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The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
The Key 2013 — Deutsche Bank Presenation — Larry Adam
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The Key 2013 — Deutsche Bank Presenation — Larry Adam

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  • 1. Deutsche Asset & Wealth Management 4Q13 Market Outlook k October 2013 Larry Adam, U.S. Chief Investment Strategist Managing Director 410-895-4135 larry.v.adam@db.com
  • 2. 4Q13 Economic and Financial Market Outlook Questions and Key Topics for Discussion 1 The Market Message of 2013, Thus Far g , 2 Living in a Fair Market Environment 3 Are the Stars Aligning for an Economic Rebound? 4 QE Means “Quite Easy” Monetary Policy 5 Normalization in Yields to Continue 6 Credit Fair Valued; Looking for Opportunities 7 And the Bull Rally Marches On 8 Selectivity Important in Fair Valued World 9 Will the Dollar Be King? 10 Commodities to Be Challenged Deutsche Asset & Wealth Management Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 1
  • 3. The Market Message of 2013, Thus Far 1 What Have the Markets Told Us? 3Q13 Performance by Asset Class/Sector QTD 35% 25% Commodities: Broad gains; Agriculture struggles Year to Date Total Return (colors vary) Fixed income: Modest gains, long term Treasuries fall 3Q13 Total Return (colors vary) 15% 5% -5% S&P 500 sectors: Rotation into select cyclicals; interest rate sensitive, telecom, lags. Growth outperforms value -15% -25% Equities: All regions except India positive, Europe rebounds FX: Dollar Falls; Euro/GBP rally EuroStoxx 50 Fr rance CAC 40 Hang Seng B Brazil Bovespa G German DAX Nikkei S&P 500 FTSE 100 India Nifty 50 S&P/Citi igroup Growth S&P/C Citigroup Value Materials Industrials Cons. Discretionary Healthcare Info Tech Energy Financials C Cons. Staples Utilities Telecom U U.S. High Yield Emerging Mark Local Govt ket Emerging Market Europe Credit Euro Sovereign ope U.S. Invst Grade Credit t 10-Y Year Treasury GBP EUR JPY CNY BRL Dollar Index Copper Gold Oil DJ UBS Corn -35% 35% Footnotes: Sorted by 3Q13 returns. Data as of September 30, 2013 Data Source: FactSet, Bloomberg Finance LP. Deutsche Asset & Wealth Management Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 2
  • 4. 2 Living in a Fair Market Envir ronment Equities and Commodities Approaching Fair Value S&P 500 P/E Fair Valued Oil in the Fair Value Zone 24x $160 $140 $120 Fair Value 16x 12x C Crude Oil Price ($/bbl) 20x $100 Fair Value $80 $60 $40 $20 $0 65 8x '04 '05 '06 '07 '08 S&P 500 Trailing P/E (AVG) S&P 500 Trailing P/E '09 '10 '11 '12 '13 Recession Periods - United States — The trailing P/E of the S&P 500 (15.7x LTM) is trading relatively close to its 10-year average (15.8x LTM). 70 75 80 85 90 95 Global Crude Oil Consumption (million barrels per day) With 2014 demand expected to rise above 90 million barrels per day, the fair value of oil appears to be between $ and $90 $100/barrel. — Deutsche Asset & Wealth Management The price of oil is highly correlated with demand. As demand increases, the price of oil increases. — Data Source: FactSet. — With oil consumption increasing, demand appears to be more inelastic. Footnotes: Time period reflects 1Q91 to 2Q13. Data Source: U.S. Energy Information Agency, FactSet. Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 3
  • 5. Living in a Fair Market Environm ment Fixed Income Testing Fair Value Ten Year Treasury on Normalization Process High Yield Spreads Below Historical Average 20% 2,500 15% 2,000 10% 1,500 Fair Value 5% 1,000 Fair Value 500 0% 0 -5% '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 (% 1 YR) Nomi nal GDP - Uni te d Sta te s US Be nchm ark Bon d - 10 Yea r Yi el d — The rise in yields since May has resulted in a normalization of interest rates to a relatively fair value level in relation to GDP. GDP Deutsche Asset & Wealth Management '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Barcl ays Ca pital U.S. High Yi eld Spread (to 5 year T reasu ry Yi el d) i n bps (AVG) Ba rcl ays Capi tal U.S. Hi gh Yiel d Spread (to 5 ye ar T re asury Yi eld ) in bp s Recessi on Peri od s - Uni ted States Recessio n Perio ds - Uni ted States — Historically, the 10 year Treasury yield closely tracks the year over year change in nominal GDP. Data Source: FactSet. '99 — After credit spreads reached record highs in the depths of the “Great Recession,” spreads have normalized and remain below their 15 year average. Data Source: FactSet. Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 4
  • 6. 3 Are the Stars Aligning for an Economic Rebound? n Economic Recovery Weak in Historical Context U.S. Economic Recovery Still Weak in Historical Context The Root of Economic Disappointment 150 145 140 135 1953-1954 1960-1961 1973-1975 1981-1982 2001 1957-1958 1969-1970 1980 1990-1991 2007-2009 Weaker New Global Growth Paradigm 130 125 Fiscal Drag Disappointing Corporate Spending Challenged Confidence 120 115 110 105 Current recovery 100 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 95 Quarters Q arters Leading Up to and After Recessions — Even 17 quarters after the end of the “Great Recession,” the U.S. economic recovery has still been the weakest in a historical context of all the recessions since the 1950s. Footnotes: Time period reflects 1950-2013. Zero marks the end of each recession Data Source: FactSet. Deutsche Asset & Wealth Management Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 5
  • 7. Are the Stars Aligning for an Ec conomic Rebound? The Formula – From Grinding for Growth to Procuring Economic Pr rosperity Global Growth Acceleration + Business Spending = Deutsche Asset & Wealth Management + Consu umer: Positiv Net ve Wealth Effect h + Improving Labor Market + Ease of Fiscal Drag +2.5-3 3.5% U.S. GDP Growth P Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 6
  • 8. Are the Stars Aligning for an Ec conomic Rebound? Signs that Global Economic Rebound is Ahead U.S. Economic Growth Expected to Accelerate 3.5% Fiscal Drag on U.S. Growth Expected to Ease in 2014 Estimates 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% % 0.0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 U.S. GDP Estimate — Economic growth should accelerate in 2H13 and 2014, based on an increase in business spending, exports and productivity. In addition, the waning impact from the fiscal drag should p further complement the resilient consumer demand. Footnotes: Estimates as of October 18, 2013. Data Source: DEAWM, Bloomberg Finance LP. Deutsche Asset & Wealth Management — In terms of the fiscal drag on growth, DB Global Markets estimates that after peaking this year, the impact on GDP from austerity measures will fall by 1.6% in 2014 (from 2.3% to 0.7%) and decline further in 2015. Data Source: Deutsche Bank Global Markets Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 7
