333 Bush Street 104 Date: Nove mber 4, 2016 · 2016. 10. 31. · Footnotes: Data is weekly and as...
Transcript of 333 Bush Street 104 Date: Nove mber 4, 2016 · 2016. 10. 31. · Footnotes: Data is weekly and as...
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Larry Adam, CFA, CIMACIO and Chief Investment Strategist — WealthgManaging [email protected]
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Review of Performance Year to Date —1
Where are We in the U.S. Economic C2
Divergent Monetary Policy — Using Th3 Divergent Monetary Policy — Using Th3
Market Risks — Kryptonite Caution4
Global Fixed Income — Time to Put on t5
U.S. Equities — Same Bat Time, Same Ba6
Global Equities — Batman..Beware of th7
U.S. Dollar — Solving the Riddler’s Dollar8
Commodities — The “Dark Knight” Comm9
Coming Together — Collide or Collabora10
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
g g10
rom the Greatest American Hero)
— Some Blockbuster Performance
Cycle? — A “Superman” Economy?
heir X-Ray Abilitiesheir X-Ray Abilities
the Cape…and Use Intellect!
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r Dilemma
modity Rises
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nvestment Strategist – Wealth Management - Americas1
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Review of Performance Ye1
A Review of Asset Class Performance in
Some “Blockbuster” Performance
30.0%
35.0% Equities: LATAM outperforms on crude oil rebound.
Sectors: Cyclical Sectors O3Q16
15.0%
20.0%
25.0%
5.0%
10.0%
-10.0%
-5.0%
0.0%
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Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
I
Footnotes: Data as of September 30, 2016. Sorted by year to date returns.Source: FactSet, Deutsche Bank Wealth Management.
ar to Date
n 3Q16 and YTD
Outperform in MLPs Maintain Strong Recovery
Commodities: Rebound Continues
Fixed Income: “Carry” on
00 es ry als re ex ar Oil
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nvestment Strategist – Wealth Management - Americas
C
2
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Where are We in the U.S. E2
A “Superman” Economy?
U.S. Europe
Withholding Tax Receipts German Exports Orders
Jobless Claims Credit Impulse
Belgium ManufacturingISM Production
Commercial & Industrial Loans
Belgium Manufacturing Survey
Consumer SentimentLoans
New Vehicle Sales Inflation
U.S. growth should modestly accelerate in the next 12 months as headwinds
fade, consumer spending is boosted by a strong labor market and relatively low
interest rates support housing and
Consumption and government should be the drivers of growth in 2016 and
2017 with limited Brexit fall out effects. ECB should remain accommodative as
inflation remains low
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Source: Deutsche Bank Wealth Management.
business investment. inflation remains low.
Economic Cycle?
ChinaJapan
Electricity DemandCore Machinery Orders
Cement OutputPMI Manufacturing/Services
Housing Prices
Retail Sales
Average Real Earnings
Consumer Confidence
InflationInflation
China’s economy appears to be stabilizing with little probability of a hard landing. The PBOC will keep the door
open for additional policy action if warranted
Growth is expected to be muted in 2016 and 2017 suggesting that fiscal stimulus
will need to accompany aggressive monetary stimulus. The BoJ will likely need to cut rates at least once more
nvestment Strategist – Wealth Management - Americas 3
warranted. and increase their purchase program.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Where are We in the U.S. Econ
Employment Conditions Solid
Faster than Trend Growth…..
$1,800,000
$2,000,000
$2,200,000
$2,400,000
450 000
500,000
550,000
600,000
650,000
700,000
Employment Conditions SolidJobless claims at the lowest level since 1973 and withheld tax receipts growing
at a record high suggest ongoing improvement in the labor market.
'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16$1,000,000
$1,200,000
$1,400,000
$1,600,000
200,000
250,000
300,000
350,000
400,000
450,000
(MSUM 1Y) Withheld Income & Employment Taxes in millions - U S (Left)(MSUM 1Y) Withheld Income & Employment Taxes, in millions U.S. (Left)(MOV 4W) Initial Jobless Claims - United States (Right)
Vehicle Sales Strong
Footnotes: Data is weekly and as of September 30, 2016.Source: FactSet, Deutsche Bank Wealth Management.
Vehicle sales have naturally slowed from their recent peak but still remain near the highest levels since 2005.
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data as of September 2016.Source: FactSet, Deutsche Bank Wealth Management.
nomic Cycle?
Manufacturing Stabilizing
60
70
80
Manufacturing StabilizingThere are signs of stabilization in manufacturing as the broad ISM Index and ISM
production subcomponent have both moved back in expansionary territory.
20
30
40
50
ISM Production
ISM Index
Jan-00 Dec-02 Nov-05 Oct-08 Sep-11 Aug-14
Footnotes: Data as of September 2016.Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
According to the Senior Loan Officer Survey, banks have
Lending Stalling?
been tightening lending standards for three consecutive quarters and there has been less demand for loans for two
consecutive quarters.
nvestment Strategist – Wealth Management - Americas 4
Footnotes: Data as of 2Q16.Source: FactSet, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Where are We in the U.S. Econ
More Powerful than Other Economies…
U.S. Economy Resilient – Entering the E
4.0%
5.0%
6.0%
1.0%
2.0%
3.0%
-2.0%
-1.0%
0.0%
11 11 11 12 12 12 12 13 13 13
Eurozone
China
2Q1
3Q1
4Q1
1Q1
2Q1
3Q1
4Q1
1Q1
2Q1
3Q1
Japan
UK
Brazil
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data is most recent data as of October 4, 2016. Red squares indicate when GData Source: FactSet, Deutsche Bank Wealth Management.
nomic Cycle?
.
Eighth Year of Expansion
U.S. GDP (QoQ Annualized)
13 14 14 14 14 15 15 15 15 16 16
4Q1
1Q1
2Q1
3Q1
4Q1
1Q1
2Q1
3Q1
4Q1
1Q1
2Q1
nvestment Strategist – Wealth Management - Americas
DP was negative.
5
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Where are We in the U.S. Econ
Current Expansion vs History
Able to Leap Tall Buildings in a Single B
Current Expansion vs. History
80
100
120
140
s
Economic Expansion (AVG) Economic Expansion
0
20
40
60
80
# of
Mon
ths
1938
-194
5
1945
-194
8
1949
-195
3
1954
-195
7
1958
-196
0
1961
-196
9
1970
-197
3
1975
-198
0
1980
-198
1
1982
-199
0
1991
-200
1
2001
-200
7
2009
-Pre
sent
*
— By the end of 2016, the current expansion will be 91 months, well above the historical average of 60 months and the fourth longest in history.
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Time period reflects 1938 to present. Current expansion is using June 2009-Dec 2016.Source: NBER, Deutsche Bank Wealth Management.
nomic Cycle?
Slow Growth or Recession Ahead?
ound….
15%
20%
25%Average GDP Growth vs. Pre-Cris Peak (up to
2Q16)
Slow Growth or Recession Ahead?
0%
5%
10%U.S.
Germany
Japan
FranceEurozone
-10%
-5%
0 1 2 3 4 5 6 7 8
# of Years
— The recovery after the “Great Recession,” has significantly lagged the recovery seen in prior recessions.
— In fact, the U.S. economy is ~10% above its pre-crisis GDP, vs. 22% for previous recoveries.GDP, vs. 22% for previous recoveries.
— However, the U.S. recovery has been significantly stronger than Eurozone and Japan.
nvestment Strategist – Wealth Management - Americas 6
Footnotes: Data as of 2Q16. *Average recessions are 1973, 1981, 1990 and 2001. Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Where are We in the U.S. Econ
Analyzing Historic
Remember, Even Superman Gets Tired
% of Time in Cycle Business Cycle S&P 500 ReturnAverage S&P 500
P/E
17%
Recession -14.7% 13.31
17%
Current Cycle -25.2% 16.18
13%
Recovery 25.1% 15.90
Current Cycle 23 2% 16 62Current Cycle 23.2% 16.62
22%
Expansion 8.9% 18.36
Current Cycle 10.2% 15.39
48%
Late Cycle 5.9% 16.74
Current Cycle 8.2% 18.11
ReturnsP/Es
Footnotes: Table is using eight economic cycles from 1953 to present. Current cycle is frothrough 9/30/2016. Recession is quarter prior to start of recession to the trough in real GDExpansion is from recovery to first rate hike Late cycle is first rate hike to next recession
Returns tend to slow in
late cycle.
contract as the cycle
matures.
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Expansion is from recovery to first rate hike. Late cycle is first rate hike to next recession. current cycle began 12/31/2015, data annualized as of 9/30/2016 where applicable.Source: Bloomberg Finance LP, FactSet, Deutsche Bank Wealth Management.
nomic Cycle?
al Economic Cycles
Earnings GrowthAverage Real Fed
FundsAverage Real 10 YR
YieldAverage Real GDP
10Year Treasury Return
-20.1% 0.7% 1.8% -1.7% 10.7%
-15.0% -1.0% 0.8% -2.2% 8.5%
7.5% 0.6% 2.3% 3.7% 11.2%
25 5% 0 5% 2 6% 2 7% 4 5%25.5% -0.5% 2.6% 2.7% 4.5%
17.5% 0.6% 2.5% 4.3% 11.1%
5.5% -1.4% 0.7% 2.1% 4.9%
8.5% 1.8% 2.3% 4.1% 4.7%
1.1% -0.6% 0.5% 2.2% 9.6%
Earnings Fed “Real”
om 2007 to 9/30/2016. All available data, returns and estimates for current cycle are DP. Recovery is from trough in real GDP to when real GDP surpasses prior cycle peak.
