Tax Bill haggling a risk for stocks, REITs & MLPs good shelter

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1 The Allocator November 3, Tax Bill haggling a risk for stocks, REITs & MLPs good shelter David Bianco Chief Investment Strategist, Americas Deutsche Asset Management The House s tax plan is complicated with risks for U.S. multinational companies We welcome a one-step cut of the corporate tax rate from 35% to 2 as now proposed by the House. However, we think sizable risk of the Billl not passing remains due to controversial personal income tax proposals (mortgage interest, state and local tax (SALT) deduction limits) as well as there still being very complex and controversial proposals for corporate tax changes. On the corporate front, despite the 2 proposed statutory rate, several proposals exist that are not friendly to large U.S. multinationals: 1) a 1 tax rate on foreign liquid assets, this is very high and could drive U.S. multinationals (MNCs) to quickly spend it abroad or redomesticate; 2) a 5% rate on all other unremitted foreign earnings back to 1986, this could produce an enormous increase in deferred tax liabilities paid over 8 years, perhaps adding ~5%pts to the cash tax rate of many S&P MNCs over next 8 years, 3) a global minimum tax of 1, with new rules on measuring foreign subsidiary profits and qualifying payments to such that could result in significant additional U.S. tax. Limiting interest deductions is fine in our view, leases appear untouched. Immediate capital expenditure expensing is nice, but this is a timing benefit not permanent tax benefit. Don t chase the rally into year end, our Next 5%+ price move tactical call is Down With S&P trading at 25% premium to history and volatility at record lows, setbacks in tax cuts could trigger an equity market dip. With the proposal at it stands now, we think the benefits to the S&P and Russell 2000 (R2000) are essentially fully priced. We think the next 5% price move of S&P is likely to be down. We tactically lower our U.S. large cap (S&P 500) allocation from 35% to 3 and keep small cap (R2000) allocation at. We raise foreign developed market (DM) equities from 2 to 2 and emerging market (EM) from 5% to. Within Fixed Income, we lower Treasury allocation by 5% and raise both investment grade (IG) and high yield (HY) corporate credit allocations. We still see healthy S&P 500 total returns (~7% ar) over the next few years, thus the near term pullback should offer a good entry point. We raise Real Estate to OW and lower Consumer Discretionary to UW We raise Real Estate from equal weight (EW) to overweight (OW). Historically real estate investment trusts (REITs) usually trade at a premium to the S&P, but now at a slight discount on forward earnings. REITs pay no corporate tax, so they are not susceptible to tax reform disappointment. We lower Consumer Discretionary from EW to underweight (UW). The sector is the most expensive within S&P other than Energy on our 2018E earnings per share (EPS). Competition among Retailers remains fierce and they are disappointing as they report 3Q. Auto sales seem to have peaked for this cycle and Auto industry s profits likely decline in We OW Financials, Health Care, Tech and Real Estate, EW Utilities, and UW the rest. S&P 500 Outlook 2018 S&P Dividend Yield 2.1% 2.1% S&P total return 11.5% 8. Next 5%+ price move (Up / Balanced Risk / Down) Risk of near-term correction (Low / Moderate / High) Down Moderate S&P EPS $119 $131 $140 PE on trailing EPS DPS $49 $53 Allocations for taxable / USD capital as of Nov 3, Deutsche AM View Current Long-term Fixed Income 35% 35% Equities 6 55% U.S. Equities 3 4 S&P % Small Caps (R2) 0-1 Foreign DM Equities 2 15% Foreign EM 0-1 Alternatives 5% 1 Risk & Duration: Preference shaded Gold Short Duration Yields Up Cyclical Stocks Value Stocks Oil /Copper REITs and Utilities offer ~3.5% div yield and ~5.25% EPS yield Given our tactical view, we add a bit of a defensive sector tilt into yearend. REITs are now our preferred bond substitute equity sector over Utilities. Consumer Staples is expensive and Telecom struggles for any profit growth under fierce competition. But Both REITs and Utilities trade at a discount to the S&P, while offering a high dividend yield of ~3.5%. We only EW Utilities because their tax cut benefits are probably largely passed forward and 10yr yields likely climb upon passage of this tax Bill. Utilities have traded in lockstep with long term yields. Also, a Dec Fed hike could also weigh a bit on the valuation of Utilities. Low Risk β Stocks Down TIPS Treasury Bonds IG Bonds Muni Yields Down Long Duration Growth Stocks Defensive Stocks HY Bonds Bond Substitutes Stocks Up High Risk β 3Q EPS tracker: 8 reported and btm-up S&P EPS rose to $33.51, 8. y/y Strong results at Tech boosted 3Q S&P EPS and contributed to almost 5 of the overall S&P EPS growth: 3Q S&P EPS is 8. y/y, but 4.1% ex Tech. Most of the retailers have yet to report. If they disappoint again as recent trend has suggested then the final 3Q S&P EPS will likely finish around $33.50, y/y. Our 4Q EPS estimate is $34, ~9% y/y. Source: Deutsche AM. All opinions and claims are based upon data on 11/3/ and may not come to pass. This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. For illustrative purposes only. Contributor - Ju Wang, Investment Strategist & Portfolio Analyst For institutional client and registered representative use only. Not for public viewing or distribution.

