EFTA Document EFTA01477363

Crawling, not Leaping, into the New Year 2016 Ten Themes Larry Adam, CFA, CIMA Chief Investment Officer and Chief Investment Strategist Managing Director Tel: 410-895-4135 Email: [email protected] EFTA01477363 Ten Themes — 2016 1 2 3 4 5 6 7 8 9 10 Deutsche Bank Wealth Management Crawling, not Leaping, into the New Year Global Economy — No Peloton in the Tour de Global Economy Our Consumption Assumption — Shop 'til You Drop America (and World!) Monetary Policy Divergence — "Two Roads Diverged in a Wood and I Took the One Less Traveled"* Global Inflation — Germination, Examination and Protection U.S. Dollar — Downshifting its Pace Global Fixed Income— Combing the Field for Yield Global Equities —All Eyes on Earnings EM Equities — Will the EM Giants Awaken? Equity Sectors — An "Appreciation" for Innovation and Demographics Crude Oil — A "Glut"ton for Punishment.....is $55 Oil Enough? :*Source: The Road Not Taken by Robert Frost 1 EFTA01477364 Global Economy No Peloton in the Tour de Global Economy 1 2015: +2.2% 2016: +2.4% 2015: +1.4% 2016: +1.6% rjLeader of the pack. tAfter six plus years of recovery and expansion, U.S. enters late stage of business cycle. Deutsche Bank Wealth Management rqStuck in neutral. Looking for a way to breakout. V-IiUnemployment above U.S. Widest margin since Eurozone created. 2016: +1.2% 2015: +0.8% 2015: +4.2% 2016: +4.5% rliSpinning its wheels tifoday's economy is same size as it was in 1995, 2001, 2003 and 2008. $jMixed cycle. Not a well "oiled" team. $jBrazil/Russia struggle with commodity headwind as China & India downshifting. Footnotes: Forecasts as of November 2015. Emerging market growth estimate is for broad EM not just the BRIC country flags that are pictured. Source: Deutsche Bank Wealth Management. 2 EFTA01477365 Global Economy "Fab 5" Confirms U.S. Leadership Europe U.S. Withholding Tax Receipts German Exports Japan Core Machinery Orders China Electricity Demand Jobless Claims Credit Impulse ISM Production Commercial & Industrial Loans New Vehicle Sales We expect a stronger consumer, a fading of the export/fiscal/capex drag and strength in housing to support U.S. growth in 2016. Source: Deutsche Bank Wealth Management. Deutsche Bank Wealth Management 3 Belgium Manufacturing Survey Consumer Sentiment PMI Manufacturing/Services Cement Output Average Real Earnings Housing Prices Consumer Confidence Retail/Auto Sales Inflation Inflation We expect moderate to solid growth supported by monetary policy, easing fiscal drag, growing consumer demand, increasing wages and EUR depreciation. Japan's economy should be supported by aggressive monetary policy, a pick up in export activity as global growth accelerates and positive consumer momentum. Aggressive easing is likely to push inflation higher. Inflation Growth is likely to slow from 6.8% in 2015 to 6.0% in 2016. However, reform implementation and central bank flexibility should result in better long EFTA01477366 term growth prospects. EFTA01477367 Employment Conditions Improve Global Economy Jobless claims hovering near the lowest level since 2000 and withheld tax receipts growing near a record high suggest ongoing improvement in the labor market. U.S. Economic Acceleration is Underway Manufacturing Slowdown 20 30 40 50 60 70 80 Vehicle Sales Strong Footnotes: Data as of December 30, 2015. Source: FactSet, Deutsche Bank Wealth Management. Manufacturing remains the weak segment of the U.S. economy The broad Manufacturing Index and production are both in contraction territory (a level below 50). ISM Production Jan-96 Dec-99 Nov-03 Lending Improving Demand for commercial and industrial loans have been positive for 19 consecutive quarters. ISM Index Oct-07 Sep-11 Footnotes: Data as of December 2015. Source: Bloomberg Finance LP, Deutsche Bank Wealth Management. Aug-15 Vehicle sales are at the