1980 and 1981 1982 recessions are treated as one economic cycle Late cycle in
growth cut nearly in
half in late cycle.
Fed starts raising rates.
Real Treasury
yields stabilize.
GDP growth slows.
Bond returns slow.
nvestment Strategist – Wealth Management - Americas
1980 and 1981 -1982 recessions are treated as one economic cycle. Late cycle in
7
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Divergent Monetary Polic3
Central Bank Playbook: Using Their X-Ray A
Fed ECBFed ECB
Tightening Policy Easing PolicyBase case is two rate hikes over the
next 12 months, with one by December 2016 and another by
September 2017.
Following the extension of QE earlier this year, the ECB is in wait and see
mode. We anticipate the ECB to prolong QE from Mar ’17 to Sep ‘17
and remain open to another rate cut if warranted (not our base case
scenario).
2 0%
2.5%
3.0%
3.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2016 2017 2018
While we anticipate two Fed rate hikes over the next 12 months, the trajectory of Fed rate
hikes continue to move lower.
While the ECB is in wait and see mode, low inflation and a stubbornly strong Euro
increases the probability of more monetary policy over the next 12 months.
2016 2017 2018
Dec-15 Mar-16 Jun-16 Sep-16
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data is most recent as of September 30, 2016.Source: FactSet, Deutsche Bank Wealth Management.
policy over the next 12 months.
cy Abilities
BOJ BoEBOJ BoE
Easing Policy Easing PolicyBase case is that the BoJ will increase
their QE program and announce additional measures (fiscal and
monetary), all in an effort to steepen the yield curve.
Base case is for one rate cut over the next 12 months due to Brexit fallout.
1.2
1.4
1.6
1.8
e te
rms
1 3%
1.5%
1.8%
2.0%
0.0
0.2
0.4
0.6
0.8
1.0
in p
erce
ntag
e
0.3%
0.5%
0.8%
1.0%
1.3%
2016 2017
As Japanese economic growth continues to disappoint, the Japanese yield curve has
flattened to the lowest level in years. The BoJannounced yield curve targeting in the
As the U.K. economy is expected to be significantly impacted by the Brexit, we expect the BoE to cut interest rates one time over the
next 12 months.
Sep-00 Nov-04 Jan-09 Mar-13
Japan Yield Curve 10YR - 2YR
2016 2017
UK Growth Forecasts
nvestment Strategist – Wealth Management - Americas 8
announced yield curve targeting in the attempt to steepen the yield curve.
next 12 months.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Divergent Monetary PolicyWhy the Fed is Walking a Fine Line
Job Gains and Tightening CyclesJob Gains and Tightening Cycles
2,500
3,000
3,500
h ad
ditio
n of
in
thou
sand
s)
First Rate Hike
Payroll gains have slowed but have been much higher than historically seen ahead
of a tightening cycle.
1,000
1,500
2,000
-12 -9 -6 -3 0 3 6 9 12
rolli
ng 1
2 m
onth
nonf
arm
pay
rolls
(
December 2015 Rate HikeAverage of all Tightening Cycles
Core CPI and Tightening Cycles
Footnotes: Average is 15 tightening cycles since 1955. Recent as of August 2016.Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
9 6 3 0 3 6 9
# of Months
5.0%First Rate Hike
Core inflation is significantly lower than has historically been seen in tightening cycles, but is
gradually moving higher.2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
r C
hang
e in
Cor
e C
PI
First Rate Hike
0.0%
0.5%
1.0%
1.5%
2.0%
-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12
Yea
r ov
er Y
ear
# of Months
Average all Tightening Cycles
December 2015 Tightening Cycle
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Average is 14 tightening cycles since 1958. Recent as of August 2016.Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
ISM and Tightening Cycles
53
55
57
59
61 First Rate Hike
ISM and Tightening Cycles
45
47
49
51
53
-12 -9 -6 -3 0 3 6 9 12
# of Months
Average all Tightening Cycles
December 2015 Tightening Cycle
ISM was much weaker leading into the recent
tightening cycle than history but is improving.
# of Months
GDP and Tightening Cycles
Footnotes: Average is 15 tightening cycles since 1955. 3 Mo Moving Average of ISM. Recent as of September 2016.Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
5.0%
First Rate Hike
Whil GDP h hi i ll2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
ter
Ave
rage
of Y
oY R
eal
GD
P
While GDP has historically accelerated through the first rate hike, real GDP has been slowing
in this tightening cycle.
0.0%
0.5%
1.0%
1.5%
2.0%
-4 -3 -2 -1 0 1 2 3 4
Tra
iling
4 Q
uart
# of Quarters
December 2015 Tightening CycleAverage all Tightening Cycles
nvestment Strategist – Wealth Management - Americas 9
Footnotes: Average is 15 tightening cycles since 1955. Recent as of 2Q16.Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
# of Quarters
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Market Risks - Kryptonite C4
EuroStoxx Limited Response
Fading Impact of QE (and Aggressive Mo
3,600
3,800
4,000
C t R t
Announce QE
Cut Rates
EuroStoxx Limited Response
3,000
3,200
3,400
Cut Rates;Increase &Expand QE
1/15 4/15 7/15 10/15 1/16 4/16 7/16 10/162,600
2,800
Euro STOXX 50 - Price
— The positive impact of aggressive central bank measures on equity prices is losing its lasting effects.
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data as of October 3, 2016. Annotations are strictly ECB actions.Source: FactSet, Deutsche Bank Wealth Management.
Caution
Currency Conundrum
onetary Policy)
Currency Conundrum
123
128 BoJ ExpandsQE Program BoJ Expands
QE Program
ECB Cuts Rates BoJAnnounces Yield Curve
Control
113
118FOMCRaisesRates
ECBAnnounces
QE
103
108
1/4/13 7/8/13 1/9/14 7/13/14 1/14/15 7/18/15 1/19/16 7/22/16
Average Trade Weighted EUR & JPY (Index)
ECB CutsRates:
Raises QE
— Despite aggressive easing and the expansion of their balance sheets, the Trade Weighted Euro and JPY have rallied 5% and 19% year to date, respectively.
e age ade e g ted U & J ( de )
nvestment Strategist – Wealth Management - Americas 10
Footnotes: Data is weekly and as of September 30, 2016.Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Market Risks - Kryptonite Ca
Limited Ability for Fiscal Stimulus
Fading Impacts of QE (with Limited Fisca
100
120
140
GD
P
Limited Ability for Fiscal Stimulus
20
40
60
80
Gro
ss D
ebt
as %
0
20
Italy Portugal France Spain Ireland Germany
2014 2015 2016 2017
— Many European governments have limited ability to use fiscal stimulus as a way to boost their economies.
— This is due to the fact that they are exceeding the debt to GDP limitations set by the Maastricht Treaty.
— According to the criteria, each member state must not have more than 60% of debt to GDP.
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data as of 2015. Estimates as of April 2016. Ranked according to 2017. Source: IMF, Deutsche Bank Wealth Management.
autional Flexibility)
Economies in “NIRP”*Economies in NIRP
-0.2%
-0.1%
0.0%
-0.6%
-0.5%
-0.4%
-0.3%
-0.8%
-0.7%
Switzerland Sweden Europe Denmark Japan
Central Bank/Deposit Rates
— Another way to try to boost growth has been to drive short term interest rates into negative territory to entice investors to move to risky assets and spark lending.
Footnotes: Data as of October 4, 2016. *NIRP stands for negative interest rate policy. Switz Sweden Denmark and Japan are central bank rates Europe is overnight deposit
nvestment Strategist – Wealth Management - Americas 11
Switz., Sweden, Denmark and Japan are central bank rates. Europe is overnight deposit rate.Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Market Risks - Kryptonite Ca
P/E Tailwind Turns into Headwind
Normalizing Monetary Policy
P/E Tailwind Turns into Headwind
— The U.S. equity market has seen valuations supported by the expansion of the Fed balance sheet.
— As the Fed continues down its path of normalization, P/E expansion is unlikely.
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data as of September 30, 2016. Source: FactSet, Deutsche Bank Wealth Management.
aution
Late Cycle Set Back?Late Cycle Set Back?
105
110 First Rate Hike
90
95
100
85
90
-252 -216 -180 -144 -108 -72 -36 0 36 72 108 144 180 216 252
Average S&P 500 Return 2015
— Historically, the S&P 500 tends to peak ~ nine months after the Fed starts their tightening cycle.
— In fact, from nine months after the tightening cycle to one year later, the S&P 500 only returns, on average, 0.2%.
If hi i id h S&P 00 b id h h— If history is a guide, the S&P 500 can be sideways through 4Q16.
nvestment Strategist – Wealth Management - Americas 12
Footnotes: Data as of.October 3, 3016. Average tightening cycles from 1955-2004. Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Market Risks - Kryptonite Cauti
GDP Cycle
Market and Economic Performance in El
GDP Cycle
5678910
2 0%
2.5%
3.0%
3.5%
4.0%
4.5%Nine of the 14 recessions
since 1929 have started in the first year of a Presidential
term.
