Deutsche Bank Research The House View...Jan 09, 2015 · Group Chief Economist The views in this...

Research Deutsche Bank

Deutsche Bank Research The House View – Outlook 2015 9 January 2015

DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014.

Contents

1. Outlook 2015

2. A review of 2014

3. The world in 2015

4. The markets in 2015

5. Deutsche Bank forecasts

1 Outlook 2015

Research Deutsche Bank [email protected]

The House View – 9 January 2015, http://houseview.research.db.com

The House View - Outlook 2015

The global economy will gather pace in 2015. Above trend expansion in the US will far outpace the weak and uneven

acceleration in Europe, while growth in China will be slower but still high. Although global growth has fallen short of

expectations since 2011, more optimism is warranted in 2015 as economic drags from recent years fade. Peak fiscal

tightening in the US and the Eurozone is behind us, bank lending in Europe has stopped contracting, and the collapse

in oil prices will effectively provide a tax cut for consumers across the globe

In the near term, cheap oil adds to deflationary pressures, enabling central banks to maintain their ultra supportive

stance. However, the divergent global growth dynamics will be mirrored in central bank policy. Persistent concerns over

low inflation in the Eurozone and Japan will see the ECB and BoJ continue to ease policy, with the ECB pursuing public

QE. In contrast, the Fed, buoyed by a strengthening economy and rising wages, will raise rates. Monetary policy will

however remain accommodative, with rates remaining low relative to previous cycles

Central bank divergence will underpin further USD strength. Equities remain our preferred asset class. However, with

valuations having fully corrected from depressed post-crisis levels, sector allocation and stock picking will be crucial to

investment performance. Returns in Credit will be low, however Europe should outperform the US on the back of ECB

support and lower exposure to Energy. Core sovereign bond yields should rise moderately over the year, although even

lower rates are possible in the near term. We see limited further downside for Oil, but any price recovery will be gradual

Key risks to our view include an escalation of the crisis in Europe such as the rise of anti-establishment parties, a more

pronounced slowdown in China, a series of crises across EM and less predictable risks such as natural disasters or

rising geopolitical tensions 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

consists of senior research staff, may occasionally differ from those disseminated by their research colleagues

Editors: Marcos Arana, Simone

Baur, Wolf von Rotberg, Sahil

Mahtani, Rajni Thakur

4


The House View – 9 January 2015, http://houseview.research.db.com 5

Fed: first hike in Jun-2015, but could be delayed to Sep-2015. Timing remains data-dependent, focus shifting from a robust labour market to low inflation

ECB: expect expansion of QE purchases in Q1, as TLTRO, private QE insufficient to remove deflation risk

BoJ: committed to 2% inflation target; will ease further if deemed necessary

BoE: on hold, first hike pushed back to Q3-2015 PBoC: started broad-based easing cycle, expect further

rate cuts in 2015 EM: cheaper oil provides cover for easing, but FX

weakness prompts tightening in certain countries

Crisis returns to Europe: ECB fails to end low growth

and inflation or market loses faith in ECB; rising

political risk (e.g., Grexit), slow reform progress, loss of

fiscal discipline

China hard landing: more severe property investment

slowdown, lack of export traction, lack of policy easing

EM crises, driven by China slowdown, stronger dollar

and rising rates, or cheaper oil pressuring producers

Earlier or faster Fed hikes lead to a disorderly market

sell-off

Geopolitical risk: rise in tensions derails world economy

Global growth to accelerate to 3.6% in 2015, from 3.3%

in 2014. Low oil prices provide upside risk

US growth robust at 3.7% in 2015, up from 2.5% in

2014, supported by stronger consumer and business

spending, lower fiscal drag and housing recovery

Eurozone growth to accelerate only gradually to 1.0%,

marginally above 2014. No recession, but recovery

weak and uneven

EM growth of 4.5% in line with 2014, as stronger US

demand offsets China deceleration

Oil price: fall mostly supply-driven rather than a

reflection of weak global growth. Further downside to

prices limited, but price recovery only gradual and from

mid-2015. Cheaper oil offers upside risk to growth

Global inflation: depressed by oil in near term; gradual

pick up in H2

Global growth: disappointing since 2011, but now more

optimism warranted as economic drags from recent

years (e.g., fiscal austerity, Europe credit crisis) fade

Supportive monetary policy USD1tn liquidity injection in

2015 from BoJ, ECB despite Fed, BoE rate hikes

The global economy will gather pace in 2015 driven by above trend growth in the US

Views on key themes

Economic outlook Central bank watch

Key downside risks to our view

Notes: H / M / L indicates estimated probability of risk (High, Medium, Low).

M

M

M

L

L



6.5%

0.3%

-0.9%

0.7%

2.5%

0.9%

1.0%

1.3%

7.0%

3.7%

1.0%

3.6%

-2% 0% 2% 4% 6% 8%

India

Italy

Russia

Brazil

UK

France

Germany

Japan

China

US

Eurozone

World 2015

2014

Annual GDP growth in top 10 economies (%yoy): we see positive

momentum in most major economies, with global growth up by ~4pp

Global growth to accelerate on US outperformance. Despite slower China, EM Asia to contribute ~60% of global growth

* World aggregate calculated with 2010-12 average PPP GDP weights

Source: Bloomberg Finance LP, IMF, Deutsche Bank Research

% Contribution to

global growth

EM = 58% of

World GDP,

growing at 4.5%

– contributing

72% of growth

DM = 42% of

World GDP,

growing at 2.4%

– contributing

~28% of growth

62%

7%

18%

7%

3%

4%

Real GDP Growth

(% yoy)

World =3.6%

3.7%

2.1%

1.9%

1.5%

1.0%

6.2%

2015 growth forecast: EM will continue to

contribute the vast majority of growth

Share of

World GDP*

Asia

(Ex-

Japan),

36.2%

Latam,

8.2%

CEEMEA,

13.2%

US,

17.8%

Eurozone,

12.9%

Other DM,

11.7%

6



Se

ve

re

Sig

nif

ica

nt

Mo

de

rate

L

oc

ali

se

d

Low Medium High

Probability

Imp

act o

n o

ur

ba

se

ca

se

The House View - Risk Matrix Downside risks

Crisis returns to Europe: ECB fails to end low growth and inflation

or market loses faith in ECB; rising political risk, e.g., Grexit; slow

reform progress, loss of fiscal discipline

China hard landing: more severe property investment slowdown,

lack of export traction, lack of policy easing

EM crises: driven by China slowdown, stronger dollar and rising

rates, or cheaper oil pressuring producers

Earlier or faster Fed hikes on the back of strong labour market and

a rebound in inflation lead to a disorderly market sell-off

Geopolitical risk: rise in tensions derails world economy

Abenomics fails in Japan: BoJ / government abandon efforts (not a

risk in short-term)

US growth slowdown: US economy fails to accelerate; the housing

recovery is derailed and / or business spending fails to pick-up

Upside risks

Cheap oil provides a stronger boost to global growth

1

2

3

4

5

6

1 2

3

6

8

8

Key risks to our view: return to crisis in Europe, slowdown in China, crises in EM and earlier or faster Fed hikes

7

7

7

4

5

2 A review of 2014



2014 in Headlines

BBC, 29 Oct 2014

BBC, 17 Jul 2014

Reuters, 31 Oct 2014

The Guardian, 05 Jun 2014

Reuters, 16 May 2014

BBC, 19 Sep 2014 NY Times, 04 Aug 2014

The Guardian, 18 Mar 2014

Bloomberg, 30 Dec 2014 Reuters, 29 May 2014

Reuters, 21 Nov 2014

IMF, 7 Oct 2014

Reuters, 23 Nov 2014

9

WSJ, December 23

Reuters, September 5

CitiAM, November 25 FinFacts, November 24



-2.1

4.6 5.0

4.2

1.3

0.3 0.6

0.3

-3 -2 -1 0 1 2 3 4 5

1Q 14 2Q 14 3Q 14 4Q 14F

US Eurozone

GDP % qoq, saar

US growth momentum stood out in a year

of disappointing overall global growth…

0

100

200

300

400

500

600

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

….driving central bank divergence with the

Fed ending QE as ECB / BoJ eased further…

100 = 2006 Fed

BoJ

ECB

BoE

55

65

75

85

95

105

115

Jan-14 Mar-14 Jun-14 Sep-14 Dec-14

Oil prices collapsed as supply rose and

the USD strengthened

$/bbl, Brent

-0.5

0.0

0.5

1.0

1.5

2.0

2.5


…which added to deflationary pressures

across the globe

CPI (Headline), % yoy

US

Eurozone

98

100

102

104

106

108

110

112

114

116


Dollar Index

100= Jan 2014

……which helped to drive huge USD

outperformance

10

15

20

25

30

35

40

1500

1600

1700

1800

1900

2000

2100


S&P 500

VIX (RHS)