  • 9. Are the Stars Aligning for an Ec conomic Rebound? Acceleration in Global Growth Leads to Pickup in Exports European Growth to Pick up in 2H13 and 2014 Exports Turning Slightly Positive 2.0% 50% estimate 1.5% 40% 1.0% 30% 0.5% 20% 0.0% 10% 0% -0.5% -10% -1.0% -20% -1.5% 1.5% -30% -2.0% -40% Jan-07 -2.5% Dec-07 Nov-08 Oct-09 Sep-10 Aug-11 Jul-12 Jun-13 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Euroland GDP (QoQ Ann%) — Europe has emerged from the longest economic recession on record. — While growth may modestly slow from 2Q13 in the coming q quarters, we expect g , p growth to accelerate in 2014. U.S. Exports to EM U.S. Exports to EU U.S. Exports to Japan — In fact, we have started to see signs of a recovery in export activity to some of our largest trading partners within the developed economies and the emerging markets. — This should help to boost U.S. economic growth through increased export activity. Footnotes: Estimates as of September 2013. Data Source: Deutsche Bank Global Markets Deutsche Asset & Wealth Management Footnotes: EM sums Brazil, Mexico, China, Russia, India, Korea, Taiwan. Data Source: Bloomberg Finance LP. As of July 2013. Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 8
  • 10. Are the Stars Aligning for an Ec conomic Rebound? Acceleration of Capex Spending Business Outlook for Capex Improving S&P 500 Spending on Capital Expenditures 80 40 30 70 20 60 +71% +55% 10 50 +84% 0 40 -10 30 20 -20 -30 Aug-00 Oct-02 Dec-04 Feb-07 Apr-09 Jun-11 Aug-13 20 Dec-90 Capex Spending Outlook Richmond Fed & Philadelphia Fed (Avg) — Capex spending has been slow to materialize in the economic recovery but is a foundation of our economic outlook. — There has been signs of optimism as the capex spending g y g g outlook in some of the regional surveys is reaching its highest level since 2000. Oct-93 Aug-96 Jun-99 Apr-02 Feb-05 Dec-07 Oct-10 Aug-13 S&P 500 Capital Expenditures — If you use history as a guide, companies in the S&P 500 tend to increase capex spending by 78%, on average, in a business recovery. — However, companies in the current cycle have only increased , p y y capex spending by 55%. — This illustrates how underinvested companies remain after the “Great Recession.” Data Source: Bloomberg Finance LP Deutsche Asset & Wealth Management Footnotes: Data is an Index and uses the trailing 12 months capex spending. Data Source: Bloomberg Finance LP Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 9
  • 11. Are the Stars Aligning for an Ec conomic Rebound? Near Term Risk More About Confidence Than Structural Decelera ation Limited Damage from Federal Government Furloughs Ultimate Impact Dependent Upon Confidence Turnaround 90 Largest decline in over two years 85 80 75 70 65 60 55 50 2008 2009 2010 2011 2012 2013 U. of Mich. Consumer Sentiment - 3-Month Moving Average — Despite ~800K government workers furloughed at the start of the shutdown (~25% of federal employees), 350K were reclassified as “essential” employees so that they could return to work and the deal made by Congress is set to pay furloughed workers retroactively. Data Source: Deutsche Bank Global Markets. Deutsche Asset & Wealth Management — Consumer confidence was hampered by the government impasse with the three month moving average of consumer sentiment falling at the fastest pace in more than two years in October. — New deadlines from the deal will be in focus but hopefully confidence will be restored. In the absence of a fiscal policy “shock” we expect the combination of lower gas prices, falling mortgage rates, rising equity prices and the end of the shutdown should bolster sentiment. . Data Source: FactSet. Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 10
  • 12. 4 QE Means “Quite Easy” Mon netary Policy “Easy” Policy Globally Global Balance Sheets Rates to Remain Accommodative $4,500 60% Only 50% chance of rate hike by Jan 2015 $4,000 50% $3,500 in billion ns $3,000 40% $2,500 30% $2,000 $1,500 20% $1,000 10% $500 $0 Aug-00 Oct-02 Dec-04 Fed Balance Sheet Feb-07 Apr-09 Jun-11 Aug-13 0% Oct-13 Dec-13 Jan-14 Mar-14 Apr-14 Jun-14 Jul-14 Sep-14 Oct-14 Dec-14 Jan-15 Bank of Japan Balance Sheet (in USD) Probability of Rate Hike (as of August 20, 2013) ECB Balance Sheet (in USD) Probability of Rate Hike (as of Sept 27, 2013) — Despite the talk of “taper,” the Fed is still expected to increase its balance sheet over the next 6-12 months, just at a slower pace. — Within the U.S., even if the Fed begins the gradual removal of QE, interest rates should remain low until 2015, at the earliest. — In fact, the probability of a rate hike in January 2015 has fallen from 51% to 46% in a month month. Data Source: Bloomberg Finance LP. Deutsche Asset & Wealth Management Data Source: Bloomberg Finance LP. Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 11
  • 13. QE Means “Quite Easy” Monetary Policy QE Tapering Postponement “Mixed” Employment Perspectives Mixed 10.0% Potential Timing for Tapering Weak payroll gains remain a concern for the Fed 9.5% 250 225 FOMC Oct 29-30 200 9.0% Taper? Comment   Fed not more comfortable now than in Sep 175 150 8.5% Dec 17-18 ? Jan 28-29 ? 125 8.0% 100 75 7.5% 7% remains one threshold we believe needs to be reached before the Fed “tapers” QE p 7.0% 6.5% Sep-2010 Mar-2011 Sep-2011 Mar-2012 Sep-2012 Mar-2013 50 25 0 Sep-2013 Mar 18-19 Unemployment Rate (% LHS) Nonfarm Payroll Change 6-Month Moving Average (thousands, RHS)  Possible, but “burden of proof” for data high, e.g., high e g payrolls above +200k  Chances of real long-term fiscal resolution by December have risen  Possible; data will be stronger, political uncertainty likely reduced  Last meeting under Bernanke   Fed publishes new forecasts, Chair holds press conference – making it easy to Market explain / justify taper pricing* — Labor market improvements remain in focus for the Fed as they assess future policy. While the unemployment rate fell (to 7.2%) to its lowest level since November 2008 in September, underlying trends continue to reflect a tepid environment. — Janet Yellen will likely take a similar “dovish” stance as Bernanke did with the focus on the labor market as a gauge for future QE. Labor participation remains at the lowest level since 1978 and the total number of people employed is still below pre-crisis levels. — In addition to the six-month moving average of payroll gains six month declining in recent months, uncertainty surrounding the actual impacts from the government shutdown will be closely watched. — In terms of taper timing, the odds of a December announcement p g, are falling given the Fed’s data dependent approach. If monthly payroll gains can move back above 200K and a long-term fiscal resolution is achieved by lawmakers, December remains in play. — With the March meeting including new Fed forecasts and Yellen’s first press conference, it could be an opportunity to be more transparent in explaining th path and j tifi ti of t t ti l i i the th d justification f tapering. i Data Source: FactSet Deutsche Asset & Wealth Management Data Source: Deutsche Bank Global Markets Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 12