01234
0.0%
0.5%
1.0%
1.5%
2.0%
Year 1 Year 2 Year 3 Year 4
Average GDP in Presidential Cycle (LHS) # of Times Recession Started (RHS)
Footnotes: Time period reflects 1929-2015.Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
Equities in Open Election Underperform
Average GDP in Presidential Cycle (LHS) # of Times Recession Started (RHS)
The S&P 500 in a year of an open election (8 8% y p (occurrences) has underperformed all election years by
852 bps.
-2%
0%
2%
4%
6%
8%
-6%
-4%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
S&P 500 Performance in Years of Open Elections
S&P 500 Performance in All Elections Years
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Time period reflects 1933-2015.Source: FactSet, Deutsche Bank Wealth Management.
ion
Eighth Year vs Fourth Year of Cycle
lection Cycle
Eighth Year vs. Fourth Year of Cycle
5%
10%
15% The S&P 500 in the eighth year (8 occurrences) of a presidential cycle has underperformed the fourth year
by 1716 bps.
-10%
-5%
0%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Year 4 Year 8
Footnotes: Time period reflects 1933-2015. Eight occurrances.Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
— The U.S. Presidential election has often been an inflection point for both the S&P 500 and economic growth.
— For example, going back to 1929, nine of the 14 recessions have started in the first year of a Presidential term.
— In addition, the S&P 500 tends to underperform in the fourth quarter of an open election year.
nvestment Strategist – Wealth Management - Americas 13
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Market Risks - Kryptonite Cauti
Equities “Stretched”
Expensive Valuations….I am Batman!
Equities Stretched
— Equity valuations (trailing P/E of the S&P 500) are trading well above their historical average.
— In fact, over the past 10 years the S&P 500 P/E (LTM) has been lower than its current level, 97% of the time.*
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data is as of October 3, 2016. *Current level used is 18.5x LTM as of October 3, 2016.Source: FactSet, Deutsche Bank Wealth Management.
ion
Interest Rates at Record LowsInterest Rates at Record Lows
— Fixed income yields look expensive as they hover near record lows. Since 1960, the 10 year Treasury yield has been higher than its current level 99% of the time.
— In fact, the 10 year yield recently fell below the year over year f PCE f th fi t ti i S t b 2012pace of core PCE for the first time since September 2012.
— This is a rare occurrence and has only happened in two other instances since 1960.
nvestment Strategist – Wealth Management - Americas 14
Footnotes: Data as of October 3, 2016.Source: FactSet, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Global Fixed Income5
Lower U S Supply
Time to Put on the Cape…and Use Intel
Lower U.S. Supply
$1,500,000
$2,000,000 estimate
$-
$500,000
$1,000,000
in m
illio
ns
$(500,000)
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
U.S. Treasury Net Issuance
— Due to sequestration and better tax revenue, the U.S. budget deficit should continue to shrink in 2016 and 2017.
— This should reduce the amount of Treasury issuance in 2016 to the lowest level (~$325 billion) since 2007 and down to $225 billion in 2017.
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data as of Septembe 30, 2016. Estimate as of October 2016.Source: Bloomberg Finance LP, Deutsche Bank Global Markets, Deutsche Bank Wealth Management.
At a Time When Yield is Needed
lect!
At a Time When Yield is Needed
Switz. Japan Germ. France Swed. Italy Spain U.S. Port. UK
3 Mo -0.96% -0.40% -0.80% -0.68% -0.75% -0.39% -0.58% 0.33% -0.04% 0.32%
2 YR -0.95% -0.28% -0.68% -0.63% -0.67% -0.10% -0.23% 0.82% 0.42% 0.12%
3 YR -0.97% -0.27% -0.69% -0.60% -0.51% 0.03% -0.13% 0.94% 1.01% 0.12%
5 YR -0.85% -0.23% -0.55% -0.41% -0.35% 0.31% 0.10% 1.23% 1.95% 0.23%
7 YR 0 75% 0 22% 0 44% 0 23% 0 20% 0 69% 0 33% 1 51% 2 52% 0 44%7 YR -0.75% -0.22% -0.44% -0.23% -0.20% 0.69% 0.33% 1.51% 2.52% 0.44%
10 YR -0.54% -0.07% -0.05% 0.27% 0.21% 1.31% 0.98% 1.68% 3.39% 0.78%
30 YR -0.02% 0.46% 0.53% 1.05% 0.42% 2.37% 2.10% 2.41% 4.32% 1.51%
— This lower issuance is coinciding with the ECB’s aggressive monetary policy which makes the need for yield even greater.
nvestment Strategist – Wealth Management - Americas 15
Footnotes: Data as of October 4, 2016.Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Global Fixed Income
ECB Absorbs Europe Supply
Holy Supply/Demand Imbalance, Batma
ECB Absorbs Europe Supply
The ECB will purchase ~293% of
Country Cap Key (%) Implied Buying (billion EUR)
Net Issuance (billion EUR)
Germany 25.6 309.6 -19.3
France 20.1 262.6 89.0
Italy 17.5 250.5 220.6
Spain 12.6 177.6 104.1 293% of the expected net issuance through its
asset purchase program.
Netherlands 5.7 69.8 5.5
Belgium 3.5 50.4 4.3
Austria 2.8 40.3 0.8
Portugal 2.5 36.0 13.8
Finland 1.8 25.1 13.5Ireland 1.6 23.0 18.8
Slovakia 1.1 15.8 0.9
Slovenia 0.5 7.1 3.1
Footnotes: Data as of October 4, 2016.Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
Amount of Negative Yielding Debt
Slovenia 0.5 7.1 3.1
Others 4.7 67.7
Total 100 1335.5 455.1
$16.1 T< 0%26.1%
$16.5 T> 2%25 5%
Breaking Down Sovereign Debt Interest Rate Ranges
Total Global SovereignDebt:$63T as of October 4, 2016
g g
Almost 30% of the total Global sovereign debt is yielding less than zero.
26.1%
$17.6 T0% to 1%
27.9%
$9.3 t1% to 2%
14.8%
25.5%
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data as of October 4, 2016.Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
Strong Participation in Auctions
n!
50
60
70
80
ge
term
s
Strong Participation in AuctionsIndirect bidders (foreign central banks) of 10 YR U.S. Treasuries
remains well above average at auction.
20
30
40
50
Jul-11 May-12 Mar-13 Jan-14 Nov-14 Sep-15 Jul-16
In p
erce
nta
g
10YR I di t Bidd P ti i ti % f Bidd A t A t d10YR Indirect Bidder Participation % of Bidder Amount Accepted
(5YR AVG) 10YR Indirect Bidder Participation % of Bidder Amount Accepted
Footnotes: Data as of September 2016.Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
Inflows into U.S. Bonds
0
200
400
600
800
Flows into U.S. bonds have increased while funds have moved out of Europe and Japan.
-800
-600
-400
-200
Dec-09 Sep-10 Jun-11 Mar-12 Dec-12 Sep-13 Jun-14 Mar-15 Dec-15
United States Euro Area Japan
nvestment Strategist – Wealth Management - Americas 16
Footnotes: Data as of July 2016.Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
United States Euro Area Japan
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Global Fixed Income
Combing the Field for Yield
Convertibles *Convertibles
Historically, convertibles have a high correlation to equities.
Emerging Market Selective
Footnotes: Data is monthly and as of September 2016. *Check marks indicate favored sectors.Source: FactSet, Deutsche Bank Wealth Management.
Emerging markets offer attractive carry over sovereigns. However, with spreads near their historical
average, selectivity is important.
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data as of October 4, 2016. Source: FactSet, Deutsche Bank Wealth Management.
Investment Grade *Investment Grade
Current = 138 bps
12 month target = 115 bps
High Yield Selective
Footnotes: Data as of October 4, 2016.Source: FactSet, Deutsche Bank Wealth Management.
10%
15%
20%
25%High yield debt may already be
reflecting the estimated improvement in the default rate
over the next 12 months.
0%
5%
Jan-00 Oct-02 Jul-05 Apr-08 Jan-11 Oct-13 Jul-16
U.S. Speculative Grade Default RateHigh Yield Spreads (in percentage terms)
nvestment Strategist – Wealth Management - Americas 17
Footnotes: Data is default rate estimates per Moody‘s as of August 2016. Current spreads is as of October 3, 2016.Source: FactSet, Moody‘s, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
U.S. Equities6
Bull Market Trudges On
Same Bat Time, Same Bat Channel!
Bull Market Trudges On
400
450
500
550 2009 2002
1987 1982
1974 1957
1949 1942
Average Bull Market
200
250
300
350
400 Average Bull Market
100
150
200
1 2 3 4 5 6 7 8 9 10
Number of Years
— The current bull market is the strongest at this juncture (~8 years) and is the second longest bull market in history.
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Time period reflects all bull markets from 1942 to present. Current bull market is taken from March 9, 2009 and current data as of October 3, 2016.Source: FactSet, Deutsche Bank Wealth Management.
As Volatility Picking UpAs Volatility Picking Up
35
40
45
10
15
20
25
30
5
10
Dec-90 Mar-94 May-97 Aug-00 Oct-03 Jan-07 Mar-10 May-13 Aug-16
Rolling 1 YR Average of VIX Index
(AVG) Rolling 1 YR Average of VIX Index
— As the bull market matures, the historically low environment of volatility is likely to reverse.
— In fact, the rolling one year average VIX Index has increased ~20% from its October 2014 lowincreased ~20% from its October 2014 low.
nvestment Strategist – Wealth Management - Americas 18
Footnotes: Data as of October 4, 2016.Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
U.S. Equities
Valuations Stretched
What is the Appropriate P/E?
