Markets in 2012—Foresight with Insight Deutsche Bank Markets in 2012—Foresight with Insight Deutsche Bank Deutsche Bank The Markets in 2012 – Foresight with Insight The Markets in 2012 Foresight with Insight Deutsche Bank Corporate & Investment Bank Markets in 2012—Foresight with Insight Deutsche Bank Foreword A broader view The year 2012 looks set to be as challenging as 2011 with many open questions about the outlook for the markets and the future of the global economy. It will be harder than ever for investors to make decisions that strike a strategic balance between opportunity and risk, both in the shorter and longer term. More than ever, understanding the issues impacting the market as a whole will be critical to investors' success in the year ahead. Strategies based purely on expertise in a particular industry or asset class will be insucient; developing a broader view is essential to navigate the increasingly correlated environment. With this publication, we aim to deliver exactly that comprehensive overview to help you rene your perspective across a host of markets, economies and industries. We hope you nd it useful. On behalf of all of my colleagues, we thank you for choosing to work with Deutsche Bank and look forward to further partnership in the year ahead. Anshu Jain Head of the Corporate & Investment Bank Member of the Management Board 1 Leaders 1.1 Global Economy The outlook for 2012 1.2 The Renminbi The world’s next reserve currency? 1.3 The Case for Equities Is fundamental valuation dead? 1.4 US Elections Presidential prospects and implications 1.5 Investing in a Crisis Tough times ahead but there will be opportunities Executive Viewpoints 1.6 Brazil Economic prospects 1.7 Risk Monitor Ten key risks to watch out for 1.8 Ination Central banks looking the other way? 1.9 Trade Finance Back in fashion 2 Economics & Geo-Politics 2.1 The Eurozone Crisis Fast track Europe’s road map 2.2 China Soft or hard landing? 2.3 The US Dollar Are we entering a post-dollar world? 2.4 US Green shoots or parched roots? 2.5 Growth Solutions What Greece and Italy could learn from Ireland 2.6 Emerging Markets Can they decouple? 2.7 Africa The next frontier: who to watch 2.8 Asia Slowing but how much? 3 Markets 3.1 US Equities It’s all about the multiple 3.2 European Equities Time to be bold 3.3 Asian Equities Focus on large caps 3.4 Emerging Market Equities Dicult year ahead 3.5 Credit Outlook for 2012 3.6 Commodities Can they push higher? 3.7 FX Prospects for key exchange rates 3.8 Rates Two scenarios 3.9 ABS Challenges and opportunities 4 Sectors & Corporate Strategy 4.1 Outlook for Corporates Test of nerve 4.2 M&A Outlook for 2012 4.3 Natural Resources Valuation disconnect 4.4 Telecoms & Media The digital revolution 4.5 Consumer Goods Deals on the way 4.6 Industrials Prospects for earnings 4.7 Financial Institutions Deleveraging 4.8 Financial Sponsors Shifting focus 4.9 Technology Cloud computer land 4.10 Healthcare What’s ahead for 2012? 5 Financing, Investment & Risk Management: 5.1 Bond Market Outlook Outlook for 2012 5.2 Equity Market Outlook Prospects for issuers 5.3 Commercial Mortgage Backed Securities False boom, real dawn 5.4 Art The waiting room Financing, Investment & Risk Management: Research Viewpoints 5.5 The Ideal Portfolio What to own 5.6 European Financial Risk How to hedge systemic risk 6 Regulation & Trading Technology 6.1 Regulatory Change What’s ahead 6.2 Electronic Trading Trends to watch 6.3 Centralised Clearing Adopt early or wait and see? The Markets in 2012 Foresight with Insight Contents Articles marked with the ‘ ’ icon are based on Deutsche Bank Research. 1 Leaders Global Economy The Renminbi The Case for Equities US Elections Investing in a Crisis Markets in 2012—Foresight with Insight Deutsche Bank Markets in 2012—Foresight with Insight Deutsche Bank 1.1 Leaders 1.1 Leaders David Folkerts-Landau Global Head of Research Global Economy The outlook for 2012 The year just ending was challenging for the world economy – the US economy suered a signicant slowdown, Japan was hit by a devastating earthquake and Europe’s sovereign debt crisis deepened. Despite these shocks, a strong growth performance in emerging markets enabled the global economy to expand by 3.5% in 2011, a pace we expect to continue in 2012, as a rebound in China’s growth and a continued recovery in the US economy oset a likely recession in Europe. In our view 2012 will see the turning point in the European sovereign crisis. Recent events have seen dramatic political shifts in the peripheral euro zone nations, especially Greece and Italy, which should boost reform and, ultimately, ensure that the region emerges stronger and more stable. The situation in Greece is stabilising, and the changes now being made should remove the country from the spotlight. Italy is where the key risks and challenges lie, in our opinion. We believe the country is solvent: Italy has signicant economic potential, low private sector debt, the highest household wealth among the G7 and a record of delivering primary surpluses during the past decade. The key challenge