Deutsche Asset & Wealth Management

Europe, Middle East & Africa Edition Nine positions

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CIO View

Chinas metamorphosis
CIO View | Europe, Middle East & Africa Edition | April 2014 1

Nine positions Focus The big picture Investment trafc lights Portfolio

Nine positions
Our key forecasts
We forecast solid global growth in 2014: The Eurozone economy is likely to gain momentum. The EURO STOXX 50 is likely to rise. Our 12-month prediction.

3.7%
World
Fed tapering: Quantitative easing will likely end in the third quarter.

0.9%
Eurozone
Policy interest rates in the United States, Japan and the Eurozone are likely to remain low.

3,400
Yields of 10-year Bunds are likely to rise. Our 12-month prediction.

2.25%
1.54%

Risk for stock markets:

The European Central Bank may take aim at the strong euroa thorn in its side.

Asset allocation of our balanced model portfolio:

Commodities
1.4% 41.8%

Absolute return
10%

!
Rising interest rates are hurting stocks in emerging economies. Added to this is political unrest in some emerging countries.
Fixed income

Equities

46.8%

Important terms are explained in our glossary at the end of this edition. Past performance is not indicative of future returns. No assurance can be given that any forecast, investment objectives and/or expected returns will be achieved. Allocations are subject to change without notice. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. The above forecasts reect our opinion as of March 20, 2014.

CIO View | Europe, Middle East & Africa Edition | April 2014

Nine positions Focus The big picture Investment trafc lights Portfolio

Letter to investors

Differentiation is necessary
Investors are drawing comparisons between emerging markets current problems and the crises that hit these economies between 1994 and 1998. But there are important differences that give cause for optimism.
Whenever the U.S. economy is chugging along smoothly, emerging economies seem to come under pressure. The reason: the change in the direction of capital ows. The massive hikes in the benchmark rate by the U.S. Federal Reserve Board (the Fed) between 1993 and 1998 caused money to flow out of Asia, Latin America and eastern Europe and into developed economies. This resulted in a number of crises: Mexico in 1994, Asia starting in 1997 and Russia in 1998. The parallels to today are easy to spot. Investors reacted to the Feds tapering announcement which implied a future increase in interest ratesby pulling capital out of emerging economies. This led to massive losses on emerging bond and stock markets. Investors made little distinction between individual markets. Many emerging economies, though, boast considerably stronger fundamentals. India, for example, is only marginally dependent on foreign moneyand China does not need any. Nonetheless, prices on stock markets in China have also fallen. Evidence that Chinas economic momentum may be losing steam has contributed to this slide. At the same time, the Chinese government is trying to put a damper on credit growth, which negatively impacts the economy. But it is also pressing ahead with structural reforms, which could potentially strengthen the Chinese economy over the long term. In any case, despite the slowdown in some emerging economies, global growth is likely to remain solid. As developed economies pick up speed, we expect that interest rates will rise and bond prices will tend to fall. By itself, this would weigh on equities. But accelerating growth is also fueling corporate earnings and thus creating potential for higher equity prices. This is an argument for overweighting stocks.
Asoka Whrmann, Co-chief investment ofcer

Accelerating economic growth should fuel corporate earnings.

No doubt some countries are once again living beyond their means, as indicated by excessive current account deficits. We expect Turkey and South Africa, for instance, to have current account deficits for 2014 of 5.9% and 4% of gross domestic product (GDP), respectively.

Download our macro outlook: www.deawm.com/ CIOView-NinePositions_EMEA

CIO View | Europe, Middle East & Africa Edition | April 2014

Nine positions Focus The big picture Investment trafc lights Portfolio

Focus

China: achieving metamorphosis

Beijing pushes a new growth model
Chinas success story is breathtaking. Growth rates have, in the past, even gone into the double digits. That is why the news coming out of China today is all the more foreign. The latest shock is that Chinas exports were down 18.1% year- on-year in February.1 This precipitous drop adds to the evidence that Chinas growth model, which relies heavily on foreign demand, can no longer do its job.

Banking sector starts to reform

Chinas government has also decided to reform the countrys nancial system. In the past, the formal banking sector granted only state-owned enterprises and major companies access to loans. In addition, state banks offered only low interest rates on savings. This led to the emergence of a shadow banking sector outside the formal sector that offered higher interest rates on savings and issued unregulated loans. This sector is now facing potential loan defaults that could negatively impact the economy. The introduction of a more market-oriented formal banking system is expected to improve lending practices. In addition, the government hopes that a more efcient and market-driven system will bolster economic growth.

Reducing export dependency

This is not a new issue for the Chinese government. For years now it has been working to strengthen domestic demand and decrease Chinas dependence on exports. To spur domestic consumption, it has promoted wage increases and allowed the renminbi to gradually appreciate. Wage increases and other policy-related price rises have, in turn, caused Chinas global competitiveness to wane by nearly 20% between 2007 and October 2013.2 We therefore expect the contribution of net exports to growth to remain low in 2014.

