2010 global outlook ten themes+-+db

7/31/2019 2010 Global Outlook Ten Themes+-+DB

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2010 Global Outlook

Ten Themes for 2010

January 2010

Larry Adam, CFA, CIMA

Chief Investment Strategist

Telephone (410) 895-4135

[email protected]

Megan Horneman

Investment Strategist

Telephone (410) 895-4148

[email protected]

Ben Sonley

Investment Strategy Analyst

Telephone (410) 895-4282

[email protected]

Jared McDaniel, CFA

Investment Strategist

Telephone (212) 454-6814

[email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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U.S. Investment Strategy Page 2(002555.01/04/10)

0%

1%

2%

3%

4%

1950 1960 1970 1980 1990 2000

U.S. GDP by Decade Historical Average

0%

1%

2%

3%

1950 1960 1970 1980 1990 2000

U.S. Non-Farm Productivity Historical Average

0%

2%

4%

6%

8%

1950 1960 1970 1980 1990 2000

U.S. Consumer Price Index Historical Average

0%

2%

4%

6%

8%

10%

1970 1980 1990 2000

U.S. New Home Price Historical Average

U.S. GrossDomestic Product

Deciphering the 2000s Decade

Data Source: FactSet, EcoWin, Bloomberg Finance LP. All returns and performance are annualized unless otherwise stated.1 Historical averages include current decade. 2Assuming 4.0% growth in 4Q09. 3 2000 decade through 3Q09. 4 2000 decade through November 2009

1.7%2 3.3%

Since the 1950s, the 2000 decade ranked as

the worst decade, growing at an average annual

rate of 1.7%, half the historical average (3.3%).

Corporate scandals, two wars, a terrorist attack,

the dot com and housing bust led to two

recessions, including the Great Recession.

2.6%3 2.3%

2.6%4 3.8%

2.8%4 5.6%

U.S. Non-FarmProductivity

U.S. ConsumerPrice Index

U.S. Real Estate

2000s Average1

Comments

The dot com bust did have its benefits as the

technological advances made over the 2000

decade led to the highest level of productivity

since the 1960s. Strong productivity helped the U.S. from dipping

into depression in the midst of the recent

recession and helped boost corporate profits.

Inflation has been steadily declining since the

1970s as globalization and robust productivity

have helped reduce pricing pressures. In fact, in

2009 the U.S. experienced its first deflationary

environment since the 1950s.

Inflation in the 2000s was the lowest since the

'60s despite commodities reaching record highs.

Despite the housing boom that temporarily led

to record home prices, the decade saw the

lowest period of home price appreciation.

The decade also included record high

homeownership and subsequently record high

foreclosures and delinquencies.


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-5%

0%

5%

10%

15%

20%

25%

1930 1940 1950 1960 1970 1980 1990 2000

S&P 500 Historical Average

0%

2%

4%

6%

8%

10%

12%

14%

1930 1940 1950 1960 1970 1980 1990 2000

Intermediate Bond Return Historical Average

-4%

-2%

0%

2%

4%

6%

8%

10%

1960 1970 1980 1990 2000

Reuters CRB Commodity Index Historical Average

-4%

-3%

-2%

-1%

0%

1%

2%

1970 1980 1990 2000

Trade Weighted Dollar Index Historical Average

Equity Market

The Decade of Winners and Losers

Data Source: FactSet, EcoWin, Bloomberg Finance LP. All returns are annualized unless otherwise stated.1 Historical averages include current decade. 2 4Q09 earnings estimate from FirstCall. 3 Ibottson Intermediate Government Bond Index and Barclays Aggregate Govt (5-10Y).

-0.9% 9.5%

Despite touching a record high for the sixth

consecutive decade, the S&P 500 experienced

its steepest drop since the Great Depression,

erasing all its gains and finished its worst

decade on record.

In addition, earnings grew (1.9%) at the slowest

pace on record.2

6.0% 5.5%

6.3% 2.7%

-2.7% -1.1%

Bond Market3

Commodities

Dollar

2000s Average1

Comments

Bond yields continued their downward descent

through the 2000 decade, falling for the third

consecutive decade.

Although they did not post the best decade on

record, they did post an above average return.

In addition, ten year Treasury yields reached a

record low and T-bills dipped negative for the

first time on record.

The global economy expanded in the 2000

decade led by robust growth in the emerging

markets. As a result of the increase in

incremental demand, many commodities

reached a record high during the decade.

While it was not the best decade on record, the

2000 decade saw above average performance

for commodities.

The dollar declined during the decade due to

rising fiscal and trade deficits, subpar economic

growth, a reduction in the growth of capital

flows, and falling interest rates.

However, the dollar continued to be a viewed as

a safe haven currency as it appreciated during

the times of crisis that included the bursting of

the tech and real estate bubbles.


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Honeymoon Rebound Masks Fundamental Weakness

Which Gray Block is Darker?

1

Data Source: Wikipedia Contrast Effect


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U.S. GDP Forecasts

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10


What Will Drive Growth? At Least in 2010

Data Source: Bloomberg Finance LP.

