to: members, investment committee i. agenda item #...

State Compensation Insurance Fund Investment Committee – November 16, 2017 Open Agenda Item 4 – Market Outlook and Economic Update

333 Bush Street San Francisco, CA 94104 (415) 263-5400 www.statefundca.com

Date: November 3, 2017

TO: MEMBERS, INVESTMENT COMMITTEE

I. AGENDA ITEM # AND TITLE : Agenda Item 4 – Market Outlook and Economic Update

II. NAME AND PROGRAM: Deutsche Asset Management III. ACTIVITY: Informational

Request for Direction Action Proposed Exploratory

IV. JUSTIFICATION: Standard/Required Item

Board Request – New Item New Topic from Staff

V. EXECUTIVE SUMMARY:

Mr. Josh Feinman, Chief Global Economist at Deutsche Asset Management will provide a broad macroeconomic update.

VI. ANALYSIS:

Mr. Josh Feinman will provide a broad macroeconomic update focusing on the U.S. The update will focus on economic growth, labor markets, inflation, monetary policy, political/policy risks and other topical broad economic themes.

Economic Outlook: Cyclically strong, structurally still challengedJosh FeinmanGlobal Chief EconomistNovember 2017

Certain information in the subsequent pages constitutes forward-looking statements. Due to various risks, uncertainties and assumptions made in our analysis, actual events or results or the actual performance of the markets covered by this presentation may differ materially from those described. The information herein reflect our current views only, are subject to change, and are not intended to be promissory or relied upon by the reader. There can be no certainty that events will turn out as we have opined herein.

Assumptions, estimates and opinions contained in this document constitute our judgment as of the date of the document and are subject to change without notice. Any projections are based on a number of assumptions as to market conditions and there can be no guarantee that any projected results will be achieved.

The information contained in this document should not be considered a recommendation to purchase, hold or sell a particular security. Past performance is not indicative of future results.

For institutional investors only. Not for use with the public.

State Compensation Insurance Fund Investment Committee - November 16, 2017 Open Agenda item 4 - Market Outlook and Economic Update

Deutsche Asset Management

U.S. outlook: The beat goes on Solid momentum; cyclical wounds largely healed; but inflation progress has slipped

2

As of: October 2017Source: CBO, IMF, OECD, DeAM

GDP growth continues to exceed diminished potential— Recent data encouraging (abstracting from the storms)

— Labor market healing continues; close to full employment, but few signs of overheating

— Inflation is the one missing piece – the one area where the economy has not met (or exceeded) expectations this year

— Looking ahead, we expect growth to remain slightly above diminished potential, allowing labor markets to complete their recovery (and perhaps even move a bit beyond full employment)

— Positive underpinnings: — Sound household and business finances— Accommodative financial conditions — Modest stimulus from washington (regulatory reform, and some

tax/spending initiatives)

— Improved global backdrop

— The expansion will become the second longest on record by Spring 2018, but is still not harboring major excesses or imbalances

— Inflation to edge gradually back toward target — Some of the recent forces holding it down seem transitory — Inflation expectations remain generally well anchored — Tightening labor markets will likely exert some modest upward

pressure — But the recovery in inflation may take longer and seems a bit less

assured than previously anticipated

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

perc

ent

Actual/projected Estimate of potential



U.S. labor market Cyclical healing nearly completed

3

As of: October 2017Source: BLS, Federal Reserve, DeAM estimates

Slack largely gone— Labor markets continue to tighten

— Job growth has moderated from break-neck pace of 2014–2015 (even abstracting from the storm effects), but still above what’s needed to keep up with trend demographics

— Slack close to depleted

— There may still be some scope to counter the demographic downtrend in participation rates and reduce the ranks of involuntary part-timers, but that scope has dwindled

— Will full employment near, job growth will eventually have to cool further to prevent overheating, though that cooling need not be abrupt or drastic, especially because labor costs are showing only modest signs of picking up

— Further acceleration in labor costs is likely, but still only gradual and modest because:

— Slack only very recently depleted (and perhaps not completely)

