cio insights august 2016 - deutsche bank · 2016. 8. 22. · cio insights – august 2016 contents...

Deutsche BankWealth Management

Marketing Material

August 2016EMEA

CIO Insights

Understanding inflection points

Asset class analysis and forecasts

Multi-asset approaches

CIO Insights – August 2016Contents2

Contents

Inside the coverSome important events ahead - from the triggering of Article 50 of the Brexit process, through Fed and other key central bank meetings, to French and German elections next year.

5

MACROECONOMICS

The impact of uncertainty

3

LETTER TO INVESTORS

Binary vs. broad-path thinking

9 EQUITIES

The continuing appeal of the U.S.

13

ALTERNATIVES

Hedge Funds and Real Estate

15

DATA TABLES

Macroeconomic forecasts

6MULTI ASSET

Recalibrating strategy

11

FIXED INCOME

Monetary medicine side-effects

16

DATA TABLES

Asset class forecasts

18

GLOSSARY

20

DISCLAIMER

CIO Insights – August 2016Letter to investors3

LETTER TO INVESTORS

Binary vs. broad-path thinking

Events over the last few months have reminded us that the world does not always run according to the consensus. Political, social or economic developments can demand a change in overall direction. Sector-specific problems may require a policy response.

So we have to continue to look for future “inflection points” which could profoundly change the investment environment. It is possible to identify several of these well in advance – for example, the Italian constitutional reform referendum and the U.S. elections in November. Other inflection points could give less notice of their arrival.

The identification of such inflection points is an essential undertaking. They allow us to assess potential effects and contagion channels from them.

There is, however, a temptation to see these inflection points as essentially binary – a fence that we will either jump or fall at. But is this really the case?

Consider for example the Brexit referendum. On paper, this was a truly binary event – an unexpected result delivering an outcome with high associated economic and investment risks. But after an initial sell down, most markets stabilized, at least temporarily: the binary event did not generate a binary market outcome.

In fact, future inflection points are more likely to be gates to get through, rather than fences to bring us down. Some gates will be wider than others: markets may give more leeway, for example, to economic data points than to political surprises. This is something we need to take into account when managing portfolios.

Past performance is not indicative of future returns. Readers should refer to the explanatory notes at the end of this document.

CIO Insights – August 2016Letter to investors4

Thinking like this moves us away from a simple binary risk on/risk off calculation. We must think instead about the broad path that can best navigate us through the changing landscape.

The good news is that the ground we are travelling on is rough but not impassable: global growth is forecast at 3.3% in 2016 and 3.4% in 2017 and most central banks could remain in a highly supportive mode – although their efforts still need to be supported by a political drive for structural reform.

The challenge is that staying on the middle of the path may not yield particularly attractive returns. Equity markets look unlikely to move much higher over the next 12 months. Many government bond investments already carry negative returns and market liquidity issues are another reminder of how important it is to have active fixed income management. Moreover,

Christian NoltingGlobal CIO

the ability of a static strategic asset allocation to boost returns is limited by increased correlations between asset classes.

What this means in practice is that strategic asset allocation could need to be complemented by a constantly monitored tactical asset allocation, individual security selection and, of course, risk management to help protect the value of a portfolio against potential downturns. Doing this – as we approach and then move through future inflection points – will require knowledge and dexterity. I’m convinced that such a multi-faceted approach is a thoughtful way to manage your wealth through the coming months and years.


CIO Insights – August 2016Macroeconomics5

Uncertainty regarding the Brexit referendum result is likely to burden economic development in the UK – and the Eurozone – and lead investors and consumers to spend less. We expect a deceleration of economic growth in the UK to 0.8% next year, down from an expected 1.3% in 2016. This should lead to declining imports. As the UK’s most important trading partner, the Eurozone is likely to be materially affected by this and we have trimmed our Eurozone growth forecast to 1.2% in 2017 down from an expected 1.4% in 2016. Countries with less extensive trading links to the UK should be much less affected. Our U.S. growth forecast of 2% for 2017 remains unchanged from pre-referendum levels, as do our forecasts for Japan and emerging markets.

It’s our opinion that central banks have acknowledged the result of the Brexit vote, and may alter policy to cushion any broader economic repercussions. The U.S. Federal Reserve (Fed) is likely to raise official rates only moderately. At most, we would expect two rises of 25 basis points each by mid-2017. Discussions whether the European Central Bank (ECB) will

is worried about meager economic growth and near-zero inflation rates.

