EFTA01379445.pdf

11 December 2017 Special Report EMFX Outlook 2018: Growth-led Revaluation Equity allocations near historical lows still reduces policy imbalances (supporting ECB catch-up), which has been associated with EUR strength (chart). Absent USD strength, FX-hedging demand should Em•egung Afmkist$ tun Etre/010 WeIgn 51' 15104r CI.,. .7-4fl ea:W:0, remain subdued as long as US inflation is contained - a 22 risk likely to increase later in the year, however. 21 20 10 The USD could still be supportive in 2013 10 17 Coe of war. ofsupsOr r1 DetO•150 SlOwth 16 incre••• simclwonualion 15 Intnaan4 14 •1 I wt.:00004cl, 13 At 12 i • : 11 01 2008 Fa 2010 2011 2012 2013 2014 201$ 2016 2017 • 1 Se.50t 4/417 4444.inann.k4414, mon., Ainl, arn ETI4 Sway Onsals8•11. EPFlt stun, nAgen am/An andET44 . 01 1.1 2. EM FX valuations are still attractive 19 0.2 According to our preferred DBeer model (which models FX as a function of inflation, terms of trade and tan Deng an Olownin frnlP productivity) EM r< is needy urid,,,Norued in aggregate (chart). The overall undervaluation of EM currencies despite their appreciation relative to the USD reflects EM FX's loss of ground relative to the Which specific; DNA currencies stand out? EUR (and other GI0 currencies). Accordingly, on a trade-weighted basis (which underpins valuation estimations) the rally has been limited this year. More With valuation and growth/flows as the main tailwinds importantly, periods of significant undervaluation tend but facing rising core yields, we favour currencies to be corrected amidst higher EM growth and more where these tailwinds are stronger and those that score restrictive monetary conditions - both of which we higher on defensive metrics (i.e. are better able to expect will be in place next year as real rates also seem withstand rising core yields). to have bottomed in EM. 'Defensive' longs EM EX is still significantly undervalued Ciate •••••renentIlli7 boos. •4 — EMEA . .1•11/1111 The main macro headwind we foresee is tightening 12 iirei;rh”; or:ncle;ans on ECB tapering and Fed's divestment (amid increased supply on fiscal easing). Also, with less room to maneuver the risk of policy 4 1. rt mistakes is higher and volatility tends to increase as St • 1 liquidity tightens. In our view, as long as inflation 0 pressures are limited, sudden stops are unlikely and AE therir risEs he contained And tl.:ev.-ed to‘vard HZ Still we prefer EM currencies that are better able to EM FX unilinithad withstand shocks and perform even in more difficult external environments. .12 01 02 03 04 06 06 07 08 00 10 11 12 13 14 15 16 17 Ow 'defensive' ranking is based on three 'defensive' dimensions - real rates. FX reserves and current Sarno Ontath• an Nor. EA✓I f X sonviilb.4••• • inward •••••••••••••• • no accountibasie balance fbt.-::.; As the chart below shows, THB, RUB and BM. have among the best scores in our In addition, USD strength and hedging demand feeil 'defensive' ranking These are among our preferred EM unlikely to disrupt EM FX revaluation. DB foresees longs for 2018. We are also bullish on 1St,'" - while it is in the middle of the pack on our 'defensive' rankings, EUR/USD at 1.20 in 2018 and higher in 2019. If anything, more synchronized and faster growth its robust external balances provide strong butters, in our view. Page 4 Deutsche Bank Securities Inc, CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0076923 CONFIDENTIAL SDNY_GM_00223107 EFTA01379445