Mg 2009 Outlook 011509

The Outlook for 2009
Investing in uncertain times

Marshall Gittler
Chief Strategist, International
Deutsche Bank (Suisse) SA

Tel: +41(0)22 739 0463
e-mail: marshall.gittler@db.com

Overview: a tough year economically; a better year financially?

The first global balance sheet recession
 We have seen a period of unprecedented drama in the financial markets, culminating in a collapse
of most markets (stocks, credit, commodities) and a freezing of the world‟s credit markets
 At the same time, governments around the world have gone to extraordinary lengths to offset the
effects of the financial market disaster and prevent a downward spiral
 Nonetheless, we believe economic policy cannot reverse the course of the business cycle, only
soften it. This is because we are in a different type of recession than we have seen before in the
post-war period: a global balance sheet recession. We expect the downturn to intensify in 2009

The question is, how much is in the price already?
 No one expects the global economy to do well. On the other hand, markets have already plunged
 The big question is whether they have fallen enough to discount the future economic problems or
whether we will get hit again as the real economy catches up with the financial markets

Strategy recommendations: we still like fixed income
 This may be the buying opportunity of the century for equities, but with the economic outlook so
uncertain we still prefer fixed income
 Investment grade corporates are our preferred assets, as well as index-linked bonds
 Within equities, we recommend infrastructure, a sector that is likely to benefit from government
efforts to reflate. Also sectors with a guaranteed real yield, such as regulated utilities

2

Outlook for the economy

3

The typical recession

 In the past, most US recessions came about through monetary policy. The Fed raised interest rates
until the economy went into recession. Then it cut rates, and the economy eventually recovered
 The previous two recessions – 1990/91 and 2000/01 – are different. In the first case, the Fed had
already cut rates by 150 bps when the recession started (although it may have raised them too high
to begin with); in the second case, the rise was not excessive, and in any case the Fed had started
to cut rates before the recession started
 The current recession too probably cannot be blamed on overly tight monetary policy

Typically, recessions start & end with the Fed
20
Recessions
Fed Funds %
15

10

5

0
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Source: Bloomberg, National Bureau of Economic Research
4

The balance sheet recession: a schematic

5

How a balance sheet recession unfolds

Low interest rates encourage excessive borrowing
 The cycle starts when interest rates stay too low for too long. People believe rates will stay low
indefinitely. With the hurdle rate for investment low, companies are encouraged to invest in
increasingly marginal projects, while low repayments allow households to borrow (often against their
house) to buy financial assets, boats, expensive vacations, and more houses
 When asset prices start to fall, the value of the debt does not. This creates balance sheet problems
 Companies switch from profit maximisation (households = consumption maximisation) to repaying
debt. Companies cut investment and slash jobs, households spend less, save more. Lower interest
rates do not stimulate further investment or consumption until the debts are repaid. (Traditional
economics could not explain this point until Japan’s balance sheet recession made it clear)
 A vicious circle results as companies and households do what is best for them but worst for the
economy overall (“fallacy of composition”). As the economy spirals downward, prices start to fall,
which worsen the problem as incomes fall but debt doesn‟t
 More and more borrowers default. Increasing amounts of non-performing loans (NLPs) make banks
less willing to lend and increasing the pressure on even healthy borrowers to pay back debt.
 Asset prices fall further as people sell assets to pay down debt (= deleveraging). Go back to step #2
 Central bank tries to solve the problem by easing monetary policy, but it doesn‟t work because
nobody wants to borrow. Even if they did, in many cases the banks wouldn‟t lend to them
 We arrive at a liquidity trap, where monetary policy is no longer effective
6

How a balance sheet recession ends (we hope)

With monetary policy at an impasse, fiscal stimulus is needed to break the vicious cycle
 Govt builds bridges etc. They buy steel, employ bridge-builders, and otherwise support demand
 Over time, the private sector can pay down its debt:
 Companies can continue to sell products. This provides them with profits to repay their banks;
eventually they get their debt down to a manageable level
 Individuals keep their jobs and, by cutting back on consumption, eventually repay their mortgages,
credit card loans, auto loans, etc.
 Meanwhile, the government‟s borrowing keeps the money supply growing while the private sector is
repaying debt. This prevents deflation and thereby diminishes the forced deleveraging
 Key word: eventually