— The response of wages to diminished slack is modest and operates with a lag

— Productivity growth has been sluggish

— Inflation expectations remain subdued

Estimates of labor market slack

-8-6-4-202

Q1

2007

Q1

2008

Q1

2009

Q1

2010

Q1

2011

Q1

2012

Q1

2013

Q1

2014

Q1

2015

Q1

2016

Q1

2017

% o

f lab

or fo

rce

Unemployment gap Participation gap P/T workers gap Total

UR minus CBO estimate of natural rate. LFPR minus CBO estimate of trend rate .5*(P/T workers who want F/T work minus pre-recession norm)

Labor costs edging up

1.01.52.02.53.03.54.04.5

Q12007

Q32008

Q12010

Q32011

Q12013

Q32014

Q12016

Q32017

4-qu

arte

r % c

hang

e

AHE

Atlanta Fed wage tracker

ECI wages & salaries (ex. incentives)



U.S. inflation Progress has slipped this year; gradual resumption likely, but questions linger

4

As of: September 2017Source: BLS, Federal Reserve

— Underlying inflation still slightly below target

— Was moving up until recently, when several temporary factors contributed to edging it slightly down again

— Likely to resume inching up

— As slack continues to diminish, labor costs continue picking up, and the impact of transitory restraints fades

— But any acceleration is apt to remain modest and gradual

— Because the inflation process has become extremely inertial, its response to changes in slack quite modest, and inflation expectations remain well contained

— Unknowns in the inflation process

-1.5

0.0

1.5

3.0

4.5

2008:1 2009:7 2011:1 2012:7 2014:1 2015:7 2017:112-m

onth

% c

hang

e

Total Core Fed's target

-8-6-4-202468

-15-10

-505

101520

Jan-03 May-05 Sep-07 Jan-10 May-12 Sep-14 Jan-17

12-mo %

ch12-m

o %

ch

Trade-weighted $ (rhs)

Import prices ex. fuel (lhs, lagged 3 mos)

PCE prices

As $’s rise reverses, restraint on import prices is apt to fade further



Fed policy On course for continued “low and slow” removal of policy accommodation

5

As of: October 2017Source: Federal Reserve, Deutsche AM Macro Research estimates

— As long as labor markets continue to tighten, Fed policymakers will remain inclined to reduce accommodation

— But as long as inflation remains subdued, they won’t feel an urgency to move aggressively

— Fiscal policy initiatives will be factored into the Fed’s calculus, but only if and when they are enacted and begin to impact the economic outlook

— Balance sheet shrinkage has begun, as expected — It will proceed on a gradual, pre-set course, running in the background, subordinated to

the main policy lever of the funds rate, but its effects will be taken into account when the Fed sets the funds rate

— Over the next two years, balance sheet changes may substitute for ≈ 50 bps of funds rate hikes, to achieve whatever degree of policy tightening Fed deems appropriate

— Gradual rate hikes to continue — Next hike likely in Dec; followed by perhaps two more in 2018 (though three hikes more

likely than one)

— Arguing against aggressive tightening: — Lower neutral rate; recent weakness of inflation; job growth has moderated; few signs

of imminent overheating

— Arguing for some additional tightening: — With labor market close to full employment, growth continuing to run above trend, and

financial conditions accommodative, some further tightening likely needed to reduce the risk of an overshoot that could ultimately imperil the expansion

— Fed appointments: Base case is that the makeup of the Fed (including the leadership) will remain reasonably “mainstream,” with no major shifts in near-term Fed policy

— Likely candidates for Fed chair:— Yellen: Obviously offers the greatest continuity and proven expertise — Powell: Closest to Yellen in terms of continuity and views — Warsh: A bit more hawkish, a former Fed governor, was opposed to QE (though

that is less relevant now that balance sheet is on a path of reduction), and has said that inflation of 1% to 2% (rather than 2%) might be suitable

— Cohn: Little known about his monetary policy views, but he has deep financial market knowledge and would likely work within the Fed mainstream

— Taylor: Favors a more rules-based approach, but would likely be practical

0

10

20

30

40

<=(1.25-1.50)

1.50-1.75 1.75-2.00 2.00-2.25 >2.25

prob

abilit

y, %

Funds rate target at the end of 2018

Current target: 1.00 – 1.25

02004006008001,0001,200

0306090

120150180

Q42017

Q12018

Q22018

Q32018

Q42018

Q12019

Q22019

Q32019

Q42019

$ billions$ bi

llions

Treasuries MBS Total Cumulative total (rhs)