*Deutsche Bank Global Markets 2010 GDP forecasts

Although the economic recovery is expected to be fairly muted, byhistorical standards, growth is expected to grow by more than 3.0% in

each quarter through 2010.

U.S. GDP Expected to Rebound through 2010*

1

Government Spending

Infrastructure

spending peaks in 1H10

Weak Dollar: Net Exports

Competitiveness of U.S. goods has increased

Capital Investment

Capex spending over hiring people in a joblessrecovery

Stealth Stimulus

The wild card in an election year

Inventory Restocking

Inventories remain at historically low levels

The Baby V


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'86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

3%

4%

5%

6%

7%

8%

9%

10%

11%Correlation: -0.76

NFIB Small Business Hiring Plans, Percent - United States (Lef t)

Unemployment Rate, Percent - United States (Right)

Jobless Recovery Underway

Data Source: FactSet, EcoWin.

*Cartoonist Group, Gary Varvel Editorial Cartoon

Small business hiring makes up 65-70% of the total labor market.

Recent small business surveys show that there is little improvementin the outlook for hiring.

In addition, regional surveys show corporations favoring capital

expenditures over hiring of new employees.

Government Uncertainty Weighing on Hiring Plans*

1

Uncertainty surrounding changes to government policy and the future

outlook for the economy have led to hesitation among businesses toexpand their labor force.

This will likely result in a jobless recovery unfolding which we define

as the unemployment rate falling to 9% (from 10% currently) by the

end of 2010, but having difficulties falling further.


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-35

-30

-25

-20

-15

-10

-5

0

5

1932 1939 1946 1953 1960 1967 1974 1981 1988 1995 2002 2009

in%

terms

Deficit as % GDP (LHS)


Government Deficit to Weigh on Growth


*Cartoonist Group, Lisa Benson Editorial Cartoon

Government Becoming a Burden*

1

Government spending has worked to mitigate the negative effects of the Great Recession. However, the price tag has been expensive and thedeficit as a percentage of GDP has reached the highest levels seen since the 1940s.

In addition, based on the projections given in the 2010 U.S. Governments fiscal budget, the deficit as a percentage of GDP is expected to be

above the historical average (-3.1%) through at least 2012.

Real GDPAveraged

4.0%

Real GDPAveraged

4.4%

Real GDPAveraged

9.1%


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$0

$500

$1,000

$1,500

$2,000

$2,500

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

inbillions

Total Spending on Medicare, Medicaid and Social Security

Net Interest Costs


0

1

2

3

4

5

6

7

8

9

10

1930 1940 1950 1960 1970 1980 1990 2000 2010 2015 2020 2025 2030

#ofpeople

Ratio of 25-64 Year-Olds to 65 and Older

Spending on Aging Population

Data Source: U.S. Census Bureau,

*Future projections according to the Office of Management and Budget 2010 U.S. Government Budget (Table S-3).

When social security was developed (signed into law in 1935) there

were approximately 8.6 Americans working to support each retiree. However, given the aging demographics of our country, that number

has been cut in half to four people working for every one retiree.

By current census estimates, that number is expected to fall to 2.5 by

2030.

Aging Population Threatens Long-Term Growth

1

The spending on just the aging population has continued to climb,

and given current budget projections, spending on medicare/medicaidand social security alone will exceed $2.0 trillion by 2013, or 12% of

projected GDP.

est


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The Economic Recovery is Vulnerable

Data Source: *Cartoonist, Karl Wimer Editorial Cartoon

Given our outlook for rising interest rates in 2010, the housingrecovery may face challenges.

Mortgage rates have averaged 5.0% in 2009. However, without the

Fed supporting the mortgage rate by buying mortgage backed

securities and the overall rise in interest rates, mortgage rates may

creep higher.

Rising Interest Rates to Impact Housing Recovery*

1

Higher Interest Rates

The 10-Year Treasury Bond yield approaching

5% would be problematic

Weak Confidence

Languid confidence = hesitant spending

Rising Energy Prices

Gasoline above $3/gallon would be a burden

Protectionism

Trade wars could hamper the benefits of

globalization

Tight Credit

Stringent bank lending = limited growth


10/40


0

10

20

30

40

50

60

70

Dec-60 Dec-70 Dec-80 Dec-90 Dec-00 Dec-10

in%t

erms

Debt Held by the Public (Marketable Debt Only) as Percentage of Real GDP '02 '03 '04 '05 '06 '07 '08 '09-20%

0%

20%

40%

60%

80%

100%

120%

(% 1YR) Treasury Securities, Held by Public, Bills - U.S.(% 1YR)Treasury Securities, Held by Public, Notes - U.S.

The Crowd Pushes Interest Rates Higher

Treasury Extends Debt Maturity

In addition, the Treasury has stated that they plan to extend the

average maturity of their debt from 4.6 years to 6 or more years.

After using the bill market as a way to fund the debt problem in

2008-2009, the Treasury has begun the process of shifting their debt

maturities longer and on a year-over-year basis the amount of bills

outstanding is negative.


*Future projections for debt held by the publica are estimates from Congressional Budget Office.

