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					   Deutsche Bank

                        Deutsche Bank Research:
                        The Equity View
                        August, 2013

                Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest
                that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND
Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532
       > Overview

      The Equity View
          Equities are trading close to record highs in developed markets despite an underwhelming Q2 earnings season.
           Multiples have rallied to mid cycle levels as markets discount an imminent earnings recovery.
          Recent macro data has given the market considerable empirical cover to anticipate an inflection in earnings
           momentum, particularly given bottom up consensus expectations are now muted (+1% Europe/+6% US for CY13):
            – ISM Manufacturing and Services data for August posted strong gains, including the new orders component.
            – European PMIs confirmed the uptrend in flash figures, with the strongest gains from the periphery suggesting a
                more balanced pattern of growth. Our long-standing non consensus view of a return to growth in Europe in Q2
                was confirmed with a +0.3% print.
            – In July, the UK composite PMI hit its highest level since 1998 and retail sales surged to a 7 year high
            – Bearish views on China had become consensual. July trade data surprised positively and IP accelerated in July
                to 9.7%, a 5 month high with electricity consumption in August up 10%.
            – Only Japan came in light of forecasts with 2.6% GDP (annualised) vs consensus of 3.6%.

          Money flows continue to provide support to DM equities. AUM inflows have spread to Europe and are now positive
           YTD in addition to the US and Japan. This is providing a positive tone to markets, particularly on pull-backs.
          After a slow start to 2013, global M&A activity has accelerated in Q2 and June –July were ahead of the 5 year
           average. Global ECM activity (placings, IPOs) is up 42% at the H1 stage, highlighting levels of risk appetite.
          Conclusion: Despite concerns over rising treasury yields/taper risk and markets near to their highs, equities are well
           supported at these levels through to YE on greater confidence of an inflection in earnings momentum, based on
           more evidence of a broadly based recovery than had been anticipated, plus continued inflows to the asset class.
          The biggest risk to our view is a disorderly market response to the end of QE that sees bond yields rise or equities
           fall in a manner that would impede growth. We expect intermittent volatility spikes around events such as German
           elections/US debt ceiling discussions and would buy such pull-backs.

                                                                                                          Editors: Paul Reynolds, Christopher DiPaola, William Bratton, Hassan Al-Wakeel

Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532                                                                                    2
       > Overview

         US and selected European equity indices are hitting all time
         highs...EM assets remain broadly out of favour

         Total returns – 2013 YTD and distance to pre crisis peak
                                                                                  Equities                                                                                                                Corporate credit                    Sovereign debt                            FX                                     Commodities
            40%      36%
            20%                                    16%              15%
            15%                                                                                       11%             11%             10%
            10%                                                                                                                                                                                                                            4%
             5%                                                                                                                                     2%                                                     3%                                                            3%
                                                                                                                                                                                                                           1%                                                           1%                   0%
           (5)%                                                                                                                                                 -2%                                                                                -2%                                                                          -1%
                                                                                                                                                                                                                                   -3%                       -3%   -4%
          (10)%                                                                                                                                                               -7%
          (15)%                                                                                                                                                                                                                                                                                   -12%                                       -9%
          (20)%                                                                                                                                                                         -17%
          (25)%                                                                                                                                                                                                                                                                                                                                       -21%


                                                                                                                                                                                                                                                                         Dollar Index


                                      US S&P 500

                                                                                                                                                                                                                           EU IG

                                                                                                                                                                                                                                   US IG
                                                                    UK FTSE 100


                                                                                                                                                                                                                                                                                                             Commodity Index
                                                                                                                                                                              MSCI EM

                                                                                                                                                    Hang Seng
                       Japan Nikkei

                                                                                                      Spain IBEX 35

                                                                                                                                                                                                                                                                                                                                 Brent Oil
                                                                                                                                                                India Nifty
                                                                                   Europe Stoxx 600

                                                                                                                      German DAX 30

                                                                                                                                                                                         Brazil Bovespa
                                                    French CAC 40

                                                                                                                                                                                                           US High Yield
                                                                                                                                      Italy Milan

                     16               1            18               3              3                  29              -4              94            16          7             18         45
                                                                                                                                                                                                                                   2013 YTD Distance to post 2007 peak >>                         <10%                         >10 <25%               >25%

         Note: Total return accounts for both income (interest or dividends) and capital appreciation. Prices as of 14 Aug 2013, 09:00 GMT
         Source: Bloomberg Finance LP, Deutsche Bank Research

Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532                                                                                                                                                                                                                                                       3
       > Overview

        Strong index performance finds limited upside to our strategists’ YE
                                                      Equity Index Current Current YTD                                Sector
                             Macro View                                                                                                           Rationale
                                                        Targets    Valuation Level perf *                            Weightings
                           Anticipate a few yrs
                                                                                                                                            Tech offers best div.
                           of above avg returns                                                                    Overweight: Tech,
                                                      S&P 500:                                                                              growth potential and re-
                           on accelerating cash                                                                    Industrials &
                                                      2013: 1675                                                                            rating as enterprise
        US                 flow, continued
                                                      2014: 1850               13.9x 14PE           1,659   +19%   Financials
                                                                                                                                            spending improves. Expect
                           equity inflows, &                                                                       Underweight: Energy,
                           improving corporate                                                                                              double-digit div growth to
                                                                                                                   Staples & Telecom
                           outlooks                                                                                                         drive Bank PE’s.

