European Equity Update Christopher Warren April 2017
Europe A quick recap of market conditions since 2015 14 th Annual Capital Link Forum April 23, 2015 15 th Annual Capital Link Forum April 21, 2016 16 th Annual Capital Link Forum April 27, 2017 MSCI Europe Index 1,704.064 (4/23/2015) 1,460.494 (4/11/2016) 1564.475 (4/20/2017) Markit Eurozone Composite PMI Output Index 53.5 (April 2015) 53.1 (March 2016) 56.7 (April 2017 - Flash) European Union Unemployment Rate 9.60% (4/30/2015) 8.90% (1/31/2016) 8.00 (February 2017) European Union Economic Sentiment Indicator 106.4 (April 2015) 104.6 (March 2016) 109.1 (March 2017) Euro/USD Spot $1.0726 (4/23/2015) $1.1395 (4/12/2016) ~ 1.0696 (4/21/2017 - Intraday) ~ German Ifo Business Climate Index 108.6 (April 2015) 106.7 (March 2016) 106.7 (March 2017) = positive from previous year = down from previous year = negligible change As of: April 2017 Source: Bloomberg, European Commission, Markit, Eurostat. Past performance is not indicative of future returns. ~ 1
Europe 2017 key topics 1 2 3 Macro Politics & Elections Monetary Policy 4 5 Inflation Earnings Source: AM; as of May 2017 2
Activity indicators continue to be expansionary Pointing to possible further growth in the Eurozone Purchasing Managers Index (PMI) composite indicators for Euro area countries 60 57 54 51 48 45 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 PMI Composite Germany PMI Composite Italy PMI Composite France PMI Composite Euroarea PMI Composite Spain Past performance is not indicative of future returns. As of: March 2017 Source: Markit 3
European unemployment picture improves While recovery is uneven, employment may support continued growth EU, Eurozone and selected countries total unemployment rates in percentage since 2006 30% 25% 20% 15% 10% 5% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 EU (28 countries) Euro area (19 countries) Germany Spain United Kingdom Past performance is not indicative of future returns. As of: April 2017 Source: Eurostat 4
Consumer sentiment currently continues to be supportive Eurozone consumer sentiment 5 0-5 -10-15 -20-25 -30-35 -40 Feb-90 Oct-93 Jun-97 Feb-01 Oct-04 Jun-08 Feb-12 Oct-15 EUZ Consumer sentiment Past performance is not a reliable indicator of future returns. As of: March 2017 Source: Eurostat, European Commission, Investment GmbH 5
Emerging markets currently are no longer a drag EM exposed stocks previously limited earnings growth 3m relative earnings momentum for regionally exposed stocks from Euro Stoxx index 20% 15% 10% 5% 0% -5% -10% EM exposed stocks have been a drag on earnings -15% -20% Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 US exposed E300 Europe exposed E300 EM Exposed E300 Eurozone exposed E300 As of: end of February 2017 Source: UBS 6
Europe Elections and markets Political events 2017 Market reactions around political events 1 15% 10% 9% 10% 8% March May June September 5% 0% 0% 0% 0% Article 50 Presidential elections Parliamentary elections -5% Referendum? -4% -10% -9% Parliamentary elections Parliamentary elections -15% Snap elections Greece 2015 Brexit referendum Maximum drawdown Italy referendum After 1 month U.S. elections Capital markets may only react when the economy reacts... (1) Euro Stoxx 50 Index, level after 25 days; Past performance is not a reliable indicator of future returns. Forecasts are not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect. Source: Bloomberg Finance L.P., Investment GmbH; as of March 2017 7
Eurozone Monetary policy Normalization of monetary policy: ECB versus Fed 1 Fed 2008 2010 2013 2014 2015 2016 Start of QE Expansion of QE Thinking About Tapering Tapering First Rate Hike Second Rate Hike ECB???? 2015 2016 2017 2018 2019 2020 ECB followed the Fed with a time lag of at least four years (1) AM forecast for 2017 2020 Forecasts are not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect. Source: Bloomberg Finance L.P., Investment GmbH; as of March 2017 8
