TheHouseView

TheHouseView
Deutsche Bank
Deutsche Bank Research

Research
Outlook 2016 13 January 2016
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI(P) 124/04/2015

Contents
1. Outlook 2016
2. Recent market turmoil
3. A review of 2015
4. The world in 2016
5. Markets in 2016
6. Deutsche Bank forecasts
1 Outlook 2016
TheHouseView – Outlook 2016
The second half of 2015 was difficult for markets. The start of 2016 has not been any easier, with the yuan’s
devaluation reigniting concerns over China and global growth. The move comes at a particularly sensitive time: in
addition to an uninspiring macro backdrop, the first Fed hike in nearly a decade has added to market anxiety. Oil prices
fell to 12-year lows and risk assets sold-off broadly.
The magnitude of the sell-off outside of China appears exaggerated relative to macro fundamentals. We expect a
modest rise in global growth in 2016, from the slowest pace post crisis in 2015. The US and European cyclical
recoveries continue, and we expect average growth to remain stable, yet unspectacular, in both regions. Other large
advanced economies should see growth accelerate. Meanwhile, the outlook in EM remains challenging, but less deep
recessions in Russia and Brazil and an acceleration in India should see growth pick up. As for China, while the gradual
deceleration continues, fears of a sharp slowdown are overdone. Hardly an outlook worthy of the worst ever start of a
year for the S&P500.
The macro impact of the market sell-off is unlikely to push central banks into changing course. The Fed should
continue its gradual rate rises, with market pricing converging toward Fed guidance sometime this year. In the case of
the ECB, further easing in the near-term is possible given the recent decline in oil prices, but a resilient growth outlook
should keep the ECB on hold. Rather, absent further shocks there is more risk in 2016 of focus shifting to discussing a
reduction in the pace of easing.
Tactical rebounds in risk assets are possible in the short-term, but a sustainable recovery requires China uncertainty to
fade. More generally, markets in 2016 are likely to remain choppy. Dollar strength should continue, though at a more
modest pace. US and European rates should rise modestly. In equities, we see 10-15 per cent upside for the US and
Europe with both earnings growth and slightly higher valuations contributing to index gains. US credit, especially high
yield, continues to suffer from high commodity exposure, and Europe credit should outperform on more solid
fundamentals. EM assets will remain under pressure, though we do not expect 1980s-90s style EM crises.
David Folkerts-Landau, Group Chief Economist
The views in this publication are informed by Deutsche Bank’s Global Strategy Group, which advises management and
clients on broad market risks and global economic and financial developments. The views and forecasts of the group, which
Editors: Marcos Arana, Matthew Luzzetti,
consists of senior research staff, may occasionally differ from those disseminated by their research colleagues Rajni Thakur
Deutsche Bank thehouseview@list.db.com http://houseview.research.db.com 4
Research TheHouseView – 13 January 2016
Global growth to accelerate slightly in 2016 from slowest post-
crisis pace in 2015. Cautiously constructive view overall
Economic outlook Central bank watch
 Global growth to pick-up slightly in 2016 to 3.3%, from  Fed: gradual pace of hiking in 2016, with 3 hikes; pace
the slowest post-crisis pace in 2015 of hikes to accelerate in 2017. Fed to keep balance
 US modest recovery continues with growth around 2%. sheet flat this year
Weak external traction weighs against domestic  ECB: QE to continue, more easing possible but
strength unlikely. Risk of focus shifting to QE taper in H2
 Eurozone resilient but unspectacular growth continues  BoJ: like ECB, QQE to continue but no further easing
(stable around 1.5%), supported by domestic economy  BoE: first hike in Q2-2016, but risk of delay is high
 EM growth to accelerate in 2016 (from 4% to 4.4%) on  PBoC: easing to continue with interest rate cuts (2) and
shallower recessions in Russia and Brazil and RRR** cuts to support growth, reduce downside risks
acceleration in India. Gradual slowdown but no hard  EM: easing bias in Asia contrasts with end of easing /
landing* in China start of tightening cycles in LatAm & parts of CEEMEA
Views on key themes Key downside risks to our view
 Market turmoil: repeat of August 2015, with fears over  Sharp market corrections / volatility episodes, e.g.,
M
China and global growth again rattling markets. Sell-off reassessment of Fed rate hiking cycle, continued China
overdone, but sustainable recovery requires better uncertainty
visibility on China macro and China policies  China hard landing: sharper contraction of domestic
M
 China FX policy: looking to prevent yuan strength vs. demand, policy easing proves ineffective – dragging
other currencies as dollar rises, not to gain competitive down global growth
advantage. Further weakness vs. dollar, to keep yuan  Corporate credit crisis and wave of defaults, as rising
M
stable vs. basket dollar and US rates put pressure on EM corporates and
 Monetary policy: scope for market pricing of Fed hikes US HY, especially energy sector
for 2017 and beyond to converge toward Fed guidance.  Political risk escalation in Europe derails recovery (e.g.,
L
In Europe, further easing less likely than taper talk Brexit, renewed Grexit episode, unstable politics)
Deutsche Bank thehouseview@list.db.com http://houseview.research.db.com Notes: H / M / L indicates estimated probability of risk (High, Medium, Low). 5
Research TheHouseView – 13 January 2016 (*) Sharp deceleration in growth, e.g., growth falling below 5%
(**) Reserve requirement ratio for large banks
Global growth will remain low albeit slightly higher in 2016, with
Emerging Markets continuing to contribute 4/5ths of growth
Share of 2016 growth forecast: EM to contribute

Real GDP growth* (%yoy) World GDP* 3/4ths of global growth
2015 2016
Real GDP growth % contribution to
World 3.3 (% yoy) global growth
EM 4.4
DM 1.7
EM = 3/5ths of
Asia world economy,
(Ex- 6.1% 71%
US 1.8 growing at 4.4%
Japan),
37.6% and contributing
UK 2.5 4/5ths of growth
Germany 1.9
Eurozone 1.6 CEEMEA,
12.7% 1.9% 8% DM = 2/5ths of
France 1.4 world economy,
Italy Other DM, growing at 1.7%
1.4 1.8% 6% and contributing
11.5%
Japan 1.1 1/5th of growth
US,
1.8% 10%
India 17.4%
7.5
China
6.7
Eurozone, 1.6% 6%
Brazil -2.4 12.9%
Russia -0.7 LatAm, -0.1% World =3.3% 0%
7.9%
-4 -2 0 2 4 6
8
* Aggregates calculated using IMF PPP GDP weights
Source: Bloomberg Finance LP, IMF, Deutsche Bank Research
2 Recent market turmoil
The start of the year has been brutal for global markets, with
China’s devaluation versus the dollar triggering a broad sell-off
China yuan depreciated sharply against the Widening offshore / onshore yuan basis* China equities collapsed, with trading halted
dollar in the first few days of the year signalled fears of further yuan weakness twice in four days as losses reached 7%
6.1 Inverted, USDCNY 0.2 Basis at highest since 3,700 Shanghai Composite Index
September 2011
3,600
6.2 -18% since
0.1 3,500 Christmas
6.3 ~3% 3,400
6.4 3,300
0.0
3,200
6.5
~2% Offshore - onshore yuan basis 3,100
6.6 -0.1 Trading halts
3,000
Global equities sold-off: some markets (e.g., ...and oil prices fell to 12-year lows as fears
S&P 500) suffered worst ever start to year Implied volatility rose sharply… about global growth increased
DAX Estoxx MSCI FTSE S&P 30 35 40 Brent, $/bbl

Approached
30 Nikkei 50 EM 100 500 VIX Vstoxx (rhs) $30/bbl,
0 38 lowest level
25
since 2003
-2 30
36
20
-4
34
25
-6 15
-5.9 -5.8 32
-8 -7.0 -7.0 -6.8
10 20 30
-8.5 2016 YTD Nov-15 Dec-15 Jan-16 11-Dec 18-Dec 25-Dec 01-Jan 08-Jan
-10%
Note: (*) Calculated as offshore minus onshore yuan. Source: Bloomberg Finance LP, Deutsche Bank Research