  • 14. QE Means “Quite Easy” Moneta Policy ary Taking a “Taper” Breather…For Now Fed Economic Checklist More Room to Go Improvement Checklist Confidence Employment Prices Pi Economy Government Factor Level to Look for Last Time Level Reached Current Level Level May 2013 x x Consumer Confidence >90 October 2007 80 74 Small Business Optimism >100 October 2006 94 94 x x Nonfarm Payrolls (6 Mo >210K April 2006 160K 203K Unemployment Rate <7.0% November 2008 7.3% 7.6% x  x Housing Prices (S&P Case >165 December 2008 162 152 1693 1669 x  x Moving Average) Shiller Index) (initial "taper" talk) Equity Prices (S&P 500) 1585 Inflation (PCE Deflator) 2.0% February 2012 1.4% 1.1% GDP >2.3% ( (YoY) (sustain for two/three co onsecutive quarters) 2010 1.6% (2Q13) 1.3% (1Q13) Interest Rates (10YR) <3.1% July 2011 2.62% 1.93% Budget and Debt Ceiling Agreement Between Both Parties December 2012 No Budget/Debt Ceiling at Risk Footnotes: Treasury yields and S&P 500 level for May is as of May 21, 2013. All other data as of O October 2, 2013. Data Source: FactSet. Deutsche Asset & Wealth Management Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 13
  • 15. QE Means “Quite Easy” Monetary Policy Fed Becoming More Hawkish? Fed Composition 2013 Fed Composition 2014 2014 FOMC Voting Members 2013 FOMC Voting Members Member Name Ben S. Bernanke FOMC Member Role Chairman - Board of Governors 1 Member Name FOMC Member Role Rating Janet Yellen (Favorite) Chairman - Board of Governors 1 Vice Chair of FOMC - New York 1 Rating William C D dl Willi C. Dudley Vice Chair f Vi Ch i of FOMC - N Y k New York 1 William C Dudley C. Janet Yellen Vice Chair Board of Governors 1 TBD Vice Chair Board of Governors Charles L. Evans* Chicago Fed President 1 TBD* Cleveland Fed President Eric S. Rosengren* Boston Fed President 1 TBD Board of Governors Elizabeth A. Duke Board of Governors 2 TBD Board of Governors Sarah Bloom R ki S h Bl Raskin Board f Governors B d of G 2 Daniel K. Tarullo D i l K T ll Board f G B d of Governors 2 Daniel K. Tarullo Board of Governors 2 Jeremy C. Stein Board of Governors 2 Jeremy C. Stein Board of Governors 2 Jerome H. Powell ? Board of Governors 3 Minneapolis Fed President 3 Jerome H. Powell Board of Governors 3 Narayana Kocherlakota* James Bullard* St. Louis Fed President 3 Richard Fisher* Dallas Fed President 4 Kansas Cit F d President K City Fed P id t 4 Charles Pl Ch l Plosser* * Philadelphia F d P Phil d l hi Fed President id t 5 Esther L G E th L. George* * Average "Dove-Hawk" Rating (Dove =1, Hawk = 5) 1.9 Average "Dove-Hawk" Rating (Dove =1, Hawk = 5) 2.6 — Janet Yellen remains the favorite to replace Ben Bernanke in 2014. H However, a new Vice Chairman will need to be appointed and with Fed Governor Duke having stepped down at the end of August, Fed Gov vernor Raskin set to be deputy Treasury secretary and Sandra Pianalto resigning, resigning the unfilled spots are likely to cause some uncertainty regarding majority views in the year ahead. ahead — In terms of the four regional Fed Presidents, the “dovish” Evans and Rosengren will be rotating out along with the more neutral Bullard and e “hawkish” George. In their place, Kocherlakota (leans “hawk”) will be joined by two of the Fed’s most “hawkish” members (Fisher and Plosser). — Using the “dove-hawk” scale (1 = dove, 5 = hawk), the average of the known (assuming Yellen is Chairman) members saw a much more “hawkish” tilt (2.6) relative to 2013 (1.9). Obama will need to determine if a more balanced or “hawkish” Fed is appropriate. Footnotes:*Represents a regional Fed President that is a voting member for one year. Ranked based on the “Dove-Hawk” scale (Dove = 1, Hawk = 5). Data Source: FRB, Bloomberg Finance LP, Wall Street Journal, DB U.S. Investment Strategy Group, DB Global Markets Deutsche Asset & Wealth Management Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 14
  • 16. 5 Normalization in Yields to Continue Acceleration in Growth Supports High Yields Economic Outlook Still Points to Higher Yields 16.0% Interest Rate Break-Out Break Out 5.5% US Benchmark Bond - 10 Year - Yield 5.0% 14.0% 4.5% 12.0% 4.0% 10.0% 3.5% 8.0% 3.0% 2.5% 6.0% 4.0% DB Year End 2014 Target ~4.0% 10-Year Treasury Yield End of 3Q13 1.5% 2.0% 0.0% -4.0% 2.0% 1.0% '07 -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% (% 1YR) Nominal GDP (YoY %) - United States — Using the year over year level of nominal GDP, interest rates should continue to mover higher over the next 12 months (~4%). Footnotes: Time period reflects 30 years through 2Q13. Data Source: FactSet. Deutsche Asset & Wealth Management '08 '09 '10 '11 '12 US Benchmark Bond - 10 Year - Yield (MOV 50D) US Benchmark Bond - 10 Year - Yield (MOV 200D) US Benchmark Bond - 10 Year - Yield '13 — While rates have moved modestly lower with the political risks in Washington, long term yields have broken through their long term bull market trend. Data Source: FactSet. Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 15
  • 17. Normalization in Yields to Continue Supply/Demand Dynamic Likely To Become More Difficult Retail Outflows to Continue? Net Issuance Will Remain Healthy 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 $450 2023 0.0% $400 -0.5% $350 -1.0% $300 -2.1% -2.0% -2.5% 3 2% -3.2% -3.0% -3.5% -2.3% -2.4% -2.5% -2.7% -3.8% -3.7% -4.0% -2.3% -2.5% -2.9% 2 9% -2.9% -3.2% -3.1% -3.2% -3.5% -3.4% -3.3% -3.6% -3.8% -3.8% -4.5% -5.0% -5.5% bil llions -1.5% $250 $200 $150 $100 $50 -5.3% $0 Dec 07 Dec-07 U.S. Budget Deficit Projection - September 2013 (% of GDP) U.S. Budget Deficit Projection - February 2013 (% of GDP) May 09 May-09 Oct 10 Oct-10 Mar 12 Mar-12 Aug 13 Aug-13 12 Month Rolling Flow into Bond Mutual Funds Data Source: ICI Net Unrealized Gains/Losses for Commercial Banks — Treasuries should continue to face headwinds from supply as the deficit is d fi it i expected t get worse from 2015 and b t d to t f d beyond. d — In addition, ongoing fund outflows and regulations may present risks to bond investors. The 100 bps sell off in interest rates in May-June resulted in a $40 billion reduction in tier-1 capital and cut tier-1 capital by 0.3%. Data Source: Congressional Budget Office Deutsche Asset & Wealth Management Data Source: Treasury Borrowing Advisory Committee, Federal Reserve Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 16
