CIO Insights Reflections

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1 October 2018 Global Trade at Breaking Point? Spotlight on the Balance of Payments CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - WM.CIO-Office@db.com 1

2 Global Trade at Breaking Point? Spotlight on the Balance of Payments October 2018 Authors: Christian Nolting Global CIO Introduction & Executive Summary The Balance of Payments Economic models & real world examples Spotlight on national economies Current discussion: U.S. EU trade dispute Summary Appendix Markus Müller Global Head of Chief Investment Office CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - WM.CIO-Office@db.com 2

3 Introduction & Executive 01Summary Introduction Trade disputes & protectionist measures Recent trade tensions between the U.S., Europe and China have dominated the economic newsflow of late and spurred an intense debate about global trade balances. Ever since U.S. president Donald Trump imposed tariffs on steel and aluminum from the EU, Canada and Mexico, as well as unprecedented tariffs on a wide range of Chinese goods, concerns about an all-out trade war have come to the fore. Another trade conflict is arising between the U.S. and Turkey as both countries recently announced additional tariffs on certain products such as metals, cars and tobacco. As intensifying trade tensions pose a significant risk to economic relationships and the global economy itself, it is important to examine global current account balances. We focus on the main global economies in terms of GDP: the U.S., Japan, China and Germany. Executive Summary While it is true that excessive imbalances can pose a risk, it is not true that deficits are always a negative sign. To the contrary, they can be a force for good for a country s economy, typically when young, fast-growing economies are in need of investment in order to grow. Such economies access external resources by importing more than exporting and borrowing to cover implied deficits. On the other hand, developed economies with ageing populations hold savings in order to finance retirement payments. As a consequence, if they lend to countries with deficits, that can, together with trade flows, cause current account surpluses. Nevertheless, countries running current account deficits and therefore incurring debts need to invest the money in order to increase their productivity and output so that they can service their debts. Much like private households, using debt for consumption and living beyond one s means is, other things being equal, not sustainable for any economy in the long run. Examining the current account balance provides a comprehensive and detailed overview of global trade links and their underlying causes. CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - WM.CIO-Office@db.com 3

4 Structure of the Balance of Payments 02Understanding the composition of the Balance of Payments. Current Account Balance The current account balance consists of all earnings and expenditures within an economy. A current account surplus indicates that an economy is a net lender to the world, while a negative current account balance denotes a net borrower. The current account balance consists of the following sub-balances: Trade Balance: Usually the largest category in the balance of payments arises from differences between the value of merchandise imported and exported to and from a nation. If exports exceed imports, a nation is considered to have a trade surplus. On the other hand, higher imports than exports leads to a trade deficit. Balance of payments Services Balance: The services balance represents services such as travel, transportation, communications, financial, computer services and license fees. Many of these areas are becoming more and more relevant in international transactions. Primary income: This consists of cross-border labour income or net corporate profits transferred from overseas as well as portfolio investment flows such as dividend payments or interest rate payments. Secondary income: Refers to all other transnational payments. These include money transferred from foreign workers to their families in their countries of origin as well as payments of governments to recipients in other countries. Capital Account Balance Capital account balance: The capital account balance represents the net change in ownership of assets and therefore amounts to the exact opposite of the current account balance. As the balance of all payments out of and into a country amounts to zero, economies with a current account deficit automatically run capital account surpluses and vice versa. Broadly speaking, the capital account balance indicates the attractiveness of an economy to foreign investors as it comprises investments into assets such as stocks and bonds and therefore also impacts exchange rates, similarly to the way trade flows impact exchange rates. Source: Cambridge Dictionary, IMF, Deutsche Bundesbank, OECD, Deutsche Bank AG CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - WM.CIO-Office@db.com 4

5 Economic models & real world examples Economic principles and international trade theory are key to understand cause and effect of current developments in 03international trade. Figure 1: The three-sector model Source: Deutsche Bank AG. As of September 2018 Economic models Is the three-sector model outdated? Extraction of natural resources such as mining or farming, commonly used for further processing. Primary sector Economic sector providing services to consumers, comprising restaurants, financial institutions or education. Tertiary sector Secondary sector Industrial manufacturing of finished goods and products from raw materials produced in the primary sector. New sector including knowledge-based or intellectual economic activity such as R&D, or computing. Fourth sector The three sector model is a theory of economics developed in the 1930s that divides an economy into three sectors. This theory claims that an economy s main activity shifts from being focused on the agricultural sector to a specialization in manufacturing and finally to the service sector, increasing its prosperity with each step. Due to recent technological progress there have been calls for a new, fourth sector. International trade theory Division of Labour: The principle of the division of labour goes back to the Scottish economist Adam Smith, who claimed that increasing productivity is rooted in division of labour as specialization and partition of complex tasks into several sub-tasks increases output. Theory of comparative advantage: The concept of division of labour was later adapted and enhanced by the economist David Ricardo who introduced the theory of comparative advantage. The theory claims that each nation should focus on producing the specific good or service that has the lower opportunity cost compared to other countries. This indicates that cross-border trade boosts economic growth even if a country has an absolute cost advantage, leading to increased welfare for all trading partners. CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - WM.CIO-Office@db.com 5