These developments come at a particularly sensitive time for
markets, which explains the magnitude of the market reaction
1 Unspectacular global growth 2 Monetary policy uncertainty 3 Geopolitical tensions
 Weakest global growth post-crisis  Less than a month since first Fed  Saudi-Iran escalation
in 2015 rate rise in nearly 10 years... − Diminishes chance of
− Slowest EM growth since  ...And uncertainty over future resolution in Syria
2010, since the 90s in China path for Fed rate rises − Adds uncertainty to oil prices
 Recent US data disappointments − Big divergence between Fed  North Korea alleged H-bomb
have led to forecast downgrades guidance and market pricing − Short-term challenge to North-
 Eurozone the positive exception  Markets still digesting disappoint- South unification process
with strongest growth since 2011 ment from less-than-expected
ECB easing in December
Market anxiety

This new episode of volatility feels like “déjà vu”, a repeat of last
August, with China growth concerns again taking centre stage...
Markets’ starting premise... Challenged at start of year by... Resulting in fears that...
Disappointing  Disappointing Caixin PMIs*

China macro −Manufacturing below 50 for
data 10th straight month
−Services lowest since Jul-2014 Authorities have lost
 Largest FX reserve bleed on control
record in Nov-Dec 2015 –
“China growth will
evidence of large capital outflows
continue declining but
only gradually.  Policies introduced to contain China’s economy is
Failure of equity
Anything worse and circuit-breakers
sharp sell-offs ineffective** slowing faster than
Chinese authorities −Trading halted twice in four expected
have the ability and days after 7% equity drop
resources to fix it.”
 Sharp yuan drop vs. dollar this
Confusion over
China FX policy
month took markets by surprise We should worry
 Lack of clarity on China’s FX goal about global growth
−No buy-in into move away from
dollar peg to currency basket
−Fear that this is a competitive
devaluation to sustain growth
(see section 5 for our views on China’s FX policy)
...and like in August, concern and market reaction appear overdone

given the macro impact in China and beyond is likely to be limited
Deutsche Bank thehouseview@list.db.com http://houseview.research.db.com Note: (*) While the private Caixin PMIs disappointed, recent official PMI readings have improved. 10
Research TheHouseView – 13 January 2016 Note: (**) These circuit-breakers were suspended on 7-Jan
A sustained improvement in market sentiment requires less China
uncertainty; signals from US, Europe could also help in short-term
Triggers for resolution Comment

 Transparency on FX policy and objective – i.e., extent and intent of devaluation
 Policy clarity  Market still reluctant to buy-into PBoC story that the yuan is being devalued
Necessary
against the dollar to keep currency stable vs. basket of currencies

 Stronger macro  Need to see better data confirming that the macro picture is stable as we
China
data believe after recent data disappointments and growth concerns
 Additional monetary or fiscal easing would support economic activity and help
 Additional
abate growth concerns, but will increase pressure on FX in the absence of
policy easing
better data or capital controls
 Improving US data would reassure markets on US recovery and global

economy
 Stronger macro
US
data
 Double-edged sword: very strong data could lead to more hawkish Fed and a
Nice to have
faster US tightening cycle and would be disruptive for markets at this stage
 Dovish signals from ECB and Fed (e.g., verbal intervention) would be positive
− Though Draghi’s credibility eroded since December’s ECB under-delivery
− Fed could suggest a delay in the next hike, but recent speakers have been
Monetary  Support from
relatively hawkish
policy ECB, Fed
 Additional easing unlikely without a significant further deterioration
− Actual impact so far limited – e.g., tightening in eurozone financial conditions
less than in Aug-2015, which had little impact on subsequent macro picture
3 A review of 2015
2015 in headlines
The Guardian, 22nd Jan 2015 WSJ, 3rd Feb 2015
WSJ, 25th Feb 2015
FT, 21st Dec 2015
Dow Jones NewsPlus, 11 Mar

Reuters, 11th March 2015
Reuters, 24th April 2015

The Telegraph, 3rd July 2015
CNN, 15th July 2015 The BRICS post, 7 July 2015
CNN, 22nd Sept 2015
IB Times, 24th Aug 2015
FT, 24th Sept 2015
WSJ, 3rd Nov 2015
WSJ, 6th Oct 2015
Reuters, 16th Dec 2015

BBC, 30th Nov 2015
The Telegraph, 21st Dec 2015 FT, 21st Dec 2015

2015 in six charts
1 The eurozone was 2015’s positive growth 2 Inflation in developed markets remained 3 Expectations (and speculation) over Fed
surprise, while US and EM disappointed very low and close to zero hikes punctuated the year
Consensus 2015 GDP forecasts % yoy Market-implied probability of a Fed hike by:
5% 1.6% 3
Eurozone (rhs) US Eurozone 100%
1.4 2 80
4
EM 1.2 60
1
1.0 40
3
US 0 Jun FOMC
0.8 20
Sep FOMC
Dec FOMC
2 0.6 -1 0
Jan Mar May Jul Sep Nov 2012 2013 2014 2015 Jan Mar May Jul Sep Nov
4 Returns were materially different in the 5 The unexpected devaluation of China’s 6 Commodities remained under pressure
first months of 2015 vs. the rest of the year currency shocked financial markets especially since mid-year
30% Total return 1,850 6.1 70 USD/bbl Index 110
20 Jan-Apr Apr-Dec
10 6.2 60 100
1,750
0
-10 6.3 50 90
-20
1,650
-30 6.4 40 80
MSCI World Brent oil
-40 USDCNY (rhs, inverted) Commodity Index (rhs)
TWI*
Euro-
Bunds
Dollar
S&P500
Shanghai
Oil
US HY
MSCI
EUR
stoxx
index
credit
EM
Comp
1,550 6.5 30 70
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov
Source: Bloomberg Finance LP, Deutsche Bank Research

2015 was a volatile year with most markets closing well off highs;
robust equity returns look much less so in dollar terms
Returns per asset class in 2015

%
45
60
Equities Corporate Sovereign FX** Commodities**
35 32 Credit debt
25 19
16
15 11 10 9
10 9 5
1 0 0 1
5 1 1
0
-5 -1 -3 0 -1 -3 0
-4 -5 -5
-15 -10
-13 -14 -15 -11
-25 -20 -20
-22 -25
2015 performance
-35
Maximum return during 2015 -33 -33 -35
-45 -41
Greece Athex
Italy Milan
Japan Nikkei
Spain IBEX 35
Germany
Italy
EUR
AUD
Commodity Index
Turkey
JPY
Shanghai Composite
US IG
EU IG
US
UK
Dollar Index
CNY
RUB
BRL
GBP
Europe Stoxx 600
US S&P 500
India Nifty
MSCI EM
Brent Oil
EURCHF
TRY
Copper
Iron Ore
Brazil Bovespa
EUR HY
US HY
Portugal General
German DAX 30
UK FTSE 100
Russia Micex
Russian, European Equities EM equities fell on European HY Sovereign USD finished Euro fell as EM and Industrial metals After rallying
periphery equities closed well debt and growth outperformed; bonds just off its ECB easing commodity FX and energy led early in 2015,
outperformed; dollar shy of 2015 fears, Fed hikes, US HY hurt by finished off high as Fed crystallised Fed fell most commodities oil continued
returns much lower highs lower commodities energy sector year highs raised rates divergence versus USD lower to plummet
Note: (*) Total return accounts for both income (interest or dividends) and capital appreciation. (**) FX, Commodities are spot returns.
Source: Bloomberg Finance LP, Deutsche Bank Research. As of 31st December 2015
4 The world in 2016
Global growth should rise slightly from the slowest post-crisis
level in 2015. Most of the uptick comes from a stabilisation in EM
Global growth outlook
Eurozone: resilient but

unspectacular growth,
supported by domestic
economy. Long-term China: growth to continue
structural issues (high debt, slowing gradually, but sharp
low growth) remain slowdown to be avoided –
thanks in part to policy
easing
US: moderate recovery
continues with growth
staying around 2%. External
weakness weighs against Japan: return to trend growth
domestic strength after temporary slowdown in
2015, supported by domestic
economy. Trade contribution
muted despite weak yen
EM: growth remains weak.