Private banks may go legitimate

As part of a pilot program, Chinas banking regulator has approved the establishment of ve private banks within the formal banking sector. Privately owned businesses and households are likely to prove attractive customers for the new private banks to be located in Shanghai, Tianjin, Guangdong province and Zhejiang province. Such banks may also start to reverse the rise of the shadow banking sector, so reducing risks to the nancial system.

Can consumption pull the plow?

As indicated by the current account surpluss downward slide, foreign trade has not made any signicant contribution to economic growth in China for many years now. Instead, the pillars of growth have become domestic consumption and gross xed capital formation. The Chinese government aims to accelerate this trend and transform Chinas export-led growth model into one powered by consumption. The growing purchasing power of Chinas middle classcoupled with increased social welfare spendingsignals that this transformation is now taking hold.

Implications for growth

We are optimistic that Chinas political leadership will succeed in steering the country onto a long-range, stable growth course with such reforms as the authorization of private banks, the strengthening of property rights, the creation of an efcient antitrust authority and the restructuring of the Chinese tax system. Nonetheless, these simultaneous efforts to achieve economic transformation and manage the countrys legacy burden are likely to put a damper on Chinas economic momentum. For these reasons, we lower our growth outlook for 2014 to 7.2%slow for China, but still a rate to be envied.

1 2

General Administration of Customs, 03/2014 Deutsche Bundesbank: Macroeconomic approaches to assessing price competitiveness, Monthly Report October 2013.

Past performance is not indicative of future returns. No assurance can be given that any forecast, investment objectives and/ or expected returns will be achieved. Allocations are subject to change without notice. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect.

CIO View | Europe, Middle East & Africa Edition | April 2014

Nine positions Focus The big picture Investment trafc lights Portfolio

A brief history of the Chinese economic miracle

19591961
Severe famine results from The Great Leap Forward.

1987
Prices are liberalized; food prices climb dramatically; political unrest ensues.

2001
China accedes to the World Trade Organization (WTO); the Chinese market is gradually opened to foreign companies; Chinese exports increase.

2011
The Chinese government releases the new Five-Year Plan with the aim of bolstering domestic consumption.

1949
The Peoples Republic of China is established under the leadership of Mao Zedong. Its state-planned economy and approach to agricultural collectivization are modeled on the Soviet Union.

1979
Special Economic Zones (SEZs) are introduced.

1992
Reforms are launched with the aim of creating a socialist market economy. Some stateowned enterprises are privatized.

2007
The major successes achieved in foreign trade push GDP growth up to a remarkable 14.2% for the year.

2013
With reforms to support private companies, liberalize markets and open the nancial sector, the Chinese government intends to boost the market economy and strengthen the drivers of economic growth.

Drivers of economic growth in China

in % 10 8 6 4 2 0 2 4 6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

18%
Current year-on-year decline in exports

Economic reforms on the agenda in China Under Xi Jinping, the Chinese government has a number of extensive economic reforms planned. Key topics include:  Introduction of more competition to raw-material and factor prices  Establishment of equal access to production factors Revision of land and property rights Restructuring of the tax system Creation of an efcient antitrust authority  Strengthening of environmental and consumerprotection laws as well as labor laws

Consumption

Gross xed capital formation

Foreign trade

Sources: National Bureau of Statistics of China, National Australia Bank; as of December 2013

As the nancial crisis started to drag down developed economies import demand, the contribution of foreign trade to Chinas economic growth shrunk, prompting the government initially to push up investment. Recent moves to bolster domestic consumption may provide a more sustainable way of keeping economic growth on track.

7.2%
Our growth outlook for 2014
CIO View | Europe, Middle East & Africa Edition | April 2014 5

Nine positions Focus The big picture Investment trafc lights Portfolio

The big picture

Our forecasts

Stock-market valuations have normalized. However, the positive growth environment is likely to fuel an increase in corporate prots. This should give equities an additional lift over the coming 12 months.
Asoka Whrmann, Co-chief investment ofcer

Economic data (F)

GDP growth in percent (year-on-year)
2014 (F) United States Eurozone United Kingdom Japan China World 2.8 0.9 2.7 1.5 7.2 3.7 2015 (F) 3.2 1.5 2.8 1.5 7.0 3.8
United States Japan China

Ination in percent (year-on-year)

2014 (F) 2015 (F)

1.5

1.8

1.5

1.0

2.0

2.5

Eurozone (GDP growth in percent)

2.4

2.6

0.9%

1.5%

1.0

United Kingdom

1.3

Countries in southern Europe are reporting positive growth gures. This demonstrates that they have succeeded in reducing economic imbalances and improving their competitiveness. We are raising our Eurozone growth outlook for 2014 from 0.7% to 0.9%.