The Treasury debt is expected to rise to a record high as a

percentage of GDP in 2010 at over 60% of GDP. As a result, the surge in issuance is likely to put upward pressure on

yields.

Swelling Debt Problem*

2

Est

TheDebtSwap


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-$50

-$40

-$30

-$20-$10

$0

$10

$20

$30

$40

$50

$60


$billions

0%

2%

4%

6%

8%

10%

12%

14%

Net New Cash Flow into Bond Mutual Funds (LHS )

10-Year U.S. Treasury Yield (RHS)


'70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08

0%

5%

10%

15%

20%

Yield On U.S. Treasury Bonds, 10-Year - United States(% 1YR) CPI All items - United StatesRecession Periods - United States

Fund Flows to Reverse as Risk Appetite Increases*

The amount of new money placed into bond funds has been robust

this year while there has been net outflows of equity funds. As risk appetite increases and economic fundamentals continue to

improve it is likely that investors will move funds out of bond funds in

search for higher yielding assets with better return potential.

Data Source: FactSet, EcoWin, Investment Company Institute.

*Year-to-date through December 22, 2009 and 10-year U.S. Treasury yield as of December 31, 2009.

Yields have been on a steady decline since the early 1980s as

inflation has steadily declined. Over the past year, yields have been pushed to historically low levels

as a result of the first period of deflation since the 1950s.

However, as inflationary pressures increase, yields at current levels

are unlikely sustainable.

Return of Inflation Threatens Low Yields

2


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0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

U.S. Treasury 2-

Year

Barclays U.S.

Agg Credit (1-5Y)

Barclays U.S.

Agg High Yield

Barclays U.S.

Agg Credit (7-

10Y)

U.S. Treasury 10-

year

in%terms

Duration Coupon



-200

0

200

400

600

800

1,000

1,200

Barclays U.S. MBS Barclays Govt-

Agency

Barclays Credit Barclays High Yield

inbps

Spread Level at end of 2008 versus Historical Average

Current Spread Level Minus Historical Average*

Favor Products with Positive Carry**

Most of the easy money has already been made and corporate

bonds are unlikely to produce similar record returns as seen in

2009.

As a result, investors will need to look opportunistically for credit at

both the sector and individual bond levels.


*As of December 31, 2009

**Returns are for illustrative purposes only.

Given our expectation for an overall rise in interest rates in 2010,

investors should focus on products that have a lower duration which

may help mitigate the interest rate risk.

Corporate bonds tend to offer a better coupon return to cushion the

losses of principal in a rising rate environment and should benefit

from an improving economy.

Easy Money Has Been Made from Credit Market

2

Once in ageneration

opportunities haveevaporated

-5.00%-1.00% 2.50% 4.10% -0.40%

Total Return Assuming a 1% Increase in Interest Rates


13/40


14/40


Taxing the U.S. Consumer

02

4

6

8

10

12

14

16

18

Cigarettes/Tobacco

TaxIncrease

OtherTaxes*

SalesTaxIncrease

PersonalIncome

TaxIncrease

CorporateTax

Increase

AlcoholTax

Increase

MotorFuelsTax

Increase

# of States

Consumer Taxes Rising*

In order to combat the swelling budget deficits at the state level,

states have resorted to taxing items such as cigarettes, alcohol and

motor fuel.

In addition, 12 states have enacted sales tax and personal income

tax increases.

By the extra taxation, the 50 states are expected to raise $24 billion

in fiscal year 2010. It would be the largest amount of revenue raised

on record (records began 1979).


*The Fiscal Survey of States, December 2009, National Association of State Budget Officers.

Some municipals offer investors an attractive yield in relation to

Treasuries and may benefit from increased retail demand as

investors position portfolios in anticipation of higher taxes.

In addition, in 2010 issuers may opt to issue debt as a part of the

Build America Bond program instead of the traditional tax free debt

because it offers an advantage to the issuer.

This may create a supply/demand imbalance that benefits municipals.

Municipals Attractive Relative to Treasuries

3

50

100

150

200

Dec-87 Sep-90 Jun-93 Mar-96 Dec-98 Sep-01 Jun-04 Mar-07 Dec-09

in%terms

Barclays Municipal 10-Year (GO) as % of 10-Year U.S. Treasury

Historical Average Municipal as % of Treasury Ratio

Municipal as a % of Treasury ratios remain

above average.


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Consumer Pain Grows

Taxing the U.S. Consumer

'60 '63 '66 '69 '72 '75 '78 '81 '84 '87 '90 '93 '96 '99 '02 '05 '080

10,000

20,000

30,000

40,000

50,000

60,000

70,000

-5%

0%

5%

10%

15%

Households & Nonprofit Organizations Net worth (Left)(% 1YR) Personal Income (Wages and Salary Disbursements) (Right)

Market Overly Optimistic on Consumer

Valuations for consumer staples are more attractive than consumer

discretionary. While earnings growth is expected to be higher indiscretionary stocks, the current estimates may be unrealistic given

the projected consumer weakness.

In addition, given our expectation for the dollar to remain at relatively

low levels we favor sectors with a large exposure to foreign sales

(staples over discretionary).