Improvement to come from
less deep recessions in
Brazil and Russia, and a
2016F GDP growth (% yoy)
<0% 0-1% 1-2% 2-3% 3-5% >5% n/a
small acceleration in India

Global inflation remains near 40-year lows, but should rise
gradually in 2016 as some of the forces keeping it low fade
Global inflation remains depressed near 40-year lows  Global inflation is near 40-year lows – with the
16 %yoy exception of 2009
14  Inflation is low across the world, with a few notable
12
10
exceptions (e.g., Latin America, Russia, Turkey)
8  Opposing forces are at play, with some keeping
6 price pressure low...
4
2 − Output gaps* remain large in many countries
0 after the crisis and years of low growth
-2
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 − Falling oil and commodity prices weigh on
Estimate of CPI inflation for 34 OECD countries. Source: OECD, Haver Analytics, Deutsche Bank Research
energy and other prices
Opposing forces are at play when it comes to global inflation – − “Imported disinflation” from a slowing China and
though on balance inflation should gradually rise depreciating yuan
 ...while others push prices up
− Rising global growth, albeit slightly, should
contribute to closing output gaps
− Tightening labour markets, e.g., in the US, UK,
Germany and Japan
− FX weakness making imports more expensive
 Recent decline in oil price is pushing out the timing
of the recovery in inflation
Inflation Fading forces  But inflation should rise as disinflationary forces
fade, or simply due to base effects**
Deutsche Bank thehouseview@list.db.com http://houseview.research.db.com Note: (*) Output gap: difference between actual growth and potential growth. A large output gap 18
Research TheHouseView – 13 January 2016 denotes an economy operating below capacity. Growth below potential fails to rise price pressure
Note: (**) After one year, effect of a one-off shock to inflation disappears
Monetary policy remains supportive overall, but the expectation
of rising inflation is prompting many central banks to tighten
Monetary policy outlook
ECB: easing in the form of

QE to continue, but do not
expect increase in the pace PBoC: expect further rate
of easing (i.e., further rate cuts to support a slowing
cuts or increase in monthly economy and avoid a sharp
QE purchases) slowdown
Fed: after first rate hike in
nearly a decade, expect
Fed to continue raising
rates gradually – but faster
than current market pricing
BoJ: easing in the form of

QQE to continue, but do not
expect additional easing
absent a negative shock to
growth or inflation
EM: easing bias in Asia

Expected monetary policy stance contrasts with end of
easing / start of tightening
Tightening
cycles in LatAm and parts
On hold
of CEEMEA
Easing
n/a
Monetary policy will diverge initially in 2016 as the Fed raises
rates while the ECB and BoJ continue their QE programmes
 Monetary policy divergence between Fed and ECB Policy rate: tightening Fed…
/ BoJ at last crystallised with the Fed’s rate rise 2% Fed BoJ ECB
 In 2016 the Fed will continue gradually raising
Fed rate hikes
rates, while it keeps its balance sheet constant... contrast with low
1
 ...As the ECB and BoJ continue their QE purchases BoJ and ECB rates
and stand ready to ease more if needed

 Even if macro conditions are in some ways similar... 0
− Steady recoveries with growth around trend 2011 2012 2013 2014 2015 2016
− Inflation well below target Source: Fed, BoJ, ECB, Bloomberg Finance LP, Deutsche Bank Research
 ...There are good reasons for this policy divergence

− Tight US labour market, compared to a large
Central bank balance sheet: …versus easing BoJ and ECB
unemployment gap in the eurozone Balance sheets: BoJ
600 Index
− Fed confidence that forces holding inflation low 500
100 = Dec-2007 and ECB expansion
continues, Fed
in the US are temporary – whereas inflation 400 stays flat
risks in the eurozone are tilted to the downside 300
− Little hope to see Japan inflation rise above 1% 200
without additional easing 100
 As the year progresses, macro improvement could 0
drive a reassessment of monetary policy especially 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Fed, BoJ, ECB, Haver Analytics,
Fed BoJ ECB
in the eurozone, and a fading of policy divergence Deutsche Bank Research

US: moderate recovery continues as external weakness weighs
on domestic strength
 US moderate recovery continues with growth We forecast growth will stay near 2% over next two years
3.9
staying around 2% in 2016 4 %qoq %yoy
saar
− Domestic fundamentals are reasonably solid...
3 2.4
…Consumer fundamentals remain strong 2.0 2.2 2.1
2.4 2.4
2.1
1.8
…Housing recovery persists with upside 2 1.5
…Capex is soft but has shown signs of 1 0.5
0.6
improvement outside energy-related sectors
0
− ...But are offset by weak external traction (strong Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 14 15 16 17
dollar, muted global growth), inventory reduction 2015 2016 Actual Forecast
…External drag to start fading from H2 2016 Source: BEA, Deutsche Bank Research
− Service sector strength contrasts with weak

manufacturing
 Labour market near full employment and improving US labour market near full employment
− Unemployment rate at 5% and should fall further %
10
− Wages showing some signs of accelerating 9
 Inflation below target but should rise as transitory 8
factors (e.g., USD surge, oil price drop) fade and 7
Fed’s full employment
economy tightens further 6
estimate (4.8-5%)
5
 Longer-term, growth likely to be lower than history
4
− Economy potential growth near 2% vs. 3% pre- 2005 2007 2009 2011 2013 2015 2017
crisis – given slower growth in productivity and
Source: BLS, FOMC, Haver Analytics, Deutsche Bank Research
labour force
Fed: after the first rate rise in almost a decade, further increases
are likely, but at a slower pace than in previous cycles
Rate hikes to proceed gradually in 2016 but pick up by (or in) 2017 and Market pricing of Fed hikes is materially lower than the Fed’s
reach a higher level than the market has priced projections of a gradual pace of hikes
 Fed to raise rates gradually as it assesses Fed funds, % Previous cycles
3.5
the impact of higher rates on the economy
2016
 Moderate inflation supports gradual pace 3.0

Fed
 We expect 3 hikes – consistent with Fed 2.5 (2015 Dec)
leadership*, but one more than the market
2.0
 Reasons for gradual pace (e.g., inflation Market
low, caution exiting zero rates) begin to 1.5
Medium-
fade – so pace of hikes should accelerate

term
1.0 Lift-off
 Balance sheet reinvestment policy unlikely
to change before 2017 0.5
0.0
 Lower than in the past due to growth Dec-14 Dec-15 Dec-16 Dec-17 Dec-18
headwinds and lower potential growth...
Terminal
Source: Fed, Bloomberg Finance LP, Deutsche Bank Research

rate**
– We see neutral rate around 3%, below Hikes (bp) 2016 2017 2018
Fed’s estimate (3.25-3.5%) Market 42 38 31
 ...But higher than market pricing (i.e., ~2%) Fed 100 100 90
Previous cycles 200 100 n/a
Fed signals 200bp of hikes in

2016-17, much slower than
Note: (*) Fed leadership consists of Yellen, Fischer and Dudley. Median FOMC forecast 4 hikes in 2016
previous cycles, but double
(**) Peak Fed funds rate in a hiking cycle market pricing

Eurozone: cyclical recovery continues and we see growth steady
in 2016 – but long-term structural issues still unresolved
 Resilient but unspectacular eurozone recovery to Eurozone growth to remain steady near 1.5% over next two years
continue in 2016: with 1.6% growth, similar to 2015 2.0 %qoq, sa %yoy
1.6 1.5
 Drivers of growth continue to be domestic... 1.5
1.5
− Improving bank credit conditions 0.9