                           GDP growth surprise        Stoxx600:                                                    Overweight:              Upside leverage to growth
                           has come through,          2013: 315                                                    Financials,              and rising rates through
                                                                               12.3x 14 PE           305    +13%
                           as predicted. Further      2014: 340                                                    Construction, Telcos,    Banks and Insurers.
        Europe             upside to come from                                                                     Chemicals & Media        Preference for domestic
                           a turn in the earnings     FTSE 100:                11.6x 14 PE          6,480   +15%
                                                                                                                   Underweight: Food &      European exposure to
                           cycle.                     2013: 6575                                                   Bev                      capture growth surprise.
                                                                                                                   Overweight: Autos,       We favour sectors where
                           More than trend
                                                                                                                   Chems, Construction,     investors are still u/w,
                           growth seems
                                                                                                                   Insurance.               earnings momentum is
                           unlikely as sluggish       DAX 30:
        Germany            global trade               2013: 8,000              11.0x 14PE           8,376   +10%   Underweight: Basic       improving ahead of
                           counteracts decent                                                                      Resources, Food &        expectations and analyst
                           domestic growth                                                                         Bev, Industrials &       target price revisions
                                                                                                                   Retail                   indicate strong conviction.
                           Expected economic                                                                       Overweight:              Banks attractive on macro
                           recovery in 2H on
                                                                                                                   Services, banks, IPPs,   recovery as well as
                                                                                                                   gas, environmental &     valuations while
                           strengthening with         MSCI China:
        China              long-term                  2013: 75
                                                                               8.5x 14PE            59.7    -5%    IT/tech                  environmental names to
                           performance being                                                                       Underweight:             benefit from reforms.
                           under-pinned by full                                                                    Materials, energy &      Materials/energy to stay
                           range of reforms                                                                        infrastructure           depressed on over-supply.

        * Local currency
Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532                                                                   4
       > Overview > Regional Strategy > US

         Equity multiples are near historical averages but look cheap both on an
         absolute and relative basis
        Our baseline sees both higher rates and a higher                                                   The multiple has been rising from unusually depressed levels
         multiple from current levels                                                                       but is still 2 multiple points cheap to fair value
          – Based on payout ratios, earnings, the 10y yield                                                 15
                                                                                                                         Recession                  P/E deviation from fit             +/-1 SD
            and growth/inflation volatility, we estimate the fair                                           12                                                                                    12
                                                                                                             9                     Current Deviation from Fitted Value : -2.0                     9
            value trading multiple for the S&P500 to be 18.4x                                                6                                                                                    6
          – The current 2pt discount to fair value implies a                                                 3                                                                                    3
            cushion to compensate for significantly higher                                                   0                                                                                    0
                                                                                                            -3                                                                                    -3
            rates                                                                                           -6                                                                                    -6
                                                                                                                                                    Undervaluation off extremes but still
              … Simply put, the current multiple is pricing in a                                            -9                                                                                    -9
                                                                                                           -12                                      close to the bottom of the band               -12
                 5.1% 10y, meaning that the multiple can
                 expand even as rates rise
                                                                                                          Source: Haver, BLS, BEA, Bloomberg Finance LP, Deutsche Bank
        On a relative basis, equities are still very cheap
          – The current spread between S&P500 OCF yield                                                     S&P500 OCF yields remain 2.2% wide to the stable historical
            and credit/treasury yields implies that equities                                                avg – This implies equities are 29% cheap to treasuries
                                                                                                                            Recession                    Spread above 10yr Treasury yields
            are underpriced by 24-29%                                                                       14%                                                                                  14%
                                                                                                            12%                                                                                  12%
          – This again suggests that before equity fair value                                                                                Current Spread: 6.9%
                                                                                                            10%                              Average Spread: 4.7%                                10%
            is threatened, rates have room to rise                                                            8%                                                                                 8%
        Fair value is not the ceiling                                                                        6%                                                                                 6%
                                                                                                              4%                                                                                 4%
          – It is normal cyclical behaviour for the multiple to
                                                                                                              2%                                                                                 2%
            rise well above fair value as inflows to equities                                                 0%                                                                                 0%
            normalize and growth expectations improve                                                        -2%                                                                                 -2%
         Related DB Research:
         Asset Allocation – Rates and the Equity Multiple (Chadha)
                                                                                                          Source: S&P Compustat, Deutsche Bank
Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532                                                                                                 5
       > Overview > Regional Strategy > US

         The backdrop of ISM at 55.4 and broadly better data is fuelling equity
         inflows supporting our preference for of a rotation out of bonds
        Strong ISM data points to period of overweight                                                     Equity inflows tend to accelerate when the ISM signals
         equity positioning                                                                                 economic momentum
          – During periods of strong ISM in this recovery,                                                  75                                                                            70

            aggregate equity beta has been 0.5-2.0 std                                                      70                                                                            50
            above average (current 0.8 std above average)                                                                                                                                 30
          – We estimate that a 0.5 std move in beta is worth                                                55

            3% for the S&P                                                                                  50
        We expect inflows to support equities near term                                                    45
                                                                                                            40                                                                            -50
         with fund positioning overweight
          – Global equity inflows have been strong with $54b
            over the last 5 weeks (~1% of AUM)                                                                               Equity Flows ($bn, rhs)          ISM Mfg: New Orders (lhs)
                                                                                                          Source: ISM, Deutsche Bank, Bloomberg Finance LP
          – Equity mutual fund flows have turned positive
            during the past two months after 7 months of                                                    In 2010 & 2011 when ISM & net orders was >55, rates
            outflows                                                                                        positioning was net short