Eurozone Deation fears in the Eurozone are overblown. The decline in the ination rate is primarily the result of a drop in import prices. The source of this decrease can be found in falling commodity and food prices. The economic recovery in the peripheral countries contradicts fears of a deationary crisis. (F) refers to forecasts. The 2014 and 2015 forecasts are as of March 20, 2014. Past performance is not indicative of future returns. It is not possible to invest directly in an index. No assurance can be given that any forecast or target will be reached. Forecasts are based on assumptions, estimates, opinions and hypothetical models or analyses which may prove to be incorrect.

CIO View | Europe, Middle East & Africa Edition | April 2014

Nine positions Focus The big picture Investment trafc lights

Capital markets (F)

Equity markets (index value in points)
Current* United States (S&P 500 Index) Eurozone (EURO STOXX 50 Index) Germany (DAX)**
Europe (STOXX Europe 600 Index)

Portfolio

Commodities in U.S. dollars

Mar 2015

(%) 5.70 8.62 7.59 8.68 15.02 6.51 3.12 Crude oil (WTI) Crude oil (WTI) Gold Silver Copper (LME) Aluminum (LME)

Current*

Mar 2015

(%) 5.62 7.36 26.01 1.56 2.71

1,868.50 3,130.15 9,434.00 331.24 721.58 535.15 969.71

1,975.00 3,400.00 10,150.00 360.00 830.00 570.00 1,000.00

99.60 1,304.04 19.84 6,603.00 1,752.50

94.00 1,400.00 25.00 6,500.00 1,800.00

Japan (MSCI Japan Index)

MSCI Asia ex Japan Index (U.S. dollars)
MSCI Emerging Markets Index (U.S. dollars)

Germany (DAX)**

9,434

10,150
As of March 26, 2014

99.6

94.0

LME = London Metal Exchange, WTI = West Texas Intermediate; as of March 26, 2014

Fundamentals are pointing to a continuation of German equities upward trend. As the year progresses, new record highs are within the realm of possibility. But in a rising-rate environment, investors must be prepared for higher volatility. This could create some attractive entry opportunities. Capital market yields (sovereign bonds) in percent
Current* United States, 2-year United States, 10-year Germany, 2-year Germany, 10-year United Kingdom, 10-year Japan, 2-year Japan, 10-year 0.45 2.72 0.17 1.57 2.70 0.07 0.62
Mar 2015

Increasing export capacities for U.S. oil are fueling a rise in the price of WTI crude oil in the United States. On the other hand, growing oil production in Canada has a price-reducing effect. Benchmark rates in percent
Current* United States (federal funds rate)*** Eurozone (re rate) United Kingdom (repo rate) Japan (overnight call rate) 00.25 0.25 0.50 0.10
Mar 2015

0.25 0.25 0.50 0.10

1.25 3.55 0.35 2.25 3.50 0.15 0.90

Eurozone (re rate)

0.25 %

0.25 %
As of March 26, 2014

Germany, 10-year

Despite the economic upswing, Eurozone ination has hovered under the 1% mark in recent months. For this reason, the ECB is likely to keep the key rate low. Currencies
Current* Mar 2015

1.57%

2.25%
As of March 26, 2014

(%)
5.47

EUR / USD USD / JPY EUR / CHF GBP / USD USD / CNY

1.3752 102.194 1.2190 1.6628 6.2132

1.30 110.00 1.24 1.62 6.00

7.64 1.72
2.57 3.43

In light of increased market volatility, German Bunds were in demand as a safe haven. The result: a decline in the yields of long Bunds. We expect yields to increase as the market stabilizes. (F) refers to forecasts. The 2014 and 2015 forecasts are as of March 20, 2014. * Source: Bloomberg Finance LP ** Total return index (includes dividends) *** Lower end of 00.25 range Past performance is not indicative of future returns. It is not possible to invest directly in an index. No assurance can be given that any forecast or target will be reached. Forecasts are based on assumptions, estimates, opinions and hypothetical models or analyses which may prove to be incorrect.