1.0
− Still low oil prices supporting consumer spend 0.5 0.4 0.4 0.4 0.4
0.5 0.4 0.3 0.4
− Fiscal easing increasing in 2016
− Very accommodative monetary policy 0.0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 14 15 16 17
 ...with external environment less supportive 2015 2016
− No contribution to growth expected from trade Source: Eurostat, Deutsche Bank Research Actual Forecast
 Individual country growth prospects are mixed

Mixed growth outlook across the eurozone: Faster growth expected
− German growth strengthening, driven by in Germany, France, Italy; slower growth in Ireland, Spain, Greece
consumption and migrant-related spending % yoy
6 2015 2016
− Growth to slow but stay high in Spain, Ireland 5
− Slow but rising growth in France, Italy 4
3 Eurozone: 1.6%
− Greece to slip into a deeper recession 2
 2016 should mark peak growth in this cycle: policy 1
0
(monetary and fiscal), oil less supportive from 2017 -1
 Longer-term growth prospects remain bleak
− Structural weaknesses remain
− Structural reform progress is slow Source: Deutsche Bank Research

European politics: political uncertainty will remain a key feature
but is unlikely to undermine European market stability in 2016
Overview of political risks in Europe
 EU political agenda in 2016
UK: Brexit not base case, but a risk Germany: refugee crisis challenge
is challenging  Referendum likely in H2-2016  Record inflow of refugees (1m+ in
 Multiple EU-level issues...  EU partners want UK to stay in EU 2015) stokes political tensions
− Migration crisis  UK likely to gain some concessions  Merkel’s position maybe weakened
− Terrorist threat from EU but not on all fronts  Immigrants offer macro upside but
− EU-Russia relations  Risk that agreement not seen as integration a challenge
sufficiently beneficial by UK voters  State elections risk political noise
− EU-UK negotiations
 ...Add to local political risks France: run up to 2017 election Greece: working toward debt relief
− Brexit referendum  Slow pace of reform to continue  Programme implementation the key
− Elections in Portugal,  Positioning for 2017 presidential focus, debt relief may be delayed
Ireland, Austria, risk of election to dominate politics  Risk of noise during negotiations
 Leading far right Front National  Reform implementation key for
repeat elections in Spain unlikely to win vote; economic
− Continuing Greece- avoiding re-escalation of crisis
recovery should help incumbent
Europe negotiations centre-left
− Run-up to France,
Germany and potentially
Italy elections in 2017
 But this shouldn’t threaten Portugal: policy uncertainty Spain: risk of new elections
European market stability  Socialist minority government  Higher political uncertainty after
supported by radical left liberals Cuidadanos under-
− Easing ECB, upside  Fiscal policy reasonably prudent – performed in general election
growth risks are positive but risk of fiscal slippage  Risk of no progress on reforms, with
− Expect unified European  Structural reform progress unlikely – tail risk of reform reversal
political response to EU- some risk of policy reversal  Catalonia independence a lingering
level risks  Political uncertainty can re-emerge risk, even if secession unlikely
Notes: Simplified map
ECB: monetary policy will remain very accommodative but no
new measures expected despite concerns about low inflation
 2015 was marked by a stepping up of ECB easing Downside risks to inflation according to ECB
− “Taboo” of sovereign QE broken during the year, High output

rate cuts further into negative gap*
− Despite disappointing markets in December,
ECB policy is very accommodative
 ECB remains concerned about low inflation and will Low oil Low
need to revise down headline inflation forecast prices / inflation
Euro
inflation
− Solid domestic growth picture not a concern expecta-
strength
− Instead, ECB is worried about external factors tions
keeping inflation low – sluggish global growth,
still falling oil prices, a euro that remains resilient
 Further ECB easing is unlikely despite low inflation
− Core inflation should rise by H2-2016 to within a Rising eurozone inflation should allow ECB to stay on hold, and
quarter of a percent of its historic average, and even signal a tapering of its asset purchases by year-end
2.0 %yoy
should rise further in 2017 and 2018 Headline HICP
− Only a material deviation from this outlook will 1.5 Core HICP
prompt further easing 1.0
− If it did ease, the ECB would opt for politically 0.5

simple moves, i.e., further deposit rate cut more 0.0
likely than higher monthly QE purchases -0.5
 In fact, we see more risk in 2016 of focus shifting to -1.0
2013 2014 2015 2016
discussing a reduction in pace of easing, i.e., a Source: ECB, Haver Analytics, Deutsche Bank Research
potential QE taper
Deutsche Bank thehouseview@list.db.com http://houseview.research.db.com Note: (*) Output gap: difference between actual growth and potential growth. A large output gap 25
Research TheHouseView – 13 January 2016 denotes an economy operating below capacity. Growth below potential fails to rise price pressure
Japan: we see the economy returning to trend growth in 2016
after a temporary soft patch. No further easing from the BoJ
Japan growth to accelerate in the second half of 2016 before falling

 Japan’s economy hit a temporary soft patch in 2015 back below 1% in 2017
%qoq, saar
but should return to trend 1-1.5% growth in 2016 5.0 4.4
%yoy
 Domestic demand should lead the pick-up in growth 4.0

3.0
− Private consumption the main driver, supported 1.5 1.8
2.0 1.4 1.1 0.8
by strong wage growth 1.0 1.0 1.0 0.7
1.0
− Non-manufacturing sector should stay resilient 0.0
-0.1
− Trade is unlikely to provide a meaningful boost -1.0 -0.5
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 14 15 16 17
despite continuing currency weakness 2015 2016 Actual Forecast
 Abenomics has clearly had some success... Source: Cabinet Office of Japan, Haver Analytics, Deutsche Bank Research
− Labour market near full employment; some early

evidence of it raising inflation pressures Core inflation** to remain resilient near 1% but will not approach the
− Core inflation has firmed and there is some risk BoJ’s 2% objective
that it will rise slightly above 1% 1.5 %yoy
 ...But despite ongoing monetary easing inflation is 1.0
unlikely to get anywhere close to BoJ’s 2% target 0.5

− QQE* (JPY80tn of asset purchases a year, 16% 0.0
of GDP) continues, while rates remain near zero -0.5 CPI Core CPI Core Core
− Further monetary policy easing unlikely unless
-1.0
there is a significant adverse shock 2012 2013 2014 2015 2016 2017 2018
Source: MIC, Haver Analytics, Deutsche Bank Research
Deutsche Bank thehouseview@list.db.com http://houseview.research.db.com Notes: (*) Quantitative and qualitative monetary easing, BoJ’s quantitative easing programme. 26
Research TheHouseView – 13 January 2016 (**) Core inflation excludes fresh food. Core-core inflation excludes food, beverages and energy.
UK: recovery continues with growth above trend but concern
over low inflation may keep BoE from raising rates
Growth to pickup modestly in 2016 before falling back toward trend

next year  UK has been the fastest growing G7 economy for
3.0 %qoq, saar %yoy 2.9 third year running in 2015
2.6
2.5 2.6 2.5 2.5 2.4 2.5  Above-trend growth to continue, supported by
2.5 2.3
2.2 consumer spending
2.0 1.8 − Rising to 2.5% in 2016 before slowing toward
1.5
1.5 trend in 2017
 But downside risks to growth have risen
1.0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 14 15 16 17 − PMIs have declined recently
2015 2016
Actual Forecast
− Deficit reduction to restrain government
Source: Office for National Statistics, Deutsche Bank Research
spending
− Net exports at risk from sterling strength, despite
Wage growth has turned down despite a continued tightening in the
labour market
recent weakening
4 SA, % (inverted) 3mma vs. year ago, SA % 5 − EU referendum uncertainty will weigh on
5 4
business investment
Tightening labour
6 market… 3
 Inflation is forecast to rise above target in 2-3 years
– but concern that inflation will stay too low remains
7 2
− Downside risks from decelerating wages, strong
8 Unemployment rate …but no wage 1
Wage growth (rhs)* pressure sterling and global disinflationary pressures
9 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 − Evidence of rising inflation needed for BoE to
Note: (*) Regular pay, private sector
turn more hawkish – risk that rate rises don’t
Source: Office for National Statistics, Haver Analytics, Deutsche Bank Research
happen until H2 or beyond
China: the structural slowdown continues, but we see growth
slowing only gradually, not sharply
The structural decline in China growth is set to continue in 2016

