Economic & Asset Class Outlook August/September 2016 Outlook Asset Management : For Institutional and Registered Rep Use Only. Not for public viewing or distribution.
Economic & Asset Class Outlook August/September 2016 Outlook Near Term Long Term World economy Monetary Policy, Inflation and FX U.S. data suggests a 3Q16 rebound. Payrolls and wages Inflation at the lower end of the Fed s target range and uneven are rising, ii housing is robust and growth will likely keep the Fed manufacturing is stabilizing. on hold until December. In Europe, manufacturing and The ECB will likely address the business sentiment data is scarcity of bonds by increasing suggesting limited near term issue limits and potentially impact from Brexit. Credit is prolonging their QE program. also gradually improving. The BoE will remain Japan manufacturing and accommodative. Further rate service sectors are struggling, cuts and fiscal stimulus likely. confidence is slipping and The BoJ should remain consumer spending is weak. accommodative with a China data suggests a 3Q16 combination of fiscal and slowdown while other EM Asia monetary stimulus to boost countries are accelerating g( (e.g. economic growth. Korea). Brazil remains in The USD should be supported recession but signs of vs. the developed markets as stabilization emerging. Fed policy diverges. U.S. growth should modestly A modest growth trajectory and accelerate as headwinds (e.g. tame inflation will likely limit the strong USD, inventory drag) Fed to raise rates two times fade, consumers are supported until June 2017. The path of by solid labor market and low hikes will be dependant on the interest rates support housing outlook for growth and inflation. and business spending. Growth differentials and Consumption, investment and diverging monetary policy government spending should support the dollar, especially support moderate growth in versus the Euro, Yen and GBP. Europe over the next 12 mos. As the EUR struggles in 2H16 Political risks a headwind. and commodities modestly rise, Japan s growth will be likely be Euro inflation should rise. sideways around potential (0% - Aggressive monetary and fiscal 0.5%) due to a strong JPY and measures by the BoJ should put weak manufacturing. pressure on the Yen. Bond markets Global sovereign yields have been range bound in recent weeks. Investors are awaiting confirmation on the next Fed rate hike and appetite for more easing from BoE, BoJ and ECB. The rise in yields in the near term should be limited due to central bank QE, modest inflation and the growing concern over a modest pullback in risky assets. We favor carry (e.g. high yield) in the near term as sovereigns offer little to no upside potential. We are neutral EM debt and favor high yield as the stabilization in oil prices has eased default concerns. The rise in long term yields over the next 12 mos will likely be muted as moderate inflation, a slow Fed tightening cycle and aggressive stimulus from the ECB, BoE and BoJ keep global sovereign yields contained. We recommend neutral duration due to the muted expected rise in yields in the near term. Focus on select credit (e.g. IG and HY). History suggests credit outperforms sovereigns in the early stages of a tightening cycle; active management recommended. EM growth should gradually China will likely cut rates and Neutral on EM debt (favor hard improve as commodity prices administer liquidity injections if currency over local) but looking rise and reforms take hold. Asia needed. Above target inflation is for attractive entry points given better potential than Latam. limiting flexibility in Brazil. the extra carry over Treasuries. Equity markets Most global Indices have rallied above or near our 12 month targets as Brexit fall out fears fade and global central banks remain accommodative. As a result, valuations are stretched and the risk for at least a modest consolidation in the near term are growing. We remain underweight European equities as they may be challenged by banking and political uncertainty. We favor the developed markets (specifically Japan) vs. the emerging g markets due to better fundamentals and more favorable monetary policy. In EM, favor Asia over Latam. Over the next 12 months, equities should be supported by a reacceleration in earnings growth, modest global growth and low interest rate environment. However, heightened volatility will offer tactical opportunities to adjust positions (e.g. regions, sectors) as warranted. As the economic cycle matures (especially in U.S.), returns should be driven by dividends, buybacks and earnings growth. We will look for opportunities to increase exposure to EM as the global interest rate environment remains supportive and growth is expected to improve. Favor Asia vs. Latam. Alternatives and Commodities Further upside in oil prices in the near term is likely limited as the supply/demand imbalance and expectation for a strong dollar remain a headwind. In addition, historically, oil prices have peaked in the summer and gradually moved lower