7

Why quantitative easing is essential to the process

Monetary and fiscal authorities have to work together
 Fiscal stimulus is an essential part of the process of getting out from a balance sheet recession
 Fiscal stimulus financed by raising taxes would be counter-productive, because there would be no
net increase in demand. It must be debt financed
 Selling large amounts of debt to the private sector could push long rates up. That would force
borrowers to accelerate their repayment of debt, making things worse
 Instead, the central bank often steps up purchases of bonds from the private sector to help fund
the stimulus (technically known as “monetizing the debt,” popularly known as “printing money”)
 In any event, rates tend to remainy low during such a period anyway because of deflation, the
absence of other borrowers, and a lack of other attractive investment vehicles
 It‟s natural then that interest rates should be unusually low, possibly around zero

8

Why the current recession looks like a balance sheet recession

 The US is emerging from an enormous credit binge, equalled only during WWII. To bring the level of
outstanding credit down to trend would mean a reduction of some $1.5tn in outstanding bank credit
 US households are starting to reduce their debt and raise their savings – consumer credit fell by
$6.4bn in August, $3.5bn in October and a record $7.9bn in November
 This is somewhat different from the Japanese balance sheet recession, which was as much in
companies as in households. Households are not marked to market
 Their problems will be transferred to the corporate sector via the banks. We expect non-performing
loans to double in the US to 3% and perhaps exceed the 3.4% at the depths of the Depression

Unwinding the credit bubble Households starting to cut debt
15 12
%
%
Household debt payments as a % of
disposable income (L) 10
14
Personal savings as a % of
disposable income (R) 8

13
6

4
12

2

11
0

10 -2
1980 1985 1990 1995 2000 2005

Source: BCA Research Source: DB Global Markets Research
9

Hard-hit banks likely to make the problem worse
Banks are tightening lending conditions at the same time as demand plummets
 The recent Senior Loan Officer surveys from the US, Eurozone and Japan have all shown that
banks are tightening up conditions for loans to both companies and households
 The tighter lending conditions coincide with a sharp fall-off in demand for loans as well. In the US,
17% of banks reported weaker demand for loans from companies in October, while 48% reported
weaker demand from households. The figures were 26% and 21%, respectively, in Europe
 The unwillingness to lend and lack of demand for loans means lower interest rates are not likely to
be as effective in reviving (releveraging?) the economy as they were in the past
Businesses find loans harder to get as do households
80 60
Senior Loan Officer Survey in US and Europe Senior Loan Officer Survey in US and Europe
Commercial loans Household loans
60 40 Tighter lending conditions,
Tighter lending conditions, more demand for funds
more demand for funds
40
20

20
0
0

-20
-20 Looser lending conditions,
Lending conditions Looser lending conditions,
Lending conditions
less demand for funds
less demand for funds
-40 Demand for funds Demand for funds
-40
2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008

Source: US Federal Reserve, ECB, DB Private Wealth Management 10

Housing market will be one key to finding the bottom
 The housing market needs to bottom before we can feel confident that the worst is over. That‟s
because stable home prices are necessary for investors to assess the value of banks‟ balance
sheets and for consumers to feel confident of their net wealth
 The signs so far are not encouraging. Price declines continue to accelerate, and the credit crunch
has made it even more difficult for those few people who want to buy a home to do so
 Our Mortgage group estimated on Sep. 10th that US house prices were only about halfway through
the correction and would have to decline another 16% or so to restore affordability to historical levels
 Of course, things could be even worse – in Japan, land prices have been falling for 16 years

Inventory of unsold homes still rising Japanese market still hasn’t bottomed
20 12
M onths of
Japanese land vs US house prices
House prices and inventory 0%
sup p ly
11
15 Japanese land prices
-10% (peak = Sep. 1991)
10
10
US house prices (peak =

% change from peak
9
-20% June 2006)
5
8
-30%
7
0

6 -40%
-5
5
-50%
-10
Median home prices % yoy (R) 4

Existing home inventory (R) -60%
-15 3
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
-6
-5
-4