Despite periodic volatility spikes, tail risks

remained contained enabling markets to rally

2014 in six charts

1 2 3

4 5 6

*Note: Inverse of JPMEMFX Index, The index comprises of 10 liquid currencies across three equally weighted regions, LatAm, EM Asia and CEEMEA. Source: Bloomberg Finance LP, Haver Analytics, Deutsche Bank Research

10

EM sell off

amid Fed

exit fears Crimea

referendum Malaysian

Air plane

shot down

Crude falls

on supply

rises First Ebola

case in US

Scots vote No

Oil declines on

global growth

concern

Fed ends

QE

Oil falls

below

$60



58

33

14

9 8 8 5

3 1

-2

-3

-29

8 7 5 2

16 15 15

10 6 5

-5

13

2

-2 -6 -12

-12

-44

-2

-14

-19

-33

-48 -50

-40

-30

-20

-10

0

10

20

30

40

50

60

Shanghai C

om

posite

India

Nifty

US

S&

P 5

00

Spain

IB

EX

35

Japan N

ikkei

Euro

pe S

toxx 6

00

Hang S

eng

Germ

an D

AX

30

UK

FT

SE

100

MS

CI E

M

Bra

zil

Bovespa

Gre

ece A

thex

EU

IG

US

IG

EU

HY

US

HY

Spain

Ita

ly

UK

Germ

any

US

EM

Gre

ece

Dolla

r In

dex

CN

Y

INR

GB

P

EU

R

JP

Y

RU

B

Gold

Copper

Silv

er

Com

modity Index

Bre

nt O

il

2014 performance

H2 2014

Total returns 2014

Equities Commodities FX Sovereign

debt Corporate

Credit

%

Note: Total return accounts for both income (interest or dividends) and capital appreciation

Source: Bloomberg Finance LP, Deutsche Bank Research. Prices as of 31 Dec 2014, COB

US credit under-

performed EUR

in H2 due to

higher exposure

to energy

Chinese equities rallied

on PBoC liquidity and

easing

Greece bonds

sank on rising

political risk

USD surged in H2 on

divergent economic and

central bank outlooks

JPY fell on further

easing by the BoJ

Oil prices

collapsed in H2

EM bonds sold off

in H2 on rising USD

In 2014, Equities and Fixed Income outperformed while Oil collapsed; many assets saw divergence in H1 and H2 performance

11

3 The world in 2015



The global economy will accelerate in 2015, with more than half of global growth coming from the US and China

<0% 0-1% 1-2% 2-4% >4%

2015F GDP growth (% yoy)

US expanding above

trend, driven by i. ultra

accommodative monetary

policy, ii. consumer and

business spending, iii.

housing recovery, iv.

boost to consumption

from lower oil prices

13

Eurozone accelerating

gradually, but growth remains

subdued and the recovery

weak and uneven. Cheap oil,

weaker euro, better credit

conditions and a committed

ECB provide support

China gradual slowdown as

economic rebalancing

progresses. But at 7% growth,

the country remains a key

driver for global growth

Japan expanding above trend.

Delay of consumption tax to

2017 removes important

obstacle to growth



-2 0 2 4 6 8

10 12 14 16 18

1970 1975 1980 1985 1990 1995 2000 2005 2010 Estimate of CPI inflation for 34 OECD countries

Source: OECD, Haver Analytics, Deutsche Bank Research

Global inflation is near the lowest level in over 40 years, with the

exception of 2009

%yoy

Global inflation is near 40-year lows – with the

exception of 2009

Inflation is low across the world, with a few notable

exceptions (e.g., Latin America, Russia, Turkey)

Several factors are keeping price pressure low

− After the crisis and years of low growth, output

gaps* remain large in many countries

− Slowing China, lower commodity prices keep

input prices low

− Oil price shock adding further to disinflation

Other drivers are raising inflation

− Dollar strength translates into higher import

costs for most countries

− Global growth is accelerating, which should

contribute to closing output gaps

Over time, inflation will rise as disinflationary drivers

fade, or simply due to base effects

− After one year, effect of a one-off shock to

inflation disappears, e.g., falling oil prices

Inflation: Global inflation is near 40-year lows as several forces weigh on prices

Weaker currency

(except for US)

Accelerating growth,

wage inflation

Base effects, as

effects of one-off

factors wear off

Inflation

Several opposing forces are at play when it comes to global inflation

Lower oil prices

Low growth, large

output gaps

Slower China growth

Lower commodities

Note: (*) Output gap: difference between actual growth and potential growth. Growth below

potential fails to rise inflation pressure 14



Oil prices are down by half since October

− Brent is trading just above $50/bbl, WTI is below

$50/bbl for first time since sharp drop in 2008

The fall has been mostly supply-driven

− A mostly “healthy” fall, rather than a reflection of

weaker global growth – though demand

projections have been revised down

− Key driver is non-OPEC supply growth (US,

Brazil, Canada) outstripping global demand

− In the first half of 2015 we expect the largest

supply-demand imbalance since 1998

Only a cut in production will stabilise prices but no

signal of cuts currently coming from OPEC

− A further drop in price unlikely as cheaper oil will

boost demand

− At current levels a large share of shale supply is

uneconomical, leading to production cuts

− Expect very limited price recovery in the first half

of 2015, given supply / demand dynamics, and

only a gradual price recovery in H2

0

30

60

90

120

150

2003 2005 2007 2009 2011 2013 2015

Oil prices have collapsed, mainly due to supply

USD/bbl, Brent

The fall in oil prices since

June has been nearly as

sharp as that in 2008

Source: Bloomberg Finance L.P., Deutsche Bank Research

85

90

95

100

2007 2009 2011 2013 2015 2017

Deficit Surplus Demand Supply

Note: mbpd = million barrels per day. Source: IEA, Deutsche Bank Research

Global oil supply / demand: we have entered a period of excess

supply which could last several years absent OPEC cuts

mbpd

Absent OPEC cuts, supply will

exceed demand for next few

years, keeping oil prices low

2014 the first year with

significant excess supply

(around 1mbpd) since late

1990s

Oil: The sharp price drop is mostly supply-driven; we see little further downside and only a gradual price recovery

15



-20

-15

-10

-5

0

5

10

EM

DM

Source: Haver Analytics, Deutsche Bank Research

Impact of lower oil prices is not evenly split among countries

Net petroleum imports (% of GDP)

Losers Winners

Lower oil prices will put downward pressure on

inflation in coming months

− Immediate direct impact via lower energy prices

− Indirect impact as lower input costs are reflected

in lower prices

Cheaper oil will also support global growth

− Direct impact on consumption

…Average US motorist will save USD500/year

at the pump, akin to a 1% pay rise

…Similarly, average German driver would save

EUR200-300/year

− Indirect impact: stronger global growth

translates into higher export

Impact is not evenly split, with net oil importers set

to benefit at the expense of producers

− A $60/bbl price cut shifts some USD1.9tn from

producers to consumers

− Eurozone, India, Japan, China notable winners

− Russia, Venezuela and Norway losing out

− Lower cost producers like Saudi Arabia have

resources to withstand lower prices for longer

Oil: Cheaper oil is a major shift that will boost consumption globally, and hurt producing countries

0.5

0.9

0.5

0.2

0.8 0.7

0.3 0.2

0.0

0.2

0.4

0.6

0.8

1.0

US Eurozone Japan China

Inflation (negative)

Growth (positive)

Note: Impact from lower oil prices, all else being equal

Source: Deutsche Bank Research

The fall in oil prices since mid-2014 will have a material effect on

inflation and growth

Estimated impact from lower oil prices (pp)

16



Monetary policy: Low inflation, exacerbated by cheaper oil, has led many central banks to ease monetary policy