2 Utilities performance in lockstep with 10-year Treasury yield Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 10yr Yield (%, inverted, lhs) XLU / SPY (rhs) Source: IBES, Deutsche AM as of 10/31/. Past performance may not be indicative of future results. REITs relative performance to S&P 500 vs. 10-year Treasury yield Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 10yr Yield (%, inverted, lhs) REITs / S&P 500 (rhs) Source: IBES, Deutsche AM as of 10/31/. Past performance may not be indicative of future results. Relative forward PE of REITs vs. S&P Relative forward PE of REITs vs. S&P Source: IBES, Deutsche AM as of 10/31/. Past performance may not be indicative of future results. For institutional client and registered representative use only. Not for public viewing or distribution. Tax Bill haggling a risk for stocks, REITs & MLPs good shelter 2

3 EPS yield of S&P 500 by sector 9% 7% 5% 3% 1% EPS Yield Source: S&P, IBES, Deutsche AM as of 10/31/. Past performance may not be indicative of future results. Dividend yield of S&P 500 by sector 5% Dividend Yield 3% 1% Source: S&P, IBES, Deutsche AM as of 10/31/. Past performance may not be indicative of future results. For institutional client and registered representative use only. Not for public viewing or distribution. Tax Bill haggling a risk for stocks, REITs & MLPs good shelter 3

4 S&P 500: EPS yield, dividend yield, nominal 10yr Treasury yield, 10yr TIPS yield 1 S&P EPS Yield Dividend Yield 10yr Yield Real 10yr Yield Source: S&P, IBES, Deutsche AM as of 10/31/. Past performance may not be indicative of future results. Utilities: EPS yield, dividend yield, nominal 10yr Treasury yield, 10yr TIPS yield 1 1 Utilities EPS Yield Dividend Yield 10yr Yield Real 10yr Yield Source: S&P, IBES, Deutsche AM as of 10/31/. Past performance may not be indicative of future results. REITs: EPS yield, dividend yield, nominal 10yr Treasury yield, 10yr TIPS yield 1 1 REITs EPS Yield Dividend Yield 10yr Yield Real 10yr Yield Source: S&P, IBES, Deutsche AM as of 10/31/. Past performance may not be indicative of future results. For institutional client and registered representative use only. Not for public viewing or distribution. Tax Bill haggling a risk for stocks, REITs & MLPs good shelter 4

5 Global manufacturing PMI m/m Prior Oct-17 Chg. 3mo avg. Chg. Global Euro Area Germany France Italy Spain UK Australia Canada Japan China India Brazil Russia US Source: Haver, Deutsche AM as of October. Past performance may not be indicative of future results. U.S. Manufacturing vs. Services ISM Mfg Services ISM gap (lhs) Mfg ISM, 3mma (rhs) Services ISM, 3mma (rhs) Source: ISM, Deutsche AM as of October. Past performance may not be indicative of future results. Real US GDP growth and capex growth 25% 2 y/y % chg 1967 capex slowdown capex slowdown Capex growth accelerates 25% 2 15% 15% 1 1 5% 5% -5% -1-15% Source: BEA, Deutsche AM as of 3Q. Past performance may not be indicative of future results. For institutional client and registered representative use only. Not for public viewing or distribution. Tax Bill haggling a risk for stocks, REITs & MLPs good shelter Recession Real GDP Capex (Equip. + IPP) y/y % chg Avg GDP: 3.7% Capex: Domestic infrastructure GDP: 4.7% Capex: 8.7% Oil boom GDP: 4.3% Capex:10. Avg GDP: 3. Capex: 5.7% Productivity driven IT capex boom GDP: 4. Capex: 10.3% Asia / export/ commodity capex GDP: 3. Capex: 6.3% Avg GDP: 2. Capex: 5.3% -5% -1-15% -2