through the remainder of the year. Gold prices remain supported by the low to negative interest rate environment and uneven global growth. However, gold prices should be challenged in the near term by the expectation for renewed strength in the dollar as we move closer to another Fed rate hike (likely December). The combination of heightened volatility, over supply and stronger dollar keeps us modestly underweight commodities. An expectation for better global growth (in 2H16 and and likely production cuts should support modestly higher oil prices (June 2017 target=$55). However, volatility should remain high. We remain cautious on gold at current levels as a strong dollar, Fed rate hikes and better global economic growth should challenge gold prices. We favor hedge funds given the expectation of more muted returns and higher volatility. Footnotes: Outlook as of August 22, 2016 Regional Investment Committee meeting. Source:
Charts of the Month August/September 2016 Core Inflation Within the Range Still Low Global Equity Valuations Stretched 2.40% 2.20% 20% 2.00% 1.80% FOMC s 2016 target inflation range 1.60% 1.40% 1.20% Inflation has entered the Fed s target range but remains at 1.00% the lower end of the range. As a result, we expect the Fed to 0.80% wait until December to raise rates further. Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Footnotes: Data as of June 2016. PCE Core (YoY %) Source: Bloomberg Finance LP,. Oil Rally Supports High Yield 200 Correlation: -0.84 $120 As crude oil has rallied, high yield default fears 300 have faded. The strong negative correlation $110 between high yield spreads (in reverse) and the $100 price of crude oil has led to strong performance 400 for high yield. $90 500 $80 $70 600 $60 700 $50 $40 800 $30 900 10/13 1/14 4/14 7/14 10/14 1/15 4/15 7/15 10/15 1/16 4/16 7/16 $20 Barclays US High Yield Spread (Left) Crude Oil ($/bbl) (Right) Footnotes: Data as of August 22, 2016. Source: FactSet,. Global equities have rallied strongly after the surprising Brexit vote. As a result, valuations are stretched with the trailing P/E of the MSCI AC World at the highest level (~20.6x) since July 2004. Footnotes: Data as of August 22, 2016. Source: FactSet,. Crude Oil Defying History 20% 15% 10% 5% 0% -5% Historically, crude oil peaks in the summer months and gradually moves lower through the remainder of the year. Despite the recent rally, oil prices will likely be challenged by a strong dollar and supply/demand imbalance in 2H16. -10% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Cumulative Performance During the Year 10 year Average (LHS) 2016 (RHS) 2015 (LHS) Footnotes: Data is as of August 22, 2016. Source: FactSet,. 50% 40% 30% 20% 10% 0% -10% -20% -30% -40%
Economic and Capital Market Forecasts August/September 2016 GDP Growth in % Currencies Current 1 12 Month Forecast World 3.3% 3.4% 12 Month Return (June USA 18% 1.8% 19% 1.9% EUR vs. USD 113 1.13 105 1.05-7.3% 73% Euroland 1.4% 1.2% USD vs. JPY 100.29 108.00 7.7% UK 1.3% 0.8% EUR vs CHF 1.09 1.05-3.6% Japan 0.5% 0.7% GBP vs USD 1.32 1.25-4.9% China 6.3% 6.0% USD vs CNY* 6.66 6.90 3.7% Inflation in % Commodities Current 1 12 Month Forecast 12 Month Return (June USA (core PCE) 16% 1.6% 18% 1.8% Oil (WTI) in USD 47 55 16.0% Euroland 0.3% 1.6% Gold in USD 1343 1390 3.5% UK 0.7% 2.6% Japan -0.2% 0.2% Equities Current 1 Dividend Yield P/E (LTM) 2 NTM P/E NTM EPS 12 Month Forecast 12 Month Return (June China 2.0% 1.5% Forecast 3 Forecast 3 USA (S&P 500) 2183 2.0% 18.78 16.75 125 2100-1.7% Curr Acct Balance Euroland (Euro Stoxx 50) 2960 3.7% 13.64 13.25 220 2900 1.7% in % of GDP Germany (DAX) 10494 27% 2.7% 13.3636 12.75 811 10300-1.9% 19% USA -2.7% -2.8% UK (FTSE 100) 6829 3.7% 17.40 14.75 420 6200-5.5% Euroland 2.9% 2.7% MSCI Japan (JPY) 788 2.3% 14.74 14.50 55 800 3.8% UK -3.9% -3.5% Asia ex Japan (MSCI in USD) 543 2.6% 14.15 13.25 37 500-5.4% Japan 2.8% 2.5% Latin America (MSCI in USD) 2452 2.7% 18.50 16.00 132 2100-11.7% China 2.5% 2.5% Sovereign Rates Current 1 12 Month Forecast 12 Month Return (June Fiscal Balance in % of GDP USA 1.54% 1.70% 0.0% USA -3.0% -3.2% Euroland (German Bund) -0.09% 0.25% -3.7% Euroland -1.9% -1.9% UK 0.56% 1.00% -3.3% UK -3.3% -3.3% Japan -0.07% -0.10% -0.4% Japan -6.0% -5.2% China -2.4% -2.5% Current Current 12-Month (Price Return Credit Coupon 1 Yield Spread 5 Estimate) 12 Month Return Key Interest Rates Current 1 12 Mo Forecast Barclays U.S. High Yield 6.56% 6.34% 497-5.1% 1.5% (Jun JPM GBI- EM Global Diversified (Local) 6.18% USA (Fed funds) 0.25% 0.75-1.00% JPM EMBIG (EM Broad Index) (Hard Currency) 339 Euroland (Refi rate) 0.00% 0.00% UK (Repo rate) 0.50% 0.10% Japan (O/N call rate) 0.00% 0.00% Footnotes: t Macro estimates t are according to Deutsche Asset Management and are as of July 2016. U.S. GDP is 4Q over 4Q. 1 Current as of August 22, 2016. 2 LTM stands for last twelve months. 3 P/E and EPS forecasts are according to Deutsche Asset &. 4 High yield spread is high yield versus five year Treasury. Source: FactSet, Deutsche Asset Management and.