Tightening

Hold

Easing

Recent policy stance EM: pockets of tightening

where inflation was

running high or to contain

currency depreciation

amid commodity price

weakness

Fed: cheaper oil removes

pressure to hike rates. As

inflation stays low, a delay

in the first hike becomes

more likely

ECB: increased pressure

to do more, given impact

of lower oil prices on

inflation and inflation

expectations

Monetary policy stance

17

BoJ: more easing

possible; central bank

committed to inflation

target

PBoC: further easing likely

in order to support a

slowing economy



0

2

4

6

8

10

12

2007 2008 2009 2010 2011 2012 2013 2014 2015

Major DM central banks have added over USD7tn in liquidity since

2007. ECB, BoJ to inject more than USD1tn more by end-2015

USDtn

Source: Haver Analytics, Deutsche Bank Research, individual central banks

Fed

BoJ

ECB

BoE SNB >1tn

+7tn

Monetary policy remains ultra accommodative

− Major central bank policy rates remain at historic

lows – e.g., ECB, BoJ, Fed, BoE

− Fed and BoE are approaching exit…

…Fed ended QE in October 2014

…Fed and BoE expected to hike rates in 2015

− …But the ECB and potentially the BoJ will ease

policy further

2015 will be another year of ultra accommodative

monetary policy

− ECB, BoJ picking-up where the Fed left off

− Expect over USD1tn extra liquidity in 2015 from

these two central banks alone – nearly 5x as in

2014

The continuation of these crisis-era support

measures is a reminder that we are still far from

normal self-sustaining growth

Monetary policy: Central bank to add a further USD1tn of liquidity in 2015 as easy policy remains a key driver for markets

“The [BoJ] will conduct money

market operations (…) at an annual

pace of about JPY80tn (an addition

of about JPY10-20tn)”

BoJ statement, 31-Oct-2014

“Our measures will have a sizeable

impact on our balance sheet, which

is intended to move towards the

dimensions it had at the beginning

of 2012”

ECB statement, 4-Dec-2014

18



Economy expanding above trend, nearing full

capacity

− Unemployment to fall below natural rate by Dec

− Capacity utilisation at post-crisis high

This pace of growth should continue through 2015

− Monetary policy remains ultra-accommodative,

even after the Fed starts hiking rates

− Fiscal policy no longer a drag; instead federal

and state / local spend are (modestly) rising

− Housing recovery picking up momentum again

− Household balance sheets are healthy, helped

by rising equity and home prices and an ever

stronger labour market

− Business spending to rise (excl. energy) on

higher confidence after years of low investment

− Sharp drop in fuel prices supports consumption

Risks to our view are balanced on both sides

− Downside: slower global growth would mean

weaker exports hurt investment spending

− Upside: lower energy costs could have a larger-

than-expected impact on consumer spending

-2.1

4.6 5.0

2.2

4.2

3.1 3.3 3.2 3.1 2.5

3.7 3.1

-3

0

3

6

Q1 Q2 Q3 Q4E Q1F Q2F Q3F Q4F 13 14E 15F 16F

Actual Forecast

%qoq

saar

2014

%yoy

2015

We forecast 3%+ GDP growth over the next 12-18 months

60

70

80

90

100

110

120

130

1985 1990 1995 2000 2005 2010 2015

Household balance sheets are healthy

Net debt, % of disposable income

Debt is at multi-year lows relative

to income, as the deleveraging

cycle is complete

19

US: We expect the US economy to continue expanding at 3%+ in 2015


2015: The year the Fed finally raises interest rates – 12 December 2014

http://pull.db-gmresearch.com/p/9370-A8BF/44930038/DB_USEconWkly_2014-12-12_0900b8c0891309b9.pdf

https://gm.db.com/servlet/ShowContent?ResourceType=S&ServerLocation=1&ResourceId=1791110




http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/3030-98BE/60735245/0900b8c088cc3e79.pdf



The Fed is slowly approaching its first rate hike

since 2006

The Fed has a dual mandate – but progress on

both fronts is not similar

− Maximum employment: very clear progress;

further improvement expected

− Stable prices: much less progress, core inflation

stable but low, wage inflation starting to rise

If the economy progresses as expected, the Fed

should be ready to hike rates around Jun-2015 –

inflation developments are the key focus

− Disinflationary effect from cheaper oil temporary

− Fed does not expect core inflation to rise before

June – but this will not delay hikes

− Policy decisions remain dependent on macro

data – and a delay is possible if data disappoint

Path of hikes should be slower than in the past

US: 2015 is the year the Fed will finally raise rates

Maximum

employment

Stable prices

Unemployment Faster-than-expected drop

Approaching NAIRU*

Job creation Very robust (200k+ payrolls)

2014 highest gains since ‘99

Quits / hires On improving trend, though

still lower than desired ~

Core inflation

(PCE)

Stable at just 1.5% yoy

Should rise from H2-2015

Wage inflation

(ECI)

Finally trending higher,

though still low

Market: fell below 2%

Survey-based: stable

~ Inflation

expectations

Fed’s dual

mandate

Progress toward rate hikes: with the maximum employment

objective satisfied, Fed’s focus is squarely on inflation developments

-1

0

1

2

3

4

2011 2012 2013 2014 2015 2016

CPI (Headline)

US inflation will fall temporarily in the coming months in response to

lower oil prices, before rebounding from mid-2015

% yoy


20 Note: (*) NAIRU = non-accelerating inflation rate of unemployment



We see Eurozone growth rising to 1.0% in 2015

and 1.3% in 2016, with risks to growth balanced

The recovery remains fragile and uneven

− Growth disappointed in 2014, almost stalling by

year end

− Reflects impact from slower global growth,

Ukraine crisis and slowdown in investment

− Germany and Italy key disappointments

The economy should accelerate gradually, with

several factors providing support to growth

− Lower oil prices supporting private consumption

− Stronger exports from rising global growth (also

helped by lower oil prices) and a weaker euro

− Rise in investment, in part due to higher exports

− Positive credit impulse* to strengthen private

consumption, while fiscal drag is ending

There are also downside risks to growth

− Low inflation keeps debt burden high

− Rising political risk -8

-6

-4

-2

0

2

4

6

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Credit Impulse, pp of GDP, 4qma, yoy %

Private Demand, yoy%

The credit impulse should improve further as the ECB AQR has

passed and QE is in the cards


Eurozone: Growth is weak but should gradually pick up on cheap oil, a weaker euro and better credit conditions

0.3 0.1

0.2

-0.4

0.1

0.3 0.4 0.3 0.3

0.8 1.0

1.3

-0.5

0.0

0.5

1.0

1.5

Q1 Q2 Q3 Q4E Q1F Q2F Q3F Q4F 13 14E 15F 16F

Actual Forecast

%qoq, sa

2014

%yoy

2015

Eurozone growth to rise gradually to trend growth in the second half of 2015, but remaining weak


21 Note: (*) Deutsche Bank’s non-consensus view is that what is important for domestic demand

growth is not credit growth, but the change in credit growth. A slowdown in the pace of deleveraging

boosts spending growth, even though credit growth is still negative. We call this change in credit

growth the “Credit Impulse”



0.3

0.8

0.8

0.9

1.0

1.2

1.7

1.9

2.7

3.3

0 1 2 3 4

Italy

Austria

Finland

France

Germany

Portugal

Netherlands

Spain

Greece

Ireland

Eurozone growth overall will remain subdued in 2015, though for the first time since 2007 all major economies should post positive growth

% yoy


Eurozone

1.0%

Growth in 2015 will vary greatly by country, with the

periphery performing better than the core. Italy is

the notable exception

Germany is no longer Europe’s growth engine

− Export and investment growth have slowed

Italy, France have lagged in their adjustment

processes and continue to suffer from low

competitiveness

− Only mild pick-up in growth in France

− Italy remains the main disappointment, with

growth remaining close to zero

Spain is the fastest growing country among EMU-4

− Unemployment is falling rapidly – though private

sector deleveraging will weigh on growth

− Will benefit most from pick-up in exports and

weaker euro

Ireland’s recovery has been a success story

− GDP is expected to continue growing at 3%+ in

2015 and 2016, supported by strong links to US

Eurozone: Germany is no longer the growth engine; instead, former crisis countries will outperform the core