  • 18. Normalization in Yields to Continue Duration Risk Unlikely To Produce Recent Returns Risk Reward: Don’t Expect Easy Returns Going Forward Don t Duration Risk 200 10.0% 180 9.0% 1 10 Year Annalized Re eturn 10.0 188 High Yield 9.0 160 Emerging Market 8.0 Convertibles 8.0% S&P 500 140 7.0 99 7.0% 120 6.0 100 5.0 6.0% 5.0% 3.0 36 40 Cash 34 20 1.0% 0.0% 0.0% 4.0 60 3.0% 2.0% 2 0% 71 80 Treasuries 4.0% 1.0 0 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 10 Year Standard Deviation 2.0 0.0 High Yield Emerging Market Debt Invt Grade 5YR Treasury 10YR Treasury Change in Basis Points to Result in Negative Total Return (1YR Time Frame) (LHS) Duration (RHS) — Treasuries have offered lower returns over the past 10 years compared to other higher yield fixed income investments (e.g. convertibles, emerging market debt and high yield). — With interest rates expected to rise, investors should focus on investments that offer lower duration and less interest rate sensitivity. years, — With the rally in credit in recent years selectivity will be important within “carry” investments. — For example given the attractive “carry ” the yield on high yield example, carry, debt would need to rise 188 bps in order for an investor to see negative returns. — In contrast, investors holding 10 year Treasuries would only need to see yields rise 34 bps. Footnotes: Time period reflects trailing 10 years as of September 30, 2013. Data Source: FactSet Deutsche Asset & Wealth Management Footnotes: Data as of October 2, 2013. Data Source: FactSet. Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 17
  • 19. Credit Fair Valued; Looking for Opportunity 6 Most Credit Fair Valued Investment Grade — Fair Valued 700 600 500 High Yield Spreads Below Average 2500 Barclays US Agg Invt Grade Credit Spread (OAS) Barclays Capital U.S. High Yield Spread (to 5 year Treasury Yield) in bps (AVG) Barclays US Agg Invt Grade Credit Spread (OAS) 2000 (AVG ex 2008-2009) Barclays US Agg Invt Grade Credit Spread (OAS) 1500 400 300 (AVG) Barclays Capital U.S. High Yield Spread (to 5 year Treasury Yield) in bps (AVG ex 2008-2009) Barclays US Agg Invt Grade Credit Spread (OAS) 1000 200 500 100 0 Oct-93 Aug-96 Jun-99 Apr-02 Feb-05 Dec-07 Oct-10 Aug-13 — Investment grade spreads look fair valued in relation to history. Even if you strip out the elevated levels seen during the financial crisis, spreads are close to fair value. — The historical average spread for investment grade debt (20 years) has been 142 bps while the average spread ex 2008-2009 has been 120 bps bps. 0 Oct-93 Aug-96 Jun-99 Apr-02 Feb-05 Dec-07 Oct-10 Aug-13 — In addition, high yield spreads look fair valued in relation to history. — The historical average spread for high yield debt (20 years) has been 571 bps while the average spread ex 2008-2009 has been 515 bps. — Th f Therefore, spreads at ~480 b h d 480 bps have li i d room f narrowing. limited for i — Therefore, spreads at ~140 bps have limited room for narrowing. Data Source: FactSet Deutsche Asset & Wealth Management Data Source: FactSet Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 18
  • 20. Credit Fair Valued; Looking For Opportunity r Convertibles Can Produce Attractive Returns Despite Rising Rates Credit Performance in Rising Rate Environment High Yield versus Convertibles in Rising Rate Environment 50% 40% 40% BofA Merrill Lynch Co onvertibles 60% 50% BofA Merrill Lynch Co onvertibles 60% 30% R2= 20% 0.73 10% 0% -10% -20% 30% 20% 10% 0% -10% -20% -30% 30% -30% -40% -40% R2= 0.05 -20% 0% 20% 40% U.S. Barclays High Yield 60% 80% -40% -40% -30% -20% -10% 0% 10% U.S. Barclays High Yield 20% 30% 40% — Convertibles have significantly outperformed high yield as equities h have continued to rally and the default environment has remained low. We believe convertibles continue to present an attractive opport tunity for several reasons. — Correlated to Equities: Historically, (10 years) convertibles are highly correlated to the S&P 500 (0.90). Therefore, given our constructive y bias towards equities, convertibles may benefit. — Drastic Spread Narrowing Likely Over: High y p g y g yield has benefited from low spreads but g g forward we believe the bulk of the spread m p going p compression is behind us. Returns going forward are likely to be mo muted than the robust returns over the past 10 years (9% ann). ore — Convertibles Outperform in Rising Rate Environment: Historically, du to the strong correlation to equities, convertibles generally ue outperform high yield in a period of rising rates and positive economic growth. Footnotes: Time period reflects August 1994-August 2013 and exclude outliers above 40% for high yield returns h Data Source: FactSet. Deutsche Asset & Wealth Management Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 19
  • 21. And the Bull Rally Marches On… 7 The Current “Bull Market” Rally Remains the Most Robust on Record at Its Current Duration Despite uncertainty around the potential path of QE “tapering” and f fiscal policy, U.S. equities have remained resilient and the S&P 500 “bull market” rally that began March 9, 2009 has remained intact. — Relative to other historical “bull market” rallies, the S&P 500 current ra is now 4.5 years in duration and at its current juncture, it is the second ally most robust rally (~+151%) on record. — At the 4.5 year mark versus other “bull market” rallies that have lasted this long without a 20% correction or greater, the trailing 12-month P/E d (15.7x) is above average (13.9x) despite the growth environment (trail ling 4-quarter average real GDP: +1.6%) being less robust than the average “bull market” rally (+3.7%). — The S&P 500 continued higher in September, one of the most season nally weak months of the year, and is now up ~26% in 2013 on an annualized basis. Dating back to the S&P 500 Index inception (1930 w the first full year), the S&P 500 is on pace for the 16th strongest was annual return on record. — Of all years, that would put this years S&P 500 rally in the top quartile of annual returns when annualizing year-to-date performance. It would also be the strongest annual rally since 1998 (+26.7%). ( 26.7%). S&P 500 Top “Bull Market” Rallies at Current Duration “Bull Market” Rally Strongest at Current Duration 550 S&P 500 Top Bull Market Rallies 2009 2002 1987 1982 1974 1957 1949 1942 Rallies at Current Duration (4.5 Years) 350 300 Total Rally Length (Years) S&P 500 Cumulative Gain S&P 500 Trailing 1212 Month P/E S&P 500 Dividend Yield U.S. Real GDP Prior 4Quarter Average Aug-1982 Aug-1987 5.0 156% 15.8 3.35% 3.0% Mar-2009 Sep-2013 4.5 151% 15.7 2.01% 1.6% Oct-2002 Oct-2007 5.0 93% 15.8 1.86% 1.9% Aug-1956 7.1 84% 9.4 N/A 5.6% Jul-1998 10.6 74% 18.6 3.15% 2.9% Oct-1974 400 Maintaining record pace S&P 500 Peak Date Dec-1987 450 S&P 500 Trough Date Jun-1949 500 Nov-1980 6.2 63% 7.9 5.27% 7.1% Average of Bull Market Rallies 6.4 104% 13.9 3.13% 3.7% 250 200 150 100 1 2 3 5 6 4 Number of Years Footnotes: Returns are price only. As of October 2, 2013. Data Source: FactSet. Deutsche Asset & Wealth Management 7 8 9 10 Footnotes: Returns are price only. As of October 2, 2013. Data Source: FactSet. Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 20