Likely Funds rate target at end of 2018

Likely runoff of Fed's balance sheet



U.S. expansion still has legs Expansions don’t die of old age

6

As of: October 2017Source: Federal Reserve, NBER, Deutsche AM Macro Research estimates

Durations of U.S. expansions— The probability of an expansion ending is independent of its duration

— “Long” expansions have no greater probability of ending than “short” ones

— Expansions die of a cause

— And the normal culprits seem largely absent right now— Private sector doesn’t seem to have overindulged in spending/lending/

borrowing/investing— Overheating pressures don’t seem likely to build intensely enough to

prompt the kind of aggressive Fed tightening that has historically killed expansions

— Economy less vulnerable to global energy shocks

— Also, expansions have been lasting longer — Four of the five longest have occurred since the early 1980s — Statistically we can reject the hypothesis that the recent four expansions

are drawn from the same distribution as the first eight of the post-WWII era in favor of the alternative that they have longer duration

— Reasons economy may be more stable:— More service oriented — Defter use of countercyclical policies— Growing prevalence of automatic stabilizers— Better inventory management — Improved safety and soundness of financial system

— None of this means recessions are obsolete

— Another one will surely occur

— Just doesn’t seem likely on a near-term horizon

37 45 3924

106

3658

12

92

120

73991

0255075

100125

1945

-'48

1949

-'53

1954

-'57

1958

-'60

1961

-'69

1970

-'73

1975

-'79

1980

-'81

1982

-'90

1991

-'00

2001

-'07

2009

-pr

esen

t

mon

ths

Fed recession probability models

Source: NBER; (1) Through Sept 2017

020406080

100

Jan-

73

Jan-

78

Jan-

83

Jan-

88

Jan-

93

Jan-

98

Jan-

03

Jan-

08

Jan-

13

perc

ent

Excess bond premium Yield curve



Downside risks to the U.S. base caseGrowth slows sharply, labor market healing stalls (or even begins to reverse), inflation slips further

7

As of: October 2017Source: Deutsche AM Macro Research

Possible catalysts: — Policy disappointment and political turmoil in Washington intensify

— But we’re not assuming much stimulus (and markets seem to have scaled back overly optimistic expectations)— Even if political/legal pressures on the Administration increase, that is likely to have only transitory economic effects (via

confidence, temporary market jitters)

— The expansion (now the third longest in history) simply runs out of steam — But expansions don’t die of old age – something kills them; and the normal catalysts (private sector overindulgence,

excessive Fed tightening) still seem largely absent

— Global shocks— But global activity looking better overall; downside risks by no means eliminated, but seem reduced

— Financial conditions tighten and begin to bite— But they’ve actually been easing; they’d have to tighten a lot and quickly to hit activity hard in next 12 months

— Inflation slips further— But some of recent dip owes to transitory factors; labor market tightening and generally stable inflation expectations should

help prevent sudden, sharp disinflation

Probability of this downside risk scenario over the next 12 months: ≈ 15% to 20%



Upside risks to the U.S. base caseGrowth picks up sharply, labor markets overheat, inflation jumps, Fed “behind the curve”

8

As of: September 2017Source: Deutsche AM Macro Research

Possible catalysts: — Bigger stimulus out of Washington than we currently expect

— Seems unlikely given the current state of politics in Washington

— “Animal spirits” kick in — We’re expecting some of this; hard to see what the catalyst would be for a lot more

— Financial conditions too accommodative — But Fed is likely to continue tightening, and the neutral rate is lower than in the past, suggesting today’s low rates may not be

as supportive of activity as they would have been in previous cycles

— Potential growth rebounds sharply— We have a slight acceleration built into our base case; hard to see what would prompt a major surge (especially on a 12-

month horizon, and given the demographic challenges)

— Inflation jumps abruptly— Unlikely given tame inflation expectations, flattish Phillips curve, and inertia in the inflation process

Probability of this upside risk scenario materializing over the next 12 months: ≈ 15% to 20%— Even if this risk case doesn’t materialize, labor markets may continue to grind tighter, pushing past full employment, especially

looking beyond the 12-month forecast horizon— This could ultimately imperil the expansion in 2019 and beyond (not least by prompting the Fed to “overtighten”)