 China’s structural growth decline continues
8 %yoy %yoy
7.3
− Country looking to rebalance economy away
7.2
7.0
7.0 6.9 7.0
6.8
7.0 from investment / exports, to domestic demand
7 6.7 6.7
6.6
6.4 − Government to target minimum growth of 6.5%
for 2016-20, down from 7% in 2011-15 – 10%
6
growth rates of the 1990s-00s not coming back
5
− Lower growth target helps policy makers
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 14 15 16 17 balance growth and structural adjustments
2015 2016  We see growth slowing slightly in 2016 vs. 2015...
Actual Forecast
Source: China National Bureau of Statistics, Deutsche Bank Research
− 6.7% in 2016 (marginally above consensus),
down from 7% in 2015
China is looking to rebalance its economy away from investment and − Rebound in investment spending as land sales
exports and toward domestic demand, but there is little progress yet support property investment, government spend
Share of economy – impact of which is underappreciated
100% 6.2 5.0 6.1 Net exports  ...Supported by the aggressive policy easing started
80% in 2015
43.7 44.7 43.7 Investment
60% − Fiscal easing continues
40% 13.6 13.2 13.3 Public spending − Expect further monetary easing (interest rate
20% 36.4 37.1 36.9
Private and RRR* cuts) through end-2016
consumption
 Fears of a sharp slowdown are overdone and not
0%
2011 2014 2017F supported by macro data – but are understandable
Source: CEIC, Deutsche Bank Research
given lack of transparency on policy moves
Research TheHouseView – 13 January 2016 Note (*): Reserve requirement ratio for large banks.
EM: growth should improve modestly but outlook remains weak
 EM growth should rise modestly in Country outlook

2016 to 4.4%, as recessions fade in  A modest bright spot in EM, with growth expected to pick-up further,
Russia and partly in Brazil, and India led by stronger consumption demand and an investment recovery
 But the recovery is likely to remain gradual and uneven
accelerates further India  Higher inflation, fiscal drag and vulnerable financial sector pose risks
 But growth prospects remain bleak
with limited scope for monetary, fiscal  Growth momentum should strengthen slightly as exports rebound
support in many economies  Key risks from elevated private sector debt and China weakness
South Korea
 Adjustments to Fed hikes will not be  Economy in a deep recession hurt by low oil prices and sanctions
smooth, but we do not expect crises  Some evidence of a bottoming out in activity but any recovery likely
 EM growth premium over DMs has to be weak, as low oil prices will increase fiscal drag
fallen as earlier drivers (e.g., strong Russia  Oil price and geopolitics pose main risks, but are more balanced
trade, commodity boom, accelerating  Business cycle downswing should intensify as weaker demand, rising
costs squeeze corporate profits, weighing on capex and employment
China) have turned
 Risks are to the downside: weaker international trade, softer
South Africa commodity prices and a more severe drought would hurt prospects
Real GDP growth forecasts for 2016  Moderate growth as political stability and policy-driven demand offset
% yoy 2015
external headwinds
8
7.5
6.7  The key risks are capital outflows as the Fed normalises, and rising
2016
6 Turkey geopolitical uncertainty, particularly relating to Russia and Syria
EM: 4.4%
3.1 2.7
4  Political and fiscal crises helped plunge economy into deep recession
2 1.1
 Domestic demand hurt by high inflation, high interest rates, and tight
0 credit conditions
-2 -0.7  Recession should only partly fade as political uncertainty clouds
-4 -2.4 Brazil outlook by undermining fiscal adjustments, market confidence
-6
India China Turkey Mexico South Russia Brazil  Weak external demand and partial deceleration in domestic demand
Africa lead to only a gradual economic rebound, but with low inflation
Source: Deutsche Bank Research
Mexico  Benefits from structural reforms could present upside
EM adjustment to Fed hikes will not be smooth, but better
external resilience means 1980-90s style crises are unlikely
In aggregate across EM, foreign reserve buffers are substantial to

fund trade needs… … and generally high enough for servicing financing needs
16 EM reserves (months of imports) 800% Foreign reserves (% of external financing needs)
600 Increasing vulnerability
12
400
8
200 100%
4 0
0
1980 1985 1990 1995 2000 2005 2010 2015
Includes private and public external financing needs
Source: Haver Analytics, Deutsche Bank Research Source: Haver Analytics, World Bank Quarterly External Debt Statistics, National Central Banks, Deutsche Bank Research
Sovereign debt generally low and manageable. But the rise in EM

corporate debt, in many cases in hard currency, is a concern
90 EM debt as % of GDP
80
Corporates*
70
Government
60
50
40
30
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Note: (*) Non-financial corporates. Source: IIF, Deutsche Bank Research

5 Markets in 2016
.1 Themes
Market (il)liquidity: impaired liquidity will continue to be a feature
across financial markets, with volatility spikes remaining likely
Daily trading volumes as percent of outstanding stocks have come

 Sharp volatility events across asset classes have down significantly*; the fall is greatest for the Treasury market
raised concerns about market liquidity 20
20 %
− Several multi-standard deviation events in FX, 0
Equity
Treasuries, equities, ETF markets since 2014 -20
Treasuries US IG US HY US Equity
 Average liquidity during low-volatility periods is fine, -40
pointing to well functioning markets -60 -50
− Bid-ask spreads low and stable, order book -80
-60
-70
depth not unusually low 4% 0.4% 0.7% 0.6%
 But relatively benign average liquidity has proved Note (*): Change in turnover compares average daily
turnover in 12-months through Oct-2015 and 2005 (rounded).
an illusion during periods of market stress – with Source: Bloomberg Finance LP, Deutsche Bank Research xx% Trading volume as % of market size
some metrics pointing to a drying up of liquidity

relative to the very liquid pre-crisis conditions The number of very rare (5 standard deviation) volatility events has
− Market turnover** has fallen and it is more risen substantially since the crisis across a number of markets
difficult to transact in size without moving market Number of 5 standard
deviation moves Pre-crisis (2001-2006) Post-crisis (2010-2015)
 Shifts in market structure underpin the changes in
2.5x more rare events
liquidity conditions – and these are unlikely to 12 in US equities >2 more rare events
10 in European equities
reverse any time soon 8 Rare events not 2.5x more rare events
− Market structure changes in Treasuries, FX and 6 more frequent in US
Treasuries
in currencies
4
equities (e.g., more electronification)
2
− Regulatory costs/constraints in corporate bonds 0
− Reduction in number and size of dealers VIX MOVE V2X CVIX
Source: WSJ, Bloomberg Finance LP, Deutsche Bank Research
− Concentration in the buy-side
Deutsche Bank thehouseview@list.db.com http://houseview.research.db.com Note (**): Average daily trading activity relative to outstanding stock. 32
Volatility: market volatility has shifted to a new, higher volatility
regime and should stay so in 2016
 Volatility across asset classes picked up in 2015: 2015 saw an increase in volatility across asset classes – e.g., equity
higher average vol and higher number of vol spikes 30% 3m realised volatility, year avg. US equities Eurozone equities
− China-led market rout in August 25% Higher avg.