6 Factor Proportions Theory: Developed by the Swedish economists Eli Heckscher and Bertil Ohlin, this theory is also known as the Heckscher-Ohlin-Theory. While Ricardo emphasises only one factor (labour), the factor proportion theory is based on two factors, labour and capital. The theory claims that international trade is determined by endowments of capital and labour. Countries abundant in capital should therefore focus on producing capital-intensive goods, while countries abundant in labour should focus on the production of labour-intensive goods. Economic policy (economic framework) Global trade integration resulting from the above-mentioned theories leads to varying levels of current account balances and its sub-balances. Understanding the dynamics of the BoP Economic policy Economic policy has a large impact on the Balance of Payments. There are many economic policy tools a government can use in order to influence the current account balance. The exchange rate has a profound impact on the export of goods and services as it influences the price on the world market. Currency devaluations make imports more expensive and domestic products more affordable on the world market, thus having a positive impact on the trade and service balance (if the demand is relatively price-elastic). Secondly, regulation can impact the BoP as well, typically when trade restrictions such as tariffs reduce a country s current account deficit. On the other hand, deregulation may help to increase the international competitiveness of domestic firms, thereby influencing the current account in a positive way. Thirdly, supply side policy and larger public investments into infrastructure projects may help decrease an excessive surplus as raw materials and other products need to be imported. Economic development (economic progress & structural change) Figure 2: Factors affecting the BoP Deutsche Bank Wealth Management. As of September 2018 Economic development The economic stage of an industry determines significantly the structure of the BoP. According to the factor proportions theory, the allocation of capital and labour and the stage of development of an economy are the main determinants of economic output. Young, fast-growing emerging economies focused on the primary or secondary sector, such as Brazil or Turkey, often feature negative current account balances because they need to borrow from external resources in order to fund their fast growth. Developed economies such as Germany or Japan on the other hand are net lenders to the former. Additionally, demographics plays an important role. A society with an ageing population is more likely to save for retirement and invest their savings Economic cycle (short term business cycle) into foreign assets, having a negative effect on the capital account balance and consequently leading to an increase of the current account. On the other hand a predominately young population is more likely to run into debt, leading to a capital account surplus and a current account deficit. Economic cycle The stage of the economic cycle equally affects the BoP, as shown later on in this report. Periods of recession lead to a drop in private consumption and thus to a decrease of imported goods and services. Conversely, periods of economic growth tend to increase surpluses and deficits as private demand increases and the likelihood to borrow and lend grows. CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - WM.CIO-Office@db.com 6

7 Real world example: Singapore Singapore s recipe for success Singapore has undergone a radical change from a capital-deprived economy focused on labour-intensive and lowwage products to a global financial and trade hub focused capital-intensive, hightech products and services. The strong growth rates were achieved thanks to Singapore s economic policy of a relatively open market for foreign investors and investments in infrastructure and education. The industrialization of Singapore proved successful at reducing the previously high unemployment that had plagued the country after its independence. After the shift from the primary to the secondary sector, the government was keen on a technological catch-up. Shifting the economy to the service sector and therefore focusing on business and finance allowed to generate higher added value from the same amount of labour, thereby increasing welfare in terms of GDP per capita. Today Singapore is a regional leader in technology and goods and services with high added value. Singapore s vision & strategies: Pioneers of the next generation Singapore aims to maintain and expand its comparative advantage by being pioneers of the next generation, according to the country s government. The Ministry of Trade and Industry (MTI) aims to diversify international connections, build strong digital capabilities and deepen workforce skills in order to allow Singaporeans to take up qualified jobs in the future economy. This indicates the preparation of the economy and society towards the expansion and further development of services and technology. Figure 3: Singapore s current account balance Source: Deutsche Bank AG, Department of Statistics Singapore, Ministry of Trade and Industry Singapore, IMF, OECD. Data as of January 2017 Figure 4: Shift of Singapore s economy Source: Deutsche Bank AG, Department of Statistics Singapore, Ministry of Trade and Industry Singapore, IMF, OECD. Data as of January Current Account Primary Income Trade Balance Secondary Income Service Balance Employment Industry (%) Employment Services (%) Emplyoment Agricultural (%) GDP per capita in US$ (rhs) CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - WM.CIO-Office@db.com 7