Emerging markets (EM) might be indirect beneficiaries of current developments, as EM governments and corporations have used the low interest-rate environment and significantly extended their debt since 2007. Rising debt has increased the dependency on the monetary policies of advanced economies, particularly the United States. The postponement of U.S. rate hikes has therefore to some extent alleviated their situation.

In the last few years, China’s political leadership has focused on credit-financed investment to stimulate the economy. Several sectors therefore experienced over-capacity and rising non-performing loans. This has increased the pressure on the government in Beijing to launch structural reforms. The example of India shows that economic restructuring and market-economy reforms can be worthwhile. For 2017, we expect Indian growth to rise by 0.3 percentage points to 7.8%. By contrast, Chinese growth is forecast to decelerate from 6.3% in 2016 to 6% in 2017.

The impact of uncertaintyMACROECONOMICS

CIO forecast for 2016

2015 GDP

Key growth forecasts

Sources: Deutsche Bank Wealth Management. Data as of August 15, 2016. Past performance is not indicative of future returns. Readers should refer to the explanatory notes at the end of this document.

start tapering QE in spring 2017 have been temporarily muted. The Bank of England (BoE) has once again joined the club of central banks pursuing quantitative easing (QE) policies and has cut its base rate by 0.25%; further policy interventions are possible. The Bank of Japan (BOJ) is likely to extend its asset purchase program and to cut rates further, but the Brexit vote is not to blame. Rather, Japan’s central bank

China

6.9% 6.3%

Eurozone

1.7% 1.4%

Japan

0.5% 0.5%

US

2.0% 1.8%

CIO Insights – August 2016Multi Asset6

Multi-asset investors face an environment where growth remains stubbornly low and there are increasing concerns about the long-term implications of very accommodative monetary policy. But, for the foreseeable future, we should live in a situation where core sovereign-bond yields are at record lows, corporate-credit yields are moving down and equities are at record highs. In short, we have an investment cycle where some asset-class price movements are out of synch with economic growth.

Lower effective returns are also accompanied by high levels of volatility. This is most simply illustrated by the classic “efficient-

frontier” chart (Figure 1) showing the highest rate of return for a given level of risk, or vice versa. A simple hypothetical example makes the point even more strongly. In 2004 you could achieve a 4% return with a portfolio made up with 85% fixed income and only 15% of equities. Now you would have to allocate ~50% into equities to have a hope of approaching this level of return – and your expected volatility would have doubled.

Recalibrating strategyMULTI ASSET

Lower returns for a higher level of risk

Figure 1.

1990–2009

2010–2015

Expected return (10y)

In short, we have an investment cycle where some asset-class price movements are out of synch with economic growth.

0%

4%

6%

8%

12%

14%Return

Volatility

10%

2%

-1% 1% 3% 5% 7% 9% 11% 15%13%

Sources: Morgan Stanley Research, Bloomberg Finance L.P. Data as of November 2015. Past performance is not indicative of future returns. Readers should refer to the explanatory notes at the end of this document.

Past performance is not indicative of future returns.


implementation, i.e. selection. The way in which they are implemented and their relative importance will change over time.

Our current approach can be characterized as follows. With the largest contribution to overall portfolio risk coming from equities it may be warranted taking on slightly less strategic risk than usual. This could allow a portfolio to better cope with and also to provide a sufficient risk budget to buy into larger sell-offs. Across a strategic base portfolio, a “carry-and-income” strategy can offer the ability to add tactically when market dislocations occur.

Diversification across styles can add valueWithin the equities exposure, limited expected upside to index targets, together with high expected volatility, suggests focusing on getting the right equity style (i.e. investing criteria). Income-generating dividend stocks and strategies designed to minimize volatility/variance may be important considerations.

Fixed-income “carry” assets (i.e. those offering appreciable yield) look set to be more interesting than equities for the next couple of months. U.S. investment grade, euro high yield and emerging-market (EM) hard-currency debt may appeal.

Portfolio diversification has become an important issue in this cycle. The natural diversifiers, fixed-income sovereigns, are now zero-yield, negative-convexity assets. Inter-asset-class correlation (looking beyond bonds) has also increased substantially over the last few years and – as we know – tends to increase to one in larger risk-aversion events.

