EFTA01379449.pdf

11 December 2017 Special Report EMFX Outlook 2018: Growth-led Revaluation ZAR is one of the cheapest currencies in the world on levels, growth is forecasted to remain above 6% in Hl; moreover, it is expected to then rebound back towards the aggregate of our three valuation metrics 6.5% later in the year on renewed policy loosening. As able. such it is unlikely to derail EM FX appreciation. chapat JPY aerency TRY ZAR Mn. A repeat of - tantrum(' seems very unlikely and we see PLN the possible bouts of repricirel as comparable rc those COP) PEN of 2017. EM real rates have improved this year and CO( they will likely continue to improve in 2018. Compared stosnow INN HUE to 2013, for example, real rates are higher, external IIWy SEK imbalances reduced and FX reserves are greater. Nip CAD Further, real rates could rise next year for a number of Brut ✓ EUR EMs as there is less room for accommodation in 2018. Rua GOP e name Asia is where tightening begins, but across most EM SOD —Meet AuD a -P Two Pen apt* Pavelent to • the easing cycles are coming to a close. FUR PIPP uscw,K co 1118 Mawr anal' —age Higher real rates vs. 2013, especially for high-yielders San. DM.SOW ant it South Africa's trade balance has moved to a record- high surplus, compressing the current account deficit - I1 4 23 • 1 imp vulnerable • • • • 0 truffiVit • • .i • grignearegifiri rgim • Real *erect I7 Anal ratm•tre 13 dew band* Swat 1 Also, despite recent inflows. positioning remains a lot lighter when compared with pre-GFC and pre-tantrum • levels (chart). Local markets (and equities, in particular) 1998 3000 20)2 3004 2006 2008 2010 2012 2014 2016 2018 have yet to refill as EM grows. ~SOtan Africa CuReni AMU* Balance (lb GDP), rbB —8000 Mica Trade Bane (1sS0 an. 12m amp $Uonl. jai flows: Only a partial iefill post-tantrum or TONI NAPA • MANN Ram, Cumulative Iron,Itin'09 H1 IAN '13 Scum Opted,.Bent Alsookand RH, TN* (OM • equity) FICrem Cumulative Ppm Jun1304 Sep '17 taper tantrum 1200 Which EM currencies will lag? 1000 800 The main risks to EM FX are USE) strength (and FX- 40D hedging induced by a surge in US ratusi and a (nolo 400 dtornatic slowdown in C€:ine. In terms of timing, 200 although dovish current pricing could trigger some bouts of rates repricing earlier in the year, we expect inflation and policy risks to build in the latter part of the PAIloss year and especially in 2019 when output gaps will be Octe9 0[1.10 Oct.11 Oct.14 Oct-IS Oct.16 Oct-17 an Dautsara Bank la much narrower. Bear in mind that QE unwinding will be very gradual with net core CB purchases until 2019. When we narrow the focus on domestic developments, valuations or enamel vulnerabilities we believe that :3 our economists expect growth to slow in the COP, Nit, and ILS will lag. LatAm is naturally most first half of 2018 due to property and financial sector exposed to a China slowdown (less so MXN in this tightening (which is already underway). However, case). despite an expected slowdown from current elevated Page 8 Deutsche Bank Securities Inc. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0076927 CONFIDENTIAL SDNY_GM_00223111 EFTA01379449