8 Spotlight on national economies 04Examining current account balances provides a more precise and comprehensive overview of an economy and its dynamics. Germany condemned to trade surplus? Figure 5: Most important trade partners and export goods Source: Bloomberg Finance L.P., State Administration of Foreign Exchange. Data as of January 2018 Top 3 Trading Partners Top 3 Goods: Characteristics of Germany s economy Lack of basic materials due to geographical and historical reasons Label Made in Germany well established since end of 19th century Dual education system and excellent skilled workers ( Facharbeiter ) Long tradition in high end manufacturing and technology High creation of value in industrial production Low cost imports of energy goods and basic materials High price exports of manufactured goods Structural trade surplus with sideways tendency in recent past Reasons for Germany s current account development In Germany, the trade balance and the current account balance are tightly linked. In fact, the correlation between these two is 0,96, which goes to show the German Around Western Europe North America Others France U.S. UK U.S. France China economy s reliance on manufacturing. Germany s trade surplus has increased fifteen-fold since the early 1990s thanks to growing exports of capital-intensive goods such as machinery and motor vehicles. However, the country s current account balance only started becoming consistently positive since after the year 2001 because the service balance is negative. Since Germany has an ageing population, a current account surplus that by default leads to a capital account deficit is perfectly normal, as people invest in foreign assets for retirement purposes. However, it is the size of the surplus that raises concerns. At a level of over 6% of GDP, this surplus is above the level considered to be tolerable by the EU. A surplus of this magnitude indicates a lack of domestic investment, most importantly into infrastructure, thereby jeopardizing future growth potential. The ultra-accomodative monetary policy of the European Central Bank in recent years has exacerbated this state of affairs Engineering / Electronic Finished goods Automobiles and parts Machines / Electronic Automobiles Chemical products Automobiles and parts Machines Chemical products by devaluing the euro and hence boosting German exports further. Figure 6: Germany s current account balance Source: Bloomberg Finance L.P., State Administration of Foreign Exchange. Data as of January 2018 bn EUR Current Account Trade Balance Service Balance Primary Income Secondary Income CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - WM.CIO-Office@db.com 8

9 The U.S. and the rest of the world Reasons behind the current account deficit in the U.S. Figure 7: Most important trade partners and export goods Source: Bloomberg Finance L.P., State Administration of Foreign Exchange Top 3 Trading Partners Top 3 Goods: From 1991 to 2006 the trade and current account balance of the U.S. had a positive correlation of nearly 1 (0.9989). The financial crisis of led to a drop in private financing, upsetting the trade balance. Since 2009 the correlation between the current account balance and the trade balance has declined further due to the increasing importance of technology and software. The surplus in the service sector and the primary income began to increase, driven by the revenues of tech firms that originate from foreign subsidiaries. This development exemplifies the growing importance of the service sector and what can be terms as the fourth sector, i.e. technology and the knowledge-based economy. The U.S. deficit is sustainable as long as the country invests the borrowed capital into value-adding projects that generate sufficient revenue for the repayment of principal and interest. The current monetary policy of the Federal Reserve (Fed) is likely to boost the current account deficit because rising interest rates attract more foreign investment, increasing the capital account surplus, strengthening the USD and thus, in theory, stifling exports, even though this effect only kicks in with a certain time lag. What next for the U.S. In order to address the imbalances in foreign trade, the U.S. administration is trying to bring the production of manufactured goods from emerging market economies with low labour cost back home. At the same time, the U.S. government has incentivised investment in the domestic economy, most notably by lowering taxes on corporate assets held outside of the country earlier this year, which has led to a significant repatriation of capital by U.S. companies. Around Canada Japan Mexico Canada Mexico Japan Canada Mexico China Japan victim of force majeure Reasons for Japan s current account development Japan has been an export-oriented economy for much of its recent history thanks to its comparative advantages in manufacturing and technology. In the second half of the 20th century Japan s economy has benefited from an abundance of capital, allowing it to produce capital-intensive goods such as machinery, electronics and automobiles. A structural upset of this economic model came about with the tsunami in the year 2011 that led to the nuclear disaster in Fukushima. The damage suffered by production facilities and the widespread interruption of supply chains caused a slump in exports, triggering a reversal of the trade surplus into a deficit and an annihilation of the current account surplus. It took exports four years to climb back from their depression. In recent years, the growing importance of information technologies has been underpinning the service sector, thereby strengthening the current account surplus. Similarly to Germany, Japan has an ageing society featuring an abundance of people saving for retirement. Commodities Agriculture Engineering / Electronic Machines / Energy generation Automobiles Chemical products Machines / Energy generation IT Energy sources Characteristics of U.S. economy Subcontinent in ideal climate zone with rich resources Melting pot of cultures with great variety of experience Political, economical, industrial and technological leadership for decades High mobility and open society, high level of wealth and living standards Economic factor consumption (>70% GDP) boosts imports Outsourcing of industrial processes to low-wage countries Fast-growing trade deficit for more than 30 years (1980s to 2008) Reduction by Lehman-crisis, re-industrialization and protectionism CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - WM.CIO-Office@db.com 9