Data Source: FactSet, EcoWin, IBES Aggregates

3

%f

romi

ts15-

yearaverage

Absolutelevel

Consumers have already felt the pain through wages that have fallen

at a record pace. In addition, net worth remains $12 trillion below itsrecord high.

Consumer discretionary stocks have significantly outperformed the

staples sector in 2009 (41.3% versus 14.9%) as economic

fundamentals have improved. However, given the ongoing challenges

that the consumer will face in 2010, the recent rally is unlikely

sustainable. Therefore, we favor consumer staple stocks over

consumer discretionary stocks.

Valuation Mea suresConsumer

Discretionary

Consumer

Staples

Price to Earnings -11.6% -22.9%

Price to Book Value -8.9% -55.6%

Price to Cash Flow 115.5% -14.1%

Dividend Yield 1.3% 2.9%

Operating Margin 4.4% 9.9%

Earnings Growth (NTM) 29.3% 8.5%

Foreign Sales as % of Total

Sales28.0% 44.0%

in$billions


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0

750

1,500

2,250

3,000

3,750


Data Source: Bloomberg Finance LP, Deutsche Bank U.S. PWM Investment Strategy Group

S&P 500 path using historical average rallyfrom each decade high = 136%

1675

1940s-25.7%

1950s215%

1960s79%

1970s11%

1980s199%

1990s308%

2000s7%

The S&P 500 has hit a record high inevery decade beginning in the1950s.

On average, each decade rally to its

next record high (in the proceeding

decade) has been 136%.

However, the rally in the 2000s to the

most recent record high reached in

October 2007 was only 7% (the lowest

subsequent record high) from the

record high hit in the 1990s.

S&P 500 path assumingS&P 500 rallies 7% in the2010 decade, similarly tothe 2000 decade = 7%

3700

Global EquitiesThe Hard Work Begins4


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-100%

-50%

0%

50%

100%

150%

200%

1/25/29 3/9/39 4/20/49 6/2/59 7/14/69 8/26/79 10/7/89 11/19/99 12/31/09

Rolling 1-Year Price Return of S&P 500

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

P/E Contraction/Expansion

Global EquitiesThe Hard Work Begins

P/E Contraction Ahead?

The P/E expansion seen during 2009 has matched the historical P/E

expansion in the year the recession ends (+26%). Historically, going back to 1960, on average, P/Es expand 27% in

the year before the recession ends.

However, going back to 1960, on average, P/Es contract by 11.6%

in the year after the recession ends.

Data Source: FactSet, EcoWin

The S&P 500 has seen a significant rebound after the record decline

it experienced in the beginning of 2009. In fact, the rebound has been the most substantial since 1998. Going

back to 1929 there have only been five rebounds of greater

magnitude than the 2009 rebound.

Historical Rebound Absorbed

4

Largest 1-year rally since 1998


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-5%

0%

5%

10%

15%

20%

25%

-12 -9 -6 -3 -1 +1 +3 +6 +9 +12

# Months

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

S&P 500 Performance (LHS) % of Time Positive (RHS)

0%

2%

4%

6%

8%

10%

12%

14%

16%

3 months 6 months 12 months

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Average S&P Performance (LHS) % of Time Positive (RHS)



S&P 500 Performance Surrounding Rate Hikes**

Historically, the S&P 500 experiences robust returns in the year

leading up to the Fed raising rates, while after they raise ratesreturns moderate.

Given our expectation that the Fed will remain on hold until 2H10 at

the earliest, the current environment is favorable for equities.

In the 3, 6, and 12 months after the unemployment rate peaks, equity

returns are typically favorable.*

Unemployment Peaking?*

4


*Observations include returns surrounding the 1969-1970, 1973-1975, 1981-1982, 1990, 2001 recessions. **Time period surrounds the rate hikes after the recessionof 1973-1975, 1980, 1981-1982, 1990-1991, 2001.


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0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

S&P 500 Performance One Year Before

Earnings Growth is M ore Than 20%

S&P 500 Performance in Year that Earnings

Growth is More than 20%

82%

84%

86%

88%

90%

92%

94%

96%

98%

100%

hhhuu Percentage of Time Positive (RHS)

0%

5%

10%

15%

20%

25%

1-Year 2-Year 3-Year 4-Year 4-Year Average

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Average Earnings Growth in Year After Earnings Bottom in Recession (LHS)

% of Time Positive (RHS)



S&P 500 Returns Surrounding 20% Earnings Growth

Historically, the average return during the year 20% earnings growth

is achieved (13 times since 1936), is less robust than the year prior(16.8% versus 10%).

Historically, earnings tend to recover at an above-average pace as

the economy rebounds from a recession. Our earnings estimate for 2010 is $76 which would represent a 25%

earnings growth from 2009.

Earnings Stabilizing and Rebounding?*

4


*Time period reflects 1938-2001.