03 04 05 06 07 08
Years from peak

Source: Bloomberg, DB Private Wealth Management 11

Outlook for the markets

12

Market dislocations have improved, but are still high

 Indications of market dislocations, such as TED spreads, CDS spreads on US financials, US agency
spreads and equity market volatility have generally receded from their previous highs, but they
remain well above even the abnormally high levels of last year
 Looking at the futures market, investors expect the dislocations to persist at least into early 2010,
although expectations have improved notably from even just a month ago

Credit markets bad, but not worst Market getting more optimistic
400
600 LIBOR/Fed Funds spread & market forecast
1 Jan 2008 = 100 HSBC Clog Index BPs
350
500 Market forecast
300
Includes Market forecast a month ago
400 1) TED spread & LIBOR-OIS spread;
250 3m LIBOR-Fed Funds spot
2) US Financial CDS spreads; 3) US spread
agency credit spreads; and 4) VIX index Level (50 bps) that signifies
300 200 almost back to normal

150
200

100
100
50

0
0
Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

Source: Bloomberg 13

Market implications of the balance sheet recession

 As we‟ve seen, a balance sheet recession can last for several years. It means little or no demand for
funds, hence a fall in interest rates. It also means sluggish demand, at least in the country involved,
and hence low corporate profitability
 It‟s not surprising that Japan‟s balance sheet recession saw a multi-year rise in bond prices and fall
in stock prices

Nikkei and JGB futures after the bubble burst
40000 150

35000 140

30000 130

25000 Nikkei (L) 120
JGB futures price (R)
20000 110

15000 100

10000 90

5000 80
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008


Stock market performance during the balance sheet recession

 From its peak at 39,000 in 1989, the Nikkei fell back to 14,800 in 1992, then spent the next nine
years in a trading range of roughly 14,000~22,000 until the banking crisis sent it crashing out
 There were substantial moves both up and down during this time: 13 rallies of over 20% from 1990
to 2003 and seven rallies exceeding 30%. But all the gains were lost eventually
 The business cycle continued during this period and stocks continued to follow it. Once the major
decline was over, the inflection points within the trading range were driven by the business cycle

13-year decline saw several rallies Nikkei followed inventory cycle
40000 23000 8%
= rallies of
more than 30%
6%
35000
21000 4%
Period when companies
30000 were repaying debt 2%
19000 0%
25000
-2%
20000 17000 -4%
-6%
15000 Nikkei (L)
15000 -8%
Shipments-to-inventory ratio,
10000 -10%
6m change (R)
13000 -12%
5000
92 93 94 95 96 97 98 99 00
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

15
Source: Bloomberg, DB Private Wealth Management

Stock market performance: stock picking matters more than ever

 While the market as a whole was rangebound for years, some stocks did better than others
 A basket of the 15 “best of breed” blue chip stocks – companies with the best balance sheets, best
management and best products (e.g. Toyota and Canon) – outperformed the market significantly.
This basket rose 330% during the decade vs a 40% decline in the broad TOPIX index
 Small cap stocks on the other hand underperformed, because small cap companies are “price
takers” that do poorly in a deflationary environment. Also they lack access to funding and so are
particularly troubled by the need to repay loans

“Best of Breed” in Japan vs TOPIX TOPIX small cap index
100
Jan 1990 = 100
90
Period when companies
80
were repaying debt
70

60

50

40

30

20 TOPIX Small caps index
TOPIX
10

0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Source: Merrill Lynch GEMS Equity Strategy Source: Bloomberg
16

QE lowered yields, flattened the yield curve, helped MoF to issue bonds

 Quantitative easing (QE) got yields down even more than the zero interest rate policy (ZIRP),
especially at the short end (five years and below). The curve was quite flat out to two years
 It had less of an effect further out the curve, in the 10s and beyond. Still, yields were extraordinarily
low. The 10yr JGB hit the lowest level in recorded history for that maturity: 0.45% on 12 June 2003
 This was despite massive bond issuance and downgrade of the country‟s credit rating
 Low interest rates and purchases of JGBs by the central bank helped the Ministry of Finance (MoF)
to issue a massive amount of bonds smoothly
2yr yields & 2yr/10yr curve Yield curve before, during & after
1.10 180 3.00
% %
1.00 ZIRP QE period
160 2001 (before QE)
0.90 2.50 2003 (during QE)
0.80 2005 (during QE)
140
2.00 2007 (after QE)
0.70
120
0.60
1.50
0.50
100
0.40 1.00