Important information Larry Adam, CFA, CIMA CIO Americas Chief Investment Strategist - WM Telephone (410) 895-4135 895 4250 larry.v.adam@db.com Megan Horneman Investment Strategist Telephone (410) 895-4148 megan horneman@db com megan.horneman@db.com Matt Barry Investment Strategy Analyst Telephone (410) 895-4282 matt barry@db com matt.barry@db.com This document has been prepared for informational purposes only and is not an offer, or solicitation of an offer, to buy or sell any security, or a recommendation to enter into any transaction relating to the products and services described herein. Before entering into any transaction, you should take steps to ensure that you understand and have made an independent assessment of the appropriateness of the transaction in light of your own particular financial, legal and tax situation, investment objectives and level of risk tolerance, and you should consult your legal and tax advisers to determine how these products and/or services may affect you. does not provide tax, legal or accounting advice. This document contains forward-looking forward looking statements statements - that is, is statements related to future, future not past past, events events. In this context context, forward forward-looking looking statements often address expected future business and financial performance, and often contain words such as expect, anticipate, intend, plan, believe, seek, or will. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Particular uncertainties that could adversely or positively affect future results include: the behavior of financial markets, including fluctuations in interest and exchange rates, commodity and equity prices and the value of financial assets; continued volatility and further deterioration of the capital markets; the commercial and consumer credit environment; the impact of regulation and regulatory, investigative and legal actions; strategic actions, including acquisitions and dispositions; future integration of acquired businesses; future financial performance of major industries; and numerous other matters of national, regional and global scale, including those of a political, economic, business and competitive nature. These uncertainties may cause actual future results to be materially different than those expressed in our forward-looking statements. Although this document has been carefully prepared and is based on information from sources believed to be reliable reliable, no representation is made that it is accurate and complete complete. We have no obligation to update or amend the information provided herein, and information is subject to change without notice. Investments in Foreign Countries - Such investments may be in countries that prove to be politically or economically unstable. Furthermore, in the case of investments in foreign securities or other assets, any fluctuations in currency exchange rates will affect the value of the investments and any restrictions imposed to prevent capital flight may make it difficult or impossible to exchange or repatriate foreign currency. Emerging Markets - Such markets may be in transitional or formative stages and thus may be significantly less stable than developed markets. Changes in emerging markets government structures or other political instability may result in nationalization, expropriation, ad hoc regulation, or foreign investment restrictions. Emerging market investments are at risk for currency devaluation devaluation, as well as convertibility convertibility, liquidity and transparency constraints constraints. The high volatility and speculative nature of emerging market investments may result in both significant losses or profits. Foreign Exchange/Currency - Such transactions involve multiple risks, including currency risk and settlement risk. Economic or financial instability, lack of timely or reliable financial information or unfavorable political or legal developments may substantially and permanently alter the conditions, terms, marketability or price of a foreign currency. Profits and losses in transactions in foreign exchange will also be affected by fluctuations in currency where there is a need to convert the product's denomination(s) to another currency. Time zone differences may cause several hours to elapse between a payment being made in one currency and an offsetting payment in another currency. Relevant movements in currencies during the settlement period may seriously erode potential profits or significantly increase any losses. High Yield Fixed Income Securities - Investing in high yield bonds bonds, which tend to be more volatile than investment grade fixed income securities securities, is speculative speculative. These bonds are affected by interest rate changes and the creditworthiness of the issuers, and investing in high yield bonds poses additional credit risk, as well as greater risk of default. Commodities - The risk of loss in trading commodities can be substantial. The price of commodities (e.g., raw industrial materials such as gold, copper and aluminum) may be subject to substantial fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. Additionally, valuations of commodities may be susceptible to such adverse global economic, political or regulatory developments. Prospective investors must independently assess the appropriateness of an investment in commodities in light of their own financial condition and objectives. Not all affiliates or subsidiaries of Group offer commodities or commoditiesrelated products and services. Unless you are notified to the contrary, contrary the products and services mentioned are not guaranteed by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of. These products are subject to investment risk, including possible loss of principal. The past performance of a product or service does not guarantee or predict its future performance. Availability of alternative investments is subject to regulatory requirements. Hedge Funds - An investment in hedge funds is speculative and involves a high degree of risk. No assurance can be given that a hedge fund s investment objectives will be achieved, or that investors will receive a return of all or part of their investment. Investments in hedge funds are suitable only for persons who can afford to lose their entire investments. Before investing, prospective investors should carefully consider these risks and others, such as lack of transparency, higher fees, illiquidity, and lack of registration. "" means AG and its affiliated companies. represents the wealth management activities conducted by AG or its subsidiaries. Brokerage services are offered through Securities Inc., a registered broker-dealer broker dealer and registered investment adviser, which conducts investment banking and securities activities in the United States. Securities Inc. is a member of FINRA, NYSE and SIPC. 2016 AG. 024527. 08/24/16. I-037089-6 (8/16) REG-REP