        Rates positions likely to be cut on solid ISM                                                      43                                                                                 400
          – When the ISM and new orders were above 55 in                                                    48                                                                                 200
            2010 and early 2011, rates positioning was                                                      53                                                                                 0
            notably net short                                                                               58                                                                                 -200
          – We expect rates positions to be pared further as                                                                                                                                   -400
            the path of the Fed has become more data                                                                                                                                           -500
         Related DB Research:
                                                                                                                      ISM Mfg New Orders (inv, lhs)          UST net longs (10y equiv, rhs)
         Investor Positioning and Flows - ISM and Positioning (Parker)
                                                                                                          Source: ISM, CFTC, Haver, Deutsche Bank
Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532                                                                                               6
       > Overview > Regional Strategy > Europe

   Euroarea Q2 growth surprise provides a platform for EPS inflection
       Q2 GDP growth in the Euro area surprised                           Earnings expectations have fallen in line                             The credit impulse looks set to rise in Q3,
       to the upside                                                      with growth forecasts                                                 followed by improving domestic demand
          %, qoq                                    %, qoq                       %, yoy                                 Index points                 % of GDP                                   % yoy   8
       3                                                     1.5                                                                       29       6               Q3 credit impulse assuming no
       2                                                     1.0        4.1                                                                                     improvement in new borrowing            6
                                                                                                                                       28       4
       1                                                     0.5        3.9                                                                                                                             4
       0                                                                                                                               27       2
                                                             0.0        3.7                                                                                                                             2
      -1                                                                                                                               26       0
                                                             -0.5                                                                                                                                       0
      -2                                                                3.5                                                                     -2
                                                             -1.0                                                                      25
      -3                                                                                                                                        -4                                                      -2
                                                             -1.5       3.3                                                            24
      -4                                                                                                                                                                                                -4
      -5                                                     -2.0                                                                               -6
                                                                        3.1           Avg consensus GDP growth of US,                  23
      -6                                                     -2.5                                                                               -8           Credit impulse (lhs)                       -6
                Total industry (lhs)                                                  Euro, China - 2013
                                                             -3.0       2.9                                                            22
      -7        GDP (rhs)                                                             Stoxx 600 earnings - 2013 (rhs)                       -10              Private domestic demand                    -8
      -8                                                     -3.5       2.7                                                            21   -12                                                         -10
        2002   2004       2006       2008    2010   2012                  10/11      02/12      06/12     10/12    02/13    06/13              1996         2000          2004         2008     2012
      Source: Deutsche Bank, ECB, Eurostat                              Source: Deutsche Bank, ECB, Eurostat                                Source: Deutsche Bank, Eurostat, Markit

     Euro area GDP grew +0.3% qoq                                      Global growth surprise should                                          Credit impulse fell in Q2 but even
      in Q2, surprising consensus to                                     help to stabilise EPS expectations                                      with no improvement in borrowing
      the upside.                                                       Earnings expectations for the Stoxx                                     in Q3 it should rise
     This was the first positive GDP                                    600 have been falling steadily for                                     We continue to expect a stabilisation
      growth seen since Q3 2011.                                         nearly 2 years.                                                         in credit growth and a return of the
     Upside surprise contributions came                                This fall has simply mirrored the fall                                  credit impulse to neutral.
      from France, Germany and Italy.                                    in global GDP growth expectations.                                     We expect an uptick in corporate
      Spain was in line with expectations.                              EPS growth expectations in the                                          expenditure and reduced fiscal drag to
     The July PMIs point to positive                                    Eurozone have fallen to just 1.1% for                                   lead the next leg of growth
      growth continuing in Q3.                                           2013 (vs 6.5% for the S&P).
  Related DB Research
  European Equity Strategy: Domestic cyclicals (Evans)
Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532                                                                                                       7
       > Overview > Regional Strategy > China

        Recent China data and ongoing reform commitment provides support
        to our 2H13/2014 economic recovery thesis

           Recent macro data from China suggest                                                            July’s macro data suggests an improving economic outlook,
            improving economic fundamentals                                                                 especially as industrial prodn came in ahead of expectations

             – July industrial production at a 5-month high beat                                              16
                                                                                                                                                          Elec Prodn          Elec Cons
               expectations on recovering demand                                                                                                          Exports             IP
             – July export growth better than expected in part                                                10
               on US housing market recovery                                                                   8
             – New July loans (RMB700b) above consensus as
               impact of June’s SHIBOR spike proved muted                                                      2
           Policy reforms are starting to gain momentum                                                       0
                                                                                                              -2         Mar               Apr          May          Jun          Jul
             – Substantial efforts to enforce anti-pollution                                                  -4
               measures and support related industries                                                    Source: Deutsche Bank Research, NBS