22



We expect growth to decline to 1.0% in 2015 from

1.4% in 2014, before accelerating to 1.2% in 2016

Germany’s growth decelerated in 2014 and

dropped below the Eurozone average

− The Ukraine crisis and slowing global demand

weighed on exports and investment

− Growth will remain subdued in the coming

quarters

In 2015, growth will be driven by domestic

consumption

− Employment to expand further

− Nominal disposable income to rise

− German exports, less price sensitive, will benefit

less from weaker euro

− Strong rebound in investment unlikely before H2

− “Black zero” budget (zero deficit target) limits

fiscal stimulus

Upside risk if cheap oil provides additional support

to the domestic economy

0

10

20

30

40

50

60 -40

-30

-20

-10

0

10

20

30

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

# of Google searches "Krise" ("crisis") (rhs, 4M lead) Domestic investment goods orders ex. airplanes, % yoy (lhs)

German "core" investment goods orders have been the main victim

of the Ukraine crisis and remain exposed to geopolitical risks

3mma

Source: Federal Statistical Office, Google Trends, Deutsche Bank Research

inverted

1.4 + 0.2 0.0 - 0.3

- 0.3

1.0

0.0

0.5

1.0

1.5

2.0

2014 GDP growth

Private consumption

Government consumption

Net exports Gross investment

2015 GDP growth

German private consumption is the only component to grow faster in

2015, while investment and export growth are set to slow down

%


Private consumption

the only sector

contributing to faster

growth in 2015

Exports and

investment will

contribute less to

growth in 2015

Eurozone: Germany’s slowdown should bottom out over coming months; growth will remain slow, but cheap oil offers upside

23



Eurozone: Europe faces mounting political risk in 2015

Notes: Simplified map

Troika: European Commission, ECB and IMF

France: Slow growth and hurdles to deep-

rooted structural reforms remain high

Support for Hollande at all-time lows

Right-wing Front National leads polls;

further possible boost from recent terror

attacks

Structural reform programme submitted,

but likely to be watered down Greece: key political risk as SYRIZA

government looms

General election most likely to yield a

SYRIZA-led government

Negotiations with Troika over country

financing beyond Feb at stake

Base case is no Grexit – but risk of

escalation remains

Portugal: solid growth but issues

remain ahead of October vote

Decent recovery since 2013

Weak banks are drag on credit

Slower reform progress since

programme exit in May-2014

Constitutional court rulings

constrain fiscal consolidation

Corruption scandal involving

former PM may weaken socialist

party ahead of Oct 2015 election

Germany: rise anti-euro party

AfD puts Merkel under pressure

The rise of right-wing, anti-

euro AfD is a risk for Merkel’s

CDU and limits her flexibility

on ECB and EU politics

Spain: strong recovery, but political risk rising

Strong structural reform track record, e.g.,

labour market, financial system

Political risk – i.e., Catalonia, rise of leftist

party Podemos ahead of December elections

UK: neck-and-neck race for general elections on 7 May

Marginal poll lead for Labour over the Conservatives

Conservatives would hold a EU referendum in 2017,

Labour has made no commitment

EU elections calendar

25-Jan: Greece

1-Mar: Estonia

19-Apr: Finland

7-May: UK

By mid-Sep: Denmark

Oct: Poland

11-Oct: Portugal

By mid-Dec: Spain

Italy: worrying structural weakness

GDP fell in 11 of last 12 quarters

Reform process remains very slow

Recession could weaken Renzi,

undermining reform further

24

http://www.flags.net/ITAL.htm

http://www.google.co.uk/imgres?imgurl=http://www.senojflags.com/images/national-flags/Portugal-Flag.gif&imgrefurl=http://www.senojflags.com/Portugal-Flags&usg=__plggDgWMVe15lru9Cx6b0GMoDlQ=&h=288&w=431&sz=10&hl=en&start=8&zoom=1&tbnid=rHTCsyQcxJePTM:&tbnh=84&tbnw=126&ei=De9mUeOROoaW0QWCqYGgBg&prev=/images?q=portugal+flag&hl=en&sa=X&tbm=isch&itbs=1&sa=X&ved=0CDoQrQMwBw

http://www.flags.net/SPAN.htm

http://www.flags.net/GREC.htm



Greece’s general elections at end-January are most

likely to yield a SYRIZA-led government

The first half of 2015 will be volatile, given Greece’s

bailout programme expires in February

− Country needs financial support through 2015

− Aid disbursement or new financing is unlikely

without a co-operative government in place

Confrontational rhetoric has raised Grexit fears –

but this remains a tail risk

− Mostly political posturing

− Expect compromise after election

Eurozone is still somewhat fragile...

− Country-level structural adjustment incomplete

− Political risk rising

− Grexit fears could crystallise redenomination risk

… But the risks of contagion and crisis escalation

are now much lower than at the height of the crisis

− Private sector owns under 20% of Greece debt

− Italy, Spain sovereign bond markets less

sensitive to changes in foreign investor

sentiment, given lower foreign debt ownership

− More resilient banking system, following

EUR250bn in bank capital raised since 2008

0

10

20

30

40

50

Italy Spain

Mar-10 Current

Source: Italian Treasury, Spanish Treasury, Bank of Italy, ECB, Bloomberg Finance LP, Deutsche Bank

Research

Beyond Greece, Italian and Spanish bond markets are more

resilient, given a much lower level of non-domestic debt ownership

% foreign ownership

Eurozone: Greece is again taking centre stage. Expect headline volatility for several months, but no Grexit* or broad contagion

36

4 12

22

27

53

24

142

Only 20% of Greek Government Bonds are held by private sector

EUR bn Restructured / new GGBs

Other GGBs

T-Bills

Other loans

ECB

Bilateral loan facility

EFSF

Private

sector

Note: (*) Grexit refers to Greece exit from the Eurozone

Greece going to early elections: rising risks for 2015 – 29-Dec-2014 25

Source: IMF, PDMA, Deutsche Bank Research IMF










http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/18168-E75F/29596077/DB_SpecialReport_2015-01-04_GDPBD00000274803.pdf



Low inflation and risk of deflation remain key

concerns for the Eurozone

− Core inflation stable but much below ECB target

− Headline inflation negative and likely to remain

so through first half of 2015

− Inflation expectations at lowest since 2001

Current ECB measures insufficient to raise inflation

− ECB easing to date (rate cuts, TLTRO#, private

asset purchases) will not weaken euro enough

to raise inflation to target in medium-term

…Demand for TLTRO was weak, private QE

limited by ABS / covered bonds market size

ECB to ease further by substantially expanding QE

into other assets, including sovereign bonds

− Broad support for expanding QE, even if some

dissent within governing council is unavoidable

− German government not outright opposed to QE

− QE is crucial for a transition into recovery mode

– a EUR1tn balance sheet expansion would lift

inflation slowly back toward target by 2017

ABS / Cov Bonds

purchases

Less: ABS / Cov Bonds repoed at

ECB*

TLTRO Less: Maturing

LTRO

Net ECB balance sheet impact

Gap ECB target balance sheet

expansion

Note: (*) Assumption. EUR2tn assets repoed at ECB, including EUR300bn ABS, EUR300bn Cov bonds.

Much will depend on current asset holders willingness to sell. Source: Deutsche Bank Research

Current measures (TLTROs, ABS / Covered bond purchases)

unlikely to reach the ECB’s target balance sheet expansion

EURbn

300-500 150-250

350-650 350

200-500

500-800 1,000

Private QE

150-250

TLTRO

0-300

Eurozone: In this macro and inflation context further ECB easing is inevitable: we expect a public QE in Q1

Note: (#) TLTRO: long-term cheap financing for banks

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2010 2011 2012 2013 2014 2015 2016

Market implied 5Y5Y inflation expectations* Headline inflation, yoy

The sharp fall in inflation has led to a de-anchoring of market-implied

inflation expectations in the Eurozone

%

Note: (*) EUR 5Y5Y CPI, 1mma. Source: Bloomberg Finance LP, Deutsche Bank Research

Average 2008-14

ECB inflation target

De-anchoring of

inflation expectations

26



Abenomics’ three arrows: Japan has delivered on monetary easing

and fiscal stimulus, but structural reforms are still amiss

Massive expansion of monetary base

Purchase of longer term JGBs

Inflation above zero

Delay of consumption tax hike

Added fiscal stimulus deployed

Corporate tax cuts planned

Re-allocation of public pension funds

assets announced

Labour market reform pending

Deregulation of agriculture and health

care sector

In 2012 Abenomics was launched with great hopes of

ending deflation and reviving growth through monetary

and fiscal stimulus and structural reform

During 2014 enthusiasm waned, given negative growth

in Q2 and Q3

However, there are reasons to be cautiously optimistic

going forward:

− A stable ~1.5% GDP path expected for 2015-16

− Delay in second consumption tax hike, falling oil

prices and steady rise in wages will boost consumer

confidence and domestic demand

− CPI inflation to stabilise around 1% in 2015/16

− Further depreciation of yen expected to raise

external demand

Abe’s first and second arrow have largely been

implemented and helped Japan to successfully fight

deflation over the last two years

The third arrow of structural reforms will now need to

be fully implemented to help Japan back on a growth

trajectory

Japan: Abenomics, Japan’s attempt to end two decades of deflation, is under scrutiny but the outlook is stable

Fiscal Stimulus

Monetary Easing

Growth Reforms

Japan has entered a period of positive inflation and modest

growth

1998-2012 2013 2014 2015F

CPI, Core (% yoy) -0.5% -0.2% 1.8% 1.1%

Real GDP (% yoy) 0.6% 1.6% 0.3% 1.3%

Note: Excluding the effect of the one-time consumption tax hike for new steady state

Source: MIC, Cabinet Office, BoJ, Deutsche Bank Research

~ ~

27



12 16 23 10

11 15 15

16

25

62 55

35

0%

20%

40%

60%

80%

100%

2013 2014 2016F

Domestic bonds

Domestic stocks

International bonds

International stocks

GPIF asset allocation is moving away from domestic bonds towards

more risky domestic and international equity

Source: GPIF Japan, Deutsche Bank Research

0 2 4 6 8 10 12 14 16

0

200

400

600

800

1000

BoJ Fed ECB

USD bn/ year

% of GDP, RHS

Quantitative easing across central banks: the BoJ’s programme is 3x

the level of that in Europe / US, as % of GDP

Note: ECB assumes EUR500bn a year.


Abenomic’s three arrows stand on three solid pillars

going forward in 2015 – voters, government and BoJ

− In Dec 2014, Abe’s party repeated their staggering

win of 2012 and were re-elected – a clear vote of

support for Abenomics

− We expect the BoJ to maintain its monetary

expansion in 2015 and 2016

…In October 2014, the BoJ announced plans to

increase its QQE* programme to JPY80tn a year,

much larger than in the US on a relative basis

…Represents a firm commitment to keep to its 2%

inflation target

− The government stays committed

…Proposed corporate tax cut

…Aggressive re-allocation of government pension

fund assets towards lower bond and higher equity

allocation that aims to stimulate economy and

finance an aging economy’s pension obligations

Downside risks

− Delay in 2nd consumption tax hike, inability to restrain

social security spending could increase fiscal deficit

− Discord between government and BoJ on JPY

depreciation

Japan Economics Weekly-5 Dec 2014

Japan: Voters, the government and BoJ remain all three fully committed to Abenomics

28

Notes: GPIF, Japan’s public pension fund, is the world’s largest public pension fund

QQE (Qualitative and Quantitative Easing) is the BoJ’s asset purchase programme

http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/1833-723B/16409503/DB_JapEconWkly_2014-12-05_0900b8c0890b7f52.pdf





20 19

47

59 62

37

22 21 14

-1 -2

2

-20%

0%

20%

40%

60%

80%

100%

G7 BRICS China

Investment

Private

Public

Net exports

China’s economy is much less skewed to consumption and more skewed to

investment relative to the G7 and other BRICS


China is still the second largest and fastest growing

major economy in the world and fears of a hard

landing (growth below 5%) are likely overdone

− We expect China to grow at rates of above 6% for

the next five years

However, China’s step towards rebalancing its

economy from an investment and export led model to

a consumption led growth model have come with a

structural slowdown

− Economy to decelerate to 7% from 7.3% in 2014

Slowdown is accepted and well managed by

authorities in order to avoid a hard landing

− Further monetary easing expected

− Fiscal policy easing will pick up as well – central

government fiscal deficit may widen to 3% of GDP

in 2015

− Aggressive privatisation programmes planned and

partially implemented including liberalisation of

financial sector, land and social security reforms

7.4 7.5 7.3

7.7

7.1

6.8 6.8

7.1 7.2 7.3

7.0

6.7

6.0

6.5

7.0

7.5

8.0

Q1 Q2 Q3F Q4F Q1F Q2F Q3F Q4F 13 14F 15F 16F

Actual Forecast

% yoy

2014

%yoy

2015


China’s economy will decelerate gradually. We expect a hard

landing to be avoided thanks to policy easing

29

China: The economy is rebalancing. The challenge is to manage the slowdown to avoid a hard landing

Asia Economics Monthly 3 Dec 2014

http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/2140-4874/5170509/DB_AsiaEconMthly_2014-12-03_0900b8c0890b8980.pdf



Fiscal pressure particularly at local government level is

mounting in 2015 due to decrease in land sale

revenues. This will likely lead to

− New privatisation wave in form of Public Private

Partnership models between local governments and

private investors

− Prolonged policy easing cycle in 2015 and 2016

Slowdown in property sector will persist in 2015

− Investment growth is forecasted to drop in 2015

− Structural drivers (e.g., urbanisation) are positive

but unlikely to have a material short-term impact

Growing credit risk and default rates in shadow banking

market need to be considered, however, scale has

come down recently

Need for leverage will increase to keep growth around

the 7% mark and will pave the way for more reforms

− Interest rate liberalisation reform is accelerating

− Continued growth of equity and bonds markets

− Liberalisation of capital account for inward

investments

30

China: The key risks in China lie with the fiscal situation of local governments, the property sector and shadow banking

China's unexpected fiscal slide 5 Jan 2015

0

500

1000

1500

2000

2500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Non-traditional & shadow banking RMB loans TSF

China credit flow: years of high credit growth, sustained by rise of non-

traditional lending and shadow banking are coming to an end

CNY bn

(3mma)

0 10 20 30 40 50 60 70

2010 2011 2012 2013 2014

Falling Unchanged Rising

House prices are falling in most of the largest cities as the property sector

goes through a cyclical slowdown

Mom change in home prices (count of cities)

-10 -5 0 5

10 15 20

1Q 14 2Q 14 3Q 14 4Q 14E 1Q 15F 2Q 15F

Local gov't revenues Total gov't revenues

Fiscal conditions will continue to worsen in 2015 due to declining

government revenues

% yoy

Note: TSF = total social financing, a measure of total credit to the economy. Source: CEIC, IMF 2013 Report for China, IMF

World Economic Outlook , CNBS, Haver Analytics, Bloomberg Finance LP, Deutsche Bank Research

http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/18168-E75F/29596077/DB_SpecialReport_2015-01-04_GDPBD00000274803.pdf



EM trend growth is slowing as the

factors that supported growth in

the 2000s fade

− Favourable demographics,

high commodity prices, double

digit China growth, structural

reforms

EM growth outperformance to

DM continues, but the ‘premium’

is shrinking

Inflation is generally under control

with support from lower oil prices

Low government debt, large

foreign reserves and lower

currency mismatches buffer

against external shocks

Accommodative monetary policy

from ECB and BoJ will offset Fed

tightening

The outlook for emerging markets

is certainly less supportive, with

challenges generally and at

individual country level

Pockets of risk likely where firms

have increased dollar borrowing

and are vulnerable to higher

dollar and rising US rates

EM: Despite slowing growth, a large scale EM crisis remains unlikely but dollar strength will weigh on corporate credit

1

2

3

4

5

6

7

1980 1986 1992 1998 2004 2010 2016

%

Trend GDP growth between EM and DM

converging

EM

G7

0

20

40

60

80

100

1995 2000 2005 2010 2015

Emerging Markets

Advanced Economies

Government debt levels are significantly

lower than in advanced economies

% of GDP

0

100

200

300

2000 2003 2006 2009 2012

EM USD denominated corporate bonds issued

2014: $ 276 bn

EM corporates have increased their USD

denominated borrowing in recent years

$ bn

1 EM growth premium to DM slowing 2 A large scale EM crisis is unlikely 3 But the outlook for EM credit is

less supportive

31

Source: IMF, Haver Analytics, Deutsche Bank Research



Several external and idiosyncratic factors will affect

EM growth in 2015

− The large oil price drop will be highly positive for

importers, while pressuring producers, though

currency depreciation lowers the impact for all

− Lower commodity prices more generally will

affect EM, in most cases negatively

− Beyond contributing to lower commodity prices,

a slower China will weigh on export-oriented

economies, especially in East Asia

− Rising US growth is positive for EM

− Rising US rates (and corresponding stronger

dollar) will put pressure especially on weaker

EMs in the second half of 2015

− Domestic policy will be supportive in some

cases, but a drag in others – and idiosyncratic

risks will weigh on growth

The impact of these factors on different countries

will vary, leading to divergence in growth rates

EM: In 2015, growth in EM will be impacted by several external and idiosyncratic factors