10 What s next for Japan In order to address structural imbalances, the economic policy of Prime Minister Shinzo Abe aims to deploy the so-called three arrows of monetary easing, fiscal stimulus and structural reforms. However, so far Japanese inflation has remained stubbornly below the central bank s target, in spite of a recent acceleration in GDP growth and a tight labour market. Figure 8: Most important trade partners and export goods Source: Bloomberg Finance L.P., State Administration of Foreign Exchange Around 1980 Top 3 Trading Partners U.S. Germany South Korea Top 3 Goods: Textile / Clothing Finished products Metal production China workbench of the wold Reasons for the Chinese current account development Before becoming a member of the World Trade Organization in 2001, China did not play a major role in international trade. The large-scale privatization of 1997 and the country s access to international markets for goods and services in the following years unprecedented economic growth. The current account surplus ballooned by 2,470% between 2002 and 2008 thanks to exponential export growth. China became the workbench of the world as a result of its comparative cost advantage in mass production made possible by cheap labour. The country s economy swiftly moved from a reliance on agriculture and mining to manufacturing. Nowadays, while China still is the workbench of the world, its manufacturing industry has long moved away from a focus on assembly of low-cost goods on behalf of foreign manufacturers to increasingly valueadded manufacturing processes. In other words, the country is moving up the manufacturing food chain towards the final assembly of high value-added goods that requires specialist knowledge and technology-intensive processes. There is also a trend towards manufacturing for local brands as opposed to serving as an assembly unit for Western companies. Similarly to what happened in other countries, the financial crisis of decreased the current account and the trade surplus. Since 2010, China has run an increasing deficit in services that in turn is curbing the current account U.S. China South Korea U.S. China South Korea Characteristics of Japan s economy Classical island position with lack of natural resources High imports of basic materials (& energy) Economical and technological leadership esp. in late 20th century Strong focus on high creation of value and export for decades Traditional and closed society with low immigration Shrinking and overaged population with flagging consumption Strong commercial links to fast-growing Emerging Asia economies The tsunami that devastated Fukushima turned a classical trade surplus into a more balanced trend for a certain period of time Machines / Electronic Automobiles Chemical products Machines / Energy generation IT Finished products Figure 9: Japan s current account balance Source: Bloomberg Finance L.P., State Administration of Foreign Exchange. As of January 2017 bn Yen 30,000 20,000 10, ,000-20, Current Account Trade Balance Service Balance Primary Income Secondary Income CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - WM.CIO-Office@db.com 10

11 Figure 10: China s current account balance Source: Bloomberg Finance L.P., State Administration of Foreign Exchange bn USD Figure 11: Most important trade partners and export goods Source: Bloomberg Finance L.P., State Administration of Foreign Exchange Around 1980 Top 3 Trading Partners Hong Kong Japan U.S. Top 3 Goods: Textile / Clothing Machines / Electronic Shoes U.S. Japan Hong Kong Machines / Electronic Textile / Clothing Metals Current Account Trade Balance Service Balance Primary Income Secondary Income 2017 U.S. Hong Kong Japan Machines / Electronic Textile / Clothing Metals Characteristics of China s economy Subcontinent with different climate zones and rich resources, huge population Figure 12: Latest tariff proposals by expected amount of revenue raised Source: Haver Analystics, Deutsche Bank Research, Deutsche Bank Wealth Management. Data as of August USD billion 250 Tight government control of politics, economy and society, state-driven capitalism Traditional long-term orientation and disciplined values and beliefs (Five-year) plans to move from Emerging Market to global No Top range of threats Bottom range of threats Already announced measures $223bn OR 1.2% GDP $137bn OR 0.7% GDP Moderate but fast growing living standard and consumption Shift from low-wage country to high creation of value and export nation High FX reserves, global No. 1 holder of U.S. Treasuries 50 0 Steel Auminium June China July China Autos Rest of China Total balance. This process highlights a structural challenge that the country will have to deal with in the years to come. What s next for China Rapid growth in the manufacturing sector has been achieved at the cost of depleting natural resources and increasing pollution. The government $21 OR 0.1% GDP aims to tackle these problems by modernising the industrial sector and moving away from polluting production techniques to cleaner, more technologyintensive production methods. Further, it plans to further improve the country s infrastructure and invest more in education. CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - WM.CIO-Office@db.com 11