highest level (-18 million annual rate) since 2005. Footnotes: Data as of November 2015. Source: FactSet, Deutsche Bank Wealth Management. Footnotes: Data as of 3Q15. Source: FactSet, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management 4 EFTA01477368 Making History? Major U.S. Election Topics Global Economy Elections Favorable for Equities 0 1 2 3 4 5 6 7 8 9 44-52 52-60 60-68 68-76 76-80 80-88 88-92 92-00 00-08 08-16 S&P 500 Return 12 months Leading up to Presidential Election Day — If a Democrat becomes the next U.S. President, it would be only the second time since the end of WWII that one party has held the White House for more than eight years. — Out of the 20 Presidential elections since 1936, the S&P 500 has been positive 17 times (85%) in the 12 months leading up to the election. — On average, the S&P 500 is up 9% in the 12 months leading up to the Presidential election day. 2012 2008 2004 2000 1996 1992 1988 1984 1980 1976 1972 1968 1964 1960 1956 1952 1948 1944 1940 1936 -40% -30% Recessions -20% -10% 0% EFTA01477369 10% 20% 30% 40% Footnotes: Data is 1944-2016 Presidential terms. Red is republican, blue is democrat President. Source: Deutsche BankWealth Management. Footnotes: Data reflects S&P 500 performance in the 12 months leading up to the election cycles from 1936-2012. Source: FactSet, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management 5 # of years of Presidential Term EFTA01477370 Shop 'til You Drop America (and the World!) Our Consumption Assumption 2 Solid Global Confidence 100 110 120 60 70 80 90 Mar-04 Nov-05 Jul-07 Mar-09 Nov-10 Jul-12 Mar-14 Nov-15 Global Consumer Confidence* — Global consumer confidence has continued to improve and is hovering at pre-crisis highs. — In addition, the Chinese consumer is becoming a bigger contributor to growth. From 2009 to 2030, the Chinese middle class is expected to grow from 11% to 72% of the total population. — Better U.S. spending, increased spending from the Chinese economy and a better European economy support the global consumer discretionary sector. Footnotes: *Global consumer confidence is the average of U.S., Japan, China and Europe. Data is most recent available as of November 2015. Source: Bloomberg Finance LP, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management Management. Chinese Middle Class Growing 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Poor Middle Class 2009 2020 2030 Europeans Spending Again Source:World Bank, Deutsche Bank Global Markets, Deutsche Bank Wealth -25.0% -20.0% -15.0% EFTA01477371 -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% Jun-04 Dec-05 Jun-07 Dec-08 Jun-10 Dec-11 Jun-13 Dec-14 Europe New Passenger Car Registrations (6 Mo Moving Average) (LHS) Eurostat Retail Sales (YoY) (RHS) Footnotes: Data is monthly and most recent as of December 2015. Source: Bloomberg Finance LP, Deutsche Bank Wealth Management. 6 -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% Rich EFTA01477372 Shop 'til You Drop America (and the World!) Our Consumption Assumption Healthy Consumer Balance Sheet 9.0% 9.5% 10.0% 10.5% 11.0% 11.5% 12.0% 12.5% 13.0% 13.5% Jun-80 Jun-87 Jun-94 Jun-01 Household Debt Service Ratio — Americans are healthier from a balance sheet perspective than they have been on record. — In addition, gasoline prices have declined —$0.80 from their June 2015 high. It is a general rule of thumb that for every $0.01 decline in gasoline prices equates to —$1 billion in extra spending power annually. — Lastly, there are signs that wage growth is materializing with average hourly earnings accelerating. Footnotes: Data is as of 3Q15. Source: Bloomberg Finance LP, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management Jun-08 Jun-15 Gasoline Prices Remain Low $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 $3.5 $4.0 $4.5 U.S. Regular Retail Gasoline Prices Dollars per Gallon Oct-90 May-94 Dec-97 Jul-01 Feb-05 Sep-08 EFTA01477373 Apr-12 Footnotes: Data is monthly and as of December 31, 2015. Source: Bloomberg Finance LP, Deutsche Bank Wealth Management. Wages Slowly Picking Up 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% Mar-07 May-09 Jul-11 Sep-13 Average Hourly Earnings (YoY%) (AVG) Average Hourly Earnings (YoY%) Footnotes: Data is as of November 2015. Source: Bloomberg Finance LP, Deutsche Bank Wealth Management. 