             – Potential national roll-out of 2-child policy
                                                                                                            And we expect China’s GDP YoY growth rate to accelerate
             – Recent liberalisation of bank lending rates
                                                                                                            from 4Q13 into 2014
             – Further significant reforms expected at the 3rd                                               8.6     %
               plenary session of 18th CPC across deregulation,                                              8.4
               resource pricing, VAT reform & financial sector                                               8.2
           These two trends give greater confidence of                                                      7.8
            GDP acceleration in 2H13 and into 2014                                                           7.6
             – In terms of YoY GDP growth, DB forecasts 7.5%                                                 7.2
               3Q13, 7.7% 4Q13, 8.1% 1Q14 & 8.5% 2Q14                                                        7.0
        Related DB Research:                                                                                           1Q13          2Q13        3Q13         4Q13     1Q14      2Q14
        China Strategy: IP growth accelerates to 5-month high (Jun Ma)
        China Strategy: Delay in recovery and acceleration in reforms (Jun Ma)                            Source: Deutsche Bank Research, NBS

Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532
       > Overview > Regional Strategy > Europe

        The Equity Derivatives Market is seeing low interest in protection
        buying and is not discounting significant macro shocks

          VIX and VSTOXX levels have fallen back                           Implied volatility skew is approaching                         Implied correlation declines highlight a
          towards pre crisis lows                                          historic lows                                                  move towards a more single stock world
            100                                                              12                                                              75

             80                                                              10                                                              65

             60                                                               8                                                              55

             40                                                               6                                                              45

             20                                                               4                                                              35

              0                                                               2                                                              25

                                                                                      E-STOXX50 6M 90%-110% IV Skew (Put IV - Call IV)                     S&P500 6M ATM Implied Correl (%)
                  VIX (volatility points)   VSTOXX (volatility points)
                                                                                      S&P500 6M 90%-110% IV Skew (Put IV - Call IV)                        E-STOXX50 6M ATM Implied Correl (%)
        Source:Deutsche Bank                                             Source:Deutsche Bank                                            Source:Deutsche Bank

           Implied volatility on many major                                Implied volatility skew is near                                Implied correlation also reaches
            global indices has slumped                                       historic low levels – i.e. Put                                  levels not seen since before the
            towards multi-year lows.                                         prices are low relative to calls                                global financial crisis
           This implies investor concern                                   Investor demand for downside                                   Low implied correlation suggests
            remains low. Residual concern                                    protection is low, given perceptions                            more single stock/sector alpha and
            over the Eurozone crisis leaves                                  of ongoing central bank support                                 fewer macro “risk-off” episodes.
            European volatility elevated versus                             Demand for upside calls, as
            US volatility                                                    investors position for upside
           Volatility likely to remain low as                               exposure, also flattens skew
            long as central banks provide high                                                                                             Related DB Research
            levels of market support                                                                                                       Derivatives Monthly Europe (Simon Carter)
Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532                                                                                          9
        > Overview > Regional Strategy > Sector Themes

        Summary of sector themes

                          Sector                                                                          Theme

          The impact of a strong                         We review the impact of a multi-year uptrend in the US$ on key sectors and
    1                                                     identify winners and losers by region

                                                         European Banks have built capital through the reporting season at a far
                                                          faster rate that the market was expecting. This pulls forward cash return
    2     European Banks                                  prospects and offers upside risk to the real economy through a more
                                                          powerful credit impulse through 2014

                                                         As part of China’s ongoing reforms, expect moves to promote higher birth
    3     China’s two-child policy                        rates to slow the country’s aging process – will lead to a further 1.6m babies
                                                          annually and increase China’s peak population by 25m

          Pharma productivity                            Greater drug R&D productivity showing through in record FDA approvals
          improving                                       supporting continued positive view on European Pharma

          Global Aerospace                               Commercial aerospace OE cycle is well underpinned and will prove
          manufacturer duopoly                            to be less cyclical, benefitting a global duopoly (Boeing and EADS)

Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532                                    10
       > Overview > Regional Strategy > Sector Themes

    1a   The Dollar is on a multi year up-trend. We look at winners, losers and
         the medium term strategic impact

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

             160                                                                Nominal Dollar vs Majors            Real Broad Dollar
                                                     6yrs,                              10yrs,
             140             6yrs,                  up 67%                                                                                 9yrs,
                                                                                      down 46%              7yrs,
                           down 18%                                                                                                      down 40%
             120                                                                                           up 43%
                                                                                                                                        (vs majors)


                   73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
         Source: Bloomberg Finance LP, Deutsche Bank Research

          We believe the USD has now entered a sustained multi year uptrend driven by:
            – Superior US growth should support the rotation from bonds to equities
            – Economic and monetary policy experimentation in Japan (Abenomics), highlights the scope that central banks outside
              of the US have to weaken their currencies against the dollar
            – China rebalancing away from investment provides downside risks for China-linked currencies (AUD, CAD)

          By 2015, we expect EUR/USD to reach 1.10, USD/JPY 115 and AUD/USD 0.85. Most EM FX will weaken
          As a result, we recommend the following top down equity strategy themes:
            – Multiples over earnings; overweight the US on prospective capital flows
            – Long commodity importers and short exporters
            – Overweight the drivers (growth and rates) of US Dollar up cycle; US financials benefit and bond like payout sectors
              Telecoms and Utilities lose.
            – Underweight Energy and Materials

Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532                                               11
        > Overview > Regional Strategy > Sector Themes