Valuations Stretched
— The trailing P/E (18.6x LTM) of the S&P 500 is well above average (15 6x LTM) and above our 12 month targetaverage (15.6x LTM) and above our 12 month target (17.25x LTM).
— We arrive at an estimated P/E range by using a variety of economic factors that can drive P/Es.
— What is important to note is that when using our estimated p grange, history suggests that returns are likely to be below average.
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data as of October 3, 2016.Source: FactSet, Deutsche Bank Wealth Management.
What’s the Appropriate P/E?What s the Appropriate P/E?Factor Mean P/E Median P/E
Direction From Current Level (17.8x)
Consumer Confidence 20.5x 19.1x Expansion
Earnings Volatility 17.4x 16.8x Contraction
Real Interest Rate 14 5X 15 5X ContractionReal Interest Rate 14.5X 15.5X Contraction
Earnings Growth 16.2x 16.8x Contraction
GDP 16.0x 16.2x Contraction
Govt Budget Balance 15.1x 16.4x Contraction
Demographics <15x <15x Contraction
Suggested Range 16.25x 17.25x Contraction
12.0%
14.0% Price Return 12 Months Later
Returns to be More Muted
Footnotes: Time period reflects 4Q63-1Q16. All analysis most recent as of September 2016. Source: FactSet, Deutsche Bank Wealth Management.
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
urn
12 M
onth
s La
ter Average
-4.0%
-2.0%
0.0%
Under 10 10-12 12-14 14-16 16-18 18-20 20+
Pric
e R
etu
P/E Range (LTM)
F A i 12 h f ll Ti i d fl
nvestment Strategist – Wealth Management - Americas 19
Footnotes: Average is average 12 months return of all years. Time period reflects January 1945 – September 2016.Source: FactSet, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
U.S. Equities
Earnings Trough?
With No P/E Expansion, Looking for Earn
8.7%
6.7% 6.8%
14.4%
7%
12%
th (
%)
Earnings Trough?
1.5%0.1%
-0.2%
-3.3%
5 7%
-1.4% -0.8%-3%
2%
Yea
r-ov
er-Y
ear
Gro
wt
-5.7%-8%
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
Y
S&P 500 Earnings Growth (YoY)
— The S&P 500 is experiencing its first earnings recession (at least two consecutive quarters of negative earnings growth) since 2009 as earnings have declined on a year over year basis for four consecutive quarters (not including 3Q16).
— Given that earnings typically beat estimates by ~3-5%, it is likely that the earnings recession ended in 2Q16.y g
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data as of October 4, 2016.Source: FactSet, Deutsche Bank Wealth Management. .
nings to Turn Around
Fading Earnings Drags
40.0%
60.0%
80.0%
Fading Earnings Drags
-40.0%
-20.0%
0.0%
20.0%
-60.0%4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17
Crude Oil (Average YoY) Dollar Index (Average YoY)
— The deterioration in energy prices and strong rally in the gy p g ydollar have had major impacts on earnings during the recent earnings recession.
— However, these drags should begin to fade as we move through 2016 and into 2017.
Footnotes: Data is estimates as of October 2016
nvestment Strategist – Wealth Management - Americas 20
Footnotes: Data is estimates as of October 2016.Source: Bloomberg Finance LP, Deutsche Asset Management, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
U.S. Equities
Sector
Scale Green (Most Attractive)
Grey (Neutral) Red (Least Attractive)
From a fundamental pe
Cyclicals vs. Defensives — Cyclicals Cat
Technology
From a fundamental pework to increase produFrom a valuation persp(to the S&P 500) basis
Cons. DiscretionaryConsumer discretionarsolid confidence and lo
Cyclicals
HealthcareIncreased volumes andelection year politics popotential buying opport
IndustrialsGradual improvement and better valuations mspending could benefit
REITsREITs should benefit fenvironment and attrac
FinancialsFinancials may be chayield curves and negat
Stabilization in oil priceEnergy ($55/bbl). Expect M&A
momentum, oil prices m
Cons. StaplesStaples may benefit asattractive and a strong
MaterialsLess attractive valuatiocompaniescompanies.
UtilitiesUtilities should be negaattractive valuations.
TelecomTelecom should be negattractive valuations. P
Defensives
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Source: Deutsche Bank Wealth Management.
Rationale Subsector in Focus
erspective capex spending should increase as companies
tch the Economic Upswing
erspective, capex spending should increase as companies uctivity. Dividend growth and buybacks have been steady. pective, valuations are attractive on an absolute and relative s.
Hardware, software, security
ry should benefit from increased job creation, wage increases, ower commodity prices.
Focus on internet (e.g. online retailers). Another way to gain
"volume exposure" is via transactions (e.g. credit cards in
t h l /fi i l t )technology/financial sectors).
d positive demographics should support healthcare but ose a modest headwind. Evaluate periods of weakness as tunities.
Biotech
in the global economy, increased transportation in the U.S. may benefit Industrials. In addition, any increase in defense t the sector.
Transportation, Machinery, Aerospace, Defense
rom a gradual increase in growth, low interest rate ctive yield.
Apartments, Hotels, Self Storage
allenged in the near term due to margin compression given flat tive interest rates.
Money centers, life insurers, asset managers.
es is underway, we expect modest upside over next 12 mosA and modest dividend cuts. However, as the dollar gains may face renewed pressure.
MLPs
s the global economy improves. However, valuations look less er dollar may weigh on prices.
ons and strength in the dollar should weigh on mining
atively impacted by a modest rise in interest rates and less
gatively impacted by modestly rising interest rates and less Pricing wars among large providers may present challenges.
nvestment Strategist – Wealth Management - Americas 21
Bottom Line:
• Favor Cyclicals versus Defensives
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
U.S. Equities
Average S&P 500 Return by Party
Which Party Does the Equity Market Fav
Average S&P 500 Return by Party
2 9%
10.5%
64.0%
66.0%
68.0%
70.0%
72.0%
6 0%
8.0%
10.0%
12.0%
2.9%
54.0%
56.0%
58.0%
60.0%
62.0%
0.0%
2.0%
4.0%
6.0%
Republican Democrat
— Historically, the equity market favors Democrats over Republicans.
Average Annual S&P 500 Return by Presidential Party (LHS)
% of Time Positive (RHS)
— However, it is important to remember that these historical differences can be explained by the sharp decline seen in the Herbert Hoover (Republican) administration which took place in the Great Depression. President Clinton (Democrat) was a beneficiary of the dotcom bubble.
— In addition, equity returns tend to be the lowest in year four of a Presidential cycle.
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Time period reflects 1930-2015.Source: Bloomberg Finance LP, FactSet, Deutsche Bank Wealth Management.
vor?
Average Annual S&P 500 by PresidentAverage Annual S&P 500 by President
6.7% 9.5% 12.9%7.0%
0.9%5.3%
11.6% 14.8% 17.7%
1.1%7.4%
-20.0%-10.0%
0.0%10.0%20.0%30.0%
-29.2%-40.0%-30.0%
Hoo
ver
Roo
seve
lt
Tru
man
Eis
henh
ower
nned
y/Jo
hnso
n
Nix
on/F
ord
Car
ter
Rea
gan
Bus
h S
r.
Clin
ton
Bu
sh J
r.
Oba
ma
A A l S&P 500 R t b P id t
S&P 500 in Presidential Cycle
Footnotes: Data is 1930-2015. Price return only. Annual growth.Source: FactSet, Bloomberg Finance LP, Deutsche Bank Wealth Management.
Ke Average Annual S&P 500 Return by President
14 8% 90 0%16 0%
5.7%
7.3%
14.8%
5.6%30 0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
0.0%
10.0%
20.0%
30.0%
0.0%
2.0%
4.0%
6.0%
Year 1 Year 2 Year 3 Year 4
Aevrage S&P 500 Return in Presidential Term (LHS) % of Time Positive (RHS)
nvestment Strategist – Wealth Management - Americas 22
Footnotes: Time period reflects 1929 to 2015. Source: FactSet, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
U.S. Equities
“Consensus” Thinking May Be a Trick
Sectors and Presidential Party
S&P 500Consumer
DiscretionaryConsumer
StaplesEnergy Financia
Truman 8.2% -3.3% 7.6% 13.6% 8.5%
Eisenhower 11.4% -4.8% 18.6% 8.9% 8.2%
Kennedy/Johnson 7.8% -13.1% 3.9% 10.5% 6.7%
Nixon/Ford -0.7% -2.4% 8.3% -1.0% -1.6%
Carter 6.5% 7.4% -4.9% 19.5% 5.0%
Reagan 10.2% -8.5% 15.6% 6.6% 0.4%
George Bush Sr. 11.5% -22.1% 19.8% 5.7% 4.8%g
Bill Clinton 15.2% 13.2% 10.0% 11.7% 19.2%
George Bush Jr. -6.2% -5.0% 1.0% 5.9% -12.5%
Barack Obama 9 9% 17 9% 10 3% 1 3% 4 3%
F t t Ti i d fl t l ti f 1945 t 2012 R d i bli bl i d
Barack Obama 9.9% 17.9% 10.3% 1.3% 4.3%
Average Republican 5.3% -8.6% 12.7% 5.2% -0.1%
Average Democrat 9.5% 4.4% 5.4% 11.3% 8.7%
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Time period reflects elections from 1945 to 2012. Red is republican, blue is dereturns may differ from annual returns per year on prior page (page 24).Source: FactSet, Deutsche Bank Wealth Management.