going forward will likely be the ability of politicians to push though growth-enhancing reforms in order to unlock Italy’s potential. We note recent changes in the government point in the right direction. We are particularly encouraged by progress thus far in Spain, which has demonstrated a strong commitment to adjustment, as well as by Ireland’s advances in competitiveness which have turned around market sentiment. Ireland has doubled its trade surplus since 2008 and robust export performance has more than made up for the weakness in the domestic economy. We expect France to remain in the spotlight in 2012, as elections approach and doubts are raised about its ability to hold on to its AAA status. In our view, despite the government’s recent announcement of additional spending cuts, we believe more scal measures will be required to avoid a downgrade, as growth will likely be weak in 2012. Indeed, we believe the eurozone economy is sliding into recession which at best will be mild and last only for a couple of quarters, although there are considerable downside risks. While the scal austerity measures and reforms being put in place are necessary for the peripheral economies to regain market condence and restore competitiveness, they will likely have a negative impact on growth. Growth will also suer from the acceleration in bank deleveraging that Basel 3 regulations will require in 2012. We expect eurozone growth to decline to 0.4% in 2012 from 1.5% in 2011. Even the data out of Germany has turned down recently. We expect the European Central Bank (ECB) to continue reversing the interest rate hikes of 2011 and see another 25bp cut early in the New Year. We also expect the ECB to continue buying peripheral country bonds, albeit at a measured pace, and to keep its various liquidity taps open. Fortunately, the United States appears to be recovering, albeit slowly, after a surprisingly weak rst half of 2011. There has been a clear improvement in the economic data in the past couple of months, with consumers showing surprising resilience and rms maintaining a decent level of investment. We expect the economy to strengthen further in 2012, as some of the headwinds from Europe abate, credit growth picks up and the housing market stabilises. The Fed has also signalled that it will leave its ocial interest rates close to zero through to mid 2013 at least, providing further support to the economy. We have revised up our forecast for US growth to 1.8% for 2011 and 2.3% in 2012. Key risks we see facing the US economy are that Congress fails to agree to stem some of the near-term scal drag (2% of GDP in 2012) and, more importantly, that it fails to agree on longer-term decit reduction measures in the longer term to avoid a more serious downgrade by ratings agencies. We remain condent that some agreement will be reached. There has been much conjecture recently about the other motor of the world economy – China. Although we believe the risks from the property, banking and small business sectors are overstated, we do see growth slowing to an annualised 7% around the turn of the year. We expect that the economy will avoid a hard landing, however, and that growth will accelerate to almost 9% by H2 2012. Ination is now falling sharply but we do not expect a major policy stimulus to follow as a result. The government is likely to launch targeted measures in some parts of the economy instead. For the rest of emerging Asia we see a slowdown in growth but, again, no hard landing, as real interest rates are low and domestic demand is still robust. The landing could be a little harder in a few economies as rapid property price increases and high credit growth potentially reverse in 2012. But while authorities have already shifted policy away from combating ination, as with China, we don’t expect major policy relaxation unless the growth or ination outcomes are signicantly lower than we forecast. Japan, nine months after its devastating earthquake and tsunami – which damaged global supply chains – is likely to have seen its economy contract by around 0.5% in 2011, not helped by a strong yen. We see growth of just over 1% in 2012, helped by further post- quake reconstruction spending by the government. But the strength of the yen and the crisis in Europe could turn out to be a bigger drag on the economy if policymakers do not implement the right measures. Overall, we expect growth in 2012 to hold up reasonably well. If the threat of a systemic event in Europe fades in the early part of next year, as we expect, 2012 could oer signicant upside potential for risk assets. Markets in 2012—Foresight with Insight Deutsche Bank Markets in 2012—Foresight with Insight Deutsche Bank 1.2 Leaders 1.2 Leaders Alan Cloete Head of Global Finance & Foreign Exchange The Renminbi The world’s next reserve currency? The rise of the RMB may happen even faster, if the past year is any guide. Since July 2010, the monthly volume of RMB-denominated trade settlements has soared almost twenty-fold to RMB185 billion in August 2011, almost 9% of China’s total monthly trade