12 Current discussion: U.S. EU trade dispute 05Why a comparison of bilateral trade balances of the U.S. with economies integrated in single markets such as Germany can be misleading. Figure 13: U.S. services balance with the EU Source: Bureau of Economic Analysis, Bloomberg Finance L.P., Deutsche Bank AG Figure 14: U.S. goods balance with the EU Source: Bureau of Economic Analysis, Bloomberg Finance L.P., Deutsche Bank AG bn USD bn USD Strength of the U.S.: Services The service balance surplus of the U.S. with the EU has more than quintupled since This development shows the strength of the U.S. in IT and financial services. Prominent tech companies play a role here, but key U.S. banks and asset managers contribute as well. Additionally, since the U.S. sells a large chunk of its services via Dutch and Irish subsidiaries, the U.S. service balance looks smaller than it really is and impacts the current account balance only as and when the U.S. headquarters repatriate their foreign revenue. Strength of the EU: Manufacturing The trade deficit of the U.S. with the EU has tripled in the past 18 years. Europe has a distinct comparative advantage in manufacturing, especially in automobiles and mechanical engineering. This state of things chimes with economic theory, whereby the division of labor leads to international specialization. Once the service balance is taken into account, the U.S. current account deficit with the EU shrinks to roughly 102 billion USD. Adding the surplus in primary income of 106 billion and the secondary income surplus of 10 billion USD leads to a current account surplus of 14 billion USD. In other words, the U.S. is a net lender to the EU and is increasing its ownership of EU assets, contrary to the general perception. CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - WM.CIO-Office@db.com 12

13 Summary 06There is much talk of unfair trade conditions of late. These observations are centered on the external trade balance, which is but one of several determinants of a country s international competitiveness and its economic standing vis-à-vis its peers. A more complete picture can only be obtained by taking into account the current account balance, which comprises trade and services, as well as the primary and secondary income. Trade surpluses and deficits are not by themselves problematic. Rather, they need to be viewed within the context of a country s stage in economic development. Young, fast-growing economies dependent on agriculture, mining and manufacturing tend to lack capital for investment that allows them to grow. Therefore such economies have to access foreign capital by importing more than they export and by borrowing to cover implied deficits. On the other hand, wealthy and mature economies with ageing populations, such as Japan and Germany, need to invest their savings in order to provide retirement income, which causes a deficit in the capital balance. Further, it is worth bearing in mind that although trade is very important, it is of course not the only driver of corporate earnings and GDP growth. Especially in the current late economic cycle, factors such as capital expenditure make a significant contribution to growth, most notably in the industrial sector. Finally, trade is a political issue as much as an economic one. Diplomatic tensions, disagreements about national economic policies and impending elections all play a role in determining when trade disputes start and end. The current trade hostility is no exception. While there is no doubt that trade barriers harm a country s economic growth in the long term, governments that impose import tariffs most probably know that the negative effects on their own country may not be be felt in the short term, which gives them a bargaining tool to deploy in their foreign policy. However, they must be careful in bringing trade disputes to an end before it harms their own country s economy. In the current trade dispute, China can not fully retaliate U.S. tariffs directly simply because Chinese imports from the US are far smaller than their exports to the U.S. But China could devalue its currency to make its exports more competitive and stifle U.S. businesses by delaying approvals for joint ventures or by taking longer to clear goods at customs, to name but two examples. In the long term, such measures would of course harm the Chinese economy as well. Indeed, the long-term structural damage a protracted trade dispute can inflict should not be underestimated. Nonetheless, this is not our base scenario for now. In conclusion, large and long-lasting imbalances are economically unhealthy and may cause negative, unintended economic side effects. A forward-looking economic policy should therefore take large imbalances into account and implement corrective policy measures. These include long-term structural reforms with longer-lasting changes and effects. Short term successes are rather unlikely and as regards recent developments in the trade conflict between the U.S. and China, it may well be that the conflict escalates before it settles down. Nonetheless, as the economic environment currently looks very robust, we see oxygen left for equities, even though uncertainty about trade gives rise to volatility and higher dispersion within and across sectors. In the long term, however, all parties have an interest in finding a solution. CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - WM.CIO-Office@db.com 13