ls Healthcare Industrials Info Tech Materials Telecom Utilities
1.7% 8.8% 12.2% 11.8% -0.2% 6.6%
19.9% 13.4% 35.8% 10.0% 10.4% 10.4%
10.5% 7.3% 16.4% 2.7% 2.4% 4.5%
5.2% 0.1% -1.5% 4.5% -1.1% -4.8%
4.5% 6.7% 1.3% -2.2% -4.1% 1.0%
16.7% 7.9% 7.3% 12.6% 13.2% 10.5%
18.4% 8.6% 3.1% 4.7% 9.9% 9.4%
18.0% 15.4% 29.5% 4.2% 12.0% 6.5%
-3.8% -5.1% -12.5% 1.7% -9.6% -3.7%
13 0% 9 9% 14 3% 7 4% 5 3% 6 6%
t R t i f l ti d t th d i t th did t l i ffi
13.0% 9.9% 14.3% 7.4% 5.3% 6.6%
11.3% 5.0% 6.4% 6.7% 4.6% 4.3%
9.5% 9.6% 14.7% 4.8% 3.1% 5.0%
nvestment Strategist – Wealth Management - Americas
emocrat. Return is from election day to the day prior to the candidate leaving office so
23
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
U.S. Equities
The Growth vs. Value Debate
Fed Tightening CyclesFed Tightening Cycles
0.7% 0.7%
2.3%
1.2%
1.0%
1.5%
2.0%
2.5%Growth stocks tend to outperform value stocks in the three, six, nine and 12 month time frame after
the Fed starts raising rates.
-0.5%
0.7% 0.7%
-1.0%
-0.5%
0.0%
0.5%
1.0%
+1am +3am +6am +9am +12am
Footnotes: Time period reflects tightening cycles since 1976. Total return.Source: FactSet, Deutsche Bank Wealth Management.
Growth Performance vs. Value Following Fed Tightening Cycle
Earnings Favor Growth over Value
11.2% 10.4% 9.7%
0.0%
5.0%
10.0%
15.0%
gEarnings growth is more favorable for growth over value.
-0.2% -0.9% -1.6%-0.7% -1.9% -2.9%
-10.0%
-5.0%
S&P 500 Growth S&P 500 S&P 500 Value
3 Mo Change to Next 12 Mo Earnings 6 Mo Change to Next 12 Mo Earnings
LTM Earnings Growth NTM Earnings Growth Estimate
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
g g
Footnotes: Data as of September 30, 2016.Source: FactSet, Deutsche Bank Wealth Management
Growth vs Value and GDP7.3%
3.8%
40%50%60%70%80%90%
0%2%4%6%8%
10%
th O
utpe
rfor
ms
alue
ance
vs.
Val
ue
man
ce
Growth vs. Value and GDPGiven our outlook for growth between
1.5-2.5%, history suggests growth stocks outperform value by, on
average, 3.8%.
-6.1%
-2.4%
0%10%20%30%40%
-8%-6%-4%-2%0%
1.5% or Less 1.5-2.5% 2.5%-3.5% 3.5% or More % T
ime
Gro
wt
Va
Gro
wth
Per
form
aP
erfo
rm
Annual GDP
(AVG) S&P 500 Growth Performance vs S&P 500 Value (Total Return) (LHS)% Time Growth Outperforms Value (RHS)
Footnotes: Time period reflects 1976-2015.Source: FactSet, Deutsche Bank Wealth Management.
Sector CompositionpGrowth tends to have more exposure into the sectors we
favor than value (e.g. tech and healthcare).
0 0%
10.0%
20.0%
30.0%
40.0%
0.0%In
fo T
ech
Con
s.
Dis
cret
iona
ry
Hea
lth C
are
Con
s. S
tapl
es
Indu
stria
ls
Rea
l Est
ate
Fin
anci
als
Mat
eria
ls
Ene
rgy
Tel
ecom
Util
ties
% in S&P 500 Growth % in S&P 500 Value
nvestment Strategist – Wealth Management - Americas 24
Footnotes: Data is as of October 4, 2016.Source: FactSet, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Global Equities7
Valuations Attractive
Batman….Beware of the Trap!
Valuations Attractive
— Relative to the S&P 500, the MSCI EAFE P/E is trading at or below the lower end of its long term average range.
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data is as of October 4, 2016.Source: FactSet, Deutsche Bank Wealth Management.
Attractive vs BondsAttractive vs. Bonds
90%
100% 100%
80%
100%
120%
54%
20%
40%
60%
80%
0%U.S. UK EuroStoxx 50 Nikkei 225
% of Companies Paying Dividend Yield over 10YR Sovereign Yield
— Relative to bonds, most major developed Indices have a significant amount (or all) of stocks in their Indices paying a dividend yield above their comparable 10 year sovereign bond yield.
nvestment Strategist – Wealth Management - Americas 25
Footnotes: Data as of October 5, 2016. EuroStoxx 50 uses 10YR German Bund as comparable.Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Global EquitiesBatman…Beware of the Trap!
Central Bank Stimulus
$4,000
$5,000
$6,000 Japan Balance Sheet (in USD)
ECB Balance Sheet (in USD)
Fed Balance Sheet
Central Bank Stimulus
$0
$1,000
$2,000
$3,000
Lackluster growth and slowing inflation has forced many central banks to increase their
balance sheets. $0Dec-06 Sep-08 Jun-10 Mar-12 Dec-13 Sep-15 Jun-17
Footnotes: Data as of September 30, 2016.Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
Valuations Attractive
Japanese equities look attractive on a relative basis versus global equities.
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data is as of October 4, 2016.Source: FactSet, Deutsche Bank Wealth Management.
BoJ Support to Equity MarketBoJ Support to Equity Market
2.0%
2.5%
3.0%
3.5%The BoJ has been the most active. By adding the purchase of equity ETFs, the BoJ owns ~3% of the entire market cap
of the MSCI Japan
0.0%
0.5%
1.0%
1.5%
Dec-10 Jan-12 Feb-13 Mar-14 Apr-15 May-16
Footnotes: Data is as of August 2016.Source: Bloomberg Finance LP, Deutsche Bank Wealth Management.
Beware of JPY
BoJ Holdings of ETFs as % of Total MSCI Japan Market Cap (in USD)
However, strength in the JPY (vs. USD) may threaten the earnings outlook for Japanese
equities.
nvestment Strategist – Wealth Management - Americas 26
Footnotes: Data is as of October 4, 2016.Source: FactSet, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Global Equities
Risks Clouding Europe
Batman…Beware of the Near Term Risk
Risks Clouding EuropeLooming Risks for Europe
Earnings Uncertainty Banking Crisis
Stubbornly Strong EURO Central Bank Credibility/Error
Italian Referendum (October) Debt Spiral
France Elections (Apr/May 2017) "Brexit" Fallout
German Elections (Aug/Oct 2017) Terrorism
Immigration Crisis Global Slowdown
Italian Fears Heating Up
Footnotes: Data as of October 2016.Source: FactSet, Deutsche Bank Wealth Management.
Immigration Crisis Global Slowdown
200 The Italian referend m is the most important political
120
140
160
180
200
in b
ps
The Italian referendum is the most important political event before year end and we have seen the markets
reflect the uncertainty in the credit default swap market.
80
100
120
Sep-15 Oct-15 Dec-15 Jan-16 Mar-16 Apr-16 Jun-16 Jul-16 Sep-16
Italy 5YR CDS
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data as of October 4, 2016.Source: FactSet, Deutsche Bank Wealth Management.
Financials and Flat Yield Curves
ks
Financials and Flat Yield Curves
1.75%
2.25%
2.75%
100
105
110
115
0.75%
1.25%
80
85
90
95
MSCI Europe Financials Earnings Estimates Next 12 Mos (RHS)
Average Yield Curve (10-2YR, Germany, Italy, Spain, France) (LHS)
Negative interest rates and a flat yield curve is damaging the
banking sector.
Footnotes: Data as of October 4, 2016.Source: FactSet, Deutsche Bank Wealth Management.
Valuation Discount May LingerWhile al ations ers s the U S are attracti eWhile valuations versus the U.S. are attractive, European equities may continue to trade at a discount to U.S. equities due to overwhelming
near term risks.
nvestment Strategist – Wealth Management - Americas 27
Footnotes: Estimates as of October 4, 2016.Source: FactSet, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Global Equities
Growth Premium No More
Robin, the Boy Wonder, Continues to Str
80
100120
140160
3.0%
4.0%
5.0%
6.0%
7.0%
Growth Premium No More
-20
020
4060
-1.0%
0.0%
1.0%
2.0%
3.0%
4Q03
1Q05
2Q06
3Q07
4Q08
1Q10
2Q11
3Q12
4Q13
1Q15
Average EM Growth Premium (LHS)
(AVG) Average EM Growth Premium (LHS)
MSCI EM (local) - S&P 500 Index (RHS)
— EM growth surpassed DM growth from 4Q03 – 1Q15, however, i th th th diff ti l h b ti fsince then, the average growth differential has been negative for
four consecutive quarters.
— In fact, according to the IMF, the 2016 growth difference should be the smallest level (2.1%) since 2000.
— Lastly given our expectation for the dollar to regain momentumLastly, given our expectation for the dollar to regain momentum,the negative correlation between the dollar and emerging markets may put pressure on prices.