India

Indo

-nesia Poland Turkey Russia

S

Africa Brazil Mexico

Lower oil Lower

commodities

Slowing China Higher US

growth Rising US

rates Domestic

policy ? Domestic idio-

syncratic risk

Key factors that will affect the EM growth outlook in 2015

Region Growth outlook

EM Asia

Upside from cheaper oil and strong US demand

Demand weakness in China and EU, slowdown

among commodity producers and volatility from US

rates normalisation are offsetting factors

CEEMEA Slowing down on Russia recession

Most affected by low Eurozone growth

Latin

America

Accelerating but will continue to underperform

Suffers from drop in commodity prices – but also poor

policy in many economies

Exte

rnal

Idio

syncra

tic

32



EM: Potential for geopolitical escalation; lower oil prices exacerbate the risk especially in producing countries

Key risks

Suffers from

lower oil

Venezuela: default risk rising

Cheaper oil, policy inaction raise

the risk of a sovereign default

Inflation, government deficit and

scarcity jeopardise country’s

stability and oil production growth

South Africa: risk of labour tensions

Potential for government

instability given leadership battles

within incumbent ANC

Need for labour market reform

may reignite tensions with unions,

adding to labour market volatility

Mexico: political challenges

Corruption allegations and

conflicting interests slow reform

Lower oil prices threaten energy

reform

Rise in violence adds to the mix

and could lead to social unrest

Brazil: risk of populist turn

Positive signals post Rousseff’s

re-election, incl. appointment of

market-friendly finance minister

But ambition for structural reform

limited, economic policy still

interventionist, populism a risk

Turkey: governance issues and

regional insecurity Political backdrop uncertain

ahead of June general election Potential for tension around

Kurdish question External backdrop (lower oil, low

US rates) provide breathing room

Argentina: more macro weakening

Fragile economic and social

backdrop due to recession, high

inflation and restricted access to

external financing

Little improvement ahead of Oct-

2015 presidential election

Ukraine: risk of conflict escalation

Little progress on crisis resolution

Temporary bouts of escalation –

but material blow-up cannot be

ruled out

MENA: risk of escalation

Tensions high across the region,

potential for further escalation, eg

Syria civil war / Iraq crisis

Israel / Palestine

Instability in Egypt, Libya

Islamist threat

Nigeria: tension, political instability

Risk of political instability ahead

of Feb-2015 presidential election

Rise in ethnic violence

Lower oil, weaker currency

exacerbate weaknesses

Russia: lower oil adds to pressure

Economy in recession from

sanctions to suffer further from oil

prices below fiscal breakeven

Full blown crisis not our base

case, but possible

33

4 The markets in 2015



0 5

10 15 20 25 30 35 40 VIX Index VSTOXX Index

Average volatility in 2014 was the lowest year since pre-crisis

Index:

Annual

Avg.

Volatility remained relatively low throughout 2014

on the back of accommodative central bank policies

that have overridden potential macro catalysts, e.g.

global growth disappointments, falling oil prices or

the Russia/Ukraine crisis

Firm floor and soft ceiling in 2015: volatility will

continue to stay relatively low in 2015 but spikes

are expected to happen more aggressively due to

− Uncertainty around timing of Fed moves

− EM vulnerable to falling oil prices

− Political risk in Europe

Similarly, rates and FX volatility likely to pick up

from 30-year lows as central bank divergence

continues to impact markets as in late 2014

Volatility: 2015 will be another year of fairly low volatility but with interruptions of larger and more frequent spikes

-2

3

8

13

18

0

50

100

150

200

250

1984 1989 1994 1999 2004 2009 2014

Rates vol*, lhs FX vol~, rhs

Both rates and FX volatility were near 30-year lows throughout most

of 2014. FX vol picked up in late 2014 on central bank divergence

*Rates (10y yield) volatility average of US, Germany and Japan. ~FX volatility average of DEM and JPY

Source: Bloomberg Finance LP, Deutsche Bank Research

%

2015 US Volatility Outlook 4 Jan 2015

VIX: Measure of the implied volatility of S&P 500 index options. VSTOXX: Measure of the implied

volatility of EURO STOXX 50 index options. Source: Bloomberg Finance LP, Deutsche Bank Research

35

http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/971-13A1/30092541/0900b8c0890f2990.pdf



The financial crisis broke a steady 25-year trend of inflows into bonds and equities

− Equity flows since 2008 remain far below trend

− As rates rise, we anticipate outflows from bonds to drive a substantial reallocation to equities

− Even adding USD1.3tn would only take flows back to the pre-crisis trend

Key drivers for flows in 2015

− Reallocation to equities from bonds as rates rise

− A rising dollar should see flows reallocate to the US

− ECB QE will likely lead to a depreciation of the euro, triggering outflows from Europe

− Within the Eurozone, we expect intra-Eurozone flows from the core to periphery to continue

− EM bonds, equities and especially US fixed income remain at risk of outflows given sizable inflows in recent years

Flows: Expectations of rising rates are likely to prompt outflows from bonds and a substantial reallocation to equities

-15 -10

-5 0 5

10 15 20 25 30 35 40 45

2011 2012 2013 2014

Inflows into some bond categories in recent years have been large

Cumulative flows (% of NAV)

Source: EPFR, Deutsche Bank Research

NA Bonds

All EM Bonds

US HY

NA Equities

Europe Bonds

Europe Equities EM Equities

Inflows in recent years

have favoured EM

bonds, US HY and NA

bonds, all of which are

vulnerable to a reversal

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

Rising Yields Cumulative Equity Flows

Equity flows increase during periods of rising yields. Presently,

cumulative equity inflows since 2008 are ~$1.3tn below peak

Equity flows $1.3tn

below normal

$tn

36



Equities: Positive but more limited performance in 2015, given modest EPS growth and less scope for re-rating, outside Japan

Region End-

2015 View Overweight Underweight

US

S&P500

2150

(+6%)

Rising global and US growth, favourable supply / demand dynamics (inflows

into equities, continuation of buybacks), rising but still low US rates

Lower oil to weigh on Energy, stronger dollar to weigh on foreign earnings

Healthcare

Tech

Financials

Utilities

Telecom

Staples

Materials

Industrials &

Energy

Europe

Stoxx600

365

(+10%)

Strong domestic demand and weak euro

Expected ECB QE is positive, especially for the periphery

Downside risks from Russia, capex disappointment

Domestic cyclical exposure is cheap vs. quality bond proxies; defensives

premium is excessive

Banks

Autos

Insurance

HPC

Utilities

Retail, Food &

Beverages

Japan

Nikkei

20,500

(+18%)

Broadening economic recovery and supportive monetary policy in 2015 will

lead to a re-rating in Japanese equities

− P/E has deteriorated while fundamentals have improved

Portfolio reallocation of public pension fund (GPIF) provides strong support

Exporters natural winners from weaker yen

Exporters

Shippers

Tech

Insurers and

select Banks

Real Estate

Utilities

Telecoms

China

HSCEI

13,500

(+12%)

Policy easing cycle should be supportive

Clearance of property inventory will be catalyst for property / equity markets &

macro policy

Private sector to benefit at the expense of SOE / public sector

Financials

IT

Consumer Disc.

