EFTA01458993.pdf

8 December 2015 World Outlook 2016: Managing with less liquidity Global Asset Allocation: The case for normalization Key themes and catalysts for 2016: [Fig. 1: Big neg. surprises this year... After a record rise in the dollar. 2015 saw unusually negative US data surprises 015 that were second only to 2002. Five and a half of the first six months saw a 010 010 prolonged and sustained period of negative surprises as the lagged impacts of the record rise in the dollar combined with a second severe winter and port 00 005 strikes. Following a brief period of positive surprises, the August equity market 000 002 correction saw sentiment indicators fall sharply and another two months of IIIIIII '' 005 011 negative surprises ensued. Macro data surprises were worse only in 2008. .010 t 0I0 I 2016 should see normal data surprise cycles, with a warmer winter an upside 0115 risk. The sharpest nine-month rise in the dollar against the major currencies 1;1A;i1A11;;;;;;Ifii was responsible directly for the sharp move down in manufacturing and Pasco 81.44044 Prance J. Devech• S.* *earth indirectly through the collapse in oil prices on energy-related capex. The divergence between manufacturing and resilient services has been closely tied to the pace of dollar appreciation and should begin to anniversary out with the [Fig. : reflected dollar's rise former catching back up to the much larger latter sector. —•-'A TY/1. 4-7/4581 ors Dn. —tufo .Th his Somas Pth 01517 Underlying (private) US growth has been much stronger than headline GDP Flat 050 growth rates and it has been resilient. Headline GDP growth in the US (2.0%) a a has been lowered by the shrinking government sector. With the peak in fiscal drag passed, we expect headline growth to lift towards private GDP growth 0 (3.0%) if not higher given expenditure multipliers. The US recovery has also been resilient in the face of a variety of large shocks in recent years with, for example, the labor market remaining in its 2.4% ar recovery channel. 4 4 •I0 Financial repression is reducing grom.h. rate nor:»ali:ation to raise incomes and 3'7 lower the savings rate. The traditional view that low rates represent stimulus Sou0e A444 &Vonterg Aninhe LP. Deutsche &lea Pe..tta focuses on the cost of household (HH) liabilities, but the asset side is much bigger (Are Low Rates Raising The Savings Rate?, Oct 2015). Of $100 tin of HH Fig. 3: Pvt. vs. headline growth assets, cash alone is $10 tin and lower rates mean lower interest income of 5360 flocesite. .000.11.7.117 bn (2% of GDP) before multipliers. Lowering the return on savings also raises the —Teal can 0007 US Reel 00P (01 2034 • 1001 I- savings rate (1 pp of GDP). Corporate cash holdings are 3x short-term debt so 127 IT 20% earnings should also rise with rates, especially for the Financials. grim% 122 122 EM growth re-normalization is advanced. the question is ',vhether be a 117 . 0% 117 soft or hard landing. The multi-year outperformance of EM during 2001.2010 112 II? represented a confluence of four circumstantial factors: slack following late 107 • I07 1990s crises; dollar down cycle encouraged capital inflows and credit boom; 22% dollar down cycle meant oil and commodity up cycle; interaction meant /02 IO2 appreciating exchange rates, which checked inflation and lengthened the 97 17 04803 Dec00 CM 07 0%40 0%-11 04713 0/075 cycle; each factor went into reverse in 2010-2011 and looks to have a little further to run. Our baseline view has been that the EM growth spread or Sown 81.4 Deaths Bent Rae* advantage will revert to its historical range, and we are almost there (When Will EM Stop be-rating?, Oct 2013). While EM growth has been slowing since iFig. 4: EM growth normalization the peak in 2010, the pace of deceleration slowed beginning in 2012 with the EMI/1484DM Rmi0CP Leowlh Illy 0416 •4.2 end of the European financial crisis. Our baseline view is that the pickup in 1/775008 developed markets growth, combined with the fact that EM FX has overshot 7 1% 404 0.1 ---20U —2011100080 leveeing S'''''' r : the decline in relative growth, will see a soft landing in EM. • •21)137•20.5091 • 2010.305.07 ..."...0.1171005.42 i 4 211508/447.1 The relatively typical global economic recovery continues at trend-like global GDP growth rates. Despite the angst and narrative of how weak global growth has been, 2015 marked the fourth year running of trend-like global GDP growth. Using market exchange rate weights, growth has actually been rising f since 2012 and should move at above trend next year. Asynchronous global recoveries are typical. We view the current global recovery as being like the flig*if:Ot0 1111;;; 1990s when asynchronization was the norm; not like the unusually Sans MK, Damn 1St 49.4041 synchronized 2003-07 recovery, which was the exception. Deutsche Sank AG/London Page 67 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0119174 CONFIDENTIAL SDNY_GM_00265358 EFTA01458993