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U.S. Investment Strategy Page 20

(002555.01/04/10)

'01 '02 '03 '04 '05 '06 '07 '08 '090.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

Relative Attractiveness of MSCI Asia Ex Japan P/E (NTM) versus S&P 500 P/E (NTM)Trendline: Linear with 1st standard deviation, trend based

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '090.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

Relative Attractiveness of MSCI Europe ex UK P/E (NTM) versus S&P 500 P/E (NTM)Trendline: Linear w ith 1st standard deviation, trend based

Asian Multiples to Expand with Economic Maturation

Data Source: Bloomberg Finance LP, FactSet, EcoWin.

Europe Becoming More Expensive Versus U.S.

4

Europe expensive versus U.S.

Europe attractive versus U.S.

When looking at the forward P/E for the MSCI Europe ex UK relative to

the S&P 500 on a trend basis, Europe has become increasinglyexpensive.


As Asian economies mature and become more stable, multiples will

likely expand and the gap between Asian and developed marketmultiples is likely to shrink.

Asia has upside potential as they may receive the benefit of a re-

rating (i.e. P/E expansion).

Asia expensive versus U.S.

Asia attractive versus U.S.


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100

110

120

130

140

150

160

170

180

0 11 22 33 44 55 66 77 88 99 110 121 132 143 154 165 176 187 198 209 220 231 242 253

# of days

1949 1957 1970 1974 1982 1990 2002 2009

The Most Powerful Post World War II Equity Rally*

Phase I:Reflex RallyStabilization of BankingSystem

Armageddon ScenarioDissipates

Phase 2:P/E ExpansionAnticipation ofEarnings Recovery

Cost Cutting BoostsProfits

Phase 3:Confirmation of Economic andEarnings Recovery

Sustainable Growth ProspectsTop Line Revenue Growth

5 Proliferation of Pullbacks

Source: FactSet.

*As of December 31, 2009


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-30%

-25%

-20%

-15%

-10%

-5%

0%

1946 1954 1958 1961 1971 1975 1980 1983 1994 2004

Largest Pullback in 12 Months Surrounding First Fed Rate Hike

Average: -11.0%

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

1930 1938 1946 1954 1962 1970 1978 1986 1994 2002

Largest Pullback in12 Months Surrounding Mid-Term Elections

Average: -17.6%

Proliferation of Pullbacks

Mid-Term Elections Could Lead to Pullbacks

In addition, uncertainty surrounding the mid-term elections has alsobeen a catalyst for declining equity prices.

In the 12 months surrounding the mid-term elections, which will take

place in November, the S&P 500 has incurred a temporary decline,

on average, of 17.6%.

Data Source: FactSet, EcoWin, Bloomberg Financial L.P.

*Fed Funds Target Rate 12/1970 Present, Effective Fed Funds Rate 7/1954 12/1970, Discount Rate 1934-7/1954

Fed Rate Hikes or*

The expectation and realization of a Fed rate hike has historically led toa pullback in equity markets.

On average, the S&P 500 experiences an 11% decline in the 12 months

surrounding (six months before and six months after) the first interest

rate increase.

5


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(002555.01/04/10)

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

1973 1978 1980 1984 1994 2006

Largest Pullback in 12 Months Surrounding 200bp Rise in 10 Year Treasury Yield

Average: -13.2%


Rising Bond Yield Ramifications?

Data Source: FactSet, EcoWin

Rising Bond Yields Could Interrupt Equity Rally

Our expectation for 10-year Treasury yields to rise to 4.50% in 2010would place yields 244 bps above their low made in December 2008.

Historically, a rise in yields in a similar magnitude has coincided with

declines in equity prices. On average, in the 12 months surrounding a

200 bps rise in bond yields, equity prices have experienced a temporary

pullback of 13.2%.

5

Despite the decline in household and business debt, the U.S.economy continues to be largely dependent on debt.

This could pose challenges to consumers, business and the

government as rates rise throughout 2010.

On average, the S&P 500 has suffered a 34% pullback during these

time periods. These include the crash of 1987 (-32%), the midcycle

slowdown (-8%), the tech collapge (-37%) and the Great Recession

(-57%).

0%

50%

100%

150%

200%

250%

300%

3Q54 3Q59 3Q64 3Q69 3Q74 3Q79 3Q84 3Q89 3Q94 3Q99 3Q04 3Q09

0

2

4

6

8

10

12

14

16

in%t

erms

Total Debt (Public, Household and Business) as % of Real GDP (LHS)*

10-Year U.S. Treasury Yield (RHS)

GreatRecession

TechCollapse

Crashof 1987

Mid cycle

slowdown


24/40


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'00 '01 '02 '03 '04 '05 '06 '07 '08 '09-20

0

20

40

60

80

100

0

10

20

30

40

50

60

70

CBOE Volatil ity Index (VIX), Percent (Right)CSFB/Tremont HF Long/Short Equity (Index) - S&P 500 (Index) (Left)

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

W hen VIX Rises for the Year W hen VIX Falls for the Year

HFRI Fund of Funds Index Performance Relative to S &P 500

HFRI Equity Market Neutral Index Performance Relative to S& P 500


Increased Volatility Benefits Hedge Funds*

Two strategies which have tended to benefit from increased volatilityhave been fund of funds and equity market neutral. Since 1991

these two strategies have outperformed the equity market in years

when the VIX rises while they have, on average, underperformed in

years when the VIX falls.