6 Total U.S. non-residential construction (ltm) Private Commercial 2 Civic Infrastructure 1 Private Power 1 Health Care 5% $796bn Private Exploration (Oil & Gas) 11% Education 11% Private Mfg Private Telecom 3% Highways 11% Transportation 5% Source: Census Bureau, Deutsche AM as of September. Past performance may not be indicative of future results. Total U.S. construction spending: non-residential and residential $ bn, SAAR Public Non-Res Private Non-Res Total Residential Source: Census Bureau, Deutsche AM as of September. Past performance may not be indicative of future results. Total non-residential construction and Ex. Energy growth y/y 2 y/y % chg Total Non-Resi Const. (Private + Public) Ex. Exploration, Power & Mfg Source: Census Bureau, Deutsche AM as of September. Past performance may not be indicative of future results. For institutional client and registered representative use only. Not for public viewing or distribution. Tax Bill haggling a risk for stocks, REITs & MLPs good shelter 6

7 U.S. public non-residential construction (ltm) Conservation & Develop. 3% Health Care Commercial 3% 9% Water Supply Sewage & Waste 7% Power Highway & Street 33% $273bn Education 2 Transport. 1 Public Safety 3% Source: Census Bureau, Deutsche AM as of September. Past performance may not be indicative of future results. U.S. public non-residential construction and ex Highways & Streets $ bn, SAAR Public Non-Res Public Non-Res ex Highways & Streets Source: Census Bureau, Deutsche AM as of September. Past performance may not be indicative of future results. U.S. public non-residential construction and ex Highways & Streets growth y/y 2 y/y % chg 2 15% 15% 1 1 5% 5% -5% -5% % -15% Public Non-res Public Non-res ex Highways & Streets Source: Census Bureau, Deutsche AM as of September. Past performance may not be indicative of future results. For institutional client and registered representative use only. Not for public viewing or distribution. Tax Bill haggling a risk for stocks, REITs & MLPs good shelter 7

8 3Q earnings season statistics (based on companies that have reported) 3Q17 Summary (Based on reported companies) % of EPS # Cos EPS (% of co's) EPS EPS Sales (% of co's) Sales Sales reported reported % beat % miss surprise (%) y/y (%) % beat % miss surprise (%) y/y (%) S&P % 45% S&P 500 ex. Financials & Real Est 84.3% % 2 4.9% % 29% S&P 500 ex. Energy 85.7% % S&P ex. Tech 86.3% % 29% % % S&P ex. Energy, Financials & Real Est % 27% % 29% 0.5% 4. Consumer Discretionary % 33% 5.3% 1. 39% 35% 1.1% -0. Consumer Staples 76.5% Energy 94.7% 29 69% % % Financials % % 1 2.5% 0. Health Care % % 53% 19% -0.1% 4.9% Industrials 91.5% 57 61% % Information Technology % 26.7% % Materials 75.5% % 6. 53% 1 2.1% 10.1% Real Estate % 23% % 17% 3% 1.1% 4. Telecommunication Services % % Utilities % 57% -2.5% % -2. Source: IBES, Deutsche AM as of 11/3/. Past performance may not be indicative of future results. Fishhooks: S&P 500 quarterly analyst consensus btm-up EPS revisions 36 4Q S&P 500 quarterly btm-up EPS revisions 4Q14 2Q15 4Q15 2Q16 3Q17 2Q17 4Q Q11 4Q11 3Q12 2Q12 1Q12 4Q12 2Q13 1Q13 4Q13 3Q13 3Q14 2Q14 1Q14 3Q15 1Q15 1Q16 3Q16 1Q Q Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Source: IBES, Deutsche AM as of 11/3/. Past performance may not be indicative of future results. Revision to EPS during the calendar quarter vs. EPS beat during reporting Avg (1Q11-2Q17): Avg: -3.9% /1C 2011/2C 2011/3C 2011/4C 2012/1C 2012/2C 2012/3C 2012/4C 2013/1C 2013/2C 2013/3C 2013/4C /1C /2C /3C /4C 2015/1C 2015/2C 2015/3C 2015/4C /1C /2C /3C /4C /1C /2C EPS beat during reporting EPS cut prior to reporting (during the calendar quarter) Source: IBES, Deutsche AM as of 11/3/. Past performance may not be indicative of future results. For institutional client and registered representative use only. Not for public viewing or distribution. Tax Bill haggling a risk for stocks, REITs & MLPs good shelter 8