   1b   The investment implications of a stronger Dollar across sectors and
        stocks globally
                                 Aerospace                Airlines                     Autos                 Chemicals                Mining               Oil & Gas
                                                                                                           Mid-term, M&A to
                                                                                Beneficial for                                   US co’s becomes       Weaker Asia and EU
                               Will significantly                                                          rise as US names
                                                     Asian, EU & Latin          Japanese and                                     less competitive,     currencies translate to
                               benefit the                                                                 look to acquire
                                                     American airlines will     Europeans, with                                  China’s domestic      slower global oil
         Overall               competitive
                                                     likely see in margin       potential negative
                                                                                                           assets overseas.
                                                                                                                                 production of coal,   demand. This places
         View                  positioning of                                                              Most likely targets
                                                     degradation                implications for US,                             aluminium and steel   pressure on upstream
                               European players                                                            will be in the
                                                                                Korean and Indian                                becomes more          and service sector
                               vs. their US peers                                                          European specialty
                                                                                automakers                                       competitive.          earnings

                                                                                                           Most US names         US bulks (Alpha,
                               Embraer                                                                                                                 Chevron, Exxon
                                                                                                           (Tronox, Celanese)    Walter)
         Americas              United                US airlines                US Auto assemblers
                                                                                                           Large US exporters    US Steel, Usiminas,
                                                                                                                                                       US export refiners
                               Technologies                                                                                                            (VLO, MPC, PSX)
                                                                                                           (Westlake)            Gerdau

                                                                                                           EU Speciality
                               EADS, Safran,                                                                                     Glencore              Royal Dutch Shell ,
                                                                                European auto              chemicals (M&A)
         Europe                MTU, Zodiac           European airlines
                                                                                assemblers                 High cost potash
                                                                                                                                 Barrick Gold,         Hunting
                                                                                                                                 Acerinox,             BG
                                                                                                           names (K+S)

                                                                                                           Large US exposure
                                                     Air China, Cathay          Japanese Auto              (LG Chem,
                                                                                assemblers                 Reliance)                                   RIL, Origin Energy
                                                     Pacific, China
         AsiaPac                                     Eastern, Korean Air,
                                                                                                                                 Alumina, FMG          ONGC , CNOOC,
                                                                                Korean and Indian          High cost Asian                             Woodside
                                                     SIA                        auto assemblers            names (PTTGC,
        Source: Deutsche Bank, Research

        Key: Relative winners / Relative losers                                                           Related DB Research:
                                                                                                          FITT Research: Investment Implications of a Stronger $ (Chadha)
Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532                                                                          12
        > Overview > Regional Strategy > Sector Themes

    2   European Banks rebuilding capital and earnings ahead of expectations
        which should also be supportive for our positive credit impulse view

          European Banks have built capital ratios                            2013 Earnings revisions are now positive,                Implied cost of equity falling as capital
          in Q2 far faster than anticipated                                   and 2014 revisions are improving steadily                ratios and dividend prospects recover
                                                                                4.0%                                                 26.0%
         11.0%                                                        +0.3%                                                                    10% upside to crisis level CoC
                                                                                2.0%                                                 24.0%
                                                  +0.2%                                                                                        30% upside for full normalisation
                                                                                0.0%                                                 22.0%
            9.0%                                                               -2.0%                                                 20.0%
                                                              10.7%                                                                  16.0%
                                          9.8%                                 -6.0%                                                 14.0%
            7.0%         8.9%
                                                                               -8.0%                                                 12.0%
                                                                              -10.0%                                                 10.0%
            5.0%                                                                           Post Post Post Post Post Post              8.0%
                         2012            2013E            2014E                            Q1 12 Q2 12 Q3 12 FY 12 Q1 13 Q2 13        6.0%
                                                                                                                                         5/1/04   5/1/06   5/1/08      5/1/10    5/1/12
                    Fully Loaded Tier 1             Q2 "surprise"                                 2013e EPS              2014e EPS               CoE            Avge           Pre-crisis
            Source:Deutsche Bank Estimates and Company Data                       Source:Bloomberg Consensus Estimates               Source: Deutsche Bank Estimate

           Over Q2 reporting season, and in                                     The improvement in capital ratios                     Banks traded around 10% cheap to
            2013 more generally, European                                         has been achieved without any                          implied cost of equity (12%)
            banks have built their capital ratios.                                impact on +ve revenue momentum.                        through the financial crisis
           The “surprise” component of this in                                  2013 earnings revisions have                          Next leg of upgrades should be
            Q2 was 0.2% for 2013E and 0.3%                                        improved though H113                                   improving NPLs
            in 2014E, on a Basel III fully                                         – Non performing loan (NPLs)                         Positive contribution to credit
            applied basis.                                                           levels surprised positively                         impulse now more likely in 2014
                                                                                   – Non core assets were sold                          Risks: Asset Quality Review and
                                                                                     faster, reducing earnings drag                      2014 EBA stress tests
    Related DB Research:
    European Strategy: Q2 Reporting Review (Slomka)                              2014 revisions are also improving

Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532                                                                                     13
        > Overview > Regional Strategy > Sector Themes

    3   China reforms: A two-child policy will have long-term macro
        implications but the near-term equity impact will be sector specific