volume. Hong Kong – once China’s nancial window on the world – is now the world’s back door for access to RMB. Daily transactions on Hong Kong’s oshore RMB spot market, opened in August 2010, now amount to about USD2 billion. Demand for RMB is bound to accelerate, given China’s commitment to liberalise its capital and current account by the end of 2015. Hardly a month goes by without the People’s Bank of China further loosening the restrictions on onshore RMB trade settlements for foreign investors and customers. For instance, since August 2011 foreign businesses have been able to settle contracts in RMB in any province in China, a relaxation of the rules that would have been unimaginable even two years ago. What all these developments signify – from Nigeria’s central bank vaults to Hong Kong’s trading oors – is the imminent arrival of the RMB as a reserve currency that reects China’s economic weight. That, in turn, will reduce worldwide demand from central banks for US dollars and euros, with forecasts suggesting the dollar’s share of global reserve currencies could fall from about 60% to 50% over the next decade. The RMB’s international rise will bring with it an end to the present restrictive system of parallel foreign exchange markets for China’s currency. The so- called ‘non-deliverable’ oshore RMB forward market has no long-term future of its own, since companies can increasingly nd ‘deliverable’ liquidity on Hong Kong’s burgeoning RMB spot market. Hong Kong’s near-monopoly of oshore spot trading is also under threat: Singapore is in negotiations with Beijing to open a competing market. So where does this leave the Hong Kong dollar? My view is that it will merge with the RMB to become one currency. The rationale for a separate Hong Kong currency is becoming increasingly weak, as its economy merges with the mainland. One sign of the times is the growing number of Hong Kong-based companies with operations in China that have begun to pay their employees in RMB. Expect more to follow. But I do not expect the switch to take place for the next two years at least which opens up perhaps the biggest question of all: what will happen to the Hong Kong dollar between now and its eventual merger with the RMB? The Hong Kong dollar is already under immense pressure: pegged to the US dollar yet operating in an economic environment with high ination, strong growth and signs of an asset price bubble, it is clearly undervalued. But the Hong Kong Monetary Authority faces a dicult challenge in resolving this problem. If it aligns the Hong Kong dollar to the RMB, it opens up China’s capital account too quickly. If it moves the peg from 7.8 to 7, speculation about further changes will increase. But if it moves the peg decisively from 7.8 to, say, 6, this could destabilise the economy. The saviour may turn out to be the global economy. If growth slows signicantly, easing pressure on asset prices, then Hong Kong may be able to keep the peg in place for a few more years until it is ready to adopt the RMB. If it doesn’t, we can expect continued pressure on the Hong Kong dollar. Interesting times ahead, either way. To understand why the renminbi (RMB) will become a major reserve currency in the next decade, you only have to follow the money. In September, for instance, Chile’s central bank reported that 0.3% of its international reserves are now held in RMB, while Nigeria said it would add RMB to its mix of US dollars, euros and sterling. Within 10 years, the RMB could account for 15% of global currency reserve holdings, according to US economist Barry Eichengreen. Trades on market dislocation between onshore and oshore spot market Date USD CNY USD CNH CNH Premium Trades for Corporates 19 –Oct–10 6.6446 6.4745 2.6% A corporate sold CNH at 6.4745 with 2.6% premium to onshore CNY spot rate. This premium was realised by oshore exporters receiving payment in RMB when exporting goods to China. 23–Sep–11 6.3883 6.5500 –2.5% A corporate bought CNH at 6.5500 with 2.5% discount to onshore CNY spot rate. This discount was realised by oshore importers making payment in RMB when importing goods from China. In reality, given the expectation of RMB appreciation, onshore exporters always charge a premium for USD invoicing relative to RMB invoicing to hedge their risk. It is much cheaper for oshore importers to use RMB invoicing. The discount of using RMB invoicing and buying CNH oshore instead of using USD invoicing would be close to 10%. Trades on market dislocation between onshore and oshore forward market CNH DF 12M CNY FWD 12M CNH DF 12M Premium Trades for Corporates 23–Sep–11 6.4890 6.3320 –2.5% Since the establishment of the oshore CNH DF market, CNH DF has always been trading at a discount to onshore forward market, providing a cheaper RMB source in the forward space. Corporates bought oshore CNH DF at 6.4890 with 2.5% discount to onshore CNY forward. This discount was realised by oshore importers making payment in RMB in 12 months time when importing goods from China. Trades on market dislocation between CNH DF market and NDF market USD CNH DF 12M NDF 12M