Industrials

India

29,000

(Mar-15)

(8%)

Modi’s reform programme combined with cheaper oil, lower inflation and

renewed confidence will spur a manufacturing-led growth surprise

Likely monetary easing (rate cut by March) should support investment

Banks

Energy

Materials

Consumer Disc

Industrials

Consumer

staples

Telecom

37 The Equity View - 2015 Outlook

http://pull.db-gmresearch.com/p/2487-2F1D/59083706/The_Equity_View.pdf







Expect moderate gains for S&P500 in 2015-16

− Target 2150 and 2300 at end-2015 and 2016

− Moderate EPS growth, weighed down by lower

oil and stronger USD

− PE multiple sustainable at current levels

Inflows into equities and supportive monetary policy

to support equities performance

− Rates will remain low despite Fed hikes,

keeping borrowing costs low

Stock-picking will be crucial to enhance returns,

given overall index performance will be limited

− Overweight secular growth sectors Healthcare

and Tech

− Prefer Financials over Energy, which will suffer

from cheap oil

− Overweight Financials, preferred rate hikes play

− Overweight Utilities as preferred bond substitute

− Prefer Consumer Discretionary over Industrials,

as weak oil will weigh on capex growth

Equities: Performance to be driven by stock-picking, as overall index gains will remain limited

-15%

0%

15%

Sector allocation: over / underweight relative to index weights

Note: Calculated as Over / Underweight divided by index weight


Overweight

Underweight

85

65 61

85

98 104 110

118 121

130

40

60

80

100

120

140

2007 2008 2009 2010 2011 2012 2013 2014 2015F 2016F

Actual

DB Forecast

S&P earnings should rise, but the combination of weak oil and a

strong dollar will limit EPS growth to low single-digit

$

Source: Firstcall, Deutsche Bank Research

US Equity Insights: 2015 S&P Outlook - 15 December 2014 38

http://pull.db-gmresearch.com/p/1170-D5EB/57267771/US_Equity_Insights_final.pdf






20

16

22 24

22 21 22

23 26

10

14

18

22

26

2008 2009 2010 2011 2012 2013 2014 2015F 2016F

Actual DB Forecast

Stoxx 600 EPS is expected to rise

Index points

Source: IBES, Deutsche Bank Research

We remain positive on European equities with a 2015

year-end target for the Stoxx 600 of 365

− EPS growth of 8%/9% in 2015E/16E, driven by

modest acceleration of global growth and weaker

euro

− Sustained higher multiples, we target higher

valuation multiples on the back of lower yields

− ECB QE to encourage performance of credit

linked-sectors in 1H15

− Domestic growth outlook for Euro area is

favourable (positive credit impulse, benefit from

oil, weaker euro and fading geopolitical headwind)

Prefer cyclical exposure; defensives overvalued due

to overly-bearish expectations on growth

− Overweight sectors benefitting from cheaper oil:

autos, construction, consumer discretionary

− Overweight IBEX (on strong credit impulse) and

DAX (on global growth outlook / cyclical exposure)

− Neutral FTSEMIB, CAC 40 and underweight the

UK given likely moderation in credit impulse in

1H15 and commodity risk

Equities: In Europe, we prefer cyclicals on a revival in the domestic economy, stronger global growth, and QE

-12

-8

-4

0

4

8

12 0

2

4

6

8

2000 2002 2004 2006 2008 2010 2012 2014

Def-Cyc 12m fwd PE gap (pts) +/- 1Stdev

EA PMI (6m chg, rhs, inv.)

Market concern over PMI deterioration is overdone: Defensive PE

premium to cyclical not reflecting economic reality

Source: IBES, DataStream, Deutsche Bank Research

European Equity Strategy: Outlook 2015, 15 Dec 2014 39

http://pull.db-gmresearch.com/p/5001-7BF3/55443976/0900b8c089070b37.pdf



US rates rallied in 2014 on secular stagnation and

low inflation concerns, despite a stronger economy

In 2015, we should see US rates rise moderately,

as the Fed starts hiking rates

− Rates are low relative to fundamentals, and

normalisation of rates should resume

− US 10Y at 2.7% by end-15, with downside risks

However, the path for rates is likely to be less one-

way than it was in 2013 (up) or 2014 (down)

− Fed monetary policy, strong growth coupled with

falling inflation, and more balanced investor

positioning will make 2015 more volatile

We expect rates to move in 3 broad stages in 2015

− Lower yields in Q1

− Sell-off in Q2 led by long-end, on expectations of

Fed rate hikes in June / September

− Sell-off in H2 led by front-end as Fed hikes rates

The key downside risk to our view is if the Fed fails

to hike rates, due either to low inflation expectations

or downward inflation

Rates: US rates should rise moderately in 2015, as the Fed starts hiking rates – but lower yields are possible in the near term

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17

Mkt pricing

Fed projections (median)

Source: Bloomberg Finance LP, Dec-2014 FOMC, Deutsche Bank Research

Fed Funds rate projections: market pricing broadly in line for timing

of first hike, but too slow in terms of pace of hikes

%

0

1

2

3

4

We expect US rates to move in 3 broad stages in 2015

US yield curve, %

End-2014


5Y 10Y 20Y 30Y 1Y

3

1

2

Lower rates initially, led by long-end

Higher rates as markets anticipate

Fed hikes

Higher short-end rates as Fed starts hiking

US Fixed Income Outlook - 19 Dec 2014 40

http://pull.db-gmresearch.com/p/5208-61DB/77511958/DB_FIWklyUS_2014-12-19_0900b8c0891d1d99.pdf.






European rates will be primarily driven by more

aggressive ECB easing and the inflation outlook

− Expansion in Q1 of the ECB’s asset purchase

programme should raise inflation expectations

and be supportive for the Eurozone recovery

The rates market is already pricing around

EUR400bn of ECB QE

As the market gains further clarity ECB easing and

as inflation normalises, we expect

− Core: higher long-end (10Y Bund at 1.1% by

year-end, vs. 0.5% now) and moderately lower

front-end

− Periphery: tighter spreads vs. core, especially in

the long-end

Two key risks to the view

− Rising political risk leads to a sell-off in the

periphery

− Demand for safer assets keep core rates lower

for longer

-50

0

50

100

150

200

250

QE2

(Aug-Oct 2010)

Operation Twist

(Aug-Oct 2011)

QE3 / QE4

(Aug-Oct 2012)

EUR 5Y5Y real rate

(GDP weighted)

Note: (*) of 10Y equivalent. Source: Bloomberg Finance LP, Deutsche Bank Research

The market is pricing around EUR400bn of ECB QE, judging from

the level of real rates compared to previous QE episodes in the US

bp

-200bp

in 2014

Previous QE episodes in the US

European rates

market pricing

around EUR400bn

of ECB QE USD400bn*

USD700bn*

Rates: Europe rates will be driven by ECB QE and low inflation; peripheral rates will be the main beneficiary

Impact of ECB QE on European rates

Core

Front-end to rally moderately, with negative nominal

yields likely

Long-end to sell-off if ECB QE is seen as effective,

as risk of deflation is priced out

Rising US rates to put further upward pressure,

especially in the long-end

Periphery Spreads to tighten as periphery will be the main

beneficiary of ECB QE

European Rates & Credit Outlook 2015: 5 Dec 2014 41

http://pull.db-gmresearch.com/p/14215-B000/18376006/DB_RateCreditWklyEU_2014-12-05_0900b8c0890eb4c9.pdf



Default rates remain low

− Healthier corporate balance sheets

− Borrowing costs remain ultra-low, supporting

firms’ financial position

While we expect default rates to rise, they will

remain low relative to history

− EUR forward default rates are 1.5-2%, still

incredibly low

− US HY to rise from cycle lows of 1.7% to 3.5%;

still well below historical average

In 2015, US credit will face headwinds

− Lower oil prices put pressure on US credit

(energy sector is largest in US HY, second in IG)

− Prospect for Fed hikes and higher rates

We favour Europe over US credit

− EUR credit benefits from further ECB easing

− Lower exposure to the energy sector

42

Credit: Credit will see challenging returns this year; EUR credit will outperform US credit

0

2

4

6

8

10

12

14

16

18

2000 2002 2004 2006 2008 2010 2012 2014

US

Global

Europe

Source: Moody’s, Deutsche Bank Research

Default rates are, and are likely to remain, low – as the real

economy recovers while rates remain low

%

50

75

100

125

150

175

200

225

2010 2011 2012 2013 2014

EUR Non-Fin A

USD Non-Fin A

US credit widened in H2 2014 on the back of declining oil prices and

prospect of rising US rates

bps




USD has strengthened against all major FX in 2014

and has become a consensus long on account of

stronger US growth and likely Fed normalisation

− USD rose ~12% vs EUR and JPY in 2014

We continue to be in the middle of a USD upcycle

− Current up-cycle started in 2011; now mid-cycle

We expect the USD to strengthen further—e.g.