7 Nov-15 Nov-15 EFTA01477374 Our Consumption Assumption Shop 'til You Drop America (and the World!) Conscientious Consumer New Spending Process Social Media to Advertise Smartphone Apps for Shopping Processors for the Transaction Services to Deliver Source: marketoonist.com, Deutsche Bank Wealth Management. Source: Deutsche Bank Wealth Management. Deutsche Bank Wealth Management 8 EFTA01477375 Our Consumption Assumption Shop 'til You Drop America (and the World!) Key Trends to Continue in 2016 Internet & Catalog Retail Department Stores Mobile Spending Skyrocketing Hotel Restaurants and Leisure Home Improvement Retail Apparel 0% 10% 20% 30% 40% 50% 60% 70% 80% 3013 3Q15 70% 26% 13% 5% 8% 1% Total Discretionary Retail e-Commerce Footnotes: Data as of 3015. Source: Comscore, Deutsche Bank Wealth Management. Real Spending on Tourism Automobile Manufacturers Automotive Retail Broadcasting Advertising -50.0% -25.0% 0.0% 25.0% 50.0% 75.0% 100.0% 2015 Total Return Real Spending on Travel and Tourism Footnotes: Data as of December 31, 2015. Source: Bloomberg Finance LP, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management Footnotes: Data as of 3015. Source: bea.gov, Deutsche Bank Wealth Management. 9 $600,000 $650,000 $700,000 $750,000 $800,000 $850,000 1098 EFTA01477376 Real spending on travel and tourism reached a record high $839 billion in 3Q15. m-Commerce 3Q00 1Q03 3Q05 1Q08 3Q10 1Q13 3Q15 EFTA01477377 3 Monetary Policy Divergence "Two Roads Diverged in a Wood, and I Took the One Less Traveled." Fed Getting off the Bandwagon 2,000 4,000 6,000 8,000 10,000 12,000 0 2006 2008 2010 2012 Still Plenty of Liquidity* 100 150 200 250 50 0 2008 2009 BoE 2010 2011 Fed 2012 BoJ 2013 2014 ECB 2015 Total 2016 Footnotes: Estimate as of December 2015. *Combined QE programs. Source: Deutsche Bank Global Markets, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management USD bln USD bln 100 150 200 250 50 0 2014 2016 Fed BoJ EFTA01477378 ECB +26% +24% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% -1% ECB BoE Japan Fed and BoE Normalizing U.S. Taking the Lead Jan-09 Dec-09 Nov-10 Oct-11 Sep-12 Aug-13 Jul-14 Jun-15 May-16 Fed — The Fed and BoE are moving towards normalizing interest rate policy while most other developed central banks will likely remain accommodative. — The three major DM central bank balance sheets are expected to rise by 16% in 2016. — While the Fed balance sheet is expected to be flat to slightly lower in 2016, the BoJ and ECB are expected to increase their balance sheets by over 20%. Footnotes: Data is monthly and as of December 2015. 2016 estimates as of November 2015. Source: Bloomberg Finance LP, Deutsche Bank Wealth Management. 10 EFTA01477379 Monetary Policy Divergence "Two Roads Diverged in a Wood, and I Took the one Less Traveled." Fed Takes off Training Wheels Expect More Volatility Tightening Cycle 3/84-8/84 12/86-9/87 3/88-2/89 2/94-2/95 6/99-5/00 6/04-6/06 Average # of Day 147 262 332 363 321 729 359 3-4.99% 5.00-9.99% 10% or More 2 0 1 1 0 2 1 1 3 3 3 4 4 3 S&P 500 Pullbacks — As the Fed has taken the "training wheels" off the U.S. economy, we expect increased volatility. — When looking at the most recent tightening cycles, they last, on average, one year and see at least one S&P 500 pullback of 3-5% and three pullbacks of 5-10%. — The only tightening cycle that experienced a more than 10% decline was in 2000. Footnotes: Chip Bok Editorial Cartoon used with the permission of Chip Bok and Creators Syndicate. All rights reserved. Source: The Cartoonist Group, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management EFTA01477380 Footnotes: Time period is considered a tightening cycle when the Fed raises rates three or more consecutive times. The tightening cycle is considered over at the last rate hike. # of days is calendar days. S&P 500 price only. Source: Bloomberg Finance LP, Deutsche Bank Wealth Management. 