  • 22. And the Bull Rally Marches On… The Current “Bull Market” Rally Remains the Most Robust on Record at Its Current Duration Ranking Annual S&P 500 Index Returns – 2013 (Annualized) Top Q g ( ) p Quartile and Best Since 1998 50% Top Quartile Bottom Quartile 40% 30% 20% 10% 0% 2013 = ~26% (annualized, 16th Best Year) -10% -20% -30% -40% S&P 500 Annual Returns (Price Only) 1931 1937 2008 1974 1930 2002 1941 1973 1940 1932 1957 1966 2001 1929 1946 1962 1977 1969 2000 1981 1953 1990 1934 1939 1960 1994 1948 1970 2011 1947 1978 1984 1987 1956 2005 2007 1992 1993 1968 1959 2004 1965 1949 1971 1952 1979 1988 1942 2010 1964 2012 2006 1944 1986 1982 1972 1951 1983 1963 1976 1943 1999 1967 1996 1950 1961 2009 1938 1980 2013 1991 1985 2003 1955 1998 1989 1936 1945 1997 1975 1995 1958 1935 1954 1933 -50% Footnotes: Returns are price only since the S&P 500 Index inception and data is as of October 2, 2013. Data Source: FactSet. Deutsche Asset & Wealth Management Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 21
  • 23. And the Bull Rally Marches On… Broad Equities Fair Valued S&P 500 Price to Earnings Ratio S&P 500 P/E Pricing in Expected Economic Environment 24x 17 Average P/E Given GDP Scenario 16 16.0 16.2 15.2 15 20x Average P/E 14 16x 12x 13 13.4 13 4 13.1 12.3 12 11 10 9 8x '04 '05 '06 '07 '08 S&P 500 Trailing P/E (AVG) S&P 500 Trailing P/E '09 '10 '11 '12 '13 Recession Periods - United States 8 Less than - -2% to 0% 2% 0% to 2% 2% to 4% 4% - 6% 6% or More Real GDP (YoY) ( ) — The trailing P/E of the S&P 500 is trading (15.7x) on the 10 year average (15.8x). Data Source: FactSet. Deutsche Asset & Wealth Management — In addition, when using history as a guide, the P/E is likely reflecting the outlook for growth (2-4%). Footnotes: Time period reflects 1Q48 – 2Q13. Data Source: FactSet Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 22
  • 24. And the Bull Rally Marches On… Earnings Growth Will Need to Support Higher Prices Earnings Growth Slowing but Expected to Accelerate Earnings Troughing and Reaccelerating 60.0% 14% estimates Year-over-Year Grow (%) wth 12% 50.0% 40.0% 10% 2014/4c 2014/3c 2014/2c 2014/1c -10.0% 2013/4c 0% 2013/3c 0.0% % 2013/2c 2% 2013/1c 10.0% 2012/4C 4% 2012/3C 20.0% 2012/2C 6% 2012/1C 30.0% 2011/4C 8% 4Q09 — The earnings environment is expected to improve as economic growth improves. — While we think some of the estimates may be overly optimistic, we believe earnings growth of 5-7% in 2014 can support higher equity prices. Data Source: FactSet, FirstCall. Deutsche Asset & Wealth Management 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 Quarterly Earnings Estimate (YoY %) 1Q10 1Q13 2Q13 3Q13 — If you look at the past quarters since the end of the “Great Recession,” earnings tend to be lowered going into earnings season and then typically improve throughout earnings season. Footnotes: Change in earnings estimates from 12 weeks prior to 12 weeks after earnings season. Data Source: FactSet Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 23
  • 25. 8 Selectivity Important in a Fa Valued World air Searching for Value Within Sectors Finding Value at Sector Level 2014 Earnings Achievability 30% Consensus 2014 Earnings Growth Est. Our Base Case 2014 Earnings Growth Est. DifferenceBetween Consensus and Base Case Telecom 11% 3% -8% Financials 8% 6% -2% Cons. Discret 18% 5% -13% Materials 18% 5% -13% Cons. Staples 10% 5% -5% Industrials 11% 7% -4% S&P 500 11% 6% -5% Energy 11% 8% -3% 25% 20% 15% 10% 5% 0% -5% Relative to 10 year average (P/E, P/BV, P/S, PEG) -10% Cons. Discretionar ry Utilitie es Cons. Staple es Healthcar re Material ls Industrial ls S&P 50 00 Telecom. Service es Energ gy Financial ls Info Tec ch -15% — When looking at the sector level, the majority of sectors are either trading at a premium to their 10 year average. Lower negative revisions — Info tech, financials and energy are the only sectors trading at a discount. di t 9% -2% 9% 7% -2% Utilities Deutsche Asset & Wealth Management 11% Healthcare Footnotes: Data as of October 2, 2013. Data Source: FactSet Info Tech 4% 3% -1% Footnotes: Consensus as of September 2013. Data Source: FactSet Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 24
  • 26. Selectivity Important in a Fair V Valued World Favor Dividend Paying Investments Despite Rise in Interest Rates Dividend Growth by Sector (Last 10 Years) Interest Rate Sensitive Investments and Higher Yields 14 25.0% # of Consecutive Years of Dividend Growth (LHS) 12 280 20.0% 10 YR Dividend Growth Rate (Ann) (RHS) 10 15.0% 8 10.0% 6 5.0% 4 0.0% 2 -5.0% 0 -10.0% Cons. Discretionar ry Financials Industrials Materials Healthcar re Telecom m Utilitie es Cons. Staples s Info Tec ch Energ gy 230 180 130 80 Apr-03 Oct-03 Utilities — We continue to favor dividend paying investments despite the modest rise in interest rates. — Energy and info tech have seen the highest dividend growth over the past 10 years and have seen the highest number of consecutive years with dividend growth growth. Footnotes: Annual growth through December 2012. Data Source: FactSet. Deutsche Asset & Wealth Management Apr-04 Oct-04 Telecom Apr-05 Oct-05 REITs Apr-06 Oct-06 S&P 500 Apr-07 MLPs — Despite the rise in interest rates, dividend paying investments can still perform well. As long as the rise in rates is accompanied by better economic growth some interest rate sensitive investments should perform well. — In fact, from the 2003-2007 period of rising rates utilities fact 2003 2007 rates, utilities, telecom, REITs and MLPs outperformed the S&P 500. Footnotes: Rising rate period from 2003-2007. Data Source: FactSet, Bloomberg Finance LP. Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 25