USD CNH DF Premium (in %) Trades for Financial Institutions (FI) 23–Sep–11 6.5810 6.4603 1.8% FI took the opportunity to migrate from the NDF market to the USD CNH DF market. Instead of selling at 6.4603 in the NDF market, FI sold at 6.5810 in USD CNH DF market, beneting from a 1.8% premium. Since the oshore market is deliverable, FI also beneted from the positive carry of using the deliverable CNH to invest in bonds. In this case, FI would be subjected to the spot basis risk between the CNH spot and CNY xing. However, this basis would be mean–reverting. Trades when CNH forward is in premium Date USD CNH Spot USD CNH 12M FWD USD CNH 12M FWD Premium Trades for Corporates 26–Oct–11 6.4015 6.4085 0.1% With USD CNH forward trading at a premium, corporates raised CNH funding through money market, certicates of deposits and bond issuance at very low yield given the strong demand for CNH asset in Hong Kong. They then swapped this CNH funding into USD funding via an FX swap. This ‘cheap’ USD funding oered in the CNH market would provide a cheaper source of USD funding for corporates situated in countries with wide CCS basis. Market dislocation on bond market and trades for corporates Onshore – Oshore bond basis Trades for Corporates Mar—Oct–11 around 300 bps A corporate secured cheap CNH funding in Hong Kong by issuing oshore CNH bonds at yields that are on average 300 basis points lower than onshore levels and using FDI to bring the proceeds back into the onshore market. Asset Swap trades Bond Yield USD CNH 12M Implied Asset Swap Yield Trades for Corporates 1–Mar–11 Around 1% 1.4% 2.4% Corporates raised USD oshore and swapped it into CNH to invest in the CNH bond market. Since the implied yield was as much as 1.4%, if the CNH bond yields around 1%, corporates enjoyed a return of approximately 2.4%. Markets in 2012—Foresight with Insight Deutsche Bank Markets in 2012—Foresight with Insight Deutsche Bank 1.3 Leaders Garth Ritchie Global Head of Equities The Case for Equities Is fundamental valuation dead? Equities are, in my opinion, signicantly undervalued. At the time of writing, European equities are trading on a P/E ratio of 11.2 and the S&P 500 at 12.8. This is the lowest since the nadir of March 2009. The main reason for this undervaluation is the low levels of allocations by real money investors. After the crisis of 2008 many institutions slashed equity allocations from 10% to 2% and moved USD1 trillion into the credit markets. But the investment tide is turning as investors recognise that bonds are no longer ‘risk-free’ in the wake of the Greek default and unfolding European debt crisis. Investor appetite for equities should intensify as developed world interest rates start to increase, and as investors seek to address the capital erosion in their xed-income portfolios. The fundamental case for equities is very strong. First, the dividend yield on the S&P 500 is 2.1% compared to 2.2% for US government bonds. But dividends are growing by 15% a year, while bond coupons are static. On a cashow basis, the S&P 500 ex-nancials is yielding 12%, 6% more than Baa-rated bonds. Second, many large corporates are sitting on cash and many are also beneting from continued economic growth in Asia and other emerging markets. Prots at S&P 500 companies are growing at 9% year-on-year. But to take full advantage of the opportunities, investors need to select the right stocks and trade them in the right way. Over the past three years, many investors have adopted a Mark To Market (MTM) approach to equity investment. With the markets in a ‘risk on, risk o mode’ and a high degree of correlation between geographic regions, this has been sensible. But the recovery is likely to be much more uneven, with dierent countries recuperating at dierent speeds and some failing to leave the sick bay. Bank sector solvency and liquidity also varies widely between countries. In such a patchwork-quilt environment, active management (i.e. alpha over beta) will be the better option. Emerging market growth is perhaps the most compelling story. But it may be best accessed via multinational companies listed on exchanges in Europe and North America rather than via locally-listed local players which are coming under increased margin pressure, largely due to wage and resource ination. But even emerging market growth may slow from 2012, presenting some risks. In an environment in which access to liquidity is critical, the use of advanced electronic execution tools – including Broker Crossing Systems and advanced algorithms – enable investors to trade more eciently at the same time as managing their costs. If investors are to successfully navigate the challenges of multiple trading platforms, fragmented markets, increased volatility, and an increasingly complex regulatory environment, they also need to look to maximise their use of the consultative services of their broker. By supplementing electronic execution with traditional OTC trading, investors will nd it easier to amass sizeable equity stakes and cope with other executional challenges, including wider spreads. Striking