9 S&P 500 quarterly EPS & Sales growth and Net Margins by sector (3Q17 is blended with actual for reported and consensus for the rest) 2015 EPS growth (y/ y) 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 S&P % % 2.1% % -5.1% -1.5% % 16.1% S&P 500 ex. Financials & Real Est % % % -1.5% -0.9% % -3.3% -1.1% 2.7% 6.7% 1.7% % 11. S&P 500 ex. Energy 5.5% 7.7% % 12.1% % 3.3% 8.3% % 7.5% % 5. S&P 500 ex. Tech 4.1% 7.5% 11.1% % 1.9% 0.9% -1.3% -4.1% -0.7% -5.5% % 14.3% 10.7% 4.1% S&P ex. Energy, Fin & Real Est % % % % % % 8.7% S&P ex. Energy, Fin, Real Est, Healthcare % % % 2.3% % 4.1% 7.1% 6.9% % 9.1% FANG (FB, AMZN, NFLX, Google) 22.7% % % % 34.7% % % % 47.3% FANG & AAPL % 41.7% % % 13.1% % % 8.1% 21.7% % S&P ex FANG 4.5% % % % 6.9% % 7. S&P ex FANG & AAPL 4.1% 8.3% 10.5% % % -5.1% -1.5% 3.9% % S&P ex. Energy & Fin & Real Est & FANG 6.9% 11.9% 9.1% 14.5% 10.1% 11.1% 7.7% 7.3% 2.7% % % Consumer Discretionary % 15.3% % % % 7.7% 4.1% 2. M ultiline & Specialty Retail % 16.1% 17.5% % 10.1% 12.1% 9.1% 9.7% % Consumer Staples 4.3% % % % % 0.7% % 7.3% % 3.1% 4.5% Energy -0.3% % % -57.1% % -59.9% % % NA 488.1% 163. Financials -3.3% -10.1% % -2.7% 17.7% % 11.3% % -6.7% Financials ex. BAC, C & JPM % % % 1.1% % -14.3% Health Care 12.7% 19.1% % % 12.3% % 10.7% 7.3% 7.9% Industrials % 12.7% 13.3% 9.9% 11.7% % 2.3% % % Industrials ex. BA % % 9.3% 11.7% 2.5% -0.5% % % % Industrials ex. Defense % 13.3% % % -0.1% % -2.3% 0.9% % -0.3% 2.9% % Information Technology % 9.5% 18.5% 11.7% 12.3% 7.9% % % 23. Tech ex. AAPL & GOOG % % % 3.7% -1.7% % % 24.9% 24.3% 21. Materials % % 6.5% 0.9% % % -9.3% -6.9% 8.9% % 6. Real Estate 32.3% 23.1% % 12.7% % 12.7% % 2.5% 9.7% 5.1% % 3. Telecommunication Services % % 10.7% % % % % Utilities 20.1% -0.5% 1.9% 8.5% % -9.1% % % % Sales growth (y/ y) 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 S&P % 4.9% % 3.3% % -4.1% -6.3% -4.5% -1.9% % 5.3% 4.9% S&P 500 ex. Financials & Real Est % % -4.7% % 2.1% % S&P 500 ex. Energy % 4.5% 2.1% 0.9% 1.3% % 1.3% 2.3% 4.5% % % 3.1% S&P 500 ex. Tech 3.1% 4.7% 4.1% 0.1% 3.1% -4.3% % % 4.9% 4. S&P ex. Energy, Fin & Real Est 4.7% % 4.7% 4.9% 1.9% 0.9% 1.5% -2.5% % % S&P ex. Energy, Fin, Real Est, Healthcare % % % % % 4.7% 3.3% FANG (FB, AMZN, NFLX, Google) 19.5% % 14.1% 17.9% % % 28.1% FANG & AAPL % % 14.7% % % % % 17.3% 22.5% S&P ex FANG 3.3% % 3.1% % % 4.7% 1.1% 7.1% 4.9% 4. S&P ex FANG & AAPL 3.3% 4.7% 3.9% % % -7.1% -5.3% -2.1% % 7.1% S&P ex. Energy & Fin & Real Est & FANG % 5.1% 4.5% 4.7% 1.7% % % 1.9% % 4.7% 4.1% 2. Consumer Discretionary 5.3% 5.5% 4.9% 4.1% % 2.5% % % 8.7% 8.9% 6.1% % 0.1% Multiline & Specialty Retail % 5.3% 5.9% % 3.9% % 16.9% % 