  • 27. Selectivity Important in a Fair V Valued World Searching for Value Within Global Regions Finding Value at Regional Level Monetary Policy Valuations Earnings Earnings Revisions Technicals Final Score Japan 1.00 1.00 -1.00 1.00 1.00 1.00 4.00 Europe 0.75 0 75 0.75 0 75 0.00 0 00 1.00 1 00 -1 00 1.00 1.00 1 00 2.50 2 50 U.S. 1.00 1.00 0.00 1.00 -1.00 0.25 2.25 UK 0.75 0.75 0.00 0.00 -1.00 0.25 0.75 1.00 1 00 0.25 0 25 1.00 1 00 1.00 1 00 -1.00 1 00 1.00 1 00 3.25 3 25 Korea 0.25 0.00 1.00 1.00 -1.00 1.00 2.25 Russia 0.00 0.00 1.00 -1.00 1.00 1.00 2.00 Taiwan 1.00 0.00 0.00 1.00 -1.00 1.00 2.00 2 00 India 0.25 0.75 1.00 0.00 -1.00 0.75 1.75 Indonesia 1.00 1.00 -1.00 1.00 -1.00 0.75 1.75 Brazil 0.25 0.00 -1.00 0.00 -1.00 1.00 -0.75 Mexico Emerging Econ nomies Macro Fundamentals China Developed Ec conomies Country by Ranking 0.00 0.00 -1.00 0.00 -1.00 0.75 -1.25 Footnotes: Valuation model factors attractiveness given levels of change in PMI (Macro Fundame entals), change in real interest rates (Monetary policy), P/E discount/premium (Valuations), earnings growth and interest rates (Earnings), three month earnings revisions (Earnings Revisions), 50 and 200 day moving average (Technicals). Data Source: DEAM U.S. Investment Strategy Group, FactSet, Bloomberg Finance LP. Deutsche Asset & Wealth Management Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 26
  • 28. 9 Will the Dollar Be “King”? A New Cyclical Uptrend for the U.S. Dollar? Key Factors Impacting the U.S. Dollar Outlook Historical U.S. Dollar Cycles 150 Long Dated Cycles + Historically, the U.S. dollar has gone through several multi-year cycles and it appears the most recent downward cycle (9 years) ended in mid-2011 140 130 6 years, -18% 6 years, +67% 10 years, -46% 120 7 years, +43% 9 years, -40% 110 Decoupling of Monetary Policy + The eventual "tapering" of QE by the Fed as the economy improves, as well as further policy easing by the BOJ, ECB and BOE will likely lead to U.S. dollar strength ??? 100 90 80 Better Economic Growth Prospects + Capital / Fund Flows to U.S. + Increased capital inflows into the U.S. serves as a catalyst for the U S US U.S. dollar strengthening Geopolitical Risks + Political risks in the Eurozone, Japan and the Middle East would increase the "safe haven" status of the U.S. dollar Export Sensitivity 70 U.S. economic growth prospects are superior to other major developed economies like Japan and the Eurozone 60 1973 1978 1983 1988 1993 1998 2003 2008 2013 Nominal U.S. Trade Weighted Dollar Index Real U.S. Trade Weighted Dollar Index — Strength in the U.S. dollar could hamper export activity and as a result, U.S. economic growth Data Source: Deutsche Asset & Wealth Management Investment Strategy Group. Deutsche Asset & Wealth Management — The U S dollar has strengthened YTD and appears to be at an U.S. inflection point after trending lower since 2002. We expect an upward cycle to occur as U.S. growth improves and the U.S. deficit is reduced from recent fiscal reform. — Over the last 40 years the U.S. dollar has seen five major y , p , g g years in length. g cycles, both downward and upward, averaging 8 y — While a strong dollar may benefit the fiscal health of the economy and support fund flows, we are monitoring it closely as U.S. corporate profits may be negatively impacted. Near-term, dollar gains will likely pose downside risks for commodities and hedging of foreign equity positions should be considered. Footnotes: Data as of August 31, 2013. Data Source: FactSet. As of August 31, 2013. Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 27
  • 29. Will the Dollar Be “King”? U.S. Dollar Trends Derived from Global Monetary Policy U.S. Dollar Moves Driven by Monetary Policy? 85 Bernanke “dovish” in NABE Speech Anticipation leading up to Sep. 13 QE announcement 84 83 Global Balance Sheet Expansion Fed decides not to “taper” at September meeting Japan’s Abe takes office 82 81 80 Bernanke outlines Japan details QE plans, growth reforms QE “tapering” path Jun. 18 79 78 Jul-2012 Sep-2012 Nov-2012 Jan-2013 Mar-2013 May-2013 Jul-2013 Government shutdown Sep-2013 U.S. Trade-Weighted Dollar Index — Source: DB Global Markets. Over the last year, global monetary policy has become a more year significant factor in U.S. dollar moves. Outside of Fed policy, we have seen the U.S. dollar rally as a result of Japan’s aggressive QE programs and more recently, the ECB and BOE’s forward guidance on low rates for the foreseeable future. — The magnitude of the Bank of Japan s balance sheet expansion Japan’s relative to the Fed’s will continue to support U.S. dollar strength, specifically against the Yen. Footnotes: As of October 2, 2013. Data Source: FactSet. Deutsche Asset & Wealth Management Data Source: Deutsche Bank Global Markets Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 28
  • 30. Will the Dollar Be “King”? Economic Catalysts for U.S. Dollar Strength Global GDP Estimates – U.S. Relative Strength Unemployment Rates – U.S. vs. Eurozone 12.5% 12.0% 11.5% 11.0% 10.5% 10.0% 10 0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% Jul-2010 J l 2010 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% 2013 est. U.S. GDP 2014 est. Japan GDP Jan-2011 J 2011 Jul-2011 J l 2011 Jan-2012 J 2012 U.S. Unemployment Rate Jul-2012 J l 2012 Jan-2013 J 2013 Jul-2013 J l 2013 Eurozone Unemployment Rate Eurozone GDP Data Source: FactSet. Inflation – Japan Deflation Persists — Superior growth prospects in the U.S. relative to Japan and the Eurozone are supportive of U.S. dollar strength. 4.0% 4 0% BoJ Inflation Target = 2% 3.0% — We expect the U.S. to grow by 1.8% in 2013 before accelerating to a growth level of 3.0% in 2014. — The U.S. unemployment rate has trended lower over the last three years while the Eurozone unemployment rate has trended higher and is now at a new record high (12.2%). — In terms of inflation on a year-ago basis, U.S. price levels continue to grow while Japan has seen deflation for the last 12 months. 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Japan Consumer Price Index (YoY %) Data Source: FactSet, DB Global Investment Strategy Group. Deutsche Asset & Wealth Management Data Source: FactSet. Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 29