Eurozone Inflation Eurozone: Breakdown of CPI 1 Eurozone: Inflation 2 (versus previous year, %) Core Inflation (ex energy contribution) Food & Energy 2.0 1.7 1.5 Health 1.5 Recreation Energy 1.0 Hotels & restaurants Clothing 0.5 Transport Alcohol & Tobacco = 0.0 Housing -0.5 Prognose 1 Communication Food & Non-Alcoholic Beverages -1.0 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 2017 2018 Core inflation Food & Energy Inflation Inflation: Core stable, headline driven by oil price (1) Consumer price index; (2) AM forecast for 2017/2018, contribution to total inflation according weightings Forecasts are not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect. Source: Bloomberg Finance L.P., Investment GmbH; as of March 2017 9
Catch-up potential for earnings in Europe Earnings trends are lagging behind compared with U.S. Historical Earnings 140 120 100 80 Fewer share buyback programmes Different sector allocation (Banks/Energy) Higher dependency on emerging markets 60 Tax disadvantages 40 20 0 Jan/75 Jan/78 Jan/81 Jan/84 Jan/87 Jan/90 Jan/93 Jan/96 Jan/99 Jan/02 Jan/05 Jan/08 Jan/11 Jan/14 Jan/17 U.S. earnings U.K. earnings Eurozone earnings European earnings 12-month trailing earnings in USD for U.S. and in Euro for Europe. As of: March 2017 Source: I/B/E/S, MSCI, Datastream, Societe Generale Cross Asset Research/Equity Strategy 10
Improvement in earnings growth visible Trailing earnings currently rising Europe 12 month trailing earnings growth 70 50 30 10 (10) (30) (50) Jan-05 Jul-06 Jan-08 Jul-09 Jan-11 Jul-12 Jan-14 Jul-15 Jan-17 12m trailing EPS Growth Past performance is not a reliable indicator of future returns. As of: end of February 2017 Source: UBS 11
Equity valuations remain below long term median Historical versus current valuation 12 m fwd P/E vs. 10Y median 19 45% 18 17.4 18.2 40% 35% 17 16.3 30% 16 14.9 25% 15 14 13.8 14.7 14.8 14.6 13.9 14.9 20% 15% 10% 13 5% 12 DAX SX5E CAC IBEX FTSE-MIB MSCI Eurozone 12m Fwd P/E vs 10Y median (rhs) FTSE100 AEX SMI S&P500 0% Past performance is not a reliable indicator of future returns As of: March, 2017 Source: J.P. Morgan, IBES, Bloomberg for current estimated PE 12
Negative investor sentiment remains ETF flows: Investors sold off European equities Cumulated ETF Flows (in % of AuM) 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% 01/16 04/16 07/16 10/16 01/17 USA UK Eurozone Japan As of: February 2017 Source: BofA Merrill Lynch Global Research, JP Morgan, EPFR 13
Europe Conclusion 1 2 3 Macro Politics & Elections Monetary Policy 4 5 Inflation Earnings Forecasts are not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect. Source: AM as of March 2017 14
Investment strategy What we look for in an investment Company characteristics we favor Strong balance sheet Large market share Management quality Alignment with shareholders Product differentiation Cost/technology advantage Scalability of business model Pricing power Alpha opportunities we seek Beneficiaries of positive tailwinds Beneficiaries of fundamental change Technological change Emerging market demand Regulatory/policy shifts Structural Growth Positive Earnings Delta Operational improvements Product innovation Strategic acquisitions Demographic-driven trends Capacity expansion As of April 2017 Source: 15
Presenter Christopher C. Warren Managing Director Rejoined the Company in 2006 with 12 years of industry experience. Prior to his current role, Chris was Head of Active - Global Client Group for Asia Pacific, based in Singapore, where he was responsible for Active product strategy and development. Prior to relocating to Singapore, he also served as DWS Head of Structured Products Americas in New York City. Before rejoining, he was Head of Private Investor Products for North America at ABN AMRO. Previously, he worked at Goldman Sachs, General Re Securities and at Bankers Trust (acquired by Bank). Chris began his career as a taxation and securitization attorney at Whitman Breed Abbott & Morgan LLC in New York. BA in Economics from Virginia Polytechnic Institute; MA in International Relations from University of Kent; JD from Georgetown University Law Center. As of April 2017 Source: 16
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