2.7% % % Consumer Staples % % 1.9% 0.9% % % 1.5% 3.7% % 2.5% 3. Energy % -16.9% -3.9% -35.3% -31.9% -36.1% -36.5% -36.3% -31.5% % % Financials -0.1% % % -0.1% % 3.3% % 0. Financials ex. BAC, C & JPM % % % -1.9% 0.1% -1.7% 1.1% % -0.3% Health Care 7.1% 11.5% 11.3% 8.9% 10.7% 8.7% % 6.9% 5.5% 6.9% % 4.5% Industrials 1.1% % 3.3% 1.5% % -10.3% -6.1% -5.7% -4.3% % -0.1% 3.5% 4.9% 0.9% Industrials ex. BA % 2.9% % % 2.3% 0.9% -7.7% -1.3% % -8.3% 0. Industrials ex. Defense 1.7% % % -4.1% -6.5% % -6.9% % Information Technology % 5.3% 7.1% % % % 7.1% % Tech ex. AAPL & GOOG 7.3% % 2.9% -1.1% % % % 10.3% 5.9% % M aterials 2.1% 3.3% % % -9.9% % -1.9% 8.7% Real Estate % 5.9% 7.9% 4.5% % % 8.5% 7.5% 10.7% Telecommunication Services 3.9% 3.3% % 3.9% % % % % -1.3% -0. Utilities 15.9% 3.3% 5.1% 8.9% % -4.7% % -11.7% % % Net margins 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 S&P % % % % % % 10.7% % S&P 500 ex. Financials & Real Est % 9.7% % 9.9% % % 10.1% 10.3% S&P 500 ex. Energy 10.3% 10.7% % 10.7% 11.1% % 11.3% 11.3% % % 11.7% 11. S&P 500 ex. Tech 9.1% 9.5% % 9.5% % % 9.3% S&P ex. Energy, Fin & Real Est 9.5% 9.9% 10.1% % 10.1% % % % % 11. S&P ex. Energy, Fin, Real Est, Healthcare 9.3% % % 10.3% 9.9% 10.3% 10.5% 10.7% % 11. FANG (FB, AMZN, NFLX, Google) 11.7% 11.1% % 10.1% 11.3% 10.9% 11.5% % % % 10.1% 14. FANG & AAPL 17.9% % 18.9% 17.1% % 17.5% 16.3% % 13.9% 16.7% S&P ex FANG % % % % 10.7% % S&P ex FANG & AAPL % 10.3% 9.9% % 10.5% 10.5% 10.1% % % 10. S&P ex. Energy & Fin & Real Est & FANG % 10.1% % 10.1% % % % 10.5% 10.5% 10.3% 10.3% % Consumer Discretionary 6.3% % 7.1% 6.9% 6.7% 7.5% % % 7.5% % 7. Multiline & Specialty Retail % 5.1% % % 5.3% % 6.5% 5.3% 7.1% % 6.7% 5.5% Consumer Staples 6.3% % % % % 7.1% 6.9% Energy 8.1% % % 5.1% 5.5% 2.7% % 0.7% 2.1% % Financials % % % 14.7% % 15.1% 14.5% 14.5% 15.1% Financials ex. BAC, C & JPM % 13.7% 14.1% 14.5% 13.5% % % 13.7% 11. Health Care 10.3% % 10.3% 10.3% 10.9% 11.1% % 10.7% 10.7% 10.1% % 10. Industrials % % 9.5% 9.9% 9.5% 9.5% % % % Industrials ex. BA 7.7% % 9.5% 9.3% 8.7% % % % 9.9% 9. Industrials ex. Defense % 8.5% 9.7% 10.1% 9.7% % 9.1% % Information Technology % % % % 20.3% 21.3% Tech ex. AAPL & GOOG 16.9% 17.1% % 17.9% % 18.1% 17.5% % % M aterials 9.5% % % % % % Real Estate % % % % % % 38.1% 36.1% % Telecommunication Services % 10.5% % 11.3% % % 10.1% % 12.1% 11. Utilities % 12.1% % % % % % Source: IBES, Deutsche AM as of 11/3/. Past performance may not be indicative of future results. For institutional client and registered representative use only. Not for public viewing or distribution. Tax Bill haggling a risk for stocks, REITs & MLPs good shelter 9