*Time period reflects December 31, 1990 to November 30, 2009.

Hedge Fund Strategy Flexibility Should Benefit

Historically hedge funds have benefited from increased volatility as theyprovide investors with upside exposure while protecting against

downside risks.

5


25/40


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-4%

-2%

0%

2%

4%

6%

8%

10%

12%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Average Large Cap Equity M utual Fund Outperformance vs. S &P 500 (LHS)*

% Outperforming (RHS)

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

Lehman

Aggregate

Benchmark

Russell 2000

Benchmark

S&P 500

Benchmark

MSCI EAFE

Benchmark

MSCI EM

Benchmark

2009 Mutual Fund Outperformance vs. Benchmark

Average Mutual Fund Outperformance vs. Benchmark

Alpha Mojo to Continue; Albeit at a Slower Pace

Large Cap Mutual Funds Best Performance Since 2000

In addition to the strong outperformance from fixed income and

small-cap equity mutual funds, large-cap equity mutual funds postedtheir best performance since 2000. Further, 67% of the largest 100

funds outperformed the S&P 500, the largest ratio since 2005.

While we expect active money managers to continue to outperform,

the magnitude of outperformance will be to a lesser extent.


*As of December 31, 2009.

2009 Portfolio Manager Performance Was Strong*

Fixed income mutual fund managers posted their best outperformance

relative to the Lehman Aggregate Index benchmark (more than 1,000bps) since at least 2000. Small cap mutual fund managers also

benefited from the broad-based risky asset rally, posting their best

relative performance since 2001.

6

SignificantAlpha


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-5%

15%

35%

55%

75%

95%

115%

135%

Barclays

Credit

(AAA)

Barclays

Credit (AA)

Barclays

Credit (A)

Barclays

Credit

(BAA)

Barclays

High Yield

(B)

Barclays

High Yield

(BA)

Barclays

High Yield

(CAA)

Barclays

High Yield

(CA to D)

20 09 Tota l R etur n B arc la ys U.S. Aggr egate Cr edit

15.5%

38%

72.7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0-0.75 0.76-1.25 1.26-2.0

2009 Price Return S&P 500


...and Low Quality Bonds


The Rally Benefited High Beta Equities...

As the Armageddon scenario was priced out of the market, high beta

and low quality stocks led the nearly uninterrupted rally. However, in2010 investors will need to be more selective at both the stock and

sector level as returns of this magnitude are unlikely.

6

This phenomenon was also seen in the fixed income market with the

lowest quality corporate bonds significantly outperforming the highestrated bonds.


27/40


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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Telecom

Utilities

Consumer Staples

Healthcare

Industrials

Info Tech

Consumer Discretionary

Energy

Materials

Financials

2010 Consensus Earnings Growth Estimates*


0

10

20

30

40

50

60

InfoTech

Energy

Materials

Consumer

Staples

Healthcare

Industrials

Consumer

Discretionary

Financials

Utilities

Telecom

in%t

erms

Foreign Sales as a % of Total Sales

2010 Earnings Growth By Sector

Earnings growth versus expectations will be a critical driver of

equities in 2010.

Global cyclical sectors such as energy and technology should

deliver above average earnings growth.


*Earnings estimates as of December 2009.

Foreign Sales Paramount to Revenue Growth

Currently, U.S. corporations get approximately 40% of their profits from

overseas.

Given our outlook for a relatively weak dollar, investors should focus on

sectors with high exposure to foreign sales.

6

ISG 2010 Earnings Growth Estimate

More optimistic

earnings

expectation thanconsensus


28/40


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Yearning for Yield

A Return of Dividends?

After dividends were cut at a record pace in 2008 and 2009, it is

likely companies will begin to increase dividends in 2010 aseconomic conditions improve.

We estimate that dividends paid by the constituents of the S&P 500

will increase by at least 2% in 2010.

The Importance of Dividends*

7


*Cartoonstock.com, John Morris.

**As of December 2009.

'62 '65 '68 '71 '74 '77 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07-30%

-20%

-10%

0%

10%

20%

30%

(% 1YR) S&P 500 - Dividends Per Share

Dividends have become an increasingly important part of equity

returns. In fact, since January 1928 the total return of the S&P 500 has

nearly doubled (+9.5%) the price return of the S&P 500 (+5.2%).**


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0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

0.65

0.70

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

Dividend Payou t Rat io H is tori cal Ave rage

Yearning for Yield

'47 '50 '53 '56 '59 '62 '65 '68 '71 '74 '77 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Corporate Net Cash Flow (annual rate, bill ion. chain 2000 $)

Cash Flow Supportive of Dividend Hikes

However, with corporate cash near record highs and economic

fundamentals improving, companies may be more inclined to raisedividends in 2010.

After being cut at a rapid pace the dividend payout ratio remains near

record lows.

Dividend Payout Ratio to Expand?