USD / CNY

6.2132

6.00
As of March 26, 2014

The Chinese government expanded the trading band for the exchange rate. This led to a devaluation of the renminbi, but this should only be short-lived.
CIO View | Europe, Middle East & Africa Edition | April 2014 7

Nine positions The big picture Investment trafc lights Portfolio

Equities

Investment trafc lights

Our tactical and strategic view

Regions United States Europe Eurozone Germany Japan Asia ex-Japan Emerging markets Sectors Consumer staples

The tactical view (one to three months) Equity indices: positive view neutral view negative view Fixed income and exchange rates: The xed-income sector or exchange rate is expected  to perform well We expect to see a sideways trend We anticipate a decline in prices in the xed-income sector or  in the exchange rate Previous trafc lights are shown in the small graphs to the right as well as on the next page. The strategic view up to March 2015 Equity indices and exchange rates: The arrows signal whether we expect to see an upward trend ( ), a sideways trend ( ) or a downward trend ( ) for the particular equity index or exchange rate. Fixed income: For sovereign bonds, denotes rising yields, unchanged yields and falling yields. For corporates, covered bonds and emerging-market bonds, the arrows depict the option-adjusted spread over sovereigns for each respective region. depicts an expected widening of the spread, a sideways-spread trend and a spread reduction. The arrows colors illustrate the return opportunities for long-only investors positive return potential for long-only investors limited return opportunity as well as downside risk high downside risk for long-only investors Further explanations are in the glossary. Past performance is not indicative of future returns. No assurance can be given that any forecast, investment objectives and/ or expected returns will be achieved. Allocations are subject to change without notice. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect.

Health care Telecommunications Utilities Consumer discretionary Energy Financials Industrials Information technology Materials Style Small and mid-cap

United States

6/2013 3/2014

Increasing corporate prots and rising stock valuations have been fueling stock-market gains since 2009. The climb in priceto-earnings (P/E) ratios is likely to run out of steam. The fuel for further gains will come from corporate prots, which are likely to increase in a positive growth environment. This points to a positive long-term trend for U.S. stock markets.

Eurozone

6/2013 3/2014

The Eurozone economy is picking up speed. Even the Eurozone periphery economies are recovering. This should energize corporate prots. Another factor working in Europes favor is that its companies have some catch-up potential in terms of protability in comparison with U.S. companies.

Emerging markets

6/2013 3/2014

Long term, countries with high growth potential and low currentaccount decits should fare better. Such countries are likely to be found in Asia in particular. Over the short term, interest-rate in-creases in developed economies could mean increased volatility in emerging markets.

CIO View | Europe, Middle East & Africa Edition | April 2014

mo nth s up to Ma rch 20 15

Focus

1t o3

Nine positions

mo nth s up to Ma rch 20 15

Focus The big picture Investment trafc lights Portfolio

Fixed income Rates U.S. Treasuries (2-year) U.S. Treasuries (10-year) U.K. Gilts (10-year) Eurozone periphery German Bunds (2-year) German Bunds (10-year) Japan government bonds (2-year) Japan government bonds (10-year) Corporates U.S. investment grade U.S. high yield Eurozone investment grade Eurozone high yield Asia credit Emerging-market credit Securitized/specialties Covered bonds U.S. municipal bonds U.S. mortgage-backed securities Currencies EUR vs. USD USD vs. JPY EUR vs. GBP EUR vs. JPY GBP vs. USD Emerging markets
Emerging-market xed-income basket

1t o3

Industrials

6/2013 3/2014

Purchasing managers indices are signaling a continued rise in global growth rates. In such an environment, capital expenditure typically increases. But the reluctance of mining, energy and utility companies to invest poses a barrier. Our neutral view remains unchanged.

U.S. Treasuries (10-year)

6/2013 3/2014

As a result of stable economic growth and continued tapering, we expect the yields of long U.S. Treasuries to increase eventually. But in the next one to three months, we expect to see a sideways trend for U.S. Treasuries.

Eurozone periphery

6/2013 3/2014

The growing stability of Eurozone periphery economies has resulted in the reduction of spreads between these countries sovereign bonds and German Bunds. This spread tightening is likely to continue within the Eurozone.

German Bunds (10-year)

6/2013 3/2014

Since the beginning of the year, long Bunds have been one of the beneciaries of the increased market uncertainty. At their current levels, 10-year Bunds seem to be expensive. We expect them to come under pressure once the markets begin to stabilize. We are short German Bunds.

EUR vs. USD

6/2013 3/2014

Emerging-market sovereign Alternatives Infrastructure Commodities Real estate

The likelihood that U.S. economic growth will remain stronger than the Eurozones suggests that the euro will lose strength against the U.S. dollar over the long term. The crisis in Crimea, which is making waves in Germany, and the ECBs warnings regarding a strong euro imply that the euro to U.S. dollar rate is likely to fall in the coming weeks.

Consumer staples

Real estate
6/2013 3/2014

6/2013 3/2014

Weak emerging-market currencies and rising interest rates pose a barrier for the producers of consumer staples. Their stocks are now attractively valued. We will remain underweight for now. But the sector is a candidate for an upgrade.

Continued tapering is a sign that rates are likely to rise. But these increases may remain very limited. Benchmark rates in developed economies are likely to remain low. In this low-rate environment, real-estate markets are likely to remain popular.