Augmenting strategic asset allocationAs a result, multi-asset investors may need to recalibrate their strategy. Over the last 5-10 years, strategic asset allocation might have accounted for 80% or more of a portfolio’s performance. This is no longer the case. Effective tactical asset allocation, individual security selection and risk management may now account for 50% or more of performance.

In this new, active, multi-asset-management world, key concepts include contrarian trading, risk premia or style investing and smart

Correlations and returns

Annual return of a U.S. based multi asset portfolio (60% bonds, 40% equities, rhs)

Average annual return, 2000-2015 of a U.S. based multi asset portfolio (60% bonds, 40% equities, rhs)

Correlation S&P 500 vs. 10Y UST (lhs)

Figure 2.Correlations change over time

Unstable correlation

1.0

0.0

-1.01943 1968

60%

0%

-60%

1.0

0.0

-1.02000 2015

60%

0%4.2%

-60%

Predominantly negative correlation

1.0

0.0

-1.01968 2000

60%

0%

-60%

Predominantly positive correlation

Sources: Thomson Reuters Datastream, Global Financial Data, Robert Shiller, Goldman Sachs Global Investment Research. Data as of December 2015. Past performance is not indicative of future returns. Readers should refer to the explanatory notes at the end of this document.



This is an environment that is likely to require effective global diversification – and not to forget currency exposure that is actively managed for risk – but may offer the potential for return.

Credit over equities, for nowWe continue to believe that fixed-income corporate credit may offer better risk-return characteristics than equities on a three-month horizon. With much of the continuing political and economic uncertainty focused on Europe, we have an underweight in European and, to a lesser extent, Latin American equities, but continue to see opportunities in Japan, reflected by a slight overweight here. Our allocation to U.S. and Asia-ex-Japan equities remains neutral. Our overweight to fixed income overall is mainly via investment grade and high yield. We are neutral on commodities and alternatives. Duration has been kept at a half-year underweight. The Multi-Asset Investment Committee continues to think that the U.S. dollar may strengthen, having an overweight here but an underweight on both the euro and the yen.

Our Multi Asset Indicators – looking good, on the surfaceWe calculate three specific indicators to give us different perspectives on market trends – a surprise indicator (measuring whether or not data

meets expectations), a macro indicator and also a risk indicator. As of early August, all three are relatively encouraging. This reflects, to a great extent, the slow but steady improvement in the macroeconomic environment as well as market optimism that central banks could provide further liquidity, if needed. The surprise indicator has been positive since end of May, initially driven by very positive surprises out of the Eurozone although some data here and in other regions is now coming in below expectations. The generally positive development in the macro indicator since March owes much to improving trade data, global purchasing manager indices, firm labor-market data and a rise in many commodity prices. Our third measure is the risk indicator, which has recently turned positive after a very volatile period since the beginning of the year. This reflects the changing risk sentiment. Overall, ample liquidity and central-bank support is driving financial markets. Our indicators, too, are partially driven by monetary policy. However, they also provide a very valuable fundamental cross-check to assess markets. In that sense, they should be seen as complementary to other tools for analyzing financial markets.

This is an environment that is likely to require effective global diversification, and currency exposure that is actively managed for risk.


CIO Insights – August 2016Equities9

The continuing appeal of the U.S.

EQUITIES

U.S. stock markets are the only major developed markets to have regained their 2000 or 2007 highs in U.S. dollar terms. By contrast, the MSCI ACWI ex U.S. trades around one-quarter below its 2007 high. Of course, the United States benefits from its flexibility, high returns on equity and successful technology companies. U.S. shares may also potentially profit from their perceived potential safe-haven status. Lingeringinvestor concerns are, after all, reflected in the cash positions held by institutional investors, now at levels not seen since 2001.

Other more specific factors are also in play. Thanks in part to the European Central Bank (ECB), U.S. companies are buying more of their own shares. The ECB’s low interest rate policy has already put downward pressure on U.S. interest rates. Now U.S. companies have a more direct route toward benefitting from cheaper refinancing. This is because the ECB can, in principle, purchase euro bonds from the subsidiaries of U.S. companies registered in the Eurozone. Companies whose bonds meet the criteria of the ECB’s purchasing scheme are having an unusually high volume of issuance, suggesting a willingness to take advantage of this type of subsidized financing. In this

case, fund raising is being driven not by need but, in some instances, by availability and price. And what are companies doing with all the money raised? In the United States, they are choosing to buy either their own shares or interests in other companies.