11 0 0 0 0 1 0 0 Average of all Pullbacks -5.2% -6.4% -6.3% -6.0% -9.2% -5.7% -6.5% EFTA01477381 4 Global Inflation Germination, Examination & Protection Deciphering Inflation -3 -2 -1 0 1 2 3 4 5 1997 2000 2004 CPI Services Inflation (% YoY) Core CPI (% YoY) 2008 2012 CPI Goods Inflation (% YoY) 2015 U.S. Labor Costs Picking Up 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 1001 1003 1005 1007 1Q09 1011 1013 Employment Cost Index (YoY %) (LHS) NFIB Small Business Compensation Plans (RHS) — While headline and core inflation remain below the Fed's target range, it is important to note that the drag on inflation is primarily from the goods sector. — In fact, service inflation (which makes up the bulk of personal spending) is rising at the fastest pace (+2.9% YoY) since November 2008. Footnotes: Data as of November 2015. Source: Bloomberg Finance LP, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management EFTA01477382 — Historically, there has been a strong correlation between the NFIB Small Business Compensation Plans Index and the Employment Cost Index. — In November, the Small Business Compensation Plans rose to the highest level since November 2006. 1015 10 15 20 25 0 5 Footnotes: Time period reflects 1Q01 to 4015. 4Q15 is as of November 2015. Source: Bloomberg Finance LP, Deutsche Bank Wealth Management. 12 in percentage terms EFTA01477383 Global Inflation Germination, Examination & Protection REITs: Occupancy Rates High 86% 87% 88% 89% 90% 91% 92% 93% 94% With occupancy rates at the highest levels since the 1990's, REITs should be well supported. REITs Pricing Power '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 Rental Occupancy Rate, Percent - United States Rental Occupancy Rates, 5 Units Or More, Percent - United States Footnotes: Data is quarterly and as of 3015. Source: FactSet, Deutsche Bank Wealth Management. Low Inflation Supportive of REITs -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% Since 1972, when CPI is between 1-3%, REITs rise, on average, 18% (YoY) and are positive 87% of the time. 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% Less than 0 0-1% 1-3% 3%+ FTSE NAREIT (YoY %) Given Level of CPI (YoY %) (LHS) % of the Time Positive (RHS) Footnotes: Time period is December 1972-November 2015. CPI is headline CPI. Source: FactSet, Bloomberg Finance LP, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management Footnotes: Time period is 4Q72-3015. Quarterly year over year GDP. EFTA01477384 Source: FactSet, Deutsche Bank Wealth Management. 13 -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% Dec-83 Nov-91 Owners Equivalent Rent Rental prices, as seen by owners' equivalent rent, are moving higher which suggests positive pricing power in real estate. Oct-99 Sep-07 (AVG) Owners Equivalent Rent Footnotes: Data as of November 2015. Source: Bloomberg Finance LP, Deutsche Bank Wealth Management. REITs and Economic Growth Since 1972, when GDP (YoY) is between 2-3%, REITs have rallied, on average 17.8% (YoY). They were only negative on one occasion (2Q90). Aug-15 EFTA01477385 Global Inflation Germination, Examination & Protection The A, B and Cs of Mall REITs* 100 105 110 115 70 75 80 85 90 95 Jan Feb Mar Apr May Jun A Average 26% difference Under-Owned by Investors REIT Weighting Category Mid-Cap Growth Small Growth