Fed risksPotential policy errors, and uncertainty surrounding leadership change

9

— Fed tightens too much – causes economy to roll over

— But they’ve been treading very carefully, and we expect they’ll keep going quite slowly

— Despite the moves they’ve made so far, financial conditions have eased, and the economy has held up well

— Little sign they’ve over-tightened as yet

— Perhaps a risk for 2019 and beyond – but not much on 12-month horizon

— Fed tightens too little – economy overheats, inflation jumps, financial excesses boil over

— Given inertia in inflation process, benign inflation expectations, flattish Phillips curve, and only scattered, limited signs offinancial excesses, this seems quite unlikely over the 12 months

— More possible as a risk looking beyond our one-year-ahead forecast horizon, especially if labor markets continue to tighten and/or financial market risk appetite continues to build

— Fed leadership changes

— If, as we expect, any replacements for Fed leadership are well within the mainstream, that would likely be greeted with relief/calm in financial markets

— But there is a (small) risk that this Administration chooses people outside the mainstream parameters of the macro/monetary policy debate, which could cause consternation/uncertainty in financial markets

As of: October 2017



U.S. political/policy risks Areas of concern

10

— Debt ceiling/gov’t shutdown risks have been averted, for now — But they could re-emerge — In Dec for gov’t shutdown; in Spring 2018 for debt ceiling— Base case remains that they will be averted, but risk case can’t be dismissed entirely

— Tax cuts/reform may falter — We’ve long expected only modest changes to be enacted here; markets seem now to agree, but there is a risk that even that

may not happen – especially if political dysfunction in Wash persists/intensifies

— And economy doesn’t need demand-side stimulus — With full employment near, such a boost could raise the risk of overheating, possibly imperiling the expansion

— What’s needed is help on the supply side – to lift paltry potential growth

— Tax and regulatory reform could help on this front — But the effects are likely to take time to be felt, are hard to calibrate, and could easily be exaggerated – sufficient perhaps

to mitigate but not fully offset other structural drags on potential (like demographics)

— The specter of protectionism and immigration restrictions still looms, and if realized (say, through a collapse of NAFTA), would damage the economy’s potential growth

— Possibility of increased legal/political pressure on the Administration— This could jeopardize the legislative agenda, increase uncertainty in financial markets, and raise the risks that the

Administration takes rash action (e.g., on the trade/geopolitical fronts) to divert attention

As of: October 2017



Cyclical improvement is global

11

— Europe has turned the corner

— Even Japan improving

— China: Downside risks reduced, at least in the short run

— EM recovering as commodity prices find their footing

As of: October 2017



EurozoneGrowth comfortably above potential; geopolitical risks diminished, though not gone

12

As of: October 2017Source: Eurostat, Markit, Bloomberg, Deutsche AM Macro Research

Economic fundamentals solid:

— Business sentiment indicators like PMIs or consumer confidence, hard data like industrial production, orders, employment, wages in line with above potential growth

— Fiscal policy: No huge spending programmes, but rather a slower decrease in budget deficits can be expected. E.g. Italy and EC agreed on “flexibility” on budget deficit more govt spending – e.g. in Germany on defence, infrastructure/education - or less income via tax cuts (e.g. France, Germany after the elections). Political uncertainties in the EUZ slowly fading: Austrian, German elections acc to the polls not challenging regarding populist parties. Italian election, however, could cause uncertainty and thus dampen growth in 2018 – Forza Italia threatening to form coalition with Lega Nord.

— Trade: still no clarity on U.S. trade policy yet. Risk to EUZ growth due to strong exports to the USA. EUR appreciation could dampen

Inflation: Making slow progress

— Core inflation expected to move up, although slowly, as domestic demand provides support

— Headline inflation sensitive to oil, food and USD

— Inflation expectations (consumer survey) – calmed down somewhat with energy prices moving up late 2016/ beginning 2017(after building a bottom during the last year).