0.30 80

0.20 QE 0.50
2yr yields (L) 60
0.10 2yr/10yr curve (R)
0.00
0.00 40
1
2
3
4
5
6
7
8
9
10

15

20

30
3m
6m

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008


Learning from past bear markets: How long might this bear market last?
 During previous bear markets, stocks never went straight down, hit bottom and then rebounded. The
market usually makes a few false bottoms on the way down and takes some time to recover
 We regressed how far the market fell during previous bear markets against a) the length of time from
peak to trough and b) the time it took to recover the peak level. Using the results, the 52% drop
from the Oct. 2007 peak to the November trough means that the market should in theory fall for 40
months (= until Feb 2011) and would not recover the previous peak for 96 months (until Oct 2015)
 On that basis, if past trends hold true the US economy should bottom around end-2010. That is
quite a bearish estimate; Deutsche Bank‟s official forecast is for the economy to bottom in 1H 2009

% drop in market vs months to bottom % drop vs months to recover peak
-15% -15%
1990~91
1990~91 y = -0.0034x - 0.1939
y = -0.0078x - 0.2071 -20% 1956~58
-20% 1966~67 1956~58
R2 = 0.5023 R 2 = 0.8902
1966~67
-25% -25%
1980~82
1980~82
-30% -30% 1961~62
1961~62
% decline
% decline

-35% -35%
1987~88
1987~88
1968~70 -40% 1968~70
-40% This time =
40 months = -45% 1973~75
-45%
Feb 2011 This time =
-50% 1973~75 -50% 96 months =
2000~03
2000~03 Oct 2015
-55% -55%

0 10 20 30 40 50 0 20 40 60 80 100 120
Months to recover peak
Months from peak to bottom


Stocks don’t always go up every year

 People in the financial world often say that “stocks always go up in the long term,” but they forget to
specify just how long the long term is. After all, as Keynes said, “in the long term we are all dead.”
 There have certainly been periods that anyone would call “long” when the US stock market did not
go anywhere. And let‟s not even talk about Japan, where the Nikkei is now back to 1983 levels
 This illustrates two points: 1) past performance is no guarantee of future performance, and 2)
truisms about the financial markets based on historical experience are not like the laws of physics,
which hold true everywhere and at any time
DJIA has shown long periods of going nowhere

19
Source: BCA Research

The example that nobody wants to think about: 1929~1932

 The Crash of 1929 remains the model for speculative booms & busts in the modern era
 While everyone knows what happened in Oct. 1929, people forget that 1929 was only the beginning
of the bear market. Stocks rebounded early in 1930 but then started falling again and didn‟t bottom
until July 1932. By that time prices were down 89% from the 1929 peak
 Anyone who bought at the bottom in 1929 was down 79% by 1932. They didn‟t recover their money
until Dec. 1949. Anyone who bought at the 1929 peak didn‟t get their money back until end-1954

DJIA 1929~1932 DJIA 1929~1954
400 400

350 350 1929 high
+48% from bottom
300 300
-48 ppt
250 (-48%) 250

200 -89% 1929 low
200

150 -41 ppt 150
(-79%)
100 100

50 50

0 0
Jan-29 Jul-29 Jan-30 Jul-30 Jan-31 Jul-31 Jan-32 Jul-32 1925 1930 1935 1940 1945 1950

Source: Bloomberg
20

Earnings still have to be revised down further

2008E & 2009E growth of country
earnings (%)
MSCI Latin America
16.1

MSCI EMEA
9.1

Spain: IBEX 35
1.6

France: CAC 40 2009E earnings growth (% )
-1.1
2008E earnings growth (% )
Italy: MIB 30
-2.8