Mid-Cap Blend Small Blend Jul Aug Sep Oct Nov Dec B/C Average Selectivity Important Footnotes: Data as of December 31, 2015. *See A, B, C explanation on final page. Source: FactSet, Deutsche Bank Wealth Management. -30% -10% 10% 30% 50% 2015 Total Return Small Value Large Growth Mid-Cap Value Large Value Large Blend Mutual Funds 1.2% 1.9% 4.7% 5.9% 6.6% 0.6% 5.3% 1.5% EFTA01477386 1.4% Benchmark 1.6% 2.7% 6.8% 8.6% 14.6% 1.4% 12.5% 4.1% 2.8% Estimated Underweight $1 billion $1 billion $5 billion $6 billion $8 billion $10 billion $16 billion $23 billion $25 billion — Selectivity is important when investing in REITs. For example, A class mall REITS outperformed B/C class by —26% in 2015. In addition, self storage rose —40% while the broad REIT Index was up only —3% in 2015. — The Raymond James REIT team produced the above estimates showing how underweight broader equity mutual fund managers are to REITs relative to their respective benchmarks. — The $95 billion estimate equates to over 10% of the REIT Index market capitalization. Footnotes: Data as of December 31, 2015. FTSE/NAREIT Equity Indices. Source: FactSet, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management Footnotes: Time period As of June 30, 2015. Source: Deutsche Bank Wealth Management, Dow Jones, Raymond James, S&P. 14 Self Storage Residential Apartments Shopping Centers Retail Regional Malls REITS S&P 500 Industrial/Office Diversified Healthcare Lodging Resorts EFTA01477387 EFTA01477388 Downshifting its Pace 5 U.S. Dollar Dollar Cycle to Moderate? 100 110 120 130 140 150 160 170 1 226 451 1978-1985 676 901 1995-2002 +67% 6-Year USD Uptrend 7-Year USD Downtrend +38% +43% 9-Year USD Downtrend —5-Year USD Uptrend* 6-Year USD Downtrend 1126 1351 2011 - Present — At this juncture, the dollar bull market is the strongest in history. — While the bull market should continue, the pace of its rally should moderate. — The dollar will enter the sixth year of the current bull cycle in 2016. 1576 7-Year USD Uptrend Historical Dollar Cycles Footnotes: Nominal Dollar Index. Data as of December 24, 2015. Source: FactSet, Deutsche Bank Wealth Management. Footnotes: Data as of December 24, 2015. Source: FactSet, Deutsche Bank Wealth Management. Deutsche Bank EFTA01477389 Wealth Management 15 EFTA01477390 Downshifting its Pace U.S. Dollar Dollar in Tightening Cycle -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 0 20 40 60 12/1/1976 3/29/1988 Start of Cycle 12/1/1976 8/7/1980 3/27/1984 12/16/1986 3/29/1988 2/4/1994 6/30/1999 6/30/2004 Average Median +lam -2.2% -1.1% 2.0% -5.3% 0.0% -0.9% -2.0% 0.5% -1.1% -1.0% 80 100 120 140 160 180 200 220 8/7/1980 2/4/1994 +3am -1.2% 2.0% 5.8% -7.1% 5.6% 240 EFTA01477391 -2.4% -4.3% -2.4% -0.5% -1.8% 3/27/1984 6/30/1999 +6am -1.7% 4.6% 10.4% -8.6% 7.1% -4.5% -3.3% -9.1% -0.6% -2.5% 12/16/1986 6/30/2004 +9am -2.0% 10.5% 13.1% -9.3% 1.8% -7.3% -0.9% -7.5% -0.2% -1.4% +12am -4.9% 19.7% 14.2% -16.4% 6.1% -5.2% 0.4% -2.3% 1.4% -0.9% Footnotes: Time period is considered a tightening cycle when the Fed raises rates three or more consecutive times. The tightening cycle is considered over at the last rate hike. # of days is calendar days. Source: FactSet, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management Tightening Trends EFTA01477392 Nov 76 May 81 JPN EU CAN GBR CHE AUD NZL SWE NOR Total Yes Yes Yes Yes Yes Yes N/A Yes Yes 8 Nov 82 Aug 84 No Yes Yes Yes No Yes N/A Yes Yes 6 Aug 86 May 89 Yes Yes Yes Yes Yes Yes N/A Yes Yes 8 Sep 92 Feb 95 No No Yes EFTA01477393 Yes No Yes Yes Yes No 5 Nov 98 May 00 No Yes Yes No Yes Yes Yes Yes Yes 7 Jun 03 Jun 06 Yes Yes Yes Yes Yes Yes Yes Yes Yes 9 2016 Easing Easing No Possibly No No Easing No Easing 1 — Historically, global central banks move in tandem when raising interest rates. — However, in the onset of this tightening cycle, only one other central bank (BoE) appears to be ready to hike interest rates in 2016. Footnotes: Data as of December 2015. Source: Deutsche Bank Global Markets, Deutsche Bank Wealth Management. 