14 Appendix 07Current Account Balances and Sub-Balances Current Account Balance Germany (in bn. Euro) Current Account ,7 144,9 271,4 257,7 Trade Balance 64, ,1 261,1 265,4 Services Balance -58,4-40, ,9-20,9 Primary Income -12,7 20,9 50,7 67,2 67,4 Secondary Income ,6-39, ,1 U.S. (in bn. US-Dollar) Current Account -403,45-745, , , ,142 Trade Balance -446, , , , ,495 Services Balance 74,266 68, , , ,219 Primary Income 18,069 53, , , ,731 Secondary Income -49,003-84, , , ,597 Japan (in bn. Yen) Current Account 14061, , , , ,3 Trade Balance 12698, ,2 9515,9-886,2 4955,4 Services Balance -5268,4-4078,2-2658,8-1930,6-725,7 Primary Income 7691, , , , ,4 Secondary Income -1059,5-815,6-1091,6-1966,8-2115,6 China (in bn. US-Dollar) Current Account 20,43 132,37 237,81 304,16 164,88 Trade Balance 29,91 124,28 238,08 576,19 476,14 Services Balance -1,13 0,33-15,06-218,32-265,41 Primary Income -14,66-16,11-25,89-41,05-34,44 Secondary Income 6,31 23,86 40,68-12,64-11,39 Source: Deutsche Bundesbank, Federal Ministry of Finance Bureau of Economic Analysis, State Administration of Foreign Exchange Bloomberg Finance L.P., Bank of Japan, Deutsche Bank AG. As of April CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - WM.CIO-Office@db.com 14

15 Glossary Depreciation (in an FX context) generally refers to a gradual loss of value of a currency; immediate, policy-driven changes are devaluations. The European Central Bank (ECB) is the central bank for the Eurozone. The Eurozone is formed of 19 European Union member states that have adopted the euro as their common currency and sole legal tender. Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country s borders in a specific time period. Protectionism refers to policies due to limit trade between economies, through tariffs, quotas or other means. USD is the currency code for the U.S. Dollar. CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - WM.CIO-Office@db.com 15

16 Contacts CIO Wealth Management Global Chief Investment Officer Christian Nolting 1 Regional Chief Investment Officer Larry V. Adam 4 CIO Americas Tuan Huynh 5 CIO Asia Stéphane Junod 8 CIO EMEA Strategy Group Larry V. Adam 4 Global Chief Strategist Matt Barry 4 Investment Strategy Analyst Moshe Levin 4 Investment Strategy Analyst Gerit Heinz 1 Chief Strategist Germany Dr. Helmut Kaiser 1 Chief Strategist Germany Daniel Kunz 7 Senior Strategist EMEA Contact us on WM.CIO-Office@db.com Chief Investment Office Markus Müller 1 Global Head CIO Office Sebastian Janker 3 Head Chief Investment Office Americas Konrad Aigner Gundula Helsper Ursula Morbach Alisa Spital Thomas Teufel Jürg Schmid 7 Head CIO Office Europe Enrico Börger 8 Joshua Lister 2 Eirini Pournaras 7 Graham Richardson 2 Financial Writer, CIO Office Khoi Dang 9 CIO Office Americas Jason Liu 6 Head CIO Office Asia International locations 1. Deutsche Bank AG Mainzer Landstrasse Frankfurt am Main Germany 2. Deutsche Bank AG, London Zig Zag Building, 70 Victoria Street London SW1E 6SP United Kingdom 3. Deutsche Bank Trust Company 345 Park Avenue New York, NY United States 4. Deutsche Bank Securities 1 South Street Baltimore, MD United States 5. Deutsche Bank AG, Singapore One Raffles Quay, South Tower Singapore Singapore 6. Deutsche Bank AG, Hong Kong 1 Austin Road West Hong Kong Hong Kong 7. Deutsche Bank (Switzerland) Ltd. Hardstrasse Zurich Switzerland 8. Deutsche Bank (Switzerland) Ltd. Place des Bergues Geneva 1 Switzerland 9. Deutsche Bank Trust Company Floor 1, 5022 Gate Parkway, Suite Jacksonville, FL United States CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - WM.CIO-Office@db.com 16