Footnotes: Data as of 1Q16. Growth premium is year over year real GDP. Developed
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
market is equally weighted (U.S., UK, Europe and Japan). EM countries are equally weighted (Brazil, Russia, India, China, Korea, Taiwan, South Africa). Source: Bloomberg LP, FactSet, Deutsche Bank Wealth Management. .
Premium to Remain Narrow
ruggle
4
6
8
term
s
Growth Differential 2011 Forecast2012 Forecast 2013 Forecast2014 Forecast 2015 Forecast2016 forecast
Premium to Remain Narrow
0
2
4
in p
erce
ntag
e
-21980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019
Footnotes: Projections as of April 2016 IMF World Economic Outlook Report.Source: FactSet, Deutsche Bank Wealth Management.
Cautious on Emerging Marketsr
nvestment Strategist – Wealth Management - Americas 28
Footnotes: Data is weekly and as of September 30, 2016.Source: FactSet, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Global Equities
Asia and Latam Fair Valued
Remember Robin, Always Look Both Wa
Asia and Latam Fair Valued
— EM valuations for Asia relative to Latam are fair valued.
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data is as of October 4, 2016.Source: FactSet, Deutsche Bank Wealth Management.
Earnings Uncertainty
ays
Earnings Uncertainty
90
100
110
60
70
80
D it th t bili ti i dit i i
50Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16
EM Latin America Asia ex Japan
— Despite the stabilization in commodity prices, since September 2014, earnings have been revised down by 34% in Latin America, 24% in the MSCI EM Index and 17% in Asia ex Japan.
nvestment Strategist – Wealth Management - Americas 29
Footnotes: Data as of September 2016.Source: FactSet, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Is There Room for the Do8
Pullbacks are Expected
Solving the Riddler’s Dollar Dilemma
Pullbacks are ExpectedPeak Date Trough Date Peak Trough Pull Back Total Days
6/5/1979 7/24/1979 97.43 93.59 -3.94% 49
11/13/1979 1/7/1980 98.37 94.30 -4.14% 55
4/7/1980 7/10/1980 102.98 92.25 -10.42% 94
8/4/1981 11/30/1981 114.00 103.64 -9.09% 118
4/8/1982 5/7/1982 114.94 110.26 -4.08% 29
7/7/1982 7/23/1982 120.33 116.01 -3.59% 16
8/12/1982 8/24/1982 120.27 116.23 -3.36% 12
11/8/1982 1/10/1983 123.36 113.80 -7.75% 63
8/11/1983 10/7/1983 124.88 120.19 -3.76% 57
1/11/1984 3/6/1984 126.06 119.90 -4.89% 55
11
10/16/1984 11/7/1984 136.77 131.61 -3.77% 22
Average for First Strengthening Cycle -5.34% 51.85/23/1995 5/26/1995 82.36 79.89 -3.00% 3
9/19/1995 9/22/1995 86.38 83.75 -3.04% 3
4/28/1997 5/21/1997 95.27 91.34 -4.12% 23
8/25/1998 1/11/1999 103.28 93.79 -9.19% 139
7/12/1999 10/15/1999 100 63 94 37 6 22% 958 7/12/1999 10/15/1999 100.63 94.37 -6.22% 95
5/17/2000 6/19/2000 103.69 99.23 -4.30% 33
11/24/2000 1/3/2001 108.19 102.52 -5.24% 40
7/5/2001 9/19/2001 110.88 105.86 -4.52% 76
Average for Second Strengthening Cycle -4.96% 51.510/4/2011 10/27/2011 73.75 69.69 -5.51% 23
1/13/2012 2/9/2012 74 26 71 92 3 16% 27
8
1/13/2012 2/9/2012 74.26 71.92 -3.16% 27
7/12/2012 9/14/2012 75.77 71.81 -5.23% 64
5/22/2013 6/14/2013 78.09 75.11 -3.82% 23
7/9/2013 10/22/2013 78.66 74.55 -5.23% 105
3/13/2015 5/13/2015 93.37 87.60 -6.18% 61
1/19/2016 5/2/2016 95.80 87.71 -8.49% 103
Average for Current Cycle -5.37% 58.0
7
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data as of July 15, 2016. Source: FactSet, Deutsche Bank Wealth Management.
g y
ollar to Run?
Pullbacks in Indexed CyclesPullbacks in Indexed Cycles
130140150160170180 Denotes 3-5% pullback
Denotes >5% pullback
100110120
1 49 97 145
193
241
289
337
385
433
481
529
577
625
673
721
769
817
865
913
961
1009
1057
1105
1153
1201
1249
1297
1345
1393
1441
1489
1537
1585
1633
1681
1978-1985
135140145
100105110115120125130
1 49 97 45 93 41 89 37 85 33 81 29 77 25 73 21 69 17 65 13 61 09 57 05 53 01 49 97 45 93 41 89 37 85 33 81
120125130135140
145
4 9 14 19 24 28 33 38 43 48 52 57 62 67 72 76 81 86 91 96 100
105
110
115
120
124
129
134
139
144
148
153
158
163
168
1995-2002
Building a base
100105110
115120
1 49 97 145
193
241
289
337
385
433
481
529
577
625
673
721
769
817
865
913
961
1009
1057
1105
1153
1201
1249
1297
1345
1393
1441
1489
1537
1585
1633
1681
2011-Present
nvestment Strategist – Wealth Management - Americas
2011-Present
30
Footnotes: Data as of September 30, 2016. Source: FactSet, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Is There Room for the Dollar
Current Run in Dollar On Par
Historically the Dollar is in Line, but Tech
Current Run in Dollar On Par
140
150
160
170+67%
+43%
100
110
120
130
1 226 451 676 901 1126 1351 1576
+32%
No Friends Left
Footnotes: Data as of September 30, 2016.Source: FactSet, Deutsche Bank Wealth Management.
Nov 76 Nov 82 Aug 86 Sep 92 Nov 98 Jun 03
1 226 451 676 901 1126 1351 1576
1978-1985 1995-2002 2011 - Present
Nov 76 May 81
Nov 82 Aug 84
Aug 86 May 89
Sep 92 Feb 95
Nov 98 May 00
Jun 03 Jun 06
2016
JPN Yes No Yes No No Yes Easing
EU Yes Yes Yes No Yes Yes Easing
CAN Yes Yes Yes Yes Yes Yes No
GBR Yes Yes Yes Yes No Yes Easing
CHE Y N Y N Y Y NCHE Yes No Yes No Yes Yes No
AUD Yes Yes Yes Yes Yes Yes No
NZL N/A N/A N/A Yes Yes Yes Easing
SWE Yes Yes Yes Yes Yes Yes No
NOR Yes Yes Yes No Yes Yes Easing
Total 8 6 8 5 7 9 0
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data as of October 3, 2016.Source: Deutsche Bank Global Markets, Deutsche Bank Wealth Management.
Total 8 6 8 5 7 9 0
to Run?
Rate Differentials Favor Dollar
hnicals Pose a Risk
Rate Differentials Favor Dollar
Footnotes: Data as of October 3, 2016.Source: FactSet, Deutsche Bank Wealth Management.
Key Technicals Remain Intact
nvestment Strategist – Wealth Management - Americas 31
Footnotes: Data as of October 3, 2016Source: FactSet, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Commodities – Finding a B9
The “Dark Knight” Commodity Rises
Crude Oil Bucking Seasonal TrendCrude Oil Bucking Seasonal Trend
10%
20%
30%
40%
50%
10%
15%
20%
-40%
-30%
-20%
-10%
0%
-10%
-5%
0%
5%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
— Crude oil was resilient in 3Q16, bucking a seasonal trend of declining in the second half of the year in recent years.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Cumulative Performance During the Year
10 year Average (LHS) 2016 (RHS) 2015 (LHS)
g y y
— The resiliency was largely in part due to an announced production cut by OPEC and strength in U.S. gasoline consumption.
— As U.S. production has come offline, global demand is t d t d l thi t f th fi t ti iexpected to exceed supply this quarter for the first time since
4Q13 in 2017.
— Going forward as the supply/demand imbalance narrows in 2017, we expect crude oil to move modestly higher to $55/barrel over the next 12 months.
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data as of September 30, 2016.Source: FactSet, Deutsche Bank Wealth Management. .
Balance
U S Production StabilizingU.S. Production Stabilizing
-12% decline
3 0
Supply/Demand Imbalance Waning
Footnotes: Data as of September 23, 2016.Source: FactSet, Deutsche Bank Wealth Management.
0 50.00.51.01.52.02.53.0
Bar
rels
/day
EIA estimatesOversupply
-2.0-1.5-1.0-0.5
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
Mill
ion
B
EIA Global Supply/Demand Imbalance
Undersupply
nvestment Strategist – Wealth Management - Americas
pp y
32
Footnotes: Data as of September 2016.Source: FactSet, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Commodities – Finding a Balan
Rig Count Turnaround
The “Dark Knight” Commodity Rises
50%
-40%
-30%
-20%
-10%
0%1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96 101
Rig Count Turnaround
-90%
-80%
-70%
-60%
-50%
Reduction in Baker Hughes Oil Rigs
12/14/1990 8/8/1997 11/7/2008 10/10/2014
— Following the largest reduction in rig counts on record (-78%), rig counts have now risen for 14 consecutive weeksweeks.
— While oil prices have declined, so have costs for U.S. oil producers as oil extraction costs have fallen 20% YoY.