This has reinforced an existing trend. Between 2013 and 2015, S&P 500 companies spent 21% more on dividends and share buybacks and 156% more on cash acquisitions. By contrast, investment spending on fixed assets grew by only 2%. Companies are therefore opting to use shortcuts to boost their growth and earnings per share. Low interest rates have made this possible, keeping interest payments virtually flat for the past four years despite a sharp rise in net debt. U.S. non financial companies’ gross debt as a percentage of GDP has already returned to record levels.

Rising interest rates and falling profits could pose an immediate threat to highly indebted companies. However, we think that interest rate rises are likely to be modest and believe that profits should rise again in 2016 and 2017. So while U.S. corporate debt levels may start to pose a risk in the medium-term, they seem unlikely to pose a near-term threat.


CIO Insights – August 2016Equities10

JapanFrom a cyclical perspective, the economic backdrop remains difficult for Japanese stocks just as does the strong yen. Nevertheless, most Japanese corporates are in good shape in terms of earnings and balance sheets. We remain optimistic on microeconomic and corporate governance improvement and attractive valuations.

U.S. We expect modest earnings per share (EPS) growth in 2017. Near-term, an EPS acceleration in the second half of 2016, solid macro trends and uncertainty in Europe could cause the S&P 500 index to overshoot our 12-month index target as the U.S. market serves as a less risky alternative. This might continue to lift particularly share prices of defensive dividend payers in particular.

Europe Near-term Brexit and financial sector challenges, which we don’t expect to derail the economy on a 12-month-horizon, are likely to keep the European valuation discount to the U.S. at elevated levels. We have cut our earnings forecasts to reflect less UK and EU growth and the impact of lower interest rates for financials.

Emerging MarketsThese are benefiting from the Fed hike delay, commodity price stabilization and should be pretty much protected from direct Brexit impacts. While earnings should recover in 2017, we see still down side risk to 2016 numbers. Latam should have higher earnings growth than previously expected, helped by commodity prices and a recovery from cyclically depressed levels in Brazil.

EM

S OU THPAC I F I CO C E AN

NORTHPAC I F I CO C E AN

NORTHPAC I F I CO C E AN

NORTHAT L A N T I CO C E AN

A R C T I CO C E AN

S OU THAT L A N T I CO C E AN

I N D IA NO C E AN

United States (S&P 500)Return ytd: +6.7%

End-June 2017 forecast: 2100

Eurozone (Eurostoxx 50)Return ytd: –7.9%


UK (FTSE 100)Return ytd: +9.8%

End-June 2017 forecast: 6200Switzerland (SMI)Return ytd: –6.7%End-June 2017 forecast: 8150

Latam (MSCI Latam)Return ytd: +35.9%End-June 2017 forecast: 2100

Japan (MSCI Japan)Return ytd: –15.1%


Asia ex. Japan (MSCI Asia ex. Japan)

Return ytd: +8.6%End-June 2017 forecast: 830

Sources: Deutsche Bank Wealth Management, Bloomberg Finance L P. Data as of August 9, 2016. Footnotes: Return ytd as of August 9, 2016. Past performance is not indicative of future returns. Readers should refer to the explanatory notes at the end of this document.

CIO Insights – August 2016Fixed Income11

Not so long ago, the consensus was that the Fed would soon hike rates again. Eventually, other central banks would also start the long journey back to policy normality. A number of factors, including the Brexit referendum result, have forced a reassessment of this view. Monetary policies for developed markets apart from the U.S. are likely to get looser, before they get tighter. Already, expectations of more monetary stimulus have pushed government bond yields lower and frequently deeper into negative territory. Oddities abound. For example, borrowing costs for British corporates have actually shrunk since the referendum – despite growing recession risks in the UK.

The Brexit shock places increased pressure on the European Central Bank (ECB) to do even more. However, traditional tools are limited. This raises the prospect of further security purchases or even fresh money injections for governments or households, an idea usually referred to as helicopter money. Everything seems possible. But those measures also have their downsides.