16 EFTA01477394 6 Global Fixed Income Combing the Field for Yield False Steps 1.50 2.00 2.50 3.00 3.50 4.00 4.50 2008 2010 10Y U.S. Treasury 2012 2014 2016 Fed Quarterly Survey of Professional Forecasters — When looking at the Fed Quarterly Survey of Professional Forecasters, forecasts for Treasury yields have consistently overshot actual moves in Treasury yields since 2008. — The ECB's public sector purchase program (PSPP) will likely have a total volume of €1490 bn if it lasts until March 2017. Footnotes: Data as of 3Q15. Source: Philadelphia Fed, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management the Netherlands Portugal Slovakia Based on historical ECB buying (Purchases as a % of Net Issuance) 395% 84% 189% Finland France Ireland Italy Germany Spain Belgium Austria 0% 100% 175% 363% 106% 387% 130% EFTA01477395 489% 117% 396% 200% 300% 400% 500% 600% % of Negative Yielding Govt Bonds 0% 10% 20% 30% 40% 50% 60% 70% Dec-15 30% Footnotes: Data as of December 2015. Source: Deutsche Bank Global Markets, Deutsche Bank Wealth Management. Supply Drying Up in Europe Footnotes: Data as of December 2015. Source: ECB, Bloomberg LP, Barclays, Deutsche Bank Wealth Management. 17 Switzerland Germany France Netherlands Slovakia Finland Austria Belgium Denmark Sweden Luxembourg Lithuania Ireland Italy Spain Slovenia Portugal Malta Latvia Cyprus Total EFTA01477396 Global Fixed Income Combing the Field for Yield Powerful Flows to U.S. 1,000 200 400 600 800 -800 -600 -400 -200 0 Mar-2009 Mar-2010 Mar-2011 Mar-2012 Mar-2013 Mar-2014 Mar-2015 United States Euro Area Japan Net U.S. Treasury Issuance — Given the superior yield and solid economic outlook, U.S. bonds have seen steady inflows on a rolling 12 month basis while European bonds have seen steady outflows. — Given our estimate that the federal budget deficit should shrink to the lowest level since August 2008 in 2016 (—$414 billion), the need for Treasury issuance is also shrinking. $500 $1,000 $1,500 $2,000 -$500 $0 Est. U.S. Supply Moderating Footnotes: Data as of August 2015. Source: Deutsche Bank Global Markets, Deutsche Bank Wealth Management. Footnotes: Estimate as of December 2015. Source: Deutsche Bank Global Markets, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management 18 Rolling 12 Month Fixed Income Flows (bns) in millions 2000 2001 2002 2003 2004 2005 2006 2007 EFTA01477397 2008 2009 2010 2011 2012 2013 2014 2015 2016 EFTA01477398 Global Fixed Income Combing the Field for Yield Convertibles Historically, convertibles have a high correlation to equities. iC Investment Grade Credit The balance sheets are the healthiest for the largest S&P 500 companies on record. 7C Footnotes: Data is monthly and as of December 2015. Source: FactSet, Deutsche Bank Wealth Management. Footnotes: Data as of December 31, 2015. Source: FactSet, Deutsche Bank Wealth Management. High Yield 100 110 120 60 70 80 90 -252 -201 -150 -99 -48 3 54 High Yield Spreads in Tightening Cycle Footnotes: Data as of December 31, 2015. Source: FactSet, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management 105 156 207 Current Cycle First Fed Rate Hike Selective EM Debt -4.5% -4.0% -3.5% -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% EFTA01477399 Volatile currencies and weak fiscal health keeps us cautious on EM debt. 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (AVG) EM Fiscal Deficit as % GDP Footnotes: Data as of December 2015. IMF estimate for 2015. Source: Bloomberg Finance LP, Deutsche Bank Wealth Management. 