CIO View | Europe, Middle East & Africa Edition | April 2014

Nine positions Focus The big picture Investment trafc lights Portfolio

Europe, Middle East, Africa

Portfolio
How we allocate assets

Commodities

Our core portfolio allocation

With our core portfolio, we cover assets such as equities, xed income and commodities. The chart shows how we would currently design a balanced portfolio.

46.5%

1.5%
1.5% 2.5% 6.5%

Equities

21.0%

46.5%

Fixed income: limited opportunities

U.S. yields are now expected to move higher as the Fed continues to normalize monetary policy. German Bund yields will follow suit although opportunities may still exist in the Eurozone periphery. Recent good investment-grade and high-yield performance has left some corporate bonds looking rather expensive. For investors with certain risk proles looking for higher real yield levels, emerging-market- hard currency bonds may soon appeal.

16.5% 5.5%

52.0% Fixed income

Equities
Developed markets Emerging markets
Weight

Equities: growth with volatility

Global growth will benet equities over the course of 2014, with dividend yields and share buybacks also supportive factors. But with developed-market valuations looking stretched, we need more evidence of sustained corporate-earnings growth to pull prices higher. This may take some months to materialize. Emerging-market valuations may look more attractive, but must be accompanied by a marked change in investor sentiment toward these markets (perhaps prompted by better news on China). So, in the short term, expect periods of volatility.

46.5% 5.5% 16.5% 21.0% 6.5% 2.5% 1.5%

Fixed income
Credit Sovereign Emerging markets Cash

Commodities
Commodities

Commodities: price gains not sustainable

Commodities have had an unexpectedly good start to 2014. But gravity cannot be deed forever. As recent economic worries recede, gold prices are unlikely to move higher. More normal weather and reduced supply concerns will keep the lid on oil prices. For industrial metals, Chinas economic health will be key.

Source: Deutsche Asset & Wealth Management EMEA Regional Investment Committee (RIC). As of March 18, 2014. Suggested allocation for USD based investors. This allocation may not be suitable for all investors. Investments in alternative asset classes are dealt with separately on page 12. Past performance is not indicative of future returns. No assurance can be given that any forecast, investment objectives and/or expected returns will be achieved. Allocations are subject to change without notice. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect.

10

CIO View | Europe, Middle East & Africa Edition | April 2014

Nine positions Focus The big picture Investment trafc lights Portfolio

Stphane Junod is the Multi Asset Group chief investment ofcer for Europe, Middle East and Africa (EMEA).

Long or short, Stphane Junod?

Six market views from our regional chief investment ofcer

CIO View: European equitiesroom for further gains? LONG Valuations may look high, and there are concerns about the implications of euro strength, but the positives still predominate. European corporate-earnings growth is likely to pick up during 2014. As the Eurozones structural problems recede, we could also get some positive rerating. European corporate creditattractive over the medium term? short Spreads are near cyclical lows but demand remains strong and this keeps us positive here on a tactical, short-term basis. But the risk/return relationship is likely to deteriorate, particularly as company leverage is expected to rise. This keeps us cautious on the medium-term outlook. U.S. equitiesstay relaxed on valuations? LONG Trailing P/E ratios remain above their average and look unlikely to move much higher. Moreover, rst-quarter 2014 corporate earnings could prove disappointing, due to the weather earlier this year. But earnings are likely to pick up in subsequent quartersparticularly if we see more evidence of corporate revenue growthsupporting equities.

Emerging market equitiestime to buy the market? short Emerging market valuations are at a 30% discount to developed markets. But cheap valuations on their own cant turn these markets around. We need catalysts to change overall investor sentimentfor example, better economic news out of China. For the moment, stay selective. Japanese equitiescan Abenomics maintain upward momentum? LONG Doubts about the effectiveness of Abenomics remain, and the impact of the April consumption tax hike will be closely scrutinized. But we expect the effects of this to be short-lived and expect further domestic buyer support for Japanese equities in the second half of 2014. U.S. dollarstill expecting long-term strength? LONG The dollars lackluster performance so far in 2014 has surprised many, including myself. But Fed tapering, when combined with renewed signs of strong U.S. growthonce the weather-related weakness is behind uswill eventually boost its appeal, if perhaps not for another few months.

LONG short

Stands for a positive answer Stands for a negative answer

Past performance is not indicative of future returns. No assurance can be given that any forecast, investment objectives and/ or expected returns will be achieved. Allocations are subject to change without notice. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect.

CIO View | Europe, Middle East & Africa Edition | April 2014

11

Nine positions Focus The big picture Investment trafc lights Portfolio

Europe, Middle East, Africa

Absolute Return Portfolio

Our alternatives portfolio covers nontraditional liquid and illiquid assets. For most investors, this will account for a relatively small share of their total investments.

Liquid alternatives
Investments that offer exposure to hedge-fund strategies and claiming higher liquidity than their underlying components.