Take the ECB’s recently launched corporate sector purchase

programme (CSPP). Under its criteria, which exclude bank issues and issues consistently rated below investment grade, the eligible CSPP universe is probably around €850bn. Out of this, just short of €500bn may be potentially available, as the ECB is allowed to buy no more than 70% of any single issue (and less for state affiliated companies). The ECB likely is aiming to buy in the region of €5bn a month. This could take its holdings to about 10% of its CSPP target universe by March 2017 – a helpful addition, as certain other purchasable assets, such as German Bunds, grow ever scarcer.

However, getting there is not likely to be easy, and not without risks. The market for European investment grade bonds is notoriously thin. Under CSPP, liquidity is likely to dry up further. Core countries such as Germany and France, as well as certain sectors, such as utilities, should be the main beneficiaries. Smaller, hard-pressed companies from the periphery might at best benefit only indirectly from a spill-over into non-eligible assets. This too, however, has costs; it distorts economic decisions. Higher M&A activity and firms running into

Monetary medicine side-effects

FIXED INCOME

Everything seems possible. But those measures have their downsides.


difficulties meeting liabilities may be some of the more obvious consequences.

The lesson? As monetary policy continues to keep interest rates at extraordinary lows, it effectively side-lines “normal” market mechanisms. For now, the usual suspects should continue to benefit. These include periphery bonds and European corporates. More stimulus by the

ECB and, perhaps, the Bank of Japan (which has recently refrained from major new policy initiatives), is likely to make assets in higher yielding markets, such as the U.S., more attractive. Policy makers would surely be well-advised to fret about market distortions. Investors, meanwhile, might as well continue to enjoy the ride.

Switzerland

1yr 2 3 4 5 6 7 8 9 10 30

Germany

Japan

Sweden

Netherlands

France

Spain

Italy

United Kingdom

United States

Negative

Positive

Negative yieldsAfter the June 24 Brexit vote, more bond yields turned negative

CIO Insights – August 2016Fixed Income12

Sources: Bloomberg Finance L P, Deutsche Bank Wealth Management. Data as of August 11, 2016. Past performance is not indicative of future returns. Readers should refer to the explanatory notes at the end of this document.


CIO Insights – August 2016Alternatives13

Problems also create opportunities: this is how hedge fund strategies view the Brexit referendum result. So which strategies appear best placed for the new reality that we find ourselves in? In short: those strategies which are most liquid and most capable of making money in uncertain times. This should clearly include discretionary macro, which has historically performed better in riskier markets, because managers

Hedge Funds and Real Estate

ALTERNATIVES

REIT yields vs. government bond yieldsSpreads remain positive

REIT & Developer yields

10 yr Govt bond yields

REIT yields

are typically more willing and able to aggressively move exposure around. The breakdown of asset-class correlations should also broaden the opportunity set for discretionary-macro managers. Commodity trading advisor (CTA) based trading strategies are another potential beneficiary. Given our expectation of further volatility in asset markets, we believe they may continue to outperform for the foreseeable future.

Sources: Bloomberg Finance L P, Deutsche Bank Wealth Management. Data as of June 24, 2016. Past performance is not indicative of future returns. Readers should refer to the explanatory notes at the end of this document.

0%

-1%

1%

2%

3%

4%

5%

6%

7%

Australia HongKong

Japan Singapore United Kingdom

United States

Europeex UK


CIO Insights – August 2016Alternatives14

As regards real estate, this may perform best when gross-domestic-product (GDP) growth is positive and real interest rates are low. Our post-Brexit referendum GDP growth estimates are modestly lower for some markets, yet we do not expect real interest rates to rise. Globally, real estate could deliver average to above-average returns in many markets. The U.K. might slow, but markets such as Australia, South Korea, Germany, Spain and the U.S. remain favorable.

Outside of the U.K., we also don’t see material valuation shifts. Initial yields (rents minus costs, divided by the property value) are stable while bond yields have come down, thus spreads are wider. With property supply and demand remaining balanced, we have upgraded our return outlook in certain markets.

Source: Deutsche Asset Management, June 24, 2016 Past performance is not indicative of future returns. Readers should refer to the explanatory notes at the end of this document.

Supply risk remains well below average, with only a few exceptions such as Singapore, Houston, London, and some late-cycle supply in certain Australian markets.