  • 31. Will the Dollar Be “King”? Long Term Cyclical Dollar Trends Tend to See Short Term Counter Moves EURUSD: All Long Trends Have Large Countertrend Moves EURUSD Tied to EU & U.S. 2Yr Rate Differentials 1.38 1.37 5 Euro (lhs) 2y rate diff (bps, rhs) 1.36 1.35 1.34 1.33 1 33 -5 -10 -15 1.32 1.31 1.30 1.29 1.28 1.27 1 27 1.26 Oct-12 0 -20 -25 -30 -35 -40 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Data Source: Deutsche Bank Global Markets. — All long term cycles for the U.S. dollar, specifically looking at the p, EURUSD relationship, have seen several “countertrend” moves like we have seen with recent dollar weakness. Foreign Buying of Europe Equities Over U.S. Overdone -40% — — We see recent Euro strength and dollar weakness as temporary. The difference between 2-year sovereign yields in the EU and U.S. have a close correlation to the EURUSD spot rate. We expect a reversal in the recent upward trend as the Fed begins to “taper” QE and the Eurozone recovery proves to be slow. The Euro has also benefitted from a surge in demand for European equities that has outpaced flows into U.S. markets in recent months. However, we see the current level of demand as unsustainable. Data Source: Deutsche Bank Global Markets Deutsche Asset & Wealth Management -30% Change i relative valuation of E Ch in l ti l ti f Euro stocks t k vs US (p/e ratios, lhs) Foreign buying of Euro equities minus US equities ($bn,rhs) 400 300 200 -20% 100 -10% 0 0% -100 10% -200 Euro stocks  -300 becoming  relatively  30% -400 more expensive 40% -500 500 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Data Source: Deutsche Bank Global Markets Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 20% 016437.10.02.13 30
  • 32. 10 Commodities to be Challeng ged Dollar Largest Challenge to Commodities Key Factors Impacting Commodity Index Dollar Challenge to Commodities 0.00 U.S. Dollar — Expectations for a multi-year Dollar appreciation. -0.10 -0.20 Emerging Market Economies / Emerging market growth slowly recovering but still weak in historical context. -0 30 0.30 -0.40 -0.50 Developed Market Economies + Investment Demand — Retail demand has weakened and institutions are unlikely to further increase exposure due to disappointing performance Supply Levels pp y — U.S. crude oil and natural gas oversupply concerns have emerged due to the U S energy "renaissance" U.S. renaissance — The modest "tailwind" from negative real interest rates has dissipated and higher interest rates increase the "cost" of holding commodities. Real Interest Rates Developed market economies momentum gaining traction. -0.60 -0.70 Geopolitical Unrest / Geopolitical unrest is subsiding…for now. W eather / -0.80 Energy Softs Grains DJ UBS Commodity Index Precious Metals Industrials Metals 20 YR Correlation to U.S. Dollar — Given the strong negative correlation between commodities and the dollar we believe commodities will be challenged by a rise in the dollar. — Over the past 20 y p years, the commodity sectors most negatively , y g y correlated to the dollar are precious metals and industrial metals. Limited weather disruptions expected in the near term. Looking for insights into winter weather season. Footnotes: Time period reflects September 1993-September 2013. Data Source: FactSet Deutsche Asset & Wealth Management Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 31
  • 33. Commodities to be Challenged Dynamics Driving Energy Prices Changing Oil O Less Sensitive to Geopolitical Unrest S G US/EU Iran Sanctions Arab Spring $125 Non O C S OPEC Supply to Expected to Rise Libya Supply/Syria Unrest 62.0% 61.5% $115 61.0% $105 60.5% $95 60.0% $85 59.5% $75 59.0% $65 Sep-2009 Sep-2010 Sep-2011 Brent Crude Oil Spot Price ($/bbl) Sep-2012 Sep-2013 WTI Crude Oil Spot Price ($/bbl) 58.5% 58.0% 2009 2010 2011 2012 2013 2014 Total Non-OPEC Crude Oil Output as a % of Total Non-OPEC and OPEC Output — Crude oil prices are becoming less sensitive to the disruptions from the Middle East. — Part of the reason that Middle East tensions are having less of an impact is due to the fact that Non Opec oil supply is rising. — Looking at the recent Libya supply disruptions and Syria unrest, the price of crude oil did not spike as seen during past Middle East conflicts. conflicts — With big producers such as the U.S. and Mexico, Non Opec oil supply should make up ~62% of total oil supply by 2015. Data Source: FactSet. Deutsche Asset & Wealth Management Data Source: IEA Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 32
  • 34. Commodities to be Challenged Gauging Investor Demand – Less Support from Retail and Institutio onal Investors? Speculative Retail Investors Flee the Gold Market DJ-UBS Commodity Index Trailing Returns 85 12% 75 10% -27% 65 8% 55 6% 45 4% 35 2% 25 Jun-08 0% Sep-03 Dec-04 Mar-06 Jun-07 Sep-08 Dec-09 Mar-11 Jun-12 Sep-13 Dow Jones UBS Commodity Return (10YR Rolling Annualized) — — Jul-09 Jul-10 Aug-11 Aug-12 Aug-13 Total Known ETF Holdings of Gold Footnotes: Data as of September 27, 2013. Data Source: Bloomberg Finance LP. Institutional Commodities Exposure Levels Out in 2012 After correcting in 2013, the 10-year annualized return of the DJUBS Commodity Index fell to +0.5%. C dit I d f ll t 0 5% 9% Gold is just one example of how investor demand can be “fickle,” specifically in regards to speculative commodities trading. The strong correction in gold reminds us that investments that become inflated due to speculation as opposed to solid fundamentals are sensitive to sharp corrections. corrections 7% 8% 8% 2011 2012 8% 7% 6% 6% 6% 5% 4% 4% 4% 3% 3% 3% — Institutions have increased exposures to commodities over the last decade and at current levels, they have little incentive to add additional exposure given disappointing performance. 2% 2% 1% 0% 2003 Footnotes: Data as of September 27, 2013. Data Source: FactSet. Deutsche Asset & Wealth Management 2004 2005 2006 2007 2008 2009 2010 Commodities - Avg. Institutional Allocation Data Source: NACUBO-Commonfund Endowment Studies (2003 to 2012), FactSet. Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 33