Private equity
Investments in private rms or publiccompany buyouts. Not quoted on a public exchange and with a long time horizon.

Liquid alternatives: above average

Liquid alternatives should again beat their long-term average returns this year. However, market conditions favor certain types of strategy, such as equity long/short and event driven. In contrast, improving global growth and low yields are making life tougher for trend followers and certain credit strategies.

Private equity: recovery continues

Private equity continues to recover from its post-crisis slump and fundraising is picking up. Managers are generating healthy cash returns from exiting portfolio companies. Meanwhile, capital deployment is gathering momentum and the number of privateequity deals should continue to rise.

Infrastructure
Long-term defensive investment in infrastructure assets that may offer low correlation to traditional asset classes.

Real estate
Direct or indirect investment in commercial real estate with the aim of delivering rental income and/or capital gains.

Infrastructure: improving cash ows

Infrastructure should see stable to improving cash ows this year, with assets that are more exposed to economic cycles such as toll roads, airports and railroadsfaring best. Privatesector involvement in infrastructure continues to increase, broadening the opportunity set for investors.

Real estate: rental growth

Rising demand for commercial real estate coupled with limited new construction is supporting rental growth in markets such as the United States, Germany, United Kingdom, Australia and Japan. Property yields remain above average relative to sovereign yields. When this occurred in the past, real estate delivered strong returns.

Past performance is not indicative of future returns. No assurance can be given that any forecast, investment objectives and/or expected returns will be achieved. Allocations are subject to change without notice. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. In our balanced model portfolio, we currently allocate 10% to alternative investments (see Nine positions on page 2).

12

CIO View | Europe, Middle East & Africa Edition | April 2014

Nine positions Focus The big picture Investment trafc lights Portfolio

Long or short, Tim Gascoigne?

The head of liquid alternatives advisory shares his views

CIO View: How do you expect liquid alternatives to perform this year? LONG The asset class should be able to beat its historical average returns again, with a number of strategies particularly well suited to the improving market environment. Can equity long/short funds repeat their success? LONG Equity long/short was the top performer last year and, with the global recovery taking hold, conditions should benet it again. The strategy tends to do better in steadily rising markets, which we expect to see this yearalbeit with pockets of volatility. Its a much better environment for stock pickers and fund managers are once again being rewarded for research into individual companies. Whats your view on xed-income liquid alternatives? LONG Tight spreads and the potential for rising interest rates will be challenging for credit strategies. But on balance were taking a positive stance. There should be enough opportunities to help them deliver a reasonable return. For example, long/short credit strategies should benet from the fact that fundamentalsrather than risk sentimentwill become more dominant in markets this year. Even so, astute research will be needed to identify protable investments. What is the outlook for commodity trading advisors (CTAs) and other trend followers? short Strategies that try to prot from medium- and long-term trends in markets, particularly CTAs, are likely to struggle. Trends will be in short supply in an environment of gradually rising equity markets where returns are primarily driven by stock picking. That said, some short-term strategies may benet from the intermittent volatility we expect to see across certain asset classes.

What about distressed funds? short The dearth of bankruptcies, both current and expected, should drag on realized returns for liquid-alternatives managers in the distressed sector throughout 2014. Default rates are currently at an historically low level of 2.2% compared with an average of 4.9%. Hence: underweight. How are you positioning for event-driven managers? LONG We particularly favor activist managers who generate returns from driving change in the companies they invest in. Many companies have a signicant amount of cash on their balance sheets, which management teams will be expected to put to use now that condence is picking up. For funds that specialize in mergers, the potential for consolidation in the telecoms and materials sectors in particular should provide opportunities.

LONG short

Stands for a positive answer Stands for a negative answer

Past performance is not indicative of future returns. No assurance can be given that any forecast, investment objectives and/ or expected returns will be achieved. Allocations are subject to change without notice. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. Offers and sales of alternative investments are subject to regulatory requirements and such investments may be available only to investors who are Qualied Purchasers as dened by the U.S. Investment Company Act of 1940 and Accredited Investors as dened in Regulation D of the 1933 Securities Act. Alternative investment programs may not be suitable for certain eligible investors.