the right balance between the traditional and the cutting-edge should ensure that the alpha derived from eective stock selection is not eroded by clumsy trading. Equities selected on the basis of fundamental value analysis will deliver signicant upside in 2012 but investors will need to adopt the right trading strategies to get the best returns. Markets in 2012—Foresight with Insight Deutsche Bank Markets in 2012—Foresight with Insight Deutsche Bank US Elections Presidential prospects and implications The United States is now less than a year away from presidential and congressional elections which could have a very signicant impact on the future direction of the US economy and nancial markets. Clearly, markets are most focused on the presidential elections. President Barack Obama has informally launched his re-election campaign and begun signicant fundraising eorts. His goal is to raise USD1 billion, the highest ever for a presidential election. Overall, observers believe President Obama’s re-election will be a tough road. The economic situation is one of the worst in recent US history; unemployment rates are hovering at 9%; and the Iraq and Afghanistan military campaigns remain unresolved. Recent polls show President Obama’s job approval ratings in the mid-40% range. Only one president in modern times has had ratings this low and gone on to be re-elected: Ronald Reagan in 1984. But the economic outlook was stronger then than it is now: having decisively made the turn out of recession and with recovery rmly on the horizon. A better comparison may be 1980 when President Carter came up for re-election just as the economy moved into recession (and with the Iran hostage debacle fresh in voters’ minds), and duly lost to Reagan. The parallel is not precise. In Q2 1980, the US economy declined by 7.9%, its biggest fall since the great depression. Barring a string of severe tail-risk events such as a collapse of the euro, it is hard to see the US economy contracting by this amount in 2012. Nevertheless, it seems likely that if the economic situation does not improve before mid 2012, Obama will face a signicant challenge. The biggest factor in President Obama’s favour is the lack of sustained excitement around the Republican candidates lining up to run against him. Former Massachusetts Governor Mitt Romney has steadily kept in the forefront of most polls but has failed to fully engage voters. Other candidates such as Texas Governor Rick Perry and former pizza executive Herman Cain have temporarily grabbed polls leads only to recede back into the pack. Republican primaries start on 3 January. We will know the nal candidate by May. While President Obama’s approval ratings are low, Congress’ ratings are lower – far lower. In fact, they have never been worse. In a recent Gallup poll, just 13% of voters approve of Congress’ performance while 81% disapprove. If this is a true indication of voter sentiment and (once again) the economy does not improve, we may see many voters vote out the incumbent no matter what their political aliation. This would hit the Democrats harder than the Republicans since 25 of the 33 state elections due next year are currently held by Democrats. If they get voted out, the Republicans would gain a majority in the Senate. If we don’t see a signicant improvement in economic conditions by the summer, President Obama will struggle to get re-elected. The possibility of a Republican President, Congress and Senate would bring signicant changes to US economic policy and nancial regulation. 1.4 Leaders Frank Kelly Head of Communications and Public Aairs, Americas It is important to remember though that there is still the better part of a year to go until the elections and several signicant events could change the dynamics considerably. First among these is the so-called congressional ‘Super Committee’. The Super Committee, composed of 12 hand-picked senators and congressmen, is charged with nding at least USD1.2 trillion in decit cuts by 23 November 2011. If they reach an agreement, both chambers of Congress (the House of Representatives and the Senate) must approve by 23 December 2011. At the time of writing, the outcome of both remained unknown. But failure to reach an agreement will trigger immediate cuts to national healthcare programmes such as Medicare as well as deep cuts to the defence budget, and may lead to further rating downgrades. It is dicult to predict which party would be damaged more by this turn of events but it would denitely increase the likelihood of incumbents being voted out. Washington is also beginning to watch the direction of the various federal legal challenges to President Obama’s hallmark healthcare legislation. There is growing likelihood that the US Supreme Court will hear arguments from various states over the constitutionality of the proposed legislation as early as January 2012. If this happens, there is a strong likelihood the Court will hand down its decision next summer – perhaps in late June. And if the initial decisions by several junior federal courts are any indication, there is