— As production slowly comes offline and demand (particularly U.S. gasoline demand) remains near record (p y g )highs, we expect crude oil prices to gradually rise to $55 over the next 12 months.
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data as of September 30, 2016.Source: FactSet, Deutsche Bank Wealth Management. .
nce
Oil Production Costs FallingOil Production Costs Falling
$100
$120
$140
$160
20%
40%
60%
80%
100%
$20
$40
$60
$80
-80%
-60%
-40%
-20%
0%
Jan-06 May-07 Sep-08 Jan-10 May-11 Sep-12 Jan-14 May-15
Summer Driving Season Ending
Footnotes: Data as of August 2016.Source: St. Louis Federal Reserve, Deutsche Bank Wealth Management.
300
YoY Decline in PPI Oil Extraction Costs (LHS) WTI Crude Price (RHS)
250
260
270
280
290
300
of M
iles
210
220
230
240
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Bill
ions
o
Min 10 Yr Range 2015 2016 (YTD) 10 Year Average
nvestment Strategist – Wealth Management - Americas 33
Footnotes: Data as of July 2016.Source: Department of Transportation, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Commodities – Finding a Balan
Gold Speculative Demand Rising
Not a “Golden” Opportunity
Gold Speculative Demand Rising
1600
1800
2000
70
75
80
85
90
800
1000
1200
1400
45
50
55
60
65
70
— On increased volatility following the Brexit vote, speculative demand for Gold ETFs rose to the highest level since July 2013 Fund flows have been a key driver
Feb-09 Jan-10 Dec-10 Nov-11 Oct-12 Sep-13 Aug-14 Jul-15 Jun-16
Gold ETF Holdings (LHS, in millions) Gold Price (RHS, $/oz)
level since July 2013. Fund flows have been a key driver to gold’s performance.
— Falling real interest rates have also boosted demand for gold. As we expect a limited rise in rates over the next 12 months, gold should remain range bound.
— However, as the Dollar continues to strengthen, gold could come under pressure due to its negative 20 year correlation (-.45) to the dollar.
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data as of September 30, 2016.Source: Bloomberg Finance LP, Deutsche Bank Wealth Management. .
nce
Real Interest Rates Driving DemandReal Interest Rates Driving Demand-3%
-2%
-1%1,600
1,700
1,800
1,900
2,000
'11 '12 '13 '14 '15 '16
0%
1%
2%
3% 1,000
1,100
1,200
1,300
1,400
1,500
Gold Price (Right)
0 4
Dollar Poses a Challenge
Footnotes: Data as of October 3, 2016.Source: FactSet, Deutsche Bank Wealth Management.
Gold - Price (Right)U.S. 10 Year Treasury Yield (inverted) (Left)
-0.4
-0.2
0
0.2
0.4
-0.8
-0.6
Softs Energy Grains Precious Metals
Bloomberg Commodity
Index
Industrial Metals
20 Year Correlation to the Dollar
nvestment Strategist – Wealth Management - Americas 34
Footnotes: Data as of October 3, 2016. Data is daily 20 year correlation.Source: FactSet, Deutsche Bank Wealth Management.
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Come Together: Collide or 10
"The World has Been so Caught up With What He Can Do
EconomyCentral Bank
P liU.S. Dollar St th
ValuatiEconomyPolicy Strength
Valuati
U.S. Equities + / / -
International Equities / + / /
Treasuries - / / -
+ + / /Credit + + / /
Commodities / / - /
Dollar + + / +
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
Footnotes: Data is as of October 4, 2016. *Batman versus Superman movie.Source: Deutsche Bank Wealth Management.
Collaborate
o, that No-one Has Asked What He Should Do.“*
ons Summary Rationaleons Summary Rationale
/Favor Large Cap, Select Cyclicals over Defensives,
Dividend growth stocks; Favorite sectors = Tech, Consumer Discretionary, Healthcare and Industrials
/ No clear delineation between DM and EM. Favor U.S. and Japan over Europe. Favor Asia over Latam.
- Neutral Duration
+ Favor Credit over Treasuries (Investment Grade; Select+ Favor Credit over Treasuries (Investment Grade; Select High Yield and Hard Currency EM Debt)
- Avoid Raw Commodities. Recommend Income Producing Real Assets (MLPs).
+ Dollar over Select Developed Currencies (e.g. EUR and GBP). Hedge select International Exposure.
nvestment Strategist – Wealth Management - Americas 35
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Multi Asset Investment CommitOctober 2016GDP Growth 2016 2017in % Currencies CurrentWorld 3.3% 3.4%USA 1 8% 1 9% EUR USD 1 12USA 1.8% 1.9% EUR vs. USD 1.12Euroland 1.5% 1.2% USD vs. JPY 102.85UK 1.8% 0.8% EUR vs CHF 1.09Japan 0.5% 0.7% GBP vs USD 1.28China 6.3% 6.0% USD vs CNY* 6.67
Inflation 2016 2017Commodities Current
in %USA (core PCE) 1.6% 1.8% Oil (WTI) in USD 49USA (core PCE) 1.6% 1.8% Oil (WTI) in USD 49
Euroland 0.2% 1.5% Gold in USD 1270UK 0.7% 2.4%
Japan -0.2% 0.2% Equities Current
China 2.0% 1.5%
USA (S&P 500) 2150
Curr Acct Balance 2016 2017Euroland (Euro Stoxx 50) 3030
in % of GDP Germany (DAX) 10620
USA -2.7% -2.9% UK (FTSE 100) 7074
Euroland 2.9% 2.7% MSCI Japan (JPY) 804UK -5.5% -4.5% Asia ex Japan (MSCI in USD) 558
Japan 2.8% 2.5% Latin America (MSCI in USD) 2421China 2.5% 2.5%
Sovereign Rates CurrentFiscal Balance 2016 2017in % of GDP USA 1 69%in % of GDP USA 1.69%
USA -2.8% -3.0% Euroland (German Bund) -0.05%
Euroland -1.9% -1.9% UK 0.68%UK -3.5% -4.0% Japan -0.08%
Japan -6.0% -5.2%China -2.4% -2.5%
CreditCurrentCoupon
Key Interest Rates Current1 12 Mo Forecast Barclays U.S. High Yield 6.54%
Footnotes: Macro estimates are according to Deutsche Asset Management and are as of t d f l t t l th 3 P/E d EPS f t di t D t h A t M
Key Interest Rates Current(Sept 2017) JPM GBI- EM Global Diversified (Local)
USA (Fed funds) 0.25%-0.50% 0.75-1.00% JPM EMBIG (EM Broad Index) (Hard Currenc
Euroland (Refi rate) 0.00% 0.00%UK (Repo rate) 0.25% 0.10%
Japan (O/N call rate) 0.00% 0.00%
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
stands for last twelve months. 3 P/E and EPS forecasts are according to Deutsche Asset Myield move. 5 High yield spread is high yield versus five year Treasury. 6 Next 3% move inSource: FactSet, Deutsche Asset Management, Deutsche Bank Wealth Management.
ttee Forecasts
1 12 Month Forecast (Sept 2017)
12 Month Return (Sept 2017)
1 08 3 2%1.08 -3.2%100.00 -2.8%
1.10 0.5%1.25 -2.0%6.90 3.4%
1 12 Month Forecast (Sept 2017)
12 Month Return (Sept 2017)
55 13.0%55 13.0%
1375 8.3%
1Dividend
YieldP/E (LTM)2 NTM P/E
Forecast3NTM EPS Forecast3
12 Month Forecast (Sept 2017)
12 Month Return (Sept 2017)
2.1% 18.56 17.25 127 2190 3.9%
3.6% 14.04 13.50 224 3050 4.2%2.7% 13.65 13.00 821 10700 0.8%
3.6% 18.00 14.75 434 6400 -6.0%
2.3% 15.02 14.75 56 820 4.2%2.5% 14.50 13.75 41 560 2.8%
2.9% 17.29 13.50 180 2400 2.0%
1 12 Month Forecast (Sept 2017)
12 Month Return (Sept 2017)
1 80% 0 8%1.80% 0.8%
0.25% -2.7%
1.30% -4.3%-0.10% -0.3%
t n1 Yield
Current Spread5
12-Month (Price Return Estimate)
12 Month Return
6.10% 468 -1.7% 4.8%
September 2016. U.S. GDP is 4Q over 4Q. 1 Current as of October 4, 2016. 2 LTM M t d D t h B k W lth M t 4 Di ti i i b d i
6.18%
cy) 329
nvestment Strategist – Wealth Management - Americas
Management and Deutsche Bank Wealth Management. 4 Direction in sovereign bonds is n credit is return move.