CIO View | Europe, Middle East & Africa Edition | April 2014

13

Glossary
Here we explain central terms from CIO View

Abenomics refers to the growth-oriented economic policies advocated by Japans prime minister Shinz Abe. The Barclays U.S. Convertibles Index tracks the performance of U.S. convertible bonds. The Bloomberg JP Morgan Asia Dollar Index tracks the performance of emerging Asias most actively traded currency pairs valued against the U.S. dollar. Commodity trading advisers (CTAs), also known as managed futures funds, are predominantly computer-driven systematic trend-following hedge fund vehicles. These funds managers run different strategies using futures contracts across all futures markets, options on futures contracts and FX forwards. Correlation is a measure of how closely two variables move together over time. A 1.0 equals perfect correlation. A 1.0 equals perfect negative correlation. Deation is a general and persistent (not only temporary) fall in the level of prices for goods and services. It is not to be confused with a fall in prices in only one economic sector (energy for example) and also not to be confused with low and falling rates of ination (which is disination). The Deutscher Aktien Index (DAX) tracks the performance of the 30 major German companies trading on the Frankfurt Stock Exchange. Distressed securities are securities of companies that are in nancial difculties. Distressed funds invest in such securities. The EURO STOXX 50 Index tracks the performance of blue-chip stocks in the eurozone. The Eurozone is an economic and monetary union of 18 European Union member states that have adopted the euro as their common currency and sole legal tender. Event-driven investing is an investment strategy that seeks to exploit pricing inefciencies that may occur before or after a corporate event, such as a merger, acquisition, spinoff, or bankruptcy.

A long/short strategy seeks to prot from gains in the long positions and price declines in the short positions, while trying to minimize market exposure. The materials sector is a category of stocks that includes companies involved in the discovery, development and processing of raw materials. The Morgan Stanley Cyclical Index tracks the performance of economically sensitive industries stocks within the U.S. economy. The MSCI Asia ex Japan Index tracks the performance of non-Japanese Asian stocks. The MSCI Emerging Markets Index tracks the performance of stocks in select emerging markets. The MSCI Japan Index tracks the performance of Japanese stocks. The MSCI World Industrials Index tracks the performance of mid- and large-cap stocks in 23 developed countries around the world. Periphery countries are those member states of the European Monetary Union, which got into nancial troubles in the course of the sovereign debt crisis. Price-to-earnings (P/E) ratio compares a companys current share price to its per-share earnings. Quantitative easing is an unconventional measure of the central bank applied in the context of its monetary policy, which is coined by purchases of assets and thereby inducing an increase in the monetary base and keeping short-term interest rates low. The shadow banking system (or shadow nancial system) is a network of nancial institutions comprised of non-depository banks that generally serve as intermediaries between investors and borrowers, providing credit and capital. Because shadow banking institutions dont receive traditional deposits, they are not subject to all of the regulations imposed on the traditional banking system.

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CIO View | Europe, Middle East & Africa Edition | April 2014

Spread refers to the yield differential between various bond sectors and nancial instruments with similar maturities. Here the yield difference reects the higher risk compared to best rated bonds. The S&P 500 Consumer Staples Index tracks the performance of S&P 500 Index consumer staples companies. The S&P 500 Index tracks the performance of 500 leading U.S. stocks and is widely considered representative of the U.S. equity market. The STOXX Europe Mid 200 Index tracks the performance of mid-cap European companies. The STOXX Europe Small 200 Index tracks the performance of small-cap European companies. The STOXX Europe 600 Index tracks the performance of 600 companies across 18 countries of the European region. The Tokyo Stock Exchange REIT Index tracks the performance of all real estate investment trusts listed on the Tokyo Stock Exchange (J-REITs).

Investment trafc lights (pages 89): comments regarding our tactical and strategic view Tactical view:  The focus of our tactical view for xed income is on trends in bond prices, not yields. Strategic view:  The focus of our strategic view for corporate bonds is on yields, not trends in bond prices.  For corporates and covered bonds, the arrows depict the respective option-adjusted spread.  For bonds not denominated in euros, the illustration depicts the spread in comparison with U.S. Treasuries. For bonds denominated in euros, the illustration depicts the spread in comparison with German Bunds.  For EM sovereign bonds, the illustration depicts the spread in comparison with U.S. Treasuries.  Both spread and yield trends inuence the bond value. Investors who aim to prot only from spread trends must hedge against changing interest rates.  The basket of EM currencies comprises CNY, THB, MYR, PHP, IDR, INR, RUB, TRY, HUF, PLN, ZAR, BRL and MXN. These currencies are equally weighted. The currency basket is measured against the U.S. dollar (75%) and the euro (25%).

CIO View | Europe, Middle East & Africa Edition | April 2014

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Nine positions Focus The big picture Investment trafc lights Portfolio High-conviction ideas