20% volatility
− Fed decision not to raise rates in September
15%
− ECB disappointment in December 10%
 Volatility is unlikely to subside in 2016: several 5%
factors should keep it higher and favour spikes 0%
− Concern of a more pronounced global slowdown 2010 2011 2012 2013 2014 2015
− Lingering uncertainty over effect and timing of

US rate rises, China growth and China policy
− Low trading liquidity Though rising, from a historical perspective volatility remains
relatively benign in most assets
 This rise in volatility comes after a period of very 100% 3m realised volatility
subdued volatility in 2013-14 for most assets Annual avg. as % of min / max annual avg. since 1991
80%
 Though rising, volatility remains relatively benign 2014 2015
60%
from a longer-term perspective
40%
− Some exceptions, e.g., euro vs. dollar, Brent oil
20%
− Volatility is far below the highs of 2011, let alone
0%
the financial crisis EUR Brent German Euro US S&P500
10Y Stoxx50 10Y

Central bank repricing: both in the US and in Europe there is
scope for markets to reassess the pricing of monetary policy
Fed: upward repricing of pace of rate hikes ECB: potential for QE taper surprise in H2
 The Fed has signalled a very gradual pace of hikes  Current focus is on potential for more ECB easing:
 Markets however are pricing an even more gradual a 10bp rate cut is almost fully priced-in by mid-year
pace – with only 2 hikes in each of 2016 and 2017  However, in H2-2016 the focus could move to
vs. 6-8 signalled by the Fed for the period discussing a tapering of QE purchases
 We expect the market to converge this year toward − In late 2016 ECB will weigh whether to extend
Fed guidance on the pace of rate rises QE beyond March 2017 or taper QE purchases
− Core inflation would have risen to a level that
 Growing confidence that the Fed is on track to
enables ECB to signal a tapering of QE
deliver on its guidance could trigger the repricing –
 This would lead to an upward repricing of European
potentially even during the first half of the year
rates, with the potential for a (milder) repeat of the
2013 Fed taper tantrum volatility*
The market is pricing a much slower pace of rate rises than Fed Eurozone two-year ahead inflation forecasts likely to rise enough by
guidance year-end for ECB to start discussing tapering asset purchases
200 Fed funds rate 2.2%
Gap between Fed guidance and market pricing, bp Policy tends to tighten Probable area of
2.0 above 1.9% forecast by H2 2016
150
1.8
100 1.6
Unconventional
1.4 policies implemented
50 below 1.6%
1.2
0 1.0
Dec-16 Dec-17 Dec-18 1999 2001 2003 2005 2007 2009 2011 2013 2015
Source: Fed, Bloomberg Finance LP, Deutsche Bank Research Source: ECB’s Survey of Professional Forecasters, Haver Analytics, Deutsche Bank Research
Deutsche Bank thehouseview@list.db.com http://houseview.research.db.com Note: (“) The Fed’s signal in May 2013 that it could consider reducing the pace of QE purchases 34
Research TheHouseView – 13 January 2016 triggered a material rise in US rates that led to several months of volatility and a sell-off in risk assets
China FX: the yuan’s outlook will remain a key market concern.
We expect a gradual devaluation, with risks on both sides
 China’s FX policy has become a focus for markets The CNY depreciations against the dollar in Aug-2015 and Jan-2016
helped keep the CNY stable against a basket of other currencies
and will remain so in 2016
106 100 = 31st Dec 2014
 PBoC introduced changes to FX policy to allow a 104
102
bigger role for markets in setting the yuan’s value... 100
+0.1%
− Yuan trades in a ±2% band around a fix set daily 98

96 CNYUSD DB CNY CFETS Basket
by PBoC, who as such can control yuan’s value 94 -5.6%
 ...And also shifted focus away from dollar and Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15
toward new index based on a basket of currencies We see highest odds of a further 5-10% depreciation in 2016, but
with significant risks in either direction
− Rising dollar meant yuan was de facto rising too
Probability 50%
− Devaluations vs. dollar in Aug-2015, Jan-2016
20% 20%
 Markets instead interpreted moves as competitive 10%
devaluations, reviving concerns about China growth
 Authorities’ reaction function is unclear – <0% 0% - 5% 5% - 10% >10%
CNY depreciation against USD in 2016
communications mishaps do not help... Source: Bloomberg Finance LP, Deutsche Bank Research
 ...But we expect the focus to be on keeping yuan “Improving the market makers’ quotation will help enhance the
stable vs. the currency basket market-orientation of RMB central parity (…) enabling the
exchange rate to play a key role in adjusting foreign exchange
− Prevent further yuan rise as dollar strengthens demand and supply.” PBoC, 11 August 2015
− See further ~8% depreciation vs. dollar in 2016

“Even though RMB has depreciated against USD since the
– but with significant risks on either side beginning of this year, it has appreciated modestly against a basket
 In any case, greater yuan volatility is the new norm of currencies. Therefore, RMB is relatively a strong currency among
the major international currencies.”
PBoC, 11 December 2015

Oil: The price fall was sharper and longer than foreseen, but
fundamentals point to a gradual recovery toward the end of 2016
Largest sustained supply-demand imbalance in years is behind 70%

 Oil prices are nearly 70% down since mid-2014, fall in oil prices. Excess supply only fades toward end-2016
falling to 11-year lows 4 Excess supply, mbpd**
Sustained
$/bbl 160
140
 The drop was driven by a material supply shock 3
2 120
− Excess supply driven by a large increase in oil 100
1
production, especially in the US 80
0
− No sign of meaningful demand slowdown, 60
-1 40
despite ongoing concerns
-2 20
 The fall was sharper and longer than expected -3
Actual Forecast Brent oil (rhs)
0
− Few expected further weakness after the 50% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Excess supply calculated as global supply minus global demand. Assumes OPEC production at 31 mbpd
drop in H2-2014 Source: International Energy Agency, Bloomberg Finance LP, Deutsche Bank Research
− But OPEC raised production by 1.2mmb/d... US production adjusted slowly to falling oil prices, peaking only in
− ...And US production decline not enough to Jul-2015 and coming down gradually, even as producing rigs fell
offset this, despite 2/3rd fall in rig count* 2.0 ‘000 rigs* Production peaked in Jul- mbpd** 10
2015 and fell very gradually…
 Short-term prospects for oil prices are uncertain... 1.6 9
− Oil is undervalued but difficult to call the bottom 1.2

US rig count 8
US oil production (rhs)
− Excess supply continues through H1-2016, -2/3rd 7
0.8
albeit at lower levels than in 2014-15 6
− OPEC still reluctant to lower output 0.4 …despite the 2/3rd fall in oil 5
rigs since the Oct-2014 peak
 ...But we should see a gradual recovery toward the 0.0 4
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
end of 2016 as excess supply fades and demand Source: Baker Hughes, EIA, Haver Analytics, Bloomberg Finance LP, Deutsche Bank Research
starts to outstrip supply

Deutsche Bank thehouseview@list.db.com http://houseview.research.db.com (*) Oil rigs give an indication of activity to find and extract oil, i.e., ahead of actual oil production. 36
Research TheHouseView – 13 January 2016 (**) mbpd = million barrels per day
Commodities outlook: Purgatory, not perdition – 15-Dec-2015
Oil: The price of oil matters because of its impact on inflation,
growth, fiscal accounts and financial markets
Crude oil at 12-year lows after 70% drop in 18 months Drop in oil prices is relevant given its impact across macro and markets
 Lower energy, transport and other costs

Lower prices  Lower inflation expectations
150 $/bbl, Brent
Easier  Room for monetary easing or less pressure
Inflation
monetary policy to tighten
 Wears-off after one year, unless oil keeps
120 Base effects falling
-50%
2014 Positive for  Equivalent to tax cut for energy consumers
90 consumers  Supports consumer and corporate spend
Growth
Negative for  Lower energy-related investment
producers  Negative spill-over to other sectors
60
Benefit for oil  Improved current accounts
-35%  Stronger currencies
Fiscal and importers
2015 external  Lower energy subsidies bill
30 position Negative for oil  Worsens fiscal and current account

12-year low exporters balances
 Weaker currencies
Equities and  Weighs on energy and related sectors

0 credit  Lower oil positive for other sectors
2003 2005 2007 2009 2011 2013 2015
 Lower long-term rates as lower inflation
Source: Bloomberg Finance L.P., Deutsche Bank Research Markets Rates expectations depress bond risk premium
 Affects oil importer and exporter currencies
FX