10 Blended S&P 500 btm-up 3Q17 Sales and EPS growth by sector (blended with actual for reported and consensus for the rest) Sales y/y EPS y/y Blended btm up 3Q17 Sales and EPS y/y growth (Actual for reported and estimate for remaining) 1 5% 5% 1 15% 2 25% Cons Disc 3% Cons Staples 27% Energy Financials 7% 163% Health Care 7% Industrials 1% Tech 1 2 Ex AAPL & GOOGL 1 21% Materials Real Estate Telecom Utilities 5% 1% 3% S&P 500 5% S&P 500 ex Energy 3% S&P ex Energy, Fin. & Real Est 9% 31% FANG S&P 500 ex FANG 7% 47% Source: IBES, Deutsche AM as of 11/3/. Past performance may not be indicative of future results. For institutional client and registered representative use only. Not for public viewing or distribution.tax Bill haggling a risk for stocks, REITs & MLPs good shelter 10

11 Change in S&P 500 btm-up 3Q17 EPS since 6/30/ (on current S&P 500 constituents) 1 Change in btm-up 3Q17 EPS since 6/30/ % -1.1% -4.3% % % -1.5% % -4.3% % S&P ex. Fin & RE ex. En ex. Tech En, Fin & RE Ex. En, Fin & RE Ex. En, Fin, RE & HC Disc. Staples Energy Financials Health Care Industrials Tech Materials Real Estate Telecom Utilities Source: IBES, Deutsche AM as of 11/3/. Past performance may not be indicative of future results. Change in S&P 500 btm-up EPS since 6/30/ (on current S&P 500 constituents) Source: IBES, Deutsche AM as of 11/3/. Past performance may not be indicative of future results. For institutional client and registered representative use only. Not for public viewing or distribution.tax Bill haggling a risk for stocks, REITs & MLPs good shelter 11

12 Key Investment Forecasts Economic forecasts E Interest rates E Equities E 2018E Global GDP 3.1% 3.7% 2yr Treasury* % S&P U.S. GDP yr Treasury* 2.45% 2.6 price return % Capex % 10yr TIPS* % dividend yield 2.1% 2.1% S&P total return estimate 11.5% 8. Fed Funds rate* LT IG Muni* 3.35% ~3. DXY Next 5%+ price move: Down Euro* IG Corp* 3.39% 3.5 Oil/bbl (WTI)* HY Corp* Risk of near-term correction: Moderate Source: Deutsche AM as of 10/27/. *Forecasts for September 2018 Allocations for taxable/u.s. dollar capital as of Nov 3, Deutsche AM View Current Long-term Considerations Fixed Income 35% 35% Expected return/risk Treasury/Agency 15% seek neg. correlation Municipals 1 > return, < liquid Corp. Credit 1 selective HY > IG Equities 6 55% Expected return/risk U.S. Equities 3 4 S&P % S&P is global + Tech Small Caps (R2) 0-1 Beyond beta booster? Foreign DM Equities 2 15% Unique? Valuation? Financials 3% OW Foreign Banks Non-Financials 1 1 OW DM Industrials Foreign EM 0-1 Alternatives 5% 1 Is it truly uncorrelated? Real Estate/ Private Equity Commodities/FX/Vol/Alpha Tactical adjustments (<6mos): -5% from US Equities, + DM, +3% EM, -5% from Treasury, +5% Corp. Credit = Down S&P 500 Outlook Dare to ask: end target: 2450 Why not 2800 S&P cycle-high? 2800 = 18x 2019E EPS of ~$ end target: 2600 S&P 500 to reach 2800 by 2019 end on a long expansionary cycle of moderate growth. A E 2018E S&P avg. trailing 4qtr PE S&P EPS $119 $131 $ PE on trailing EPS DPS $46 $49 $ DPS/EPS 3 37% "S&P PE stands on the shoulders of bonds" S&P Quarterly EPS: Most favored sectors: 1Q16 $ Q17 $31.00 Healthcare, Tech, Financials 2Q16 $ Q17 $32.50 REITs 3Q16 $ Q17P $33.50 Least favored sectors: 4Q16 $ Q17E $34.00 Energy, Industrials Source: Deutsche AM as of 11/3/ Deutsche AM view: allocations for taxable / USD capital Source: Deutsche AM as of 11/3/ For institutional client and registered representative use only. Not for public viewing or distribution.tax Bill haggling a risk for stocks, REITs & MLPs good shelter 12

13 Deutsche AM S&P 500 Annual EPS Outlook Bottom-up Consensus (IBES) 2011A 2012A 2013A A 2015A A y/y E y/y 2018E y/y E y/y 2018E y/y ($) % of S&P 500 EPS (historical constituents) $97.82 $ $ $ $ $ S&P 500 EPS (current constituents) $ $ $ $ $ $ % $ % $ % $ $ % $ % Sector ($ bn) Consumer Discretionary % % % Consumer Staples % % Energy % % Financials % % % % Health Care % % % Industrials % % Information Technology % % % % Materials % % % % Real Estate % % % Telecommunication Services % % % Utilities % % S&P 500 ($ bn) % % % % S&P ex. Financials & Real Estate ($bn) % % % % S&P ex. Energy ($bn) % % S&P ex. Tech ($bn) % % % Energy & Financials & Real Est ($bn) % % % % % S&P ex. Energy & Financials/RE ($bn) % % % % Source: IBES, Deutsche AM as of 11/2/. Past performance may not be indicative of future results. * Normalized are mid-cycle normal earnings estimates and the ratios represent normal relative to E. Deutsche AM View Normalized * Deutsche AM View: S&P 500 fair value by sector: Assuming a ~5.25% real cost of equity (CoE) for overall S&P 500 Market Value ($bn) Current PE E Earnings ($bn) Normal Ratio Normal E Earnings Accounting Quality Adjustment Fully Adjusted Earnings Real Steady CoE State Value Growth Premium Start Fair Value ($bn) E Div idend Yield End Fair Value ($bn) End Fair Value PE Source: IBES, Deutsche AM as of 11/2/. Past performance may not be indicative of future results. S&P 500 EPS historical constituents represents the earnings per share (EPS) of S&P 500 index constituents at the time, while S&P 500 EPS current constituents represents the earnings per share of index constituents as of the date the data was compiled 6/30/. The estimated year end upside is on absolute valuation basis of each sector, not on relative sector valuation basis. end Upside % Consumer 2, % % % 2,188 3% 2, % 2, Disc. Consumer 1, % ,718 1, % 1, % Staples Energy 1, % % , % Financials 3, % % ,302 3, , % Banks 1, ,523 1, % 1, Health Care 3, % % 3,037 5% 3, , Industrials 2, % % 1,966 1, , Technology 5, % % 4,525 5% 4, , % Materials % % Real Estate % % % Telecom % Utilities % % S&P 500 ($ 22, ,043 20, % 21,546-3% bn) S&P 500 Index ($/sh) % % % % % >5% between -5% and 5% <-5% For institutional client and registered representative use only. Not for public viewing or distribution.tax Bill haggling a risk for stocks, REITs & MLPs good shelter 13