19 Cautious EFTA01477400 7 Global Equities All Eyes on Earnings Rolling Return: EAFE vs. U.S. -70.0% -50.0% -30.0% -10.0% 10.0% 30.0% 50.0% Dec-72 Jan-80 International outperforming U.S. International Post Fed Hike U.S. outperforming International Feb-87 Mar-94 Apr-01 May-08 MSCI EAFE (USD) vs S&P 500 (Rolling 3 YR Return Annualized) — Historically, the performance of international equities relative to the U.S. has shifted in cycles. — In fact, the past five cycles that international equities outperformed U.S. equities lasted, on average, 3.4 years. — On a rolling three year basis, the U.S. has been outperforming international equities for —6 years. — Historically, the U.S. has outperformed for, on average, four years. Footnotes: Data is monthly and as of December 2015. Price return only in USD. Source: FactSet, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management Footnotes: Time period is considered a tightening cycle when the Fed raises rates three or more consecutive times. The tightening cycle is considered over at the last rate hike. # of days is calendar days. Tightening cycles date back to 1970. Source: FactSet, Deutsche Bank Wealth Management. 20 Jun-15 S&P 500 Performance vs MSCI EAFE (USD) — Following the onset of a Fed tightening cycle, the S&P 500 has historically underperformed the MSCI EAFE Index. -16% -14% -12% -10% -8% EFTA01477401 -6% -4% -2% 0% 2% First rate hike 0 8 16 24 32 40 48 56 64 72 80 88 96 104 112 120 128 136 144 152 160 168 176 184 192 200 208 216 224 232 240 248 EFTA01477402 Global Equities All Eyes on Earnings Valuations in the Range 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 Japan Europe ex UK MSCI AC World Grey bar is high and low P/E (LTM) Blue line is 10 year average Red diamond is current P/E (LTM) U.S. Profit Recession Ending -5% 0% 5% 10% 15% 15% S&P 500 Earnings Growth (YoY) 10% 9% 6% 6% 5% 4% 1% 0% 0% -4% 2% 9% 7% 9% S&P 500 UK — Most developed equity market valuations are above their historical average and close to the upper end of their 10-year range. — In addition, there is little distinction between earnings growth amongst the developed markets for 2016. Earnings Growth Similarities Footnotes: Data and estimates as of December 31, 2015. Source: FactSet, Deutsche Bank Wealth Management. 0% 1% 2% EFTA01477403 3% 4% 5% 6% 7% 8% 9% 10% MSCI Japan Footnotes: Time period reflects trailing 10 years as of December 31, 2015. Source: FactSet, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management S&P 500 EuroStoxx 50 Footnotes: Estimates as of November 2015. Source: Deutsche Bank Wealth Management. 21 FTSE 100 DAX Year-over-Year Growth (%) 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 EFTA01477404 Will the EM Giants Awaken? 8 EM Equities Disappearing Growth Premium -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 4Q03 1Q05 2006 3Q07 4Q08 1010 2Q11 3Q12 4013 1Q15 Average EM Growth Premium (LHS) (AVG) Average EM Growth Premium (LHS) MSCI EM (local) - S&P 500 Index (RHS) — Emerging market equities have benefitted from superior economic growth over the developed markets in recent years. — However, that growth premium has been eliminated and has resulted in emerging market equities lagging developed market equities. — Emerging markets experienced several years of an earnings growth premium over the U.S. — However, the collapse in commodity prices and lackluster economic growth in EM has resulted in the earnings growth premium collapsing. — As a result, the U.S. has been outperforming the emerging markets. Footnotes: Data as of 3Q15. Source: Bloomberg Finance LP, FactSet, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management Footnotes: Data as of December 31, 2015. Source: FactSet, Deutsche Bank Wealth Management. 