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18 Important Note Past performance is no guarantee of future results; nothing contained herein shall constitute any representation, warranty or prediction as to future performance. Further information is available upon investor s request. Kingdom of Bahrain For Residents of the Kingdom of Bahrain: This document does not constitute an offer for sale of, or participation in, securities, derivatives or funds marketed in Bahrain within the meaning of Bahrain Monetary Agency Regulations. All applications for investment should be received and any allotments should be made, in each case from outside of Bahrain. This document has been prepared for private information purposes of intended investors only who will be institutions. No invitation shall be made to the public in the Kingdom of Bahrain and this document will not be issued, passed to, or made available to the public generally. The Central Bank (CBB) has not reviewed, nor has it approved, this document or the marketing of such securities, derivatives or funds in the Kingdom of Bahrain. Accordingly, the securities, derivatives or funds may not be offered or sold in Bahrain or to residents thereof except as permitted by Bahrain law. The CBB is not responsible for performance of the securities, derivatives or funds. State of Kuwait This document has been sent to you at your own request. This presentation is not for general circulation to the public in Kuwait. The Interests have not been licensed for offering in Kuwait by the Kuwait Capital Markets Authority or any other relevant Kuwaiti government agency. The offering of the Interests in Kuwait on the basis a private placement or public offering is, therefore, restricted in accordance with Decree Law No. 31 of 1990 and the implementing regulations thereto (as amended) and Law No. 7 of 2010 and the bylaws thereto (as amended). No private or public offering of the Interests is being made in Kuwait, and no agreement relating to the sale of the Interests will be concluded in Kuwait. No marketing or solicitation or inducement activities are being used to offer or market the Interests in Kuwait. United Arab Emirates Deutsche Bank AG in the Dubai International Financial Centre (registered no ) is regulated by the Dubai Financial Services Authority. Deutsche Bank AG -DIFC Branch may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Box , Dubai, U.A.E. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority. State of Qatar Deutsche Bank AG in the Qatar Financial Centre (registered no ) is regulated by the Qatar Financial Centre Regulatory Authority. Deutsche Bank AG -QFC Branch may only undertake the financial services activities that fall within the scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower, West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority. Kingdom of Belgium This document has been distributed in Belgium by Deutsche Bank AG acting though its Brussels Branch. Deutsche Bank AG is a stock corporation ( Aktiengesellschaft ) incorporated under the laws of the Federal Republic of Germany and licensed to carry on banking business and to provide financial services subject to the supervision and control of the European Central Bank ( ECB ) and the German Federal Financial Supervisory Authority ( Bundesanstalt für Finanzdienstleistungsaufsicht or BaFin ). Deutsche Bank AG, Brussels Branch has its registered address at Marnixlaan 13-15, B-1000 Brussels, registered at the RPM Brussels, under the number VAT BE Further details are available on request or can be found at Kingdom of Saudi Arabia Deutsche Securities Saudi Arabia Company (registered no ) is regulated by the Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al Olaya District, P.O. Box , Faisaliah Tower, 17th Floor, Riyadh, Saudi Arabia. United Kingdom In the United Kingdom ( UK ), this publication is considered a financial promotion and is approved by DB UK Bank Limited on behalf of all entities trading as Deutsche Bank Wealth Management in the UK. Deutsche Bank Wealth Management is a trading name of DB UK Bank Limited. Registered in England & Wales (No ). Registered Office: 23 Great Winchester Street, London EC2P 2AX. DB UK Bank Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and its Financial Services Registration Number is Deutsche Bank reserves the right to distribute this publication through any of its UK subsidiaries, and in any such case, this publication is considered a financial promotion and is approved by such subsidiary where it is authorised by the appropriate UK regulator (if such subsidiary is not so authorised, then this publication is approved by another UK member of the Deutsche Bank Wealth Management group that has the requisite authorisation to provide such approval). Hong Kong This document and its contents are provided for information only. Nothing in this document is intended to be an offer of any investment or a solicitation or recommendation to buy or to sell an investment and should not be interpreted or construed as an offer, solicitation or recommendation. CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - WM.CIO-Office@db.com 18