7



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-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

10/28/99 7/6/01 3/15/03 11/21/04 7/31/06 4/8/08 12/16/09

in%t

erms

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

in%t

erms

Difference between Bond and Dividend Yield (RHS)

Barclays U.S. Credit (1-5YR) After Tax Yield (LHS)

S&P 100 After Tax Yield Dividend Yield (LHS)

0

5

10

15

20

25

Consumer

Staples

Industrials

Utilities

Financials

Consumer

Discretionary

Energy

Energy

Materials

Healthcare

Telecom

InfoTech

#ofcompanies

Number of Companies with Dividend Yield in Excess of Intermediate Corporate Bond Yield

Yearning for Yield

Dividend Yielding Sectors

Currently, there are 101 companies within the S&P 500 that have

dividend yields in excess of their intermediate corporate bond yields.Consumer staples, industrials and utilities have the most amount of

companies that meet this criteria.*

For yield seeking investors, equities have become an increasingly

attractive alternative versus corporate bonds.

Dividends Attractive Versus Bond Yields (After Taxes)

7


*As of December 31, 2009.


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Follow the Money

-$30,000

-$25,000

-$20,000

-$15,000-$10,000

-$5,000

$0

$5,000

$10,000

$15,000

$20,000

$25,000

Jan-

09

Feb-

09

Mar-

09

Apr-

09

May-

09

Jun-

09

Jul-

09

Aug-

09

Sep-

09

Oct-

09

Nov-

09

Dec-

09

in$millions

Total Equity Flows (Domestic and International)*

Flows Follow Performance

Bonds have largely benefited from a strong inflow of money but

returns have turned negative for Treasury bonds.

As conditions improve it is likely that investors will follow the positive

performance and increase equity exposure.

Domestic equity flows have been largely negative in 2009. However,

in 2010 as economic fundamentals improve and risk appetiteincreases we expect to see this reverse and investors shy away from

the safety of bonds in favor of higher yielding assets (e.g. equities).

Fund Flows to Return to Equities in 2010?

8

Data Source: FactSet, EcoWin, Investment Company Institute.

*December fund flows as of December 22, 2009.

1/07 4/07 7/07 10/07 1/08 4/08 7/08 10/08 1/09 4/09 7/09 10/09 1/10-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Barclays Capital U.S. Aggregate Govt - Treasury - Trail ing 1-Year Return(% 1YR) S&P 500 - Trailing 1-Year Return

Positive Equity Performance!


32/40


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Total Debt as Percent of Equity

0

50100

150

200

250

300

350

400

InfoTech

Energy

HealthCare

Consumer

Staples

Materials

Consumer

Discretionary

Telecom

Utilities

S&P500

Industrials

Financials

in%t

erms

-75%

25%

125%

225%

325%

425%

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Yearly Change in M&A Activity

Follow the Money

M&A Activity Expected to Increase in 2010*

M&A activity should pick up in 2010 as cash rich companies take

advantage of attractive opportunities.

We would favor sectors that have healthier balance sheets and are

cash rich (e.g. tech, energy and healthcare) over those sectors that

are more highly leveraged.

Favor Cash Rich Sectors

8


*As of December 31, 2009. Mergerstat. U.S. companies only. Deals that are pending or completed for all acquisition types.

Healthier Balance Sheets


33/40


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0 50 100 150 200 250

Mexico

Germany

Netherlands

Australia

Brazil

China

Sweden

United States

Japan

Portugal

Italy

Abu Dhabi

Spain

Greece

Venezuela

Change (in bps) of Current CDS versus 52-Week Low

Follow the Money

'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09-50

0

50

100

150

200

250

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

Merrill Mortgages - Master - Option Adjusted Spread (OAS) (Lef t)Federal Reserve Banks Asse ts, Mortgage-bac ked Securities (Mil $) - U.S. (Right)

Are Credit Default Spreads Signaling Risks?*Fed Purchase Programs Expiring?

8

Data Source: FactSet, EcoWin, Bloomberg Finance LP.

*As of January 4, 2010.

**When a CDS rate is rising, it is an indicator of worsening credit quality. When it is falling it is an indicator of better credit quality.

While the economic recovery is expected to continue into 2010,

some sectors of the economy have further problems to face. TheFederal Reserves purchases of mortgage-backed securities (MBS)

have effectively narrowed, however, as those purchases are phased

out, we believe MBS will underperform other sectors of the credit

market.

Credit default swaps are a good indicator of the credit quality of a

specific country.**

Since their 52-week low, countries that have been reliant on

leverage have seen the largest widening in their credit default swap

rates.


34/40


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-80

-70

-60

-50

-40

-30

-20

-10

0

Oct-92

Oct-93

Oct-94

Oct-95

Oct-96

Oct-97

Oct-98

Oct-99

Oct-00

Oct-01

Oct-02

Oct-03

Oct-04

Oct-05

Oct-06

Oct-07

Oct-08

Oct-09

$billions

0

20

40

60

80

100

120

140

U.S. Trade Deficit /Surplus (LHS) Trade Weighted Dollar Index (RHS)

Diverging Dollar

Can the Trade Deficit Help Stabilize the Dollar?