36
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Important Information
Investment Strategy GroupLarry Adam, CFA®, CIMA®CIO & Chief Investment StrategistTelephone (410) 895-4135
Megan HornemanInvestment StrategTelephone (410) 8Important Information Telephone (410) 895 4135
Facsimile (410) [email protected]
Telephone (410) 8Facsimile (410) 89megan.horneman@
This document has been prepared for informational purposes only and is not an offinto any transaction relating to the products and services described herein. Before have made an independent assessment of the appropriateness of the transaction inp pp pand level of risk tolerance, and you should consult your legal and tax advisers to deprovide accounting, tax or legal advice. Investing in financial markets involves a sudescribed herein will be achieved. Investment losses may occur, and investors couprepared and is based on information from sources believed to be reliable, no repreamend the information provided herein, and information is subject to change withouits future performance. The price or value of investments to which this commentaryany products and services mentioned are not guaranteed by the FDIC (or by any gany products and services mentioned are not guaranteed by the FDIC (or by any g
This document contains “forward-looking statements”- that is, statements related toexpected future business and financial performance, and often contain words suchstatements by their nature address matters that are, to different degrees, uncertainthe behavior of financial markets, including fluctuations in interest and exchange raand further deterioration of the capital markets; the commercial and consumer credstrategic actions, including acquisitions and dispositions; future integration of acqui
tt f ti l i l d l b l l i l di th f liti lmatters of national, regional and global scale, including those of a political, economresults to be materially different than those expressed in our forward-looking statem
The information on the benchmarks is presented for illustrative purposes only and iBenchmarks are not available for direct investment. Benchmark performance assutaxes, management fees or other expenses. The performance of the benchmarks
Investing in financial markets involves a substantial degree of risk. There can be nooccur and investors could lose some or all of their investment No guarantee or repoccur, and investors could lose some or all of their investment. No guarantee or repinvestment objective, diversification strategy, or risk monitoring goal, will be succesoccur from time to time. Nothing herein is intended to imply that an investment mayand other conditions could also cause the investments to alter their investment obje
Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; gealso be subject to call risk, which is the risk that the issuer will redeem the debt at idebt instruments may fluctuate, and proceeds from sales prior to maturity may be m
“
market conditions or changes in the credit quality of the issuer. Bonds are subject tinterest and/or principal payments on a timely basis. Bonds are also subject to reininvestment may be reinvested at a lower interest rate. Investing in high yield bondsspeculative. These bonds are affected by interest rate changes and the creditworthwell as greater risk of default.
Investments in Foreign Countries - Such investments may be in countries that provforeign securities or other assets any fluctuations in currency exchange rates will a
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
“foreign securities or other assets, any fluctuations in currency exchange rates will amay make it difficult or impossible to exchange or repatriate foreign currency.
ngist895-4148
Matt BarryInvestment Strategy AnalystTelephone (410) 895-4282
Moshe LevinInvestment Strategy AnalystTelephone (410) 895-4130895 4148
fer, or solicitation of an offer, to buy or sell any security, or a recommendation to enter entering into any transaction, you should take steps to ensure that you understand and n light of your own particular financial, legal and tax situation, investment objectives
Telephone (410) 895 4282Facsimile (410) [email protected]
p ( )Facsimile (410) [email protected]
g y p , g , jetermine how these products and/or services may affect you. Deutsche Bank does not bstantial degree of risk. There can be no assurance that the investment objectives
uld lose some or all of their investment. Although this document has been carefully esentation is made that it is accurate and complete. We have no obligation to update or ut notice. The past performance of a product or service does not guarantee or predict y relates, directly or indirectly, may rise or fall. Unless you are notified to the contrary, overnmental entity) and are not guaranteed by or obligations of Deutsche Bank.overnmental entity) and are not guaranteed by or obligations of Deutsche Bank.
o future, not past, events. In this context, forward-looking statements often address as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” or “will.” Forward-looking
n. Particular uncertainties that could adversely or positively affect future results include: ates, commodity and equity prices and the value of financial assets; continued volatility dit environment; the impact of regulation and regulatory, investigative and legal actions; ired businesses; future financial performance of major industries; and numerous other i b i d titi t Th t i ti t l f tmic, business and competitive nature. These uncertainties may cause actual future
ments.
is not intended to imply the potential performance of any fund or investment. umes the reinvestment of all distributions, but does not assume any transaction costs, may vary from investments held in the account.
o assurance that the investor will achieve positive results. Investment losses may presentation is made that any investment idea including without limitation thepresentation is made that any investment idea, including, without limitation, the ssful, and investment results may vary substantially over time. Investment losses may y be considered "conservative", "safe", "risk free" or "risk averse". Economic, market, ectives, guidelines, and restrictions.
enerally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may ts option, fully or partially, before the scheduled maturity date. The market value of more or less than the amount originally invested or the maturity value due to changes in to the credit risk of the issuer. This is the risk that the issuer might be unable to make vestment risk, which is the risk that principal and/or interest payments from a given
s, which tend to be more volatile than investment grade fixed income securities, is hiness of the issuers, and investing in high yield bonds poses additional credit risk, as
ve to be politically or economically unstable. Furthermore, in the case of investments in affect the value of the investments and any restrictions imposed to prevent capital flight
nvestment Strategist – Wealth Management - Americas 37
affect the value of the investments and any restrictions imposed to prevent capital flight
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update
Investment Strategy Group
Larry Adam, CFA®, CIMA®CIO & Chief Investment Strategist
Megan HornemanInvestment Strategist
Important InformationCIO & Chief Investment StrategistTelephone (410) 895-4135Facsimile (410) [email protected]
Investment StrategistTelephone (410) 895-41Facsimile (410) [email protected]
Emerging markets may be in transitional or formative stages and thus may be signgovernment structures or other political instability may result in nationalization, expi t t t i k f d l ti ll tibilit li iditinvestments are at risk for currency devaluation, as well as convertibility, liquidity amarket investments may result in both significant losses or profits.
Foreign Exchange/Currency - Such transactions involve multiple risks, including cureliable financial information or unfavorable political or legal developments may subforeign currency. Profits and losses in transactions in foreign exchange will also bedenomination(s) to another currency. Time zone differences may cause several hopayment in another currency. Relevant movements in currencies during the settlemp y y g
Commodities - The risk of loss in trading commodities can be substantial. The pricemay be subject to substantial fluctuations over short periods of time and may be affvaluations of commodities may be susceptible to such adverse global economic, pothe appropriateness of an investment in commodities in light of their own financial ccommodities or commodities-related products and services.
Ownership in an exchange traded fund does not provide investors with entitlementsstocks, bonds, or other securities. ETFs are subject to market risk and will fluctuatthat redemption values of ETFs are based upon the market value at the time of ordare subject to commission charges and management fees. Direct Participation Program Securities (e.g. partnerships, limited liability companiesecurities exchange or on The Nasdaq Stock Market, Inc. are generally illiquid. No the purchase price. Unless otherwise indicated, the values shown herein for such s
t l Th l t t’ ti t f th i t ’ i t tquarterly. These values represent management’s estimate of the investor’s interestnot necessarily be realized upon sale of the securities. Such investments may be or become nonperforming after acquisition for a wide vaworkout negotiations and/or restructuring. Environmental liabilities may pose a riskremediation of certain hazardous substances released on, about under or in its prosuch countries may prove to be politically or economically unstable. Finally, exposuinvestmentinvestment."Deutsche Bank" means Deutsche Bank AG and its affiliated companies. DeutscheBank AG or its subsidiaries. Clients are provided Deutsche Bank Wealth Managempursuant to the contracts, agreements, offering materials or other documentation reSecurities Inc., a broker-dealer and registered investment adviser, which conductsSecurities Inc. is a member of FINRA, NYSE and SIPC. ©2016 Deutsche Bank A
Deutsche Bank Wealth Management 4Q16 Market OutlookLarry V. Adam, CIO and Chief In
Past performance is not indicative of future returns.
“
Matt BarryInvestment Strategy Analyst
Moshe LevinInvestment Strategy Analyst
480
com
ificantly less stable than developed markets. Changes in emerging markets propriation, ad hoc regulation, or foreign investment restrictions. Emerging market
d t t i t Th hi h l tilit d l ti t f i
Investment Strategy AnalystTelephone (410) 895-4282Facsimile (410) [email protected]
Investment Strategy AnalystTelephone (410) 895-4130Facsimile (410) [email protected]
nd transparency constraints. The high volatility and speculative nature of emerging
urrency risk and settlement risk. Economic or financial instability, lack of timely or bstantially and permanently alter the conditions, terms, marketability or price of a
e affected by fluctuations in currency where there is a need to convert the product's ours to elapse between a payment being made in one currency and an offsetting ment period may seriously erode potential profits or significantly increase any losses. p y y p p g y y
e of commodities (e.g., raw industrial materials such as gold, copper and aluminum) ffected by unpredicted international monetary and political policies. Additionally, olitical or regulatory developments. Prospective investors must independently assess condition and objectives. Not all affiliates or subsidiaries of Deutsche Bank Group offer
s to the underlying security. Rather investors own a “creation unit” in a portfolio of te in value based on movements in the underlying security. Investors should realize der and not at the net asset value as is the case for mutual funds. Investments in ETFs
es, and real estate investment trusts (“REITS”), which are not listed on a national formal trading market exists for these securities and their values will be different than
securities have been provided by the management of each program and are updated t i th t t f th Th f th ti t d l h h it in the net assets of the program. Therefore, the estimated values shown herein may
riety of reasons. Nonperforming real estate investments may require substantial k such that the owner of real property may become liable for the costs of removal or operty. Additionally, to the extent real estate investments are made in foreign countries, ure to fluctuations in currency exchange rates may affect the value of a real estate
e Bank Wealth Management wealth management activities conducted by Deutsche ment products or services by one or more legal entities that are identified to clients elevant to such products or services. Securities are offered through Deutsche Bank s investment banking and securities activities in the United States. Deutsche Bank G. All rights reserved. 024750.100416
nvestment Strategist – Wealth Management - Americas 38
State Compensation Insurance Fund Investment Committee - November 17, 2016 Open Agenda Item 4 - Market Outlook and Economic Update