S&P 500
-12.0

UK: FTSE 100 -12.1

Stoxx 600
-12.5

Euro Stoxx 50
-12.7

Euro Stoxx -13.6

MSCI Asia ex Japan
-16.7

Germany: Dax 30
-29.8

TOPIX -35.0 96.6%

Switzerland: SMI
-41.3

-55 -45 -35 -25 -15 -5 5 15 25 35

Source: Thomson Financial, IBES and Deutsche Bank Global Markets estimates
21

What to recommend in this environment

22

The key factor driving asset class performance is the business cycle

 Investors have to decide whether growth is above or below trend and accelerating or slowing
 Also, is inflation accelerating or decelerating?
 Based on the level and direction of these two factors, we can identify four phases in a typical
business cycle
 Different asset classes tend to perform best in each phase

Appropriate investments for each part of the
business cycle

23

The phases of the business cycle --- Impact on asset allocation

24

Recommended portfolio strategy

Maximum*
Unconstrained* Capital Maintenance Balanced Growth Capital
Preservation
Benchmark Benchmark Benchmark
Cash & FX 15% 20% 15% 10% 25%
Fixed Income - Sovereign 10% 60% 20% 40% 15% 20% 5% 50%
Fixed Income - Corporate 35% 30% 20% 15% 20%
Developed Market Equity 10% 20% 10% 40% 20% 60% 30% 0%
Emerging Market Equity 5% 5% 10% 15% 0%
Private Equity 8% 0% 5% 8% 0%
Absolute Return 7% 20% 5% 20% 5% 20% 7% 0%
Real Estate & Infrastructure 5% 5% 5% 5% 0%
Commodities 5% 5% 5% 5% 5%

Expected Return 4.9% 4.6% 5.0% 5.5% 4.0%
Volatility 5.6% 3.7% 6.9% 10.3% 3.6%
* No benchmark

25

What to recommend in this environment: equities are for trading
 With equity markets down so sharply so quickly and the prospective dividend yield greater than
government bond yields for the first time in 50 years, we believe much of the bad economic news is
already discounted in the market. However, valuations do not yet indicate “all clear”
 Equity markets will need to see the credit markets and earnings expectations stabilize before they can
embark on a sustainable rally. That‟s still some time away. Until then, markets run the risk of reacting
again to news that‟s previously discounted (e.g., the impact of the credit crunch on companies)
 This remains a trading market rather than an investing market. As a result, we remain defensive with
our sector selection and recommend covered call writing to benefit from heightened volatility
 In general, we favor US equities over Europe and Japan, primarily because of more aggressive
government policy responses to the current credit crisis and slowing global economy. As a result, we
expect the slowdown in the US to be shorter and less severe than in the other regions. In addition, our
expectation that the dollar will continue to rally versus the euro and yen over the next year will hamper
outflows from the US into other markets
 While emerging market equities have been down significantly (more than 55% from peak), pressure
will likely remain on these markets as de-leveraging, risk aversion and negative capital flows serve as
headwinds. The preferred BRICs region is China due to growth remaining at potential, fiscal stimulus,
decelerating inflation and flexible monetary policy. The two BRICs most vulnerable are Russia and
Brazil, driven by the substantial declines in commodity prices

26

What to recommend: We like market-neutral plays
 Most investments make money when an asset price goes either up or down. However, there are
some investments that are not dependent on the direction of markets. These may be an attractive
way to boost return with a minimum of risk during a period like this
 The DB Commodity Harvest indices profit from the difference in the roll between various commodity
contracts, not from the direction of commodity prices
 The DB Currency Return index is a combination of carry, value and momentum currency indices

DB Commodity Harvest Indices DB Currency return indices
120 130
1 Jan 07 = 100 15 Feb 2008 = 100

110 120

100 110

100
90
DB Commodity Harvest Total Return
DB Commodity Harvest Excess Return 90
80
MSCI World stock market index DB Currency Returns Tracker
80
70 DB Currency Momentum Tracker
DB Currency Carry tracker
70
DB Currency Valuation Tracker
60
MSCI World equity index
60
50
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 50
Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08
Source: DB Global Markets, Bloomberg
27
Past performance is no guarantee of future results. No assurance can be given that the investment objectives of the financial products represented will be achieved.