14 Deutsche AM S&P 500 Intrinsic Valuation Model S&P 5 00 Capitalized EPS Valuation S&P Cost of Equity & Fair Book M ultiple Deutsche Asset Mgmt's E S&P 500 EPS $ Fair long-term nominal return on S&P 500 index 7.25% Components of estimated fair S&P 500 return: DeAM's "normal E" S&P 500 EPS $ Long-term real risk free interest rate 1.25% "Normal E" EPS / E EPS 101% + Long-term fair S&P 500 equity risk premium* 4.0 = Long-term real S&P 500 cost of equity 5.25% Accounting quality adjustment to pro forma EPS -$ Long-term inflation forecast 2.0 = S&P 500 nominal cost of equity 7.25% Normal E S&P 500 EPS fair to capitalize $123 * S&P 500 ERP usually bps, w/ real 5% - 6.5% Key principle: steady-state value = normal EPS / real CoE Fair S&P 500 Market Value and Book Value Multiple S&P 500 EPS Capitalization Valuation end S&P 500 book value per share $800 Normal EPS / (real CoE - (EM/payout) - EM): Fair PB = Fair PE * normal aggregate ROE 2.92 S&P 500 intrinsic value at start 2333 Fair PE =(inc ROE-g)/(inc real ROE* (real CoE-real g)) 19.0 S&P 500 intrinsic value at end 2454 Implied S&P 500 fair value of book at start 2333 Implied fair fwd PE in early on E $131 EPS 17.8 Steady-state PB = normal agg. ROE / real CoE 2.92 Implied fair trailing PE at end on E $131 EPS 18.7 Confirmed by fair steady-state PE = 1 / real CoE 19.0 S&P 500 Dividend Discount Model S&P 500 Long-term EPS & DPS Growth Deutsche AM's E S&P 500 DPS $49.00 Deutsche AM's E S&P 500 aggregate ROE 16. E dividend payout ratio 37% end S&P 500 book value per share $800 DB's "normal E" S&P 500 DPS $49.00 DeAM's "normal E" S&P 500 aggregate ROE 15.3% Normal dividend payout ratio 4 S&P EPS retained for true reinvestment 3 EPS directed to net share repurchases $30.00 Estimated ROE on reinvested S&P EPS 7.25% Normal share repurchase payout ratio 2 Economic margin (EM) or ROE-CoE 0.0 Total payout of S&P 500 EPS $79.00 Sources of long-term earnings growth: Total payout ratio of normal and quality adj. EPS 6 + Long-term inflation forecast Fair return on true reinvestment 1.8 S&P 500 DPS Discount Model + Value added return on true reinvestment 0.0 Normal DPS / (nominal CoE - DPS growth): = Long-term earnings growth 3.8 S&P 500 intrinsic value at start Growth from net share repurchases 1.29% S&P 500 intrinsic value at end 2454 = Long-term S&P 500 EPS/DPS growth 5.15% Implied fair forward yield on E DPS of $ Fair normal dividend yield 2.1 Implied fair trailing yield on E DPS of $ = Total long-term return at constant PE 7.25% Normal EPS / (real CoE-value added EPS growth) 2333 DPS discount model using true DPS (all payout) 2333 Value added growth premium in fair value est. Normal E economic profit per share $80.50 S&P 500 EPS discountmodel 5 steps to value: 1) Estimate normalized S&P 500 EPS 2) Adjust normalized EPS for pro forma accounting quality 3) Estimate a fair long term real return on S&P 500 ownership (CoE) 4) Capitalize normalized and accounting quality adj. EPS at real CoE 5) Consider long term potential for value added growth opportunities Normal E S&P 500 EPS $125 $130 $ $135 $ % Real cost of 5.25% equity % Source: Deutsche AM as of 11/3/ Normal earnings per share (EPS) represents an estimate of mid-cycle normal earnings. Equity Risk Premium (ERP) is the expected excess return that investing in the S&P 500 provides over the return from government Treasury bonds. For institutional client and registered representative use only. Not for public viewing or distribution.tax Bill haggling a risk for stocks, REITs & MLPs good shelter 14