Generally, a wide trade deficit negatively impacts a countrys

currency. However, if the deficit is wide due to higher exports than

imports this could help boost domestic growth which may boost the

value of a currency.

Given the relative weakness of the dollar, U.S. goods are attractive

overseas and exports are expected to rise through 2010.

We expect the dollar will face challenges in 1H10 as wide interest

rate differentials, a burgeoning budget deficit and increased risk

appetite weigh on the dollar.

Dollar to be Challenged in 1H10*

9


*Cartoonstock.com, Ed Fischer.


35/40


(002555.01/04/10)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

China India Brazil Russia United

States

Euro Area Japan

China India Braz il Rus sia Unit ed S tat es E uro Area Japan2010 Year-End Projected Interest Rate Moves

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Japan ECB U.S. BOE China Canada Brazil India

Diverging Dollar

Interest Rates to Be Highest in Emerging Markets

In addition, interest rate differentials are expected to remain wide

between the U.S. and the emerging market economies as strong

economic growth and inflation fears result in those central banks

removing liquidity at a faster and more dramatic pace.

The dollar is likely to lead the developed market economies in growth

next year which should help the dollar stabilize (versus euro) and

even strengthen (versus yen). However, growth is l ikely to lag the

emerging market economies and as a result the dollar should

continue to weaken against these countries.

Growth Favors Dollar over Other Developed Currencies

9

Data Source: FactSet, EcoWin, Deutsche Bank Global Markets estimates.

Better Growth ProspectsDrive Capital Flows

Better Short Term Investment Rates


36/40


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0

10

20

30

40

50

60

70

80

90

100

Capacity Utilization -

Primary Metals

Capacity Utilization - Food,

Beverage and Tobacco

Capacity Utilization -

Petroleum and Coal

Products

Current Average

400

500

600

700

800

900

1000

1100

1200

1300

1Q95

4Q95

3Q96

2Q97

1Q98

4Q98

3Q99

2Q00

1Q01

4Q01

3Q02

2Q03

1Q04

4Q04

3Q05

2Q06

1Q07

4Q07

3Q08

2Q09

60

65

70

75

80

85

90

World Gold Demand (tonnes) (LHS) World Oil Demand (mb/d) (RHS)

Will Gold turn Black?

Resource Slack Not Equal Across Sectors

Resource slack in the U.S. primary metals market is currently 20%

below its historical average compared with about 4% in theagricultural sector and 3% in the energy sector. As a result, we

believe changes in demand for energy and agricultural commodities

will have a more substantial positive effect on prices for metals.

Data Source: FactSet, EcoWin, World Gold Council, U.S. Department of Energy

We believe oil will outperform gold in 2010 given the strength of oil

demand (-1.0% YoY) relative to gold demand (-33.6% YoY). Further,

since gold demand bottomed in 2Q09 gold prices have risen 21%

while oil is basically unchanged. The relative health of the oil market

compared to gold should begin to be reflected in their respective

prices in 2010.

Gold Market Fundamentals Weak

10

+9%

-1%


37/40


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7

9

11

13

15

17

19

21

23

1995 1998 2001 2004 2007 2010 2013

U.S. Europe (including UK) Asia ex Japan

Forecast

0%

1%

2%

3%

4%

5%

Asia ex-Japan U.S. Europe (including U.K.)

0%

5%

10%

15%

20%

25%

1995-2009 Oil Demand Compound Annual Growth Rate (LHS)

% of W orld Demand (RHS)


Emerging Markets to Lead Demand Growth

In line with our expectation that emerging market demand will lead

the demand recovery, non-OECD Asia oil consumption now rankssecond behind the U.S. and, at current growth rates, will overtake

the U.S. as the largest consumer of oil in the world by 2012.

Data Source: U.S. Department of Energy

Emerging markets have driven oil demand growth since at least

1995. The developed countries still account for the majority of global

demand, however, we expect marginal demand from emerging

markets will drive oil prices higher.

Oil Demand Growth

10


38/40

0

20

40

60

80

100

120

1/1/97 1/1/99 1/1/01 1/1/03 1/1/05 1/1/07 1/1/09

NASDAQ (Index) DJ REIT Index (Index) Oil (Index) Gold (Index)


(002555.01/04/10)


Data Source: Bloomberg Financial L.P.

Gold Approached Bubble Levels in Late 2009

10

TechnologyBubble Real Estate

Bubble

OilBubble

GoldBubble?

Oil aBetterValue?


39/40


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One Step at a TimePatience and Discipline

Ten Themes for 200995% Accuracy

U.S. Economy Gets Worse Before it Gets Better; Stabilization in 2H09

Temporary Deflation Scare

1

2

3

Back in BlackU.S. Equities Rally

Treasury Turbulence Ahead

Corporate Bond Revival

4

5

6

U.S. Equities to Outperform International Equities7

Hedge Funds Stumble, but Regain Their Stride

Back to BasicsDividends, Valuations and Selectivity Matter

Commodities to Find a Bottom

8

9

10

This is an excerpt from the Top Ten Themes 2010 dated December 2009.

Correct Incorrect Partially Correct


40/40

Investments in Foreign Countries - Such investments may be in