What to recommend: Private equity returns are best at the bottom of the cycle

Meltdown Meltdown
years years

35%
34%

20% 19% 19%
?
Potential
for
10%(3) excellent
vintage
years

„86-„90 „91-„93 „94-„97 „98-„00 „01-„03 „04-„07(3) „08E-„10E

Average Net IRR of top quartile Average Net IRR of top quartile
MSCI World(1)
private equity firms(2) private equity firms (1986 to 2007)(2)

(1) Source: Bloomberg and Deutsche Bank calculations. Represents index value from 12/31/1987 through 10/10/08
(2) Source: Cambridge Associates and Deutsche Bank calculations.

28

One big question: will the cure cause its own problems?

 Central banks have been pumping money into the system like there‟s no tomorrow (which they
probably thought seemed entirely possible a few weeks ago). As a result, bank reserves have been
growing at a record pace
 The world‟s supply of dollars relative to the size of the US economy has exploded (latest reading =
up over 50% yoy)
 Will this cause inflation further down the line? Soaring commodities? Collapsing dollar?
Exploding world dollar means world awash in USD
20 Excess growth in world dollar vs USD index % yoy -30%
% yoy
World Dollar - Nominal US GDP growth (L)
15 USD Index (R, inverted) -20%

10 -10%

5 0%

0 10%

-5 20%

-10 30%
82 84 86 88 90 92 94 96 98 00 02 04 06 08

Note: World dollar = US Base money ＋ Treasuries held by foreign officials.
Latest observation is Nov. 19. Using expecrted US Q4 2008 GDP -5 % （ YoY ） .

29

Long term: what could provide the next economic theme?

The infrastructure story is coming back into fashion
 The world‟s population is still growing by some 78mn people a year. That should continue until 2020
 These people will want a higher standard of living than those who came before them: more and
better houses, roads, bridges, electricity
 The developed world‟s infrastructure also badly needs refurbishment (seen JFK Airport recently?)
 Why now? Because infrastructure investment is a great way for governments to inject money into
an economy during a downturn

The world is still growing There is still demand for cars in EM
100 12% 200 mn Registered motor vehicles
MN Annual change in world population
90 # of people (L)
10%
80 % change (R)
150 US
70
8%
60 Forecast China (1908 = 1984)
50 6% 100
40
4%
30
20
50
2%
10
0 0% 0
55

65

75

85

95

05

15

25

35

45

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990
19

19

19

19

19

20

20

20

20

20

Source: UN Population Division 30 Source: US Dept of Transport, CEIC


The commodity story is only delayed, not derailed
 The sharp fall of commodity prices now has caused a major setback in plans to expand production –
in fact, some production capacity in industrial metals has been mothballed. This sets the stage for
future shortages as population continues to grow and people expect their living standards to rise
 Global warming is not affected by the business cycle
 The grain situation is particularly worrisome longer term as production growth is not keeping pace
with population or rising living standards
Oil use to rise as EM countries develop Grain output not keeping pace with population
360 0.25
Per Capita Oil Consumption Relative to GDP
3.0 KG Grain production and harvested area per person
Hectares
Canada US
Oil consumption per capita (gallons per day)

340
2.5
0.20
South Korea Taiwan
320
2.0
Japan Australia

1.5
300 0.15
Germany Sweden
France
UK
Italy
1.0 Venezuela MexicoRussia
280
0.10
Thailand Grain production per person (L)
0.5
Indonesia Brazil 260
China Grain harvested area, per person
India
0.0 240 (R) 0.05
0 5 10 15 20 25 30 35 40 45 50
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
GDP per capita ('000 USD)

Source: Earth Policy Institute Source: IMF, IEA, DB Global Markets Estimates
31

The Law of Accelerating Returns
 Moore‟s Law states that the capacity of ICs doubles every 18 months. This is exponential growth,
not the linear growth that we usually experience. Exponential growth is common among high-tech
products, because of the evolutionary way that they develop (building on previous developments):
DNA sequencing, electronic memory, ISPs, nanotechnology, brain scanning, software capabilities…
 What‟s harder to see is that this exponential pace of growth is itself accelerating at an exponential
rate as technologies reach the limit of their capabilities and are subsequently replaced by new
technologies that progress even faster. This means the rate of technological progress in the 21st
century is likely to be about 1,000 times faster than in the 20th!
 Who knows what will arise from this unprecedented pace of development in electronics, energy,
communications, etc.? And how should we value companies whose products improve like this?
Chip speed rises exponentially Growth grows exponentially too
MHz
Intel chip speed
10,000

