EFTA01459601.pdf

12 January 2016 FX Blueprint: Forever Young 'South Africa: Corporate profit growth turning negative. 1ZAR undervaluation is not yet at extremes and confidence is low 25 +22% 11111 11icornin41 20 TZARTWI —Real (deflated by GDP deflator) 1510 IPPP A misalignment % 51 0 -5 0 1 -10 undervaluation I -15 1 -16 6 • -20 -22% 10 I 1994 1998 2002 2(00 2010 2014 -25- 2005 2007 2009 2011 2013 2015 120 - 255 -20 Scarce °IMO** 6.* isver.4nmec• lel - lb 1 Other EMEA high betas: neutral on TRY and RUB - 10 TRY performed poorly in 2015 as domestic political uncertainty combined with a general EM FX sell-off. 0 The focus has shifted from political uncertainty to policy direction (and quality), concern around which ss 5 comes from three sources and continues to weigh on op the lira. First, recent government comments have 2036 2007 2004 2009 2010 2011 2012 201) 2014 2015 altered market perception about intensity of political —Corsulner COntaina, . Ina 6 men) externality on the CBT or a quicker-than-expected ...Iduscross Ccotieenco R Im a 6 rrcntisi move towards executive presidency. Second, CBT credibility has likely fallen and monetary policy Scarce Deana* Bak Meccoton> uncertainty increased following the Bank's inaction at the late-December meeting, where a hike in the base For example, SARB's pre-emptive rate hike in rate and narrowing of the corridor was expected. CBT's November did not provide any material support to the pro-growth bias could imply a reluctance to maintain rand. On the other hand, SARB can allow the currency rate differentials with the US, which clearly represents to continue to be the adjustment valve to low growth a risk for TRY and for the already elevated inflation - it and external imbalances, as pass-through to inflation also likely increases TRY's beta to adverse external has thus far been limited; spot headline CPI is at 4.8% shocks. Third, geopolitical concerns have risen, YoY, well within the 3.6% target range. Further, an particularly on the deteriorating relations with Russia. aggressive hiking cycle (+170bps in 2016) is already These policy risks are somewhat offset by fundamental priced into the rates market, which we do not expect to factors: growth is expected at 3-3.5%, which is be delivered (DB forecast is for only +75bps). reasonably good compared to the rest of EM; valuations on our fundamental metrics are attractive; ;.('' t, will weigh on sentiment around carry is substantial even in vol-adjusted terms; Turkey the rand. Last month's decision to replace the fiscally- is a commodity importer with limited direct trade links prudent Finance Minister Nene has increased concerns to China. around a shift towards more populist policy, fiscal slippage, potential ratings downgrade to sub- RUB movements in the near-term will be driven by investment grade and friction in the governing ANC. crude; we therefore remain neutral for now given the VA; In' , 1 has not provided much respite to the rand in volatility and continued search for the bottom in crude. the recent past, and is unlikely to do so now with If crude stabilizes, there are some reasons to be elevated risks on both the external and domestic fronts. constructive on RUB: we expect monetary easing to be Further, in productivity-adjusted PPP terms, ZAR less aggressive than currently priced; growth and undervaluation is not yet at extreme levels, where we inflation are set to improve from a low base; valuations believe it should trade. ZAR TWI has around 6% further are attractive; double-digit carry provides a substantial depreciation to go on this metric, which implies buffer; FX reserves are large and the current account is roughly an 8% move higher in USDZAR. Additionally, in surplus; there is potential for sanctions to be lifted as global growth is currently generating only half as next year, improving capital flows and sentiment. much trade growth as in earlier periods, greater FX G8UTI M Kalani, London, .44 20754 57066 adjustment is now required to correct external imbalances. Page 12 Deutsche Bank AG/London CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0120120 CONFIDENTIAL SDNY_GM_00266304 EFTA01459601