Important information UK

Deutsche Asset & Wealth Management offers wealth management solutions for wealthy individuals, their families and select institutions worldwide. Deutsche Asset & Wealth Management, through Deutsche Bank AG, its afliated companies and its ofcers and employees (collectively Deutsche Bank) are communicating this document in good faith and on the following basis. This document is for information purposes only and is not intended to be an offer or solicitation, or the basis for any contract to purchase or sell any security, or other instrument, or for Deutsche Bank to enter into or arrange any type of transaction as a consequence of any information contained herein. It has been prepared without consideration of the investment needs, objectives or nancial circumstances of any investor. This document does not identify all the risks (direct and indirect) or other considerations which might be material to you when entering into a transaction. Before making an investment decision, investors need to consider, with or without the assistance of an investment adviser, whether the investments and strategies described or provided by Deutsche Bank, are appropriate, in light of their particular investment needs, objectives and nancial circumstances. We assume no responsibility to advise the recipients of this document with regard to changes in our views. Deutsche Bank does not give taxation or legal advice. Investors should seek advice from their own taxation agents and lawyers, in considering investments and strategies suggested by Deutsche Bank. The terms of any investment will be exclusively subject to the detailed provisions, including risk considerations, contained in the Offering Documents. When making an investment decision, you should rely on the nal documentation relating to the investment and not the summary contained in this document. Further information is available upon investors request. Although information in this document has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon as such. All opinions and estimates herein, including forecast returns, reect our judgement on the date of this report, are subject to change without notice and involve a number of assumptions which may not prove valid. Further, investment in international markets can be affected by a host of factors, including political or social conditions, diplomatic relations, limitations or removal of funds or assets or imposition of (or change in) exchange control or tax regulations in such markets. Additionally, investments denominated in an alternative currency will be subject to currency risk, changes in exchange rates which may have an adverse effect on the value, price or income of the investment. Past performance is no guarantee of future results. 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No representation or warranty is made by Deutsche Bank as to the reasonableness or completeness of such forward looking statements or to any other nancial information contained in this document. This document may not be reproduced or circulated without our written authority. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, including the United States, where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Deutsche Bank to any registration or licensing requirement within such jurisdiction not currently met within such jurisdiction. 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Past performance is no guarantee of future results; nothing contained herein shall constitute any representation or warranty as to future performance. Further information is available upon investors request. This Document may not be distributed in Canada, Japan, the United States of America, or to any U.S. person. 2014 Deutsche Bank AG
CIO View | Europe, Middle East & Africa Edition | April 2014 16

Nine positions Focus The big picture Investment trafc lights Portfolio High-conviction ideas

Disclaimer EMEA

Deutsche Asset & Wealth Management offers wealth management solutions for wealthy individuals, their families and select institutions worldwide. Deutsche Asset & Wealth Management, through Deutsche Bank AG, its afliated companies and its ofcers and employees (collectively Deutsche Bank) are communicating this document in good faith and on the following basis. This document has been prepared without consideration of the investment needs, objectives or nancial circumstances of any investor. Before making an investment decision, investors need to consider, with or without the assistance of an investment adviser, whether the investments and strategies described or provided by Deutsche Bank, are appropriate, in light of their particular investment needs, objectives and nancial circumstances. Furthermore, this document is for information/ discussion purposes only and does not constitute an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Deutsche Bank does not give tax or legal advice. Investors should seek advice from their own tax experts and lawyers, in considering investments and strategies suggested by Deutsche Bank. Investments with Deutsche Bank are not guaranteed, unless specied. Unless notied to the contrary in a particular case, investment instruments are not insured by the Federal Deposit Insurance Corporation (FDIC) or any other governmental entity, and are not guaranteed by or obligations of Deutsche Bank AG or its afliates. Although information in this document has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon as such. All opinions and estimates herein, including forecast returns, reect our judgment on the date of this report and are subject to change without notice and involve a number of assumptions which may not prove valid. Investments are subject to various risks, including market uctuations, regulatory change, counterparty risk, possible delays in repayment and loss of income and principal invested. The value of investments can fall as well as rise and you may not recover the amount originally invested at any point in time. Furthermore, substantial uctuations of the value of the investment are possible even over short periods of time. This publication contains forward looking statements. Forward looking statements include, but are not limited to assumptions, estimates, projections, opinions, models and hypothetical performance analysis. The forward looking statements expressed constitute the authors judgment as of the date of this material. Forward looking statements involve signicant elements of subjective judgments and analyses and changes thereto and/or consideration of different or additional factors could have a material impact on the results indicated. Therefore, actual results may vary, perhaps materially, from the results contained herein. No representation or warranty is made by Deutsche Bank as to the reasonableness or completeness of such forward looking statements or to any other nancial information contained herein. The terms of any investment will be exclusively subject to the detailed provisions, including risk considerations, contained in the Offering Documents. When making an investment decision, you should rely on the nal documentation relating to the transaction and not the summary contained herein. This document may not be reproduced or circulated without our written authority. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, including the United States, where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Deutsche Bank to any registration or licensing requirement within such jurisdiction not currently met within such jurisdiction. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions.

Past performance is no guarantee of future results; nothing contained herein shall constitute any representation or warranty as to future performance. Further information is available upon investors request. This Document may not be distributed in Canada, Japan, the United States of America, or to any U.S. person. 2014 Deutsche Bank AG

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