1,000

100

10
93 94 95 96 97 98 99 00 01 02 03 04

Source: Intel 32 Source: Ray Kurzweil

Summary

Economy: recession could last longer than market expects
 Investors are not familiar with a balance sheet recession. They expect that this recession will be a
normal one and that fiscal and monetary easing will allow the economy to recover in short order
 As a result, we expect there could be some surprise at the depth and length of the recession
 Europe may have fewer balance sheet problems, but it is less able to take coordinated fiscal action
and therefore may suffer more than people think
 Even after the problems are over, growth is likely to be sluggish due to “debt rejection syndrome”
Equities: a market of stocks
 Equities overall tended to trade in a range during Japan‟s balance sheet recession. Simply buying
and holding the market did not provide any return at all lover the long term in Japan
 The best companies were able to perform nonetheless with products that set them apart and
allowed them to maintain prices even in a deflationary environment. They also had better financial
resources and so were able to get their balance sheets in order faster. Stock picking was essential
 Small cap stocks on the other hand underperformed, for the opposite reasons
Bonds: unbelievable bull market
 Short-term rates went down to zero and remained there. Long-term rates eventually hit the lowest
level in history. Bond yields stayed low for a surprisingly long time. The yield curve flattened
 Enormous issuance was not a problem as banks and insurers had no other outlet for funds. This
time it could be different for US as US is a debtor nation, not a creditor
 Credit spreads narrowed as investors moved further out the credit curve in search of yield

33

Important notes

Private Wealth Management offers wealth management solutions for wealthy individuals, their families and select institutions worldwide. Deutsche Bank Private Wealth Management,
through Deutsche Bank AG, its affiliated companies and its officers and employees (collectively “Deutsche Bank”) have published this document in good faith and on the following basis.

It has been prepared without consideration of the investment needs, objectives or financial circumstances of any investor. Before making an investment decision, investors need to
consider, with or without the assistance of an investment adviser, whether the investments and strategies described or provided by Deutsche Bank, are appropriate, in light of their
particular investment needs, objectives and financial circumstances.

Deutsche Bank does not give taxation or legal advice. Investors should seek advice from their own taxation agents and lawyers, in considering investments and strategies suggested by
Deutsche Bank.

Investments with Deutsche Bank are not guaranteed, unless specified. Unless notified to the contrary in a particular case, investment instruments are not insured by the Federal Deposit
Insurance Corporation (FDIC) and are not traded on any regulated market.

Investments are subject to investment risk, including market fluctuations, regulatory change, possible delays in repayment and loss of income and principal invested. The value of
investments can fall as well as rise and you might not get back the amount originally invested at any point in time.

The document is provided as general information only and consequently may not be complete or accurate for your purposes. It is not intended as financial advice or as an offer or
recommendation of securities or other financial products. While the information is updated from time to time, it is subject to changes in the intervening period. All the financial services
and product classes referred to in this document may not be available in all locations or to all Deutsche Bank Private Wealth Management clients.

This document has been prepared by Deutsche Bank Private Wealth Management for discussion purposes only. It is not a research product in the meaning of the “Directive on the
Independence of Financial Research” of the Swiss Bankers Association. Therefore, the directive does not apply to it. Any opinions expressed herein may differ from the opinions
expressed by other Deutsche Bank departments including the Research Department.

The manner of circulation and distribution of this brochure may be restricted by law or regulation in certain countries. Your local Deutsche Bank Private Wealth Management office will be
able to provide more information.

34

Mg 2009 Outlook 011509

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (15)

Destacado

Destacado (17)

Similar a Mg 2009 Outlook 011509

Similar a Mg 2009 Outlook 011509 (20)

Mg 2009 Outlook 011509