In the listed market, real estate may become the eleventh Standard & Poor’s Global Industry Classification Standard sector in September 2016. We believe this could lead to lower volatility and correlations over time. Also, generalist investors are estimated to be underweight the Real Estate Investment Trust (REIT) sector by c. $95bn, which could provide support. REIT dividend yields are now at 4.0 percent and well supported by underlying free-cash-flow yields of 5.0 percent. Payout ratios are low by historical standards and provide an opportunity for high-single-digit dividend growth in the near term.

Real Estate

11thGlobal Industry Classification Standard sector from end August 2016

REITs

$95bnInvestors estimated to be underweight in the REIT sector

Post Brexit decisionUK real estate valuations might ease, but most key markets remain favorable

Macroeconomic Forecasts

2016F 2017F

GDP growth (%)

U.S.* 1.8 2.0

Eurozone 1.4 1.2

U.K. 1.3 0.8

Japan 0.5 0.7

China 6.3 6.0

Consumer price inflation (%)

U.S.* 1.6 1.8

Eurozone 0.3 1.6

U.K. 0.7 2.6

Japan -0.2 0.2

China 2.0 1.5

Current account balance (% of GDP)

U.S. -2.7 -2.8

Eurozone 2.9 2.7

U.K. -3.9 -3.5

Japan 2.8 2.5

China 2.5 2.5

Fiscal balance (% of GDP)

U.S. -3.0 -3.2

Eurozone -1.9 -1.9

U.K. -3.3 -3.3

Japan -6.0 -5.2

China -2.4 -2.5

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.* For the U.S., inflation measure is core PCE Dec to Dec %. Forecast for U.S. Headline PCE (Dec/Dec) is 1.4% in 2016 and 1.9% in 2017. Source: Deutsche Bank Wealth Management. As of August 1, 2016.

CIO Insights – August 2016Tables15

CIO Insights – August 2016Asset Class Forecasts16

Asset Class Forecasts

Benchmark interest rates Official rate End-June 2017F

United States Fed fund rates 0.75-1.00

Eurozone Refi rate 0

United Kingdom Repo rate 0.1

Japan Overnight call rate 0

FX End-June 2017F

EUR vs USD USD/EUR 1.05

USD vs JPY USD/JPY 108

EUR vs JPY EUR/JPY 113.5

EUR vs GBP EUR/GBP 0.84

GBP vs USD GBP/USD 1.25

USD vs CNY USD/CNY 6.9

Equities Market Index End-June 2017F

US S&P 500 2100

Germany DAX 10300

Eurozone Eurostoxx 50 2900

Europe Stoxx 600 330

Japan MSCI Japan 800

Switzerland SMI 8150

UK FTSE 100 6200

Emerging Markets MSCI EM 830

Asia ex Japan MSCI Asia ex Japan 500

Latam MSCI Latam 2100

Commodities End-June 2017F

Gold Gold spot 1390

Oil WTI spot 55

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. ** US HY default rate assumptions: 5%; 30% recovery; EUR HY default rate assumptions: 2.5%; 30% recovery.Source: Deutsche Bank Wealth Management. As of August 1, 2016.

CIO Insights – August 2016Asset Class Forecasts17

Fixed Income Market Index End-June 2017F

U.S.

UST 2yr US 2y yield 1.00%



Municipals 10Y AAA/UST ratio 93%

US IG Corp BarCap US Credit 125bp

US HY** Barclays US HY 620bp

Securitized / MBS MTGENFCL vs. 7y UST 100bp

Europe

Schatz 2yr GER 2y yield -0.50%

Bund 10yr GER 10y yield 0.25%

Bund 30yr GER 30y yield 0.75%

Gilt 10yr UK 10y yield 1.00%

EUR IG Corp iBoxx Eur Corp all 120bp

EUR HY** ML EUR Non-Fin HY Constr. Index 500bp

Securitized / Covered iBoxx Covered 10bp

Italy 10yr* GTITL10Y 110bp

Spain 10yr* GTSEP10Y 120bp

Asia Pacific

JGB 2yr JPN 2y yield -0.30%

JGB 10yr JPN 10y yield -0.10%

Asia Credit JACI Index 290bp

Global

EM Sovereign EMBIG Div 400bp

EM Credit CEMBI 385 bp

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. * Spread over German bunds.** US HY default rate assumptions: 5%; 30% recovery; EUR HY default rate assumptions: 2.5%; 30% recovery.Source: Deutsche Bank Wealth Management. As of August 1, 2016.