signicant risk the Supreme Court will strike down the law dealing a setback to President Obama only months before the election. Finally, and perhaps most importantly for nancial services, there is Dodd-Frank. If a Republican wins presidential oce, and the party retains their majority in Congress and gains it in the Senate, there is a strong possibility that Dodd- Frank could get rolled back or perhaps repealed altogether. If Obama is re- elected, change seems unlikely. Markets in 2012—Foresight with Insight Deutsche Bank Markets in 2012—Foresight with Insight Deutsche Bank 1.5 Leaders Rich Herman Global Head of the Institutional Client Group Investing in a Crisis Tough times ahead but there will be opportunities In 2011, the markets were driven by macro themes and events with very high levels of correlation between asset classes. In 2012 – barring a major shock such as an EMU country exiting the euro, which we do not expect – systemic risk should ease and we should see greater dispersion in returns. We could also see fairly strong market rallies. The equity and credit markets are currently pricing in a severely negative market environment for 2012. But calling the bottom will, as ever, remain challenging. Beta investors face some formidable challenges. Fixed income yields are likely to remain at their current low levels in 2012 as markets seem more concerned about the spectre of deation than any inationary pressures that quantitative easing may stoke. The Federal Reserve has committed to keeping ocial rates low for as long as it takes, the European Central Bank (ECB) is cutting rates soon and the Bank of England has just launched more quantitative easing. And for US Treasuries, the traditional safe haven, yields could actually be negative. A recent study by Deutsche Bank Research showed that if yields revert to the mean, investors in 30-year Treasuries will suer an annualised loss of 3.3% over the next ve years and 1.3% over the next 10. Those who buy the 10- year benchmark bond will suer losses of 4.3% and 2% respectively. There is historic precedence for these kinds of losses. After 1946, when gilt yields were last this low, the bonds lost 75% of their value over the next three decades in real terms, as ination took its toll. And, as we know, the lower the yield on an asset when bought, the lower the long-term returns are likely to be. If the world goes back into recession, the past indicates that bonds will fare much better than equities, although that, in turn, was dependent on low ination, something that is by no means certain this time round. The outlook for equities could be promising for investors seeking capital gains with several of our equity strategists predicting signicant rises for next year if the major tail risks do not materialise. US dividend yields are now higher than 10 year US Treasury yields, something that has only been seen once (briey in 2008 and 2009) since the mid- 1950s. But if 2011 is any guide, we can expect sustained volatility and market swings which could result in signicant MTM moves. So if the prospects for beta or index based investment strategies are challenging, where should investors focus in 2012? In xed income, one potentially attractive option is relative value trading – buying one security and selling another to prot from dierences in their performance (or doing so synthetically via a swap). During 2011, we saw some outstanding trading opportunities in this area, typically created by dislocations in the market which led to some assets selling o more than others. A quick example: in June 2011, we saw a major sentiment gap open up between the equity and bond markets with equity investors being relatively optimistic about the short-term outlook and xed income investors extremely nervous. By going short the equity indices but long the credit indices, investors were able to make a positive return of 7% in less than three months with carry of 1.77% a year. One of the best things about this trade was that in addition to oering a very respectable return, it also provided a very useful hedge against an increase in eurozone sovereign credit risk, a dual- purpose advantage that is often available on many relative value strategies. I am condent we will continue to see opportunities like this in 2012 given the probability of further market volatility. In equities, some of the most exciting openings could come in the eld of thematic investment where you take a view on a specic trend by buying stocks that will be most aected. Let’s say you believe that merger and acquisition activity will increase in 2012. You can buy a note or a swap linked to a basket of stocks that have been specially selected as likely takeover targets. The range of thematic investment products available has grown signicantly in recent years and there are now hundreds to choose from, including large numbers that do not require bull market conditions to perform well. Some are based around specic events such as political elections or the launch of a new product (such as our own Apple supplier basket). Others are around longer-term economic trends such as an increase in European exports to the US. The advantage of these products (particularly when done on a synthetic basis) is that they capture macro trends but can often be less volatile and more liquid than straight long positions on equity indices or individual stocks during periods of high market volatility. Both thematic investment and relative value trading require fair amounts of analysis on the part of investors and the banks that they partner with, but hard work will I suspect be the key to success in 2012. 