           Unconfirmed media reports have suggested a                                                      A move to a 2-child policy will have a significant impact on the
            potential relaxation of the one-child policy by                                                 urban total fertility rate with a less market rural impact
            end-2013 or early 2014                                                                           2.0
             – Potential national rollout of “dandu” policy which                                            1.6
                would allow a couple to have two children if either                                          1.4                                                                                                                    2012
                the husband or wife has no siblings before full 2-                                           1.0                                                                                                                    2015
                child policy implemented after 2015                                                          0.8                                                                                                                    2018
           We estimate implementation of a 2-child policy                                                   0.4
            from 2016 would lift births by 1.6m per annum or                                                 0.2
            up 11% from our base case                                                                                            Urban                               Rural                          National
              – Increase driven by a significant increase in                                              Source: Deutsche Bank Research, NBS

                 fertility rates, especially in urban areas
                                                                                                            And the higher birth rate will add an estimated 25m additional
           Higher birth rates will have minimal near-term                                                  people to China’s peak population
            impact but should be long-term positive
              – Estimated to boost annual GDP growth by
                 0.2ppts during 2030-50 & reduce primary
                 pension deficit by 4% during 2040-50                                                     1,350

           Sectors benefiting from a relaxation in the one-                                              1,300
            child policy include infant formula, diaper, baby                                             1,250                                Reform case, m                       Non-Reform case, m
            care products, strollers, clothing & education                                                1,200
  Related DB Research:
  China Strategy: Quantifying the impact of 2-child policy (Jun Ma)                                       Source: Deutsche Bank Research, NBS

Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532
        > Overview > Regional Strategy > Sector Themes

    4   Greater drug R&D productivity showing through in record FDA
        approvals supporting continued positive view on European Pharma

           Pharmaceutical company R&D is achieving                                                         EU large cap product approvals
            unprecedented levels of productivity
                                                                                                                       Sales potential ($m)
             – 2013 could be the most successful year for new                                               25000

               drug approvals since our analysis began in 2007                                              20000
             – On track to deliver 13-15 major new approvals in
               2013 for European majors (10 already approved)
           Pipeline prospects are material and exceed
            upcoming hard patent expiries                                                                               2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E
             – 2013’s potential future sales of $23bn ($18bn
               risk-adjusted) =10% of current sector                                                                  Expected sales potential of recent or possible new approvals ($m)
                                                                                                                      Additional sales in best case (assuming 100% probability of succcess)
               pharma/vaccine revenues
                                                                                                          Source: Deutsche Bank
             – 2013-2016E Peak pipeline sales (risk-adjusted =
               $29bn) exceeds hard patent expiries of $20bn                                                 Pipelines > patent expiry exposure
             – Best case could add >15% to outer year                                                        30,000       Sales in US$ m
               earnings suggesting significant optionality                                                   25,000
                                                                                                                                                                      Expected 2013-15E
                                                                                                             20,000                                                   launches now exceed
           Greater R&D success is based on better drug                                                                                                               patent expiries
            selection, better patient research, partnering and
            fundamental changes to the FDA approval process
           Mid-term sector growth (2013E-16E EPS 8% cagr)                                                            0
            with 4% dividend yield supports sector‘s re-rating to                                                      2012       2013E       2014E   2015E      2016E      2017E           2018E

            13x forward PE                                                                                               Hard Exposure                             Soft exposure
          Related DB Research:                                                                                           Possible launches                         Risk-adjusted launches
          FITT Research: European Pharmaceuticals (Richard Parkes)                                        Source: Deutsche Bank

Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532                                                                                             15
        > Overview > Regional Strategy > Sector Themes

    5   Commercial aerospace OE cycle well underpinned and less cyclical.
        Global duopoly set to persist

           A number of factors underpin the OE cycle over                                                  2008/09 - proof of a less cyclical OE cycle
            the next decade rendering it less cyclical
             –   Backlogs at record levels (>8 years), with                                                               2008 Post crisis aircraft deliveries far
                                                                                                            150           less volatile than earlier downturns
                 better customer diversity than previous cycles
             –   High oil prices & relatively cheap capital
                 catalysing ongoing fleet replacement in DM
             –   Long term growth potential in EM driven by
                                                                                                             70          Year of traffic
                 rising middle class affluence                                                                             decline
             –   Production slot overbooking allows some                                                             Yr 1      Yr 2        Yr 3    Yr 4       Yr 5    Yr 6      Yr 7      Yr 8      Yr 9
                 absorption of deferrals and cancellations                                                           2008s cycle              2000s cycle            1990s cycle             1980s cycle
                                                                                                          Source: Deutsche Bank, Airbus, Boeing

           Boeing and EADS (Airbus) duopoly maintained                                                     The backlog is controlled by EADS/Boeing. In narrowbody
             –  China unlikely to be a material threat for the                                                                                Chart Title
                                                                                                            aircraft *, combined market share is 96%

                next 10yrs in competitive terms
                                                                                                                                                                                    C919 = 2%
             –  Within the duopoly, product portfolios now
                better matched suggesting stable competitive
                                                                                                                                                                                    MC-21 = 2%
             –  Airbus and Boeing set to deliver EPS growth &                                                                                                                       Boeing = 43%
                strong cash flow from their record backlogs
                                                                                                                                                                                    Airbus = 53%
         Related DB Research:
         FITT Research: Aerospace & Defense (Fidler / Walton)                                             Source: Deutsche Bank, Ascend                              * % 50% of value/75% of backlog volumes

Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532                                                                                                        16
       > Overview > Regional Strategy > Sector Themes > Positioning

        Trading the View

                        Themes                               Trade Idea                                             Rationale