Eurozone PMIs

French Unemployment finally declining

45

50

55

60

Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17

PMI Composite Germany PMI Composite Italy

PMI Composite France PMI Composite Euroarea

PMI Composite Spain

6.0

7.0

8.0

9.0

10.0

11.0

03 00 03 02 03 04 03 06 03 08 03 10 03 12 03 14 03 16

French Unemployment Rate, %



U.K.Growth outlook: Inflation hits consumption, investments soon to be hit by Brexit uncertainty

13

As of: October 2017Source: Deutsche Bank AG, Barclays, Bloomberg, DeAM Macro Research

Growth — We continue to expect a modest further deceleration of household

consumption on the back of rising inflation. Also, we expect investment to decline further in 2017 and, in particular, in 2018 reflecting the uncertainty around Brexit

Inflation— The ongoing devaluation of GBP is putting upward pressure Policyon

headline inflation

Monetary Policy— Makers think that Brexit may be undermining the economy’s supply

capacity and could thus keep inflation higher — We expect the BOE to reverse the post-Brexit 25 bp rate cut, and possibly

add another hike after that — But given our subdued economic outlook, we do not expect this to be the

starting point of a hiking cycle: In general we expect rate increases to be very limited on a very shallow path

Brexit– Base Case: We continue to animate our reverse association agreement scenario (80%) in which the U.K. exits the EU through an EEA style transition agreement. While we do not yet know the final relationship, we see a soft transmission into this new setup – also reflected by our slow slowdown growth scenarioRisk Case (20%): Cliff Edge Brexit – time is running down without any solution, hard exit into WTO

0.0%

0.5%

1.0%

0.5%

1.0%

1.5%

2.0%

Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18

Q/Q % forecast (rhs) Y/Y% forecast

BoE Consesnus Y/Y

Consensus last CIO Day

-1%

0%

1%

2%

3%

4%

Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Core Food, Bev. & Tob. Energy CPI

GDP growth forecast

Inflation forecast



JapanNo longer only externally driven – domestic economy on a cyclical upswing

14

As of: October 2017Source: BoJ, MoF, DeAM Macro Research

Jobs-to-applicants ratio— Solid string of GDP increases; growth above diminished potential— Improved global backdrop is helping, but domestic demand has improved

as well— Corporate sentiment has brightened, and with that, investment has firmed — Household income and spending have recovered after sentiment

improved, thus consumption has been strong, especially among the elderly

— The labor market is cyclically tight, as suggested among other things by a very high jobs-to-applicants ratio, but structural problems (e.g., weak demographics, limited mobility) persist. Wages could rise more as growth outlook improves

Monetary policy— After Kuroda became BoJ governor in April 2013 the targets were very

clear: Higher inflation (about 2% in the medium term)— The instruments were JGB purchases and loan programs, gradually

increasing in size— “QQE with Yield Curve Control” was introduced in September 2016 under

which the 10y yield is anchored at 0% — BoJ has succeeded in breaking the deflation psychology, but not in

bringing inflation back up to 2%— We expect they will continue to try, maintaining accommodative stance

(including asset purchases and 10y yield target — Tactically, BoJ likely to put more weight on yield curve control

downplaying its purchase program and accept a somewhat weaker currency. As the total assets of BoJ reach the size of GDP, the purchase program comes under scrutiny

— Policymakers are willing to be behind the curve, thus any tightening in policy would be a story for 2018, at the earliest

BoJ balance sheet

0100200300400500600

Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

Trilli

ons

of y

en

Total assets JGBs and T-bills holding

0.00.20.40.60.81.01.21.41.6

Jan-06 Jul-07 Jan-09 Jul-10 Jan-12 Jul-13 Jan-15 Jul-16



ChinaStructural reforms help to improve the near-term outlook

15

As of: October 2017Source: National Bureau of Statistics, PBoC, :, DeAM Macro Research

Deleveraging— Capacity cuts, SOE reforms and new regulations in the financial sector are the recent steps which are positive for the economic outlook

— PBoC has changed monetary policy to tightening since the beginning of year and a deleveraging process has started in the economy. PBoC is expected to keep this policy for some time as the economic performance is encouraging and no easing is needed.

— Policymakers try to reduce leverage in the economy without disturbing investments and regulating certain new business areas at the same time – so far it has been successful, but challenges remain

— Overcapacity ion housing has been cut, but target still not achieved

— Property prices have stabilized in nearly all cities The long awaited rebalancing is underway

— As the economic growth outlook brightened in the Spring, the government started to address the SOE problem by 1) hiring private managers, 2) mixed ownership and 3) closing inefficient SOEs.

