EFTA01379444.pdf

11 December 2017 Special Report: EMFX Outlook 2018: Growth-led Revaluation zero and they are ending the year in negative territory IFX strengthens with faster and synchronized growth (chart). As we mentioned above the USD factor was not the sole driver of returns as idiosyncratic shocks were significant especially in Turkey and South Africa. iThe year of the carry trade? Not really... SibOrt•,o:. o,,, teak Won, fon NO O 404" to P 2% 92% 2z 10 n 1% 13 6% 35 05 gg XX gg gg 47% Satre* gab* Bonk areettep roam••140. •1516 Higher growth spurs greater inflows into EM and ' 481., fine Nhtm ;NO PPP Oar PitsPe Mite ("A:i?!:; bf,rw it FM F>.. As the chart below shows, higher EM growth relative to DM is Sauce awns. 8.* Secenberg Armor LP associated with inflows into EM. This is particularly the case in LatAm, where the recovery has lagged the other EM regions but is set to accelerate in 2018. 2018: The boost of synchronized growth EMEM inflows are pro-cyclical on growth USD trillion We believe EM FX can perform well through 2018 but ,boo Total EM Nan-resident Capital Inflows with total return just short of 5% (neer 7% in LatAm. ikon EM, DM Growth Dil-f,xxvnTial.r1L, Potata:i 6 4.5% in EMEA and 3% in ASial absent the USD boost *400 of 2017. We are constructive for several reasons. 1,00 5 8000 I. Global growth is turning more supportive and 4 800 II synchronized; Portfolio inflows are pro-cyclical 3 on growth (particularly in equities); 4C! 2 200 0 ma id 2. EM EX valuations are attractive for the most part; as output gaps narrow arid external 2001 ;,00S 2000 2013 2017 vulnerabilities remain contained. monetary policy may tighten. Soiect Denbo awn - 1. The boost from growth and flows EM currencies tend to perform well during txlri(xis of it is important to highlight that EM equity allocations global growth accelei.,,Er,r1 ^,;y)c.ilv>riiratv,r1 This is ;Are 11.>v 8'.13 Ihe i. • >f the Fir.? 1? the pattern we expect to consolidate over the next (according to EPFR). As we have discussed in related year. Not only we expect global growth to inch up to a publications, EM inflows are most sensitive to the USD sound 3.9% (with EM up to 4.9%), but we also see cycle and growth and the latter should tame the impact reduced dispersion across the global economy. The of tightening US liquidity on EM FX. In contrast with shaded areas in the chart below mark periods of EM FX usual perceptions, the correlations between EM flows appreciation vs. the USD and they coincide with and core CB balance sheets or yields tend to be erratic periods of increased growth with synchronization as and small for the most part. Also, the investment cycle we forecast for the coming year. After all this seems to be gaining steam, which brings more global backdrop is associated with narrowing gaps, less trade - another boost for currencies. stimulative monetary policies in EM, stronger trade and capital flows - all positive externalities for FX. Deutsche Bank Securities Inc. Page 3 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0076922 CONFIDENTIAL SDNY_GM_00223106 EFTA01379444