                                                     Buy Dec-13 S&P 500                   The S&P 500 is up 16.5% YTD with upcoming catalyst in
          Protection trade                           1400-1650-1725 put                   September and November. This structure protects index gains
                                                     spread collar                        YTD and maintains upside exposure to 1725

                                                     Buy a E-STOXX 50 1                   This provides risk limited upside exposure between a 3% to
          Upside trade                               x 1.5 Dec-13 103%-                   18% rally, but loses above a c.18% rally (above E-STOXX 50
                                                     108% call ratio                      highs seen since Sept 08). Max P&L of ~4.5x initial premium
                                                     Buy DB’s reform
                                                                                          We expect significant further reforms to be announced in the
                                                     basket (DBHKCNRF)
          Buy into China reforms                                                          3rd plenary session of the 18th CPC (Sept/Oct). These should
                                                     or HSCEI Sept/Oct
                                                                                          be supportive to market sentiment
                                                     13 call spreads
                                                                                          Low energy sector vol leaves XLE and energy stock vols
          Use low Energy sector
                                                     Buy XLE – SPX vol                    attractive. XLE-SPX vol spreads capture vol in the integrateds,
          vol to defend against a                    spreads                              services & E&Ps. The current IV spread is nearly the lowest
          fall in WTI prices                                                              realized in recent years.
          Rotation of fund flows                     Dax30 stocks that                    The two largest ETFs on European equities relate to the
          out of EM into DM                          are constituents of                  EuroStoxx50 and the German Dax30. Inflows are weighted to
          equity funds (via ETFs)                    the EuroStoxx50                      ETFs. Target the stocks that feature on both indices
        Source: Deutsche Bank Research
        Note: (*) Bloomberg code

Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532                                                     17
       > Overview > Regional Strategy > Sector Themes > Positioning > Risks

        With several developed markets close to their highs, some risk metrics
        are becoming more elevated

          Earnings revisions remain negative                                                Margin debt for US securities is at record                            Markets near complacency territory as
          globally                                                                          highs in $bns                                                         measured by PE/VIX
         1.0                                                                                (index points)           0.5 months       3 months      (USD bn)          Exaggerated caution    Very high PE, so    PE reasonable, but
                        MSCI AC             Stoxx                      S&P                                                                                      1.8   signal as depressed   complacent equity       v.low VIX. A
                                                                                           1,800                                                          400                                                                         Mania
         0.5            World               600                        500                                                                                      1.6
                                                                                                                                                                        EPS raised PE &     mkt , but cautious      complacent
                                                                                           1,600                                                          350                PE/VIX         derivatives market   derivatives market
         0.0                                                                               1,400                                                          300   1.4                                                              Complacency

                                                                                           1,200                                                          250   1.2
        -0.5                                                                                                                                                                                                                      Realistic &
                                                                                           1,000                                                          200
                                                                                                                                                                1.0                                                               Disciplined
        -1.0                                                                                   800                                                        150
                                                                                               600                                                        100   0.8
        -1.5                                                                                                                                                                                                                      Skeptical or
                                                                                               400                                                        50    0.6                                                                 Denial
                                                                                               200                                                        0     0.4
        -2.0                                                                                                                                                                                                                          Crash






                                                                                                     S&P 500 peak                     NYSE Margin debt peak

                                                                                                     S&P 500 (lhs)                    NYSE Margin debt (rhs)                          S&P 500 Trailing PE / Qtrly Avg VIX
       Source: IBES, DataStream, Deutsche Bank                                              Source: NYSE, DataStream, Deutsche Bank                             Source: Deutsche Bank

              Earnings momentum is negative                                                   High levels of margin debt are likely                                With low volatility, the market is on
              European earnings improved vs Q1                                                 to exacerbate market down-moves                                       the cusp of entering complacency
               trends but are below historic ave.s                                             However, there is no causality to                                     territory
              Ex financials, we estimate US EPS                                                forecast market shocks                                               This is as much a reflection of the
               growth was negative in Q2 for the                                                 – Data also includes fixed income                                    record low levels of volatility which
               first time since 2009                                                                leveraged carry positions                                         an increase in derivatives activity
              Asian momentum slowed in Q2                                                       – The growth of HF AUM will also                                     would address
                                                                                                    put upward pressure on $bn
                                                                                                    margin balances, overstating
                                                                                                    the risk to equities

Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532                                                                                                                                          18
         The key risks to our view are a sustained slowdown in EM /
         China and a return of the crisis in Europe

         The House View - Risk Matrix
                                                                                                    Downside risks

                                                                                  Higher risk        1
                                                                                                     —    China / EM growth slowdown: e.g., data continues to
                                                                                                          disappoint, structural barriers limit growth potential
                                                                                                     —    Crisis returns to Europe: political breakdown raises
                                                4                                                         tensions, recession deepens
         Impact on our base case

                                                        3             2       2                      3
                                                                                                     —    Monetary policy shock: disorderly QE exit stokes volatility,
                                                                                                          undermines asset prices and growth e.g., rates rise
                                                                 7                                        sharper than anticipated, or equities react adversely
                                                                      1                              —    US growth slowdown: unexpected slowdown in data;
                                                                                                          political deadlock amid debt ceiling
                                                                          6                          —
                                                                                                     5    Global ‘currency war’: e.g., rate cuts, tariffs, capital controls
                                                                                                          in EM economies in response to monetary easing in DM
                                                                                                     6    Geopolitical tensions escalate and push up oil prices or
                                                                                                          slow economic activity, e.g., escalation of Syria conflict,
                                                                                                          civil unrest in Turkey, Brazil
                                                                                                     Upside risks