EURUSD at 1.15 and USDJPY at 130 by end-2015

− Stronger US growth: especially in relative terms

vs. the Eurozone (~2.5% growth rate gap)

− Divergent monetary policy: The Fed will be the

first major CB to tighten

Risks to this view include:

− Less capacity for ECB/BoJ to surprise in 2015

− EUR growth surprises on low oil

− EUR resilience of recent years persists

2.5

-10.5 -12.0 -12.1 -12.1

-12

-8

-4

0

4

CNY Commodity FX*

EUR JPY EM FX

2014 Performance

The USD rose strongly against nearly every currency in 2014

(except CNY)

(*) CAD,BRL,AUD 2013 Nominal GDP weighted. Source: IMF, Deutsche Bank Research

%

60

80

100

120

140

160

73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

Nominal Dollar vs Majors Real Broad Dollar


6yrs,

down

18%

6yrs,

up 67%

10yrs,

down 46% 7yrs,

up 43%

9-10yrs,

down 40%

(vs. majors)

US nominal and real effective exchange rate: Dollar follows long-term cycles lasting 6-10 years

FX: The USD is in the middle of a multi-year upcycle, underpinned by a strong domestic economy and easing abroad

43



Depressed demand in Europe is set to generate a

“Euroglut” of savings over the coming years

− Depressed Eurozone demand led to a record

current account surplus of 2.2% of GDP in 2014

− High unemployment and an aging society will

keep future demand low and savings high

Europe, the 21st century's largest capital exporter

− EUR 0.5 – 1tr of excess cash will be sitting in

European bank accounts and earn zero returns

− The savings surplus combined with ECB liquidity

and depressed yields will take investors abroad

The asset price implications are significant, in

particular for the long-term value of the euro

− We expect EURUSD to fall to 0.95 by the end of

2017 as capital outflows rise

− US Treasuries will likely be a key beneficiary of

rising inflows, keeping the yield curve flat

− Among EMs, the most solid countries will profit

from European capital flows

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

1.60

1.65

-20

30

80

130

180

230

2010 2011 2012 2013 2014

2yr EU-US real rates, lhs

EUR/USD, rhs

Rising central bank liquidity in Europe and the increasing yield

spread to the US will be a key driver behind a weaker euro

bps


-800

-600

-400

-200

0

200

400

600

1990 1994 1998 2002 2006 2010 2014

China Eurozone US


Eurozone current account surpluses are a new major source of

global imbalances, generating massive excess savings

USD bn

FX: Europe’s current account is leading to a glut of excess savings, which will push the euro below parity by 2017

Special Report FX & Rates: Euroglut - 6 Oct 2014 44

https://ger.gm.cib.intranet.db.com/ger/document/pdf/GDPBD00000271133.pdf






Commodity prices have fallen to multi-year lows in

many cases

− Worst performing asset class for 3rd consecutive

year in 2014

While at current levels investors may be tempted to

add long exposures, the asset class overall will

remain under pressure in 2015

− Rising dollar will continue to weigh on prices

− Asset class will struggle to attract capital inflows,

with physical fundamentals driving performance

Within commodities, energy markets and precious

metals, most sensitive to a stronger dollar, will

underperform

− Crude oil prices to remain low as supply

outstrips demand, but limited further downside

− Gold to weaken further

Global growth pick-up will push demand for

industrial metals and bulk commodities – though a

slower China is a headwind

Commodities: Will remain under pressure in 2015, on the back of a stronger dollar – but there will be pockets of outperformance

-49 -39 -30 -25 -24 -24 -15 -14 -10 -8 -4 -1 0 0

15 16 19 21

73

-60 -40 -20

0 20 40 60 80

Sugar

US

natu

ral gas

Nic

kel

Cott

on

Cru

de o

il

Alu

min

ium

Pla

tin

um

Corn

Silv

er

Soybeans

Wheat

Copper

Zin

c

Lead

Cocoa

Coff

ee

Gold

Tin

Palla

diu

m

Commodities returns will continue to underperform


How far prices in real terms are currently

trading versus their 2002-2013 average (%) Expensive

Cheap

Key commodities views for 2015

Energy Neutral Oil prices to recover only gradually from H2 –

but limited further downside

Precious

Metals

Short gold Gold is expensive relative to dollar, global

growth and rates; rising dollar and rate hikes

will drive gold prices lower

Safe haven flows to provide temporary support

Long silver Silver is cheap and tends to outperform gold in

US growth phases

Industrial

Metals

Long Supply challenges in select markets and global

growth pick-up will drive price recoveries

Risks specifically to copper from China

slowdown, rising dollar

Agriculture Long Cheap and prone to upside from weather

induced supply disruptions

45

5 Deutsche Bank forecasts



DB forecasts

* CPI (%) forecasts are period averages

CEEMEA: Czech Rep., Hungary, Poland, Russia, Turkey, South Africa, Israel, Romania, Kazakhstan,

Ukraine, Egypt, Saudi Arabia and UAE

LATAM: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela

ASIA: China, HK, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Sri Lanka, Taiwan, Thailand,

Vietnam

DM: US, Japan, Eurozone, UK, Denmark, Norway, Sweden, Canada, Australia, New Zealand, Switzerland

47

GDP growth (%) Key market metrics

2013 2014F 2015F 2016F Current Q4-14 Q2-15 Q4-15

Global 3.2 3.3 3.6 3.8 US 10Y yield (%) 2.01 2.15 2.50 2.65

US 2.2 2.5 3.7 3.1 EUR 10Y yield (%) 0.51 0.54 0.80 1.10

Eurozone -0.4 0.8 1.0 1.3 EUR/USD 1.18 1.21 1.20 1.15

Germany 0.1 1.4 1.0 1.2 USD/JPY 120 121 121 125

Japan 1.6 0.3 1.3 1.7 S&P 500 2,062 2,150

UK 1.7 3.0 2.5 2.3 Stoxx 600 342 375

China 7.7 7.3 7.0 6.7 Oil WTI (USD/bbl) 49 53 55 58

India 4.7 5.5 6.5 6.5 Oil Brent (USD/bbl) 51 58 60 63

EM (Asia) 6.1 6.0 6.2 6.1 Current prices as of 8 January COB

EM (LatAm) 2.6 0.8 1.5 2.9

EM (CEEMEA) 2.8 2.3 1.9 2.5

EM 4.8 4.4 4.5 4.9

DM 1.2 1.7 2.4 2.3

CPI inflation, YoY* (%) Central Bank policy rate (%)

2013 2014F 2015F 2016F Current Q1-15 Q3-15 Q4-15

US 1.5 1.7 1.2 2.1 US 0-0.25 0-0.25 0.50 1-1.25

Eurozone 1.4 0.4 0.2 1.3 Eurozone 0.05 0.05 0.05 0.05

Japan 0.4 2.9 1.3 0.9 Japan 0-0.1 0-0.1 0-0.1 0-0.1

UK 2.6 1.5 1.3 1.8 UK 0.50 0.50 0.75 1.00

China 2.6 2.2 2.6 3.0 China 2.75 2.75 2.25 2.25

India 10.1 7.3 6.0 6.0 India 8.00 7.50 7.50 7.00




Appendix 1 Important Disclosures Additional Information Available upon Request

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

Attribution

The Author of this report wishes to acknowledge the contributions made by Shakun Guleria and Varun Narang, employee of Infosys Ltd., a third party

provider to Deutsche bank offshore research support services.

For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most recently

published company report or visit our global disclosure look-up page on our website at

http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.

48

http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr



Regulatory Disclosures 1. Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the “Disclosures Lookup” and “Legal” tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas

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 ideas can be found at the SOLAR link at http://gm.db.com.

3. Country-Specific Disclosures Australia & New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Investment Advisers Association. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless Japan or "Nippon" is specifically designated in the name of the entity. Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in the securities referred to herein and may from time to time offer those securities for purchase or may have an interest to purchase such securities. Deutsche Bank may engage in transactions in a manner inconsistent with the views discussed herein. Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no. 00032) is regulated by the Qatar Financial Centre Regulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall within the scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower, West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation. Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company, (registered no. 07073-37) is regulated by the Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al Olaya District, P.O. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia. United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority.

Risks to Fixed Income Positions Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.



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