CIO Insights – August 2016Glossary18

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

CTA (Commodity Trading Advisor)CTA (Commodity Trading Advisor) strategies involve trading futures contracts traded on exchanges.

ContrarianContrarian investing is an investment strategy that is characterized by going against prevailing sentiment.

Corporate Sector Purchase Programme (CSPP)The Corporate Sector Purchase Programme (CSPP) is the European Central Bank scheme for purchasing corporate bonds.

CorrelationCorrelation is a statistical measure of how markets or securities move in relation to each other.

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

DiversificationDiversification refers to the dispersal of investments across asset types, geographies and so on with the aim of reducing risk or boosting risk-adjusted returns.

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

Efficient frontierThe efficient frontier is determined by the set of portfolios that offer the highest level of expected return for a given level of risk or the lowest level of risk for a given level of expected return.


CIO Insights – August 2016Glossary19

Global Industry Classification StandardThe Global Industry Classification Standard was developed by Standard and Poor’s and Morgan Stanley Capital International (MSCI) to define equities sectors.

LiquidityLiquidity refers to the degree to which an asset or security can be bought or sold in the market without affecting the asset’s price and to the ability to convert an asset to cash quickly.

MSCI AC World IndexThe MSCI AC World Index captures large- and mid-cap companies across 23 developed and 23 emerging market countries.

MSCI ACWI ex U.S. IndexThe MSCI ACWI ex U.S. Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries (excluding the U.S.) and 23 Emerging Markets (EM) countries. With 1,859 constituents, the index covers approximately 85% of the global equity opportunity set outside the U.S.

MSCI World IndexThe MSCI World Index captures large and mid-cap representation across 23 developed-market countries.

Negative convexityNegative convexity is used to describe a bond the price of which reacts less to yield changes at lower yields than a linear function would suggest.

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

Real Estate Investment Trust (REIT)A Real Estate Investment Trust (REIT) invests in and sometimes operates income-producing real estate, either directly or through mortgages.

Risk premiaRisk premia refer to the return in excess of the risk-free rate of return that an investment is expected to yield.

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

Strategic asset allocationA strategic asset allocation process involves setting preferred allocations for asset classes on a medium to long-term time horizon.

Style investingStyle investing refers to an investor’s overall investment approach (for example a preference for certain types of stocks).

Tactical asset allocationA tactical asset allocation approach changes allocations to benefit from shorter-term market moves.

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

VolatilityVolatility measures the dispersion of returns for an individual security or market.


CIO Insights – August 2016Disclaimer20

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 –

Macroecnomics 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 macro-economical 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 August 15, 2016


Important note

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 investmentare 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.

© 2016 Deutsche Bank AG


Important note

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.

State of KuwaitThis document has been sent to you at your own request. This presentation is not for general circulation to the public in Kuwait. The Interests have not been licensed for offering in Kuwait by the Kuwait Capital Markets Authority or any other relevant Kuwaiti government agency. The offering of the Interests in Kuwait on the basis a private placement or public offering is, therefore, restricted in accordance with Decree Law No. 31 of 1990 and the implementing regulations thereto (as amended) and Law No. 7 of 2010 and the bylaws thereto (as amended). No private or public offering of the Interests is being made in Kuwait, and no agreement relating to the sale of the Interests will be concluded in Kuwait. No marketing or solicitation or inducement activities are being used to offer or market the Interests in Kuwait.

United Arab EmiratesDeutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority.

State of QatarDeutsche Bank AG in the Qatar Financial Centre (registered no. 00032) is regulated by the Qatar Financial Centre Regulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall within the scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower, West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority.

Kingdom of Saudi ArabiaDeutsche Securities Saudi Arabia LLC Company, (registered no. 07073-37) is regulated by the Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al Olaya District, P.O. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia.

United Arab EmiratesDeutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority.


Important disclosures

In the UK 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 UK.

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 judgements 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 (UK) Limited. Registered in England & Wales No 5233891.Registered Office: Winchester House, 1 Great Winchester Street, London EC2N 2DB. Deutsche Asset Management (UK) 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.

© 2016 Deutsche Bank AG


Risk Warning

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 US 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 property 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.