  • 35. Economic and Asset Class For recasts GDP Growth in % World USA Euroland UK Japan China 2013 2014 3.1% 1.8% -0.4% 1.2% 1.7% 7.5% 3.7% 3.0% 0.7% 1.8% 1.5% 7.5% Key Interest Rates USA (Fed funds) Euroland (Refi rate) UK (Repo rate) ( p ) Japan (Money market rate) Currencies Inflation (CPI) Current* Year End Forecast 12-Month Forecast 0.25% 0.50% 0.50% 0.10% 0.25% 0.50% 0.50% 0.10% 0.25% 0.25% 0.50% 0.10% Current* Year End Forecast 12-Month Forecast 2013 2014 1.7% 2.5% EUR/USD USD/JPY 1.35 98.69 1.31 101.00 1.25 114.00 Euroland 1.6% 1.6% EUR/CHF 1.23 1.25 1.25 UK Japan China 2.4% 0.1% 2.8% 2.2% 1.5% 3.1% GBP/USD USD/CNY 1.61 6.12 1.57 6.10 1.52 6.00 2013 2014 Commodities Current* Year End Forecast 12-Month Forecast -2.7% 2.5% -2.9% -2.6% 2.7% -2.6% Oil (WTI) in USD Gold in USD 103 1336 100 1300 100 1300 in % USA Current Account Balance in % of GDP USA Euroland UK Japan 1.0% 1.8% China 2.2% 2.0% Fiscal Balance in % of GDP USA Euroland UK Japan China 2013 2014 -4.5% -2.9% -7.0% -9.5% -2.0% -3.5% -2.8% -6.5% -8.5% -1.8% Equities USA (S&P 500) Euroland (Euro Stoxx 50) Germany (DAX) UK (FTSE 100) Japan (Nikkei) Asia ex Japan (MSCI in USD) Latin America (MSCI in USD) Sovereign Rates USA Euroland (German Bund) UK Japan Current* 1693 2927 8666 6552 14621 543 3387 Current* 2.63% 1.82% 2.57% 0.67% Dividend Yield P/E (LTM)** Year End Forecast 12-Month Forecast 2.0% 3.6% 3.1% 3.5% 1.5% 2.4% 2.6% 15.7 13.1 12.4 12.9 19.5 12.7 14.3 1715 2925 8750 6600 14800 570 3550 1810 3185 9410 7000 16000 600 3650 Country CDS Year End Forecast 12-Month Forecast 27.5 24.7 32.2 60.9 3.00% 2.10% 2.90% 0.80% 3.70% 2.30% 3.00% 1.25% Data Source: FactSet, Bloomberg Finance LP, Deutsche Bank Global Investment Committee foreca asts as of GIC meeting on September 24, 2013. * As of September 25, 2013. **LTM stands for last 12 months. Deutsche Asset & Wealth Management Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13 34
  • 36. Investment Strategy Group Larry Adam, CFA®, CIMA® Chief Investment Strategist g Telephone (410) 895-4135 Facsimile (410) 895-4250 larry.v.adam@db.com Megan Horneman Investment Strategist g Telephone (410) 895-4148 Facsimile (410) 895-4250 megan.horneman@db.com Jon nathan Rosner Inve estment Strategy Analyst gy y Tele ephone (410) 895-4282 Fac csimile (410) 895-4250 jona athan.rosner@db.com Important Information This 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 transaction relating to the products and services described herein. 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Particular uncertainties that could adversely or positively affect future results include: the beha avior of financial markets, including fluctuations in interest and exchange rates, commodity and equity prices and the value of financial assets; continued volatility and further deterioration of the capital marke the commercial and consumer credit environment; the impact of regulation and regulatory, ets; investigative and legal actions; strategic actions, including acquisitions and dispositions; future integratio of acquired businesses; future financial performance of major industries; and numerous other matters of on national, regional and global scale, including those of a political, economic, business and competitive na ature. These uncertainties may cause actual future results to be materially different than those expressed in our forward-looking statements. economically unstable. Furthermore, in the case of investments in foreign securities or other assets, any Investments in Foreign Countries - Such investments may be in countries that prove to be politically or e 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. The information on the benchmarks is presented for illustrative purposes only and is not intended to imp the potential performance of any fund or investment. Benchmarks are not available for direct ply investment investment. Benchmark performance assumes the reinvestment of all distributions, but does not assume any transaction costs, taxes, management fees or other expenses. The performance of the benchmarks may vary from investments held in the account. ecurity. Rather investors own a “creation unit” in a portfolio of stocks, bonds, or other securities. ETFs are Ownership in an exchange traded fund does not provide investors with entitlements to the underlying se subject to market risk and will fluctuate in value based on movements in the underlying security. Investo should realize that redemption values of ETFs are based upon the market value at the time of order ors and not at the net asset value as is the case for mutual funds. Investments in ETFs are subject to comm mission charges and management fees. Deutsche Bank may have certain conflicts of interest in recommending investments in certain funds, including the fact that we may receive 12b-1 fees and other compensation from the funds and their investment advisors and that funds may execute transactions through Deutsche Bank. Emerging markets may be in transitional or formative stages and thus may be significantly less stable than developed markets. Changes in emerging markets government structures or other political instability may result in nationalization, expropriation, ad hoc regulation, or foreign investment restrictions. Emerg ging market investments are at risk for currency devaluation, as well as convertibility, liquidity and transparency constraints. The high volatility and speculative nature of emerging market investments ma result in both significant losses or profits. ay Foreign Exchange/Currency - Such transactions involve multiple risks, including currency risk and settlem ment 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, marketabil or price of a foreign currency. Profits and losses in transactions in foreign exchange will also be lity 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. s High Yield Fixed Income Securities - Investing in high yield bonds which tend to be more volatile than in bonds, nvestment grade fixed income securities is speculative. These bonds are affected by interest rate changes securities, speculative 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 to substantial fluctuations ., over short periods of time and may be affected by unpredicted international monetary and political policie Additionally, valuations of commodities may be susceptible to such adverse global economic, political es. 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 n subsidiaries of Deutsche Bank Group offer commodities or commodities-related products and services. nagement represents the asset management and wealth management activities conducted by Deutsche "Deutsche Bank" means Deutsche Bank AG and its affiliated companies. Deutsche Asset & Wealth Man Bank AG or its subsidiaries. Clients are provided Deutsche Asset & Wealth Management products or services by one or more legal entities that are identified to clients pursuant to the contracts, agreements, “ offering materials or other documentation relevant to such products or services. Brokerage services are offered through Deutsche Bank Securities Inc., a registered broker-dealer and investment adviser, which e conducts investment banking and securities activities in the United States. Deutsche Bank Securities Inc is a member of FINRA, NYSE and SIPC. ©2013 Deutsche Bank AG. All rights reserved. 015718 071513 c. Deutsche Asset & Wealth Management Larry Adam, U.S. Chief Investment Strategist 4th Quarter Market Outlook 016437.10.02.13

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