22 100 120 140 160 20 40 60 80 -20 0 Earnings Growth Premium Gone EFTA01477405 Peak EM Earnings Peak U.S. Earnings EFTA01477406 EM Equities Favor Select Asia Valuations More Attractive Sector Exposure More Appealing 30.0 EM Asia EM Latam 20.0 10.0 0 0 — From a valuation basis, Asia looks more attractive than Latin America relative to the MSCI AC World. — In addition, Asia has more exposure to some of our favorite sectors (e.g. tech, discretionary). Footnotes: Data as of December 31, 2015. Source: FactSet, Deutsche Bank Wealth Management. Footnotes: Data as of December 2015. Source: FactSet, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management 23 In percentage terms Financials Information Technology Consumer Discretionary Industrials Telecom Consumer Staples Materials Energy Health Care Utilities EFTA01477407 9 Equity Sectors An "Appreciation" for Innovation and Demographics Solid Earnings Growth Expected Tech Valuations Attractive 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 S&P 500 Info Tech P/E (LTM) Relative to S&P 500 P/E (LTM) (AVG) S&P 500 Info Tech P/E (LTM) Relative to S&P 500 P/E (LTM) — Technology is one of our favorite sectors due to attractive valuations and fundamentals. — In fact, valuations are well below average versus the S&P 500. — From an earnings perspective, consumer discretionary, info tech and financials are expected to be the leaders in earnings growth. '14 '15 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 2016 Earnings Estimate Footnotes: Data is as of December 31, 2015. Source: FactSet, Deutsche Bank Wealth Management. Footnotes: Data as of December 2015. EFTA01477408 Source: FactSet, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management 24 Consumer Discretionary Info Tech Financials Health Care Energy Materials Industrials Consumer Staples Utilities Telecom Services EFTA01477409 Equity Sectors A Poem by an Old-Timer An application was for employment A program was a TV show A cursor used profanity A keyboard was a piano! Memory was something that you lost with age A CD was a bank account! And if you had a broken disk, It would hurt when you found out! Compress was something you did to garbage Not something you did to a file And if you unzipped anything in public You'd be in jail for awhile! Source: marketoonist.com, Deutsche Bank Wealth Management. Log on was adding wood to a fire Hard drive was a long trip on the road A mouse pad was where a mouse lived And a backup happened to your commode! Cut--you did with a pocket knife Paste you did with glue A web was a spider's home And a virus was the flu! I guess I'll stick to my pad and paper And the memory in my head I hear nobody's been killed in a computer crash But when it happens they wish they were dead! Author: Unknown Source: Copyright 2014 John Klossner, www.jklossner.com Deutsche Bank Wealth Management 25 Internet of Things .Changing our Vocabulary Internet Connectivity EFTA01477410 Equity Sectors An "Appreciation" for Innovation and Demographics New Wave of Technology — The "Internet of Things" Footnotes: Data as of December 2015. Source: Machina Research, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management 26 EFTA01477411 Equity Sectors An "Appreciation" for Innovation and Demographics Record Orphan Drug Approvals 10 20 30 40 50 60 0 FDA Orphan Drug Approvals by Year Six Year Challenge?* Footnotes: Data as of December 31, 2014. 10 15 20 25 30 35 40 45 0 5 2011 2012 2013 2014 2015 Footnotes: Data as of December 31, 2015. *Annual total return, Healthcare is S&P 500 healthcare. Source: FactSet, Deutsche Bank Wealth Management. Deutsche Bank Wealth Management Source: FDA Blog, Deutsche Bank Wealth Management. Healthcare S&P 500 Genome Costs Decreasing —$95million $1,000 $10,000 $100,000 $1,000,000 $10,000,000 $100,000,000 —$1 thousand 2001 2003 2004 2005 2007 2008 2009 2011 2012 2013 2015 Cost per Genome — Despite positive fundamentals, because of the uncertainty surrounding the political landscape and the volatility that may arise in many healthcare names, we would favor tech, financials and consumer discretionary over healthcare. EFTA01477412