15 S&P 500 Sector and Industry views Price as of 11/2/ Source: Deutsche AM Market Allocated Sector Weight (%) Weight (%) PE 2018 Overweight PE PE 2018 Equal weight 2018 Underweight PE PE PE PE Ov er-weight 14.9% 18. Financials Banks Insurance Capital Markets Consumer Finance Div ersif ied Financial Serv ices % Health Care Biotechnology Health Care Prov iders & Serv ices Health Care Equipment & Health Care Technology Lif e Sciences Tools & Serv ices Pharmaceuticals % 26. Inf ormation Communications Equipment Electronic Equipment Technology Internet Software & Services IT Services Sof tware Semiconductors Technology Hardware Storage & Peripherals % Real Estate REITs Real Estate Mgmt. & Equal-weight 3.1% 3.5% Utilities Electric Utilities Independent Power Producers Multi-Utilities Water Utilities Under-weight % Consumer Hotels Restaurants & Leisure Auto Components Discretionary Household Durables Automobiles Internet & Direct Marketing Retail Distributors Media Div ersif ied Consumer Serv ices Multiline Retail Leisure Products Specialty Retail Textiles Apparel & Luxury Goods % Consumer Food & Staples Retailing Bev erages Staples Food Products Household Products Personal Products Tobacco % 6.5% Industrials Airlines Air Freight & Logistics Aerospace & Def ense Building Products Construction & Engineering Commercial Serv ices & Supplies Electrical Equipment Prof essional Serv ices Industrial Conglomerates Machinery Road & Rail Trading Companies & % 2. Materials Chemicals Construction Materials Containers & Packaging Metals & Mining % Energy Energy Equipment & Serv ices Oil Gas & Consumable Fuels % 1.5% Telecom Div ersif ied Telecommunication Aggregate PE: Deutsche AM View Ov erweight Equalweight Underweight & 2018 EPS & 2018 PE Bottom-up Cons. EPS Bottom-up Cons. PE & 2018 Ex Energy PE Btm-up Cons. Ex Energy PE PE For institutional client and registered representative use only. Not for public viewing or distribution. Tax Bill haggling a risk for stocks, REITs & MLPs good shelter 15

16 Deutsche AM September 2018 strategic forecasts Source: Deutsche AM as of 11/3/. Past performance may not be indicative of future Deutsche Bank AG. All rights reserved. R (11/17) Not for public viewing or distribution. Tax Bill haggling a risk for stocks, REITs & MLPs good shelter 14

17 Deutsche AM September 2018 equity index forecasts Source: Deutsche AM as of 11/3/. Past performance may not be indicative of future Deutsche Bank AG. All rights reserved. R (11/17) Not for public viewing or distribution. Tax Bill haggling a risk for stocks, REITs & MLPs good shelter 14

18 Contact Information David Bianco Ju Wang , , Want to start to receive The Allocator and other materials from our thought leaders directly in your inbox? Go to the Subscription Center on deutscheam.com: And sign up and request the types of thought leadership materials you would like to receive by topic (The World, The Markets, and Asset Class Perspectives) or exclusively by one or more of our experts. For purposes of ERISA and the Department of Labor s fiduciary rule, we are relying on the sophisticated fiduciary exception in marketing our services and products through intermediary institutions, and nothing herein is intended as fiduciary or impartial investment advice. Deutsche Bank does not render legal or tax advice, and the information contained in this communication should not be regarded as such. The comments, opinions and estimates contained herein are based on or derived from publicly available information from sources that we believe to be reliable. We do not guarantee their accuracy. This material is for informational purposes only and sets forth our views as of this date. The underlying assumptions and these views are subject to change without notice. Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. Investments come with risk. The value of an investment can fall as well as rise and your capital may be at risk. You might not get back the amount originally invested at any point in time. Deutsche Asset Management represents the asset management activities conducted by Deutsche Bank AG or any of its Deutsche Bank AG. All rights reserved. R (11/17) Not for public viewing or distribution. Tax Bill haggling a risk for stocks, REITs & MLPs good shelter 14