5 Markets in 2016
.2 Outlook per asset class
Summary
Asset class View Rationale
 10-15% upside but  S&P 500 sales, EPS should rebound – downside risks to earnings from lower oil
(given weight of energy sector), rate spikes and rapid dollar gains
Equities risks from macro
 European equities benefit from domestic cyclical recovery with low oil, improved
drivers
credit channel, weak euro and supportive monetary policy
 Long rates to drift  US long-end rates to rise gradually as market pricing for Fed hikes converges to
Fed guidance; rates could fall if economic momentum slowed by this move
higher
Rates  Europe rates should follow US rates higher, especially if ECB signals QE taper
 Partial convergence  We are passing the peak point of central bank policy divergence (i.e., tightening
between US, Europe Fed, loosening ECB) – rates should partially converge ahead
 Long USD  USD upswing to continue, though at a more moderate pace
FX  Short EUR  ECB to discourage further appreciation; outflows should continue
 Short GBP  Dovish BoE, fiscal tightening, current account deficit and EU referendum
 Fragile fundamentals, particularly in HY: aggressive debt accumulation,
 US under pressure significant exposure to energy, tightening Fed policy
Credit  Expect higher default rates in HY leading to wider spreads; prefer IG
 Europe to outperform  Fundamentals stronger in Europe, e.g., lower energy exposure, less debt
accumulation, easy monetary policy
EM  Downside but limited  Adjustment will not be smooth, but better external resilience, a gradual pace of
Fed hikes and cheaper valuations limit the downside
Commo-  Under pressure from stronger dollar, higher real yields

 Difficult outlook
dities  Supply adjustment is underway for oil, though market is oversupplied until 2017
Equities: US and European equities offer 10%+ upside but will
be vulnerable to the macroeconomic
1
landscape
1 US: end-2016 target of 2250 for the S&P 500 2 Europe: Stoxx 600 end-2016 target downgraded to 380
Headline S&P 500 earnings down 4%, but up more than 2%
excluding the energy and material sectors Stoxx 600 P/E is now below fair value after recent correction
18 12-month trailing P/E
% yoy S&P 500 earnings
S&P 500 earnings (ex energy & materials) Estimated 12-month trailing P/E
15% 16
10%
5% 14
0%
-5% 12
2012 2013 2014 2015 2013 2014 2015 2016
Note: Q4-2015 is based on estimated EPS.
Source: Haver Analytics, Bloomberg Finance LP, Datastream, Deutsche Bank Research
 2015 S&P 500 sales, EPS growth disappointed, but  Positive macro backdrop for European equities:
should rebound as sales, nominal GDP reconnect domestic cyclical recovery with low oil, improved
 Macro drivers continue to be key to the outlook credit channel and supportive FX, monetary policy
− Oil price uncertainty threatens energy profits...  And near-term scope for relief rally: market is 5%
below fair value, elevated levels of bearishness
− ...and overall S&P EPS which is reduced by...
…$1 every $5 per barrel oil decline  But downside risks over coming months from China
…$3 every 10% US dollar* gain FX policy volatility and higher rates with Fed hikes
 We prefer health care and tech – which account for  We prefer sectors benefiting from cyclical recovery
a rising share of total earnings (>35%) that have not re-rated (e.g., banks) and strong
dollar (e.g., tech); underweight those exposed to
 Stay underweight energy, industrials and materials
EM, commodities
Deutsche Bank thehouseview@list.db.com http://houseview.research.db.com Note (*): This refers to the DXY index, which is an average of the exchange rates between the 40
Research TheHouseView – 13 January 2016 US dollar and major world currencies.
Rates: long-term yields should drift higher in the US but also in
Europe
Short-end rates have diverged: Europe anchored by ECB action

 2016 marked by Fed rate rises, ongoing ECB QE (QE, low rates), while the Fed is raising rates…
 In the US, the pricing of Fed hikes is reasonable for 1.2 %
2016 – but beyond, the market prices too slow a
pace of hikes and too low a terminal rate 0.8
 There is scope for market pricing to converge 0.4

toward Fed guidance as the Fed continues hiking 0.0
− Rates to drift higher, could see US 10Y yield
-0.4
rising toward 2.75% around mid-year Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16
 In Europe, low policy rates and continued ECB QE
Source: Bloomberg Finance LP, Deutsche Bank Research US 2Y Germany 2Y
should keep rates low...
− Peripheral spreads to tighten on supportive
supply / demand dynamics due to QE extension ...But long-end rates are likely to converge partially from near-record
 ...But the potential for focus to shift to discussing a wide spreads
reduction in the pace of QE could see rates rise bps
200
− Higher long-rates in Europe – but short-end
160
rates still anchored
120
− Partial convergence in US-Europe long rates
 There are downside risks that could reverse this 80
drift higher in rates and send rates lower 40 10y yields: Treasury - Bunds
Forecast
− Negative macro impact from rising Fed rates 0
2012 2013 2014 2015 2016
− Further declines in oil prices and spikes in China Source: Bloomberg Finance LP, Deutsche Bank Research
volatility could also weigh on yields
FX: plenty of run left in the US dollar upswing
 Despite its recent surge, the dollar upswing should A re-pricing of the Fed should widen the short-rate differential (EU
vs. US) and weigh on the euro
continue, though at a more modest pace
Real rates differential 1.45
− Other G10 central banks are unlikely to tighten 0.90 should point to a weaker
euro when the market
with the Fed; indeed, many continue to ease 0.65 re-prices the Fed 1.30
0.40
 Medium-term drivers still point to euro weakness 0.15
− Short-end rate differential (EU vs. US) should -0.10 2Y real rate differential
1.15
widen as the market re-prices the Fed -0.35 (EU minus US, lhs)
-0.60 EUR/USD (rhs) 1.00
− European outflows should persist 2013 2014 2015 2016
 The yen is likely to weaken further in 2016, but this
should mark the bottom versus the dollar Source: Bloomberg Finance LP, Deutsche Bank Research
− Yen has fallen nearly 40% (vs. dollar) this cycle

− Less scope for impact from BoJ policy surprises
Many currencies close to fairly valued*; but China, UK slightly
− Limited outflows from pension fund reallocation overvalued; euro to fall despite being undervalued on these metrics
 Sterling uptrend has reached maturity % China FX
60 overvalued on Sterling is slightly
− Large fiscal tightening and twin deficits*, dovish 40 all measures overvalued Overvalued
turn by BoE, EU referendum will weigh 20

0
 In China, yuan weakness will continue over 2016 -20
− Further volatility likely to hurt commodity and EM -40 Yen and euro still Undervalued
-60 undervalued
FX, particularly in Asia
 End-2016 forecasts: EUR/USD=0.95,
USD/JPY=128, GBP/USD=1.28 Note (*): Valuation ranges based on purchasing power parity, behavioural and fundamental equilibrium
exchanges rates (BEER and FEER).
Source: Haver Analytics, Datastream, Deutsche Bank Research

Research TheHouseView – 13 January 2016 Note: (*) Twin deficits refers to budget and current account deficits.
Credit: US continues to feel pressure from high commodity
exposure; better fundamentals should help Europe outperform
US IG and HY spreads have widened substantially, but energy has

been the main underperformer  2016 is likely to be another difficult year for credit,
500bp US IG …but not nearly as
bp 1500 especially US, despite more attractive valuations
400
US HY ex-energy (rhs)
much as energy 1200
with spreads at or near multi-year highs
US HY energy (rhs)
 In the US, spreads should widen further as defaults
300 900
IG, HY ex-energy rise modestly from historically low levels
200 have widened… 600  US high yield fundamentals remain especially
100 300
fragile...
Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 − Debt accumulation has been aggressive
Spreads, Deutsche Bank cash indices
Source: Bloomberg Finance LP, Deutsche Bank Research − Low oil prices pressure energy, related sectors
− Monetary policy is becoming less supportive
More fragile fundamentals should lead HY default rates to rise more  ...And US investment grade should outperform high
rapidly in the US than in Europe
yield as a result
8% Default rate
During the crisis,
 Fundamentals are better for European credit, and
6% US HY default rates to
default rates reached
rise much more rapidly
we should see Europe outperform the US
the mid-teens
4%
than Europe HY...
− Less aggressive debt accumulation
2% − More modest exposure to energy and materials
0%
...but both should remain well below crisis-levels − Less direct exposure to rising US rates
− Continued ECB easing lends further support
Source: Moody’s, Deutsche Bank Research
US HY Europe HY

