EFTA Document EFTA01379449

11 December 2017 Special Report EMFX Outlook 2018: Growth-led Revaluation ZAR is one of the cheapest currencies in the world on the aggregate of our three valuation metrics —Meet FUR PIPP —age CO( INN IIWy Nip Brut  Rua SOD AuD uscw,K San. DM. SOW ant able. chapat JPY TRY aerency ZAR Mn. PLN SEK EUR CAD HUE stosnow COP) PEN GOP e name a -P Pen apt* Two Pavelent to • co 1118 Mawr anal' South Africa's trade balance has moved to a record- high surplus, compressing the current account deficit • 2006 2008 2010 2012 2014 1998 3000 20)2 3004 - 2016 2018 ~SOtan Africa CuReni AMU* Balance (lb GDP), rbB —8000 Mica Trade Bane (1sS0 an. 12m amp $Uonl. Scum Opted,. Bent Alsookand Which EM currencies will lag? The main risks to EM FX are USE) strength (and FX- hedging induced by a surge in US ratusi and a (nolo dtornatic slowdown in C€:ine. In terms of timing, although dovish current pricing could trigger some bouts of rates repricing earlier in the year, we expect inflation and policy risks to build in the latter part of the year and especially in 2019 when output gaps will be much narrower. Bear in mind that QE unwinding will be very gradual with net core CB purchases until 2019. :3 our economists expect growth to slow in the first half of 2018 due to property and financial sector tightening (which is already underway). However, despite an expected slowdown from current elevated Page 8 levels, growth is forecasted to remain above 6% in Hl; moreover, it is expected to then rebound back towards 6.5% later in the year on renewed policy loosening. As such it is unlikely to derail EM FX appreciation. A repeat of - tantrum(' seems very unlikely and we see the possible bouts of repricirel as comparable rc those of 2017. EM real rates have improved this year and they will likely continue to improve in 2018. Compared to 2013, for example, real rates are higher, external imbalances reduced and FX reserves are greater. Further, real rates could rise next year for a number of EMs as there is less room for accommodation in 2018. Asia is where tightening begins, but across most EM the easing cycles are coming to a close. Higher real rates vs. 2013, especially for high-yielders it I1 4 23 0 • • 1 imp vulnerable • • • • • truffiVit .igrignearegifiri • rgim • Real *erect I7 Anal ratm•tre 13 dew band* Swat 1 Also, despite recent inflows. positioning remains a lot lighter when compared with pre-GFC and pre-tantrum levels (chart). Local markets (and equities, in particular) have yet to refill as EM grows. jai flows: Only a partial iefill post-tantrum or TONI NAPA • MANN Ram, Cumulative Iron, Itin'09 H1 IAN '13 RH, TN* (OM • equity) FICrem Cumulative Ppm Jun1304 Sep '17 taper tantrum 1200 1000 800 40D 400 200 PAIloss Octe9 0[1.10 Oct.11 Oct.14 Oct-IS Oct.16 Oct-17 an Dautsara Bank la When we narrow the focus on domestic developments, valuations or enamel vulnerabilities we believe that COP, Nit, and ILS will lag. LatAm is naturally most exposed to a China slowdown (less so MXN in this case). Deutsche Bank Securities Inc. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0076927 SDNY_GM_00223111 EFTA01379449