevaluation, as well as convertibility, liquidity and transparency constraints. The high volatility and speculative nature of emerging market investments may result in both significant losses orprofits.Foreign Exchange/Currency - Such transactions involve multiple risks, including currency risk and settlement risk. Economic or financial instability, lack of timely or reliable financialinformation or unfavorable political or legal developments may substantially and permanently alter the conditions, terms, marketability or price of a foreign currency. Profits and losses intransactions in foreign exchange will also be affected by fluctuations in currency where there is a need to convert the products denomination(s) to another currency. Time zone differencesmay 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 settlementperiod 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 byinterest 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.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 aluminum) may be subject tosubstantial fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. Additionally, valuations of commodities may besusceptible to such adverse global economic, political or regulatory developments. Prospective investors must independently assess the appropriateness of an investment in commodities inlight of their own financial condition and objectives. Not all affiliates or subsidiaries of Deutsche Bank Group offer commodities or commodities-related products and services.This document contains “forward-looking statements”- that is, statements related to future, not past, events. In this context, forward-looking statements often address expected futurebusiness and financial performance, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” or “will.” Forward-looking statements by their nature addressmatters that are, to different degrees, uncertain. Particular uncertainties that could adversely or positively affect future results include: the behavior of financial markets, including fluctuationsin interest and exchange rates, commodity and equity prices and the value of financial assets; continued volatility and further deterioration of the capital markets; the commercial andconsumer credit environment; the impact of regulation and regulatory, investigative and legal actions; strategic actions, including acquisitions and dispositions; future integration of acquiredbusinesses; future financial performance of major industries; and numerous other matters of national, regional and global scale, including those of a political, economic, business andcompetitive nature. These uncertainties may cause actual future results to be materially different than those expressed in our forward-looking statements.Although this document has been carefully prepared and is based on information from sources believed to be reliable, no representation is made that it is accurate and complete. We haveno obligation to update or amend the information provided herein, and information is subject to change without notice.Unless you are notified to the contrary, the products and services mentioned are not guaranteed by the FDIC (or by any governmental entity) and are not guaranteed by or obligations ofDeutsche Bank. These products are subject to investment risk, including possible loss of principal. The past performance of a product or service does not guarantee or predict its futureperformance.Deutsche Bank AG, including its subsidiaries and affiliates, does not provide legal, tax, or accounting advice. This communication was prepared solely in connection with the promotion ormarketing, to the extent permitted by applicable law, of the transaction or matter addressed herein, and was not intended or written to be used, and cannot be used or relied upon, by anytaxpayer for purposes of avoiding any U.S. federal tax penalties. The recipient of this communication should seek advice from an independent tax advisor regarding any tax mattersaddressed herein based on its particular circumstances.“Deutsche Bank” means Deutsche Bank AG and its affiliated companies, as the context requires. Deutsche Bank Private Wealth Management refers to Deutsche Bank’s wealthmanagement activities for high-net-worth clients around the world. 013345.11.08.12Deutsche Bank 22Private Wealth Management