— The result is more efficient SOEs, partly reflected in the improved profit situation of industrial companies

— But here too, much reform and rebalancing still needs to be done

— Summary: China’s near-term outlook has improved, but formidable structural challenged remain

0

10

20

30

40

50

Jan-06 Jul-07 Jan-09 Jul-10 Jan-12 Jul-13 Jan-15 Jul-16

Fixed assets investment

Housing

10

15

20

25

30

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Yoy,

%

Bank credit growth has slowed



Monetary policy: Shifting gears

16

— ECB to slow QE and end it in 2018

— Bank of Canada has begun hiking

— BoE apt to reverse post-Brexit easing move

— BoJ likely to be the last to change course

As of: October 2017



Structural challenges

17

Source: IMF, OECD

Slower potential growth

Sluggish labor productivity

Weaker demographics

Rising income inequality

working-age populations (avg annual growth)

0

1

2

3

4

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Ann

ual %

cha

nge

Advanced economies (IMF) OECD economies

Euro area US

Japan

-0.10.30.71.11.51.92.32.73.1

Aust

ralia

Can

ada

Fran

ce

Ger

man

y

Italy

Japa

n

Net

h

UK

USA

vg. a

nnua

lized

gro

wth

,%

1996-2004 2005-2015Inclusive years

-0.40

0.40.81.21.6

22.4

US Other advancedeconomies

China Other emergingeconomies

perc

ent

1995-2004 2005-2015 2016-2021Inclusive years

95100105110115120125130135140

1990 1995 2000 2005 2007 2008 2009 2010 2011 2012 2013

inde

x 19

90 =

100

Top 10 % Mean income Median income Bottom 10 %

Unweighted average across 17 OECD countries

As of: October 2017



Lower neutral interest rates

18

Source: Holston, Laubach and Williams (2016). “Measuring the Natural Rate of Interest: International Trends and Determinants FRB San Francisco Working Paper (June).

— Consequence of:

— Slower potential growth

— Increased saving proclivity

— Reduced investment inclination

Estimates of the neutral rate

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

US Canada Eurozone UK

% p

er y

ear

1990 2007 2015

As of: October 2017



Consequences

19

— Monetary policy: Less accommodative than it appears

— Need higher inflation target?

— Fiscal policy: Room for more stimulus?

— Only if neutral rate has fallen by more than potential growth

— Financial market valuations

— Discount rate vs. cash flows

As of: October 2017



Backlash against globalization

20

— Manifestations

— Causes

— Consequences

— Historical parallels

As of: October 2017



Globalization slowdown

21

Source: IMF, U.S. Census

World

Free trade momentum slowing?

Global supply chains peaking?

Foreign-born population in the U.S.

0

2

4

6

8

1985-2011 2012-2015

Avg.

ann

ual %

cha

nge

Real imports Real GDP

0

1

2

3

210182634

1980 1985 1990 1995 2000 2005 2010 2015

% of all products

perc

ent

Tariffs, advanced economies (lhs)

Tariffs, emerging economies (lhs)

Global Non-tariff barriers (rhs)

Years are inclusive

3035404550556065

1995 1998 2001 2004 2007 2010 2013

perc

ent

World Advanced economies

Emerging ex. China China

Domestic content in exports reused in others’ exports + Foreign value add in exports Gross exports

02468

10121416

1860

1870

1880

1890

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

% of total population

As of: October 2017



Risk Warning

22

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.

Fixed Income – The value 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 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. 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.

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.

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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.

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Real Estate - 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.



Important information

23

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.

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.

Investing in financial markets involves a substantial degree of risk. There can be no assurance that investment ideas will achieve positive results. Investment losses may occur, and investors could lose some or all of their investment. No guarantee or representation is made that an investment idea, including, without limitation, the investment objective, diversification strategy, or risk monitoring goal, will be successful, and investment results may vary substantially over time. Investment losses may occur from time to time. Nothing herein is intended to imply that an investment may be considered "conservative", "safe", "risk free" or "risk averse". Economic, market, and other conditions could also cause investments to alter their investment objectives, guidelines, and restrictions.

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 Investment Management Agreement. When making an investment decision, you should rely on the final documentation relating to the transaction and not the summary contained herein.

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Deutsche Asset Management represents the asset management activities conducted by Deutsche Bank AG or any of its subsidiaries.

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