                                                                                                     7    Global growth upside surprise: limited fiscal drag in the US,
                                   Lower risk                                                             sharper-than-expected recovery in Europe, reforms and
                                   Lower                        Probability             Higher            stronger growth in EM, effective policy stimulus in Japan
            * Moves represent change in risk outlook over previous month

           Source: Deutsche Bank

Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532                                                                       19
        DB forecasts

         GDP growth (%)                                                                                           Key market metrics
                                         2011              2012E             2013F              2014F                                 Current                            Q3-13            Q4-13           Q1-14
         Global                            3.8               3.1               2.8                3.8             US 10Y yield (%)       2.70                             2.50             2.50           3.00#
         US                                1.8               2.8               1.6                3.2             EUR 10Y yield (%)      1.81                             1.55             1.75           2.00^
         Eurozone                          1.5              -0.6              -0.6                1.0             EUR/USD               1.325                             1.26             1.20            1.19
         Germany                           3.0               0.7               0.1                1.5             USD/JPY                98.2                              102              110             111
         Japan                            -0.6               2.0               2.0                0.6             S&P 500               1,694                                –            1,675          1,850#
         UK                                1.1               0.2               1.4                2.1
                                                                                                                  Stoxx 600               308                                –              315
         China                             9.3               7.8               7.6                8.5
                                                                                                                  Gold (USD/oz)       1,325.4                            1,350            1,300            1,350
         India                             7.5               5.1               5.0                6.0
                                                                                                                  Oil WTI (USD/bbl)       106                               95               97               98
         EM (Asia)                         7.5               6.1               6.1                7.0
                                                                                                                  Oil Brent (USD/bbl)     109                              105              107              107
         EM (Lat Am)                       4.3               2.8               2.6                3.3
         EM (CEEMEA)                       4.9               2.8               2.7                3.5              end 2014, ^Q2 2014
                                                                                                                  Current prices as of 14 Aug 12.00 GMT
         EM                                6.4               4.8               4.7                5.6
         DM                                1.4               1.4               1.0                2.1

         CPI inflation, YoY* (%)                                                                                  Central Bank policy rate (%)
                                         2011              2012E             2013F              2014F                                                Current          Q3-13            Q4-13             Q1-14
         US                                3.1              2.1                1.5                2.2             US                                0-0.25           0-0.25           0-0.25            0-0.25
         Eurozone                          2.7              2.5                1.5                1.5             Eurozone                            0.50             0.50             0.50              0.50
         Japan                            -0.3              0.0               -0.1                2.3             Japan                              0-0.1            0-0.1            0-0.1             0-0.1
         UK                                4.5              2.8                2.7                2.1             UK                                  0.50             0.50             0.50              0.50
         China                             5.4              2.6                2.6                3.5             China                               3.00             3.00             3.00              3.00
         India                             9.5              7.5                5.2                5.5             India                               7.25             7.25             6.50              6.50

         *          CPI (%) forecasts are period averages                                                     LATAM:    Argentina, Brazil, Chile, Colombia, Mexico, Venezuela
         CEEMEA:    Czech Rep., Hungary, Poland, Russia, Turkey, South Africa, Israel, Romania, Kazakhstan,   ASIA:     China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand
                    Ukraine, Egypt, Saudi Arabia and UAE                                                      DM:       US, Japan, Euro area, UK, Denmark, Norway, Sweden, Canada, Australia, New Zealand, Switzerland

        Source: Deutsche Bank
Deutsche Bank
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532
        Appendix 1
        Important Disclosures
        Additional Information Available upon Request

         For disclosures pertaining to recommendations or estimates made on a security mentioned in this research, please see the most recently published company
         report or visit our global disclosure look-up page on our website at

         Analyst Certification

         The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those
         issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report.
         Paul Reynolds

Deutsche Bank                                                                                                                                                               21
Deutsche Bank Research: The Equity View – August 2013,, +44 207 545 3532
          Equity Rating Key                                                                     Equity Rating Dispersion and Banking
             Buy: Based on a current 12-month view of total shareholder return
             (TSR = percentage change in share price from current price to
             projected target price plus projected dividend yield), we recommend                   1600
             that investors buy the stock.                                                         1400   46 %                48 %
             Sell: Based on a current 12-month view of total shareholder return,
             we recommend that investors sell the stock.                                           1000
             Hold: We take a neutral view on the stock 12 months out and,                           600       34 %
             based on this time horizon, do not recommend either a Buy or Sell.                                                   29 %
                                                                                                    400                                          5%
             Notes:                                                                                 200                                            25 %
             1. Newly issued research recommendations and target prices
             always supersede previously published research.                                               Buy                 Hold                Sell

             2. Ratings definitions prior to 27 January, 2007 were:
                                                                                                          Companies Covered     Cos. w/ Banking Relationship
              Buy: Expected total return (including dividends) of 10% or more
              over a 12-month period                                                                               Global Universe
               Hold: Expected total return (including dividends) between -10%
               and 10% over a 12-month period

               Sell: Expected total return (including dividends) of -10% or
               worse over a 12-month period

Deutsche Bank                                                                                                                                                  22
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Deutsche Bank                                                                                                                                                                 23
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