19 Important Note To the extent that this document makes reference to any specific investment opportunity, its contents have not been reviewed. The contents of this document have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the investments contained herein. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has not been approved by the Securities and Futures Commission in Hong Kong nor has a copy of this document been registered by the Registrar of Companies in Hong Kong and, accordingly, (a) the investments (except for investments which are a structured product, as defined in the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (the SFO )) may not be offered or sold in Hong Kong by means of this document or any other document other than to professional investors within the meaning of the SFO and any rules made thereunder, or in other circumstances which do not result in the document being a prospectus as defined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32 of the Laws of Hong Kong) ( CO ) or which do not constitute an offer to the public within the meaning of the CO and (b) no person shall issue or possess for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the investments which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to the investments which are or are intended to be disposed of only to persons outside Hong Kong or only to professional investors within the meaning of the SFO and any rules made thereunder. Singapore The contents of this document have not been reviewed by the Monetary Authority of Singapore ( MAS ). The investments mentioned herein are not allowed to be made to the public or any members of the public in Singapore other than (i) to an institutional investor under Section 274 or 304 of the Securities and Futures Act (Cap 289) ( SFA ), as the case may be (as any such Section of the SFA may be amended, supplemented and/or replaced from time to time), (ii) to a relevant person (which includes an Accredited Investor) pursuant to Section 275 or 305 and in accordance with other conditions specified in Section 275 or 305 respectively of the SFA, as the case may be (as any such Section of the SFA may be amended, supplemented and/or replaced from time to time), (iii) to an institutional investor, an accredited investor, expert investor or overseas investor (each as defined under the Financial Advisers Regulations) ( FAR ) (as any such definition may be amended, supplemented and/or replaced from time to time) or (iv) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA or the FAR (as the same may be amended, supplemented and/or replaced from time to time). United States In the United States, brokerage services are offered through Deutsche Bank Securities Inc., a broker-dealer and registered investment adviser, which conducts securities activities in the United States. Deutsche Bank Securities Inc. is a member of FINRA, NYSE and SIPC. Banking and lending services are offered through Deutsche Bank Trust Company Americas, member FDIC, and other members of the Deutsche Bank Group. In respect of the United States, see earlier statements made in this document. Deutsche Bank makes no representations or warranties that the information contained herein is appropriate or available for use in countries outside of the United States, or that services discussed in this document are available or appropriate for sale or use in all jurisdictions, or by all counterparties. Unless registered, licensed as otherwise may be permissible in accordance with applicable law, none of Deutsche Bank or its affiliates is offering any services in the United States or that are designed to attract US persons (as such term is defined under Regulation S of the United States Securities Act of 1933, as amended). This United States-specific disclaimer will be governed by and construed in accordance with the laws of the State of Delaware, without regard to any conflicts of law provisions that would mandate the application of the law of another jurisdiction. Germany This document has been created by Deutsche Bank Wealth Management, acting through Deutsche Bank AG and has neither been presented to nor approved by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht). For certain of the investments referred to in this document, prospectuses have been approved by competent authorities and published. Investors are required to base their investment decision on such approved prospectuses including possible supplements. Further, this document does not constitute financial analysis within the meaning of the German Securities Trading Act (Wertpapierhandelsgesetz) and, thus, does not have to comply with the statutory requirements for financial analysis. Deutsche Bank AG is a stock corporation ( Aktiengesellschaft ) incorporated under the laws of the Federal Republic of Germany with principal office in Frankfurt am Main. It is registered with the district court ( Amtsgericht ) in Frankfurt am Main under No HRB and licensed to carry on banking business and to provide financial services. Supervisory authorities: The European Central Bank ( ECB ), Sonnemannstrasse 22, Frankfurt am Main, Germany and the German Federal Financial Supervisory Authority ( Bundesanstalt für Finanzdienstleistungsaufsicht or BaFin ), Graurheindorfer Strasse 108, Bonn and Marie-Curie-Strasse 24-28, Frankfurt am Main, Germany. India The investments mentioned in this document are not being offered to the Indian public for sale or subscription. This document is not registered and/or approved by the Securities and Exchange Board of India, the Reserve Bank of India or any other governmental/ regulatory authority in India. This document is not and should not be deemed to be a prospectus as defined under the provisions of the Companies Act, 2013 (18 of 2013) and the same shall not be filed with any regulatory authority in India. Pursuant to the Foreign Exchange Management Act, 1999 and the regulations issued there under, any investor resident in India may be required to obtain prior special permission of the Reserve Bank of India before making investments outside of India including any investments mentioned in this document. CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - WM.CIO-Office@db.com 19