2012 will not be an easy year for investors but it will not be a re-run of 2011: fundamentals will play a more important part in asset valuation, and there will be more opportunities to outperform. 1 Executive Viewpoints Brazil Risk Monitor Ination Trade Finance [...]... the cost of capital of a relatively low-risk, lowmargin activity like trade finance is the Markets in 2012 Foresight with Insight Deutsche Bank 2 Markets in 2012 Foresight with Insight Deutsche Bank Economics & Geo-Politics The articles marked with this icon are based on Deutsche Bank Research The Eurozone Crisis China The US Dollar US Growth Solutions Emerging Markets Africa Asia Markets in 2012 Foresight. .. not without risks for the inflation outlook The most visible Markets in 2012 Foresight with Insight Deutsche Bank Markets in 2012 Foresight with Insight Deutsche Bank 1.9 Executive Viewpoints Werner Steinmüller Head of Global Transaction Banking Trade Finance Back in fashion Over the past three years, transaction banking has been recognised as a key strategic pillar of global wholesale banking Indeed,... financing Note how the relative rise of China did not diminish the role of the US dollar and may even have enhanced it Indeed, like the Japanese during their period of high growth, the Chinese until recently resisted the internationalisation of the renminbi recession, there is no sign that the world will forsake the dollar The world is still willing to finance the US at a low interest rate and the nominal... start a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and enforcing insolvency But on the issue of the cost of starting a business, Ireland scores best with Greece and Italy both lagging a long way behind Together with its strong showing in the ‘time spent paying tax’... deleveraging Spending on consumer durables and business equipment, as well as investment in business structures and housing, in the aggregate, is still running near historic lows as a share of GDP This spending will add an extra 5% Markets in 2012 Foresight with Insight Deutsche Bank to the level of GDP in the years ahead as it returns to levels needed to keep the stock of homes and durables expanding in line... Dollar Weakening 85 80 140 Dollar Weakening Dollar Weakening 75 160 180 70 200 1/73 Markets in 2012 Foresight with Insight Deutsche Bank 1/78 1/83 1/88 1/93 1/00 1/98 1/03 1/08 Markets in 2012 Foresight with Insight Deutsche Bank 3.4 Markets John-Paul Smith Global Emerging Markets Strategist 3.4 Markets Emerging Market Equities Difficult year ahead 2012 looks to be another difficult year for emerging market... relatively high funding costs compared to the unsecured market, and (in the latter) as the arbitrage continues to be unconvincing But although the primary outlook is not particularly exciting, there will likely be interesting opportunities in the secondary market During 3Q 2011, we saw a major sell off in these markets in response to the worsening eurozone news but the fundamentals (with the exception of... story is important Markets in 2012 Foresight with Insight Deutsche Bank 3.3 Markets 3.3 Markets Second, the relationship between nominal GDP growth and EBIT margins has broken down around the world Spain and Italy have higher EBIT margins than most of the ‘growthy’ emerging markets (see Figure 2) The reason is past over-investment in many Asian countries – particularly China, Indonesia, India, Taiwan and... Goods Industrials Financial Institutions Financial Sponsors Technology Healthcare Markets in 2012 Foresight with Insight Deutsche Bank 4.1 Sectors & Corporate Strategy Stephan Leithner Co-Head of Investment Banking Coverage & Advisory Outlook for Corporates Test of nerve 2012 will be an interesting test of nerve for corporates, both the executives that run them and the institutions that invest in them The. .. underperformed the defensives in 2011 from February through the early October bottom in equities, but have been recovering strongly with the market We see this unwind as having much further to run Markets in 2012 Foresight with Insight Deutsche Bank 3.2 Markets Gareth Evans Co-Head of European Equity Strategy European Equities Time to be bold The key question for investors in European equities, in our opinion, . Markets in 2012 Foresight with Insight Deutsche Bank Markets in 2012 Foresight with Insight Deutsche Bank Deutsche Bank The Markets in 2012 – Foresight. Foresight with Insight The Markets in 2012 Foresight with Insight Deutsche Bank Corporate & Investment Bank Markets in 2012 Foresight with Insight Deutsche