6 Deutsche Bank forecasts
DB forecasts
GDP growth (%) Key market metrics
2014 2015E 2016F 2017F Current Q2-16F Q4-16F Q4-17F

Global 3.4 3.1 3.3 3.6 US 10Y yield (%) 2.14 2.75 2.25 2.75
US 2.4 2.4 1.8 2.1 EUR 10Y yield (%) 0.54 0.75 1.10 1.50
Eurozone 0.9 1.5 1.6 1.5 EUR/USD 1.09 1.02 0.95 0.85
Germany 1.6 1.7 1.9 1.6 USD/JPY 117.8 125 128 120
Japan -0.1 0.7 1.1 0.8 S&P 500 1923.7 #N/A 2,250 2,400
UK 2.9 2.4 2.5 2.3 Stoxx 600 340.2 #N/A 380 #N/A
China 7.3 7.0 6.7 6.7 Gold (USD/oz) 1096.2 1,050 980 1,150
India 7.1 7.3 7.5 7.8 Oil WTI (USD/bbl) 31.4 50.0 50.0 57.0
EM (Asia) 6.4 6.1 6.1 6.3 Oil Brent (USD/bbl) 33.1 55.0 55.0 62.0
EM (LatAm) 0.8 -0.8 -0.1 2.2 Current prices as of 11-Jan-2016
EM (CEEMEA) 2.4 1.0 1.9 2.5

EM 4.6 4.0 4.4 4.9
DM 1.7 1.8 1.7 1.8
CPI inflation, YoY* (%) Central Bank policy rate (%)
2014 2015E 2016F 2017F Current Q2-16F Q4-16F Q4-17F

US 1.6 0.2 1.9 2.3 US 0.375 0.875 1.125 2.125
Eurozone 0.4 0.1 0.9 1.6 Eurozone 0.05 0.05 0.05 0.05
Japan 2.7 0.8 0.7 2.1 Japan 0.10 0.10 0.10 0.10
UK 1.5 0.0 1.1 1.9 UK 0.50 0.75 1.00 1.50
China 2.0 1.4 1.8 1.8 China 1.50 1.50 1.00 1.00
India 6.7 4.9 5.4 5.0 India 6.75 6.50 6.50 6.50
* CPI (%) forecasts are period averages ASIA: China, HK, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Sri Lanka, Taiwan, Thailand,
CEEMEA: Czech Rep., Hungary, Poland, Russia, Turkey, South Africa, Israel, Romania, Kazakhstan, Vietnam
Ukraine, Egypt, Saudi Arabia and UAE DM: US, Japan, Eurozone, UK, Denmark, Norway, Sweden, Canada, Australia, New Zealand, Switzerland
LATAM: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela Source: Deutsche Bank Research

DB outlook reports
World Outlook 2016 Managing with less liquidity 8th Dec. 2015
Emerging Markets EM cornered 3rd Dec. 2015
Europe Economics European Outlook 2016 11th Dec. 2015
China Economics A new REER index for RMB 5th Jan. 2016
China Economics How to think about tail risks in China 4th Jan. 2016
Global Inflation DB Inflation Report: Outlook 2016 11th Dec. 2015
Global Asset Allocation 2016 Outlook: The case for normalisation 3rd Dec. 2015
US Equity A long year ahead for the S&P 500 10th Jan. 2016
US Equity 2016 S&P Outlook: Still low yields despite Fed hikes to boost S&P PE 8th Dec. 2015
European Equity Strategy snapshot 11th Jan. 2016
European Equity 2016 sector allocation 14th Dec. 2015
Derivatives Waiting for the storm that might not come 6th Dec. 2015
FX Plenty of run left in the USD upswing 17th Dec. 2015
FX FX Blueprint: Forever Young 12th Jan. 2016
Europe Credit Credit Outlook 2016: Late cycle...but how late? 14th Dec. 2015
US Credit Year ahead Outlook 2016 8th Dec. 2015
Commodities Commodities Outlook-Purgatory, not perdition 15th Dec. 2015

Appendix 1
Important Disclosures
Additional Information Available upon Request
*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters,
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Analyst Certification
This report covers more than one security and was contributed to by more than one analyst. The views expressed in this report accurately reflect the
views of each contributor to this compendium report. In addition, each contributor has not and will not receive any compensation for providing a specific
recommendation or view in this compendium report. Marcos Arana / Matthew Luzzetti
Attribution
The Authors wish to acknowledge the contributions made by Shakun Guleria in the preparation of this report.

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Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank’s existing longer term ratings. These trade
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Deutsche Bank Research

Outlook 2016 13 January 2016

DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI(P) 124/04/2015

Share of 2016 growth forecast: EM to contribute

DAX Estoxx MSCI FTSE S&P 30 35 40 Brent, $/bbl

Deutsche Bank thehouseview@list.db.com http://houseview.research.db.com 8

1 Unspectacular global growth 2 Monetary policy uncertainty 3 Geopolitical tensions

Deutsche Bank thehouseview@list.db.com http://houseview.research.db.com 9

Disappointing  Disappointing Caixin PMIs*

...and like in August, concern and market reaction appear overdone

Triggers for resolution Comment

against the dollar to keep currency stable vs. basket of currencies

 Improving US data would reassure markets on US recovery and global

The Guardian, 22nd Jan 2015 WSJ, 3rd Feb 2015

WSJ, 25th Feb 2015

FT, 21st Dec 2015

Dow Jones NewsPlus, 11 Mar

Reuters, 24th April 2015

CNN, 15th July 2015 The BRICS post, 7 July 2015

CNN, 22nd Sept 2015

IB Times, 24th Aug 2015

FT, 24th Sept 2015

WSJ, 3rd Nov 2015

WSJ, 6th Oct 2015

Reuters, 16th Dec 2015

The Telegraph, 21st Dec 2015 FT, 21st Dec 2015

Deutsche Bank thehouseview@list.db.com http://houseview.research.db.com 13

Source: Bloomberg Finance LP, Deutsche Bank Research

Deutsche Bank thehouseview@list.db.com http://houseview.research.db.com 14

Returns per asset class in 2015

Eurozone: resilient but

EM: growth remains weak.

Deutsche Bank thehouseview@list.db.com http://houseview.research.db.com 17

ECB: easing in the form of

BoJ: easing in the form of

EM: easing bias in Asia

and stand ready to ease more if needed

 ...There are good reasons for this policy divergence

Deutsche Bank thehouseview@list.db.com http://houseview.research.db.com 20

− Service sector strength contrasts with weak

 Moderate inflation supports gradual pace 3.0

fade – so pace of hikes should accelerate

Source: Fed, Bloomberg Finance LP, Deutsche Bank Research

Fed signals 200bp of hikes in

Deutsche Bank thehouseview@list.db.com http://houseview.research.db.com 22

− Improving bank credit conditions 0.9

 Individual country growth prospects are mixed

Deutsche Bank thehouseview@list.db.com http://houseview.research.db.com 23

− “Taboo” of sovereign QE broken during the year, High output

prompt further easing 1.0

− If it did ease, the ECB would opt for politically 0.5

Japan growth to accelerate in the second half of 2016 before falling

 Domestic demand should lead the pick-up in growth 4.0

− Labour market near full employment; some early

 ...But despite ongoing monetary easing inflation is 1.0

unlikely to get anywhere close to BoJ’s 2% target 0.5

Growth to pickup modestly in 2016 before falling back toward trend

The structural decline in China growth is set to continue in 2016

 EM growth should rise modestly in Country outlook

In aggregate across EM, foreign reserve buffers are substantial to

Sovereign debt generally low and manageable. But the rise in EM

Deutsche Bank thehouseview@list.db.com http://houseview.research.db.com 30

Daily trading volumes as percent of outstanding stocks have come