EFTA01458996.pdf

8 December 2015 World Outlook 2016: Managing with less liquidity The ghosts of EM crises past: equity over•allocation to EM has been completely unwound; EM FX to have overshot the relative growth slowdown; iFigure 13: Oil near fair value R•41100011115-w 19 6 501116 USOIWO • 196' waiting for the Fed. Past EM crises occurred when US dollar up cycles (3/4 of / r1pA Gap) Son.* 190%2013%W 02% Mehl C14 the way through) coincided with US rate hiking cycles. Key difference now is USD/bbl 1.1504a 150 —Few Who 150 that EM FX has already depreciated. EM growth normalization explains well I30 t— NM Oa Pare 130 the underperformance of EM equities and fall of EM FX. EM absolute growth is 110 110 now back to the middle of its historical range while relative growth is still a bit W1 00 high. In terms of allocations, the equity over allocation to EM has been 70 70 completely unwound. Bond allocations are lower but the potential for more Bo 00 downside on a broader unwind of fixed income over allocations remains. EM a, FX has overshot. We would look to go long EM once US rates re-price for the 10 J 10 rate hiking cycle. ;I. 6 2 8 8 8 8 8 8 8 Asset allocation and trades: Stine a_anls gfN,N.3v, Dattehe Bat /Visa, Overweight equities; underweight bonds, cash and commodities, long the dollar a Within equities. we would overweight the US and Japan, neutral Europe, Figure 14: EM equity over allocation underweight EM (until Fed re-pricing). has been reversed • Expect mid-cycle price gains for US equities (+13%) on solid demand- 014 «way/low (Ctrandwee awe 20041 supply, strong underlying earnings growth as dollar drag recedes, 700 U90 an 1.156168 700 valuations slightly below fair value; similar appreciation in Europe but 600 higher risk as the largest consensus overweight and relative valuations at 500 500 400 400 the expensive end; more in Japan (+18%) as steep valuation discount 300 300 dissipates: less in EM (6%) as relative growth slows further and higher US 200 200 rates and dollar pressures spreads. 100 100 We look for higher lOy yields (+75bps) as markets gradually move toward 0 I 0 -100 •100 pricing in Fed's path of rate normalization. A higher terminal rate and risk 200 premium could mean additional pressure in the future. We are O00 .2°° 430 underweight duration and prefer HY over HG for larger spread 2004 2006 2008 2010 3012 2014 2016 compression as rates rise. Sanesra0ke.r. Oasts bat ANNA. Trades: The Fed to move faster: steepeners at the short end (EDZ7 - EDZ6) Figure 15: EM FX has overshot It's all about inflation: Short Euribor Dec 2018 futures EH .55660 gyve. atel 00 7 Equity recoveries from 10%+ corrections are strong: Long S&P 500 March 2016 risk reversals As rates catch up to the dollar: Long Financials short Energy 4 IMF rwracic., 02 Excessive defensive premium to erode: short Consumer Staples .7 W Long US-centric dollar beneficiary stocks • 77 Stay short copper: supply to add to overvaluation pressure. —5.4 mous 16-5 057151^" 72 sl -EPA FX il.458 IOW <17 2002 2016 200E 2011 2014 2017 saw. NaellIOSIVS1019•01•00"4, Orwal• Wei Romeo% Binky Chadha, (1)212 250 4776 Parag Them, (1) 212 250 6605 Raja Qua, (1) 212 250 2946 Page 70 Deutsche Bank AG/London CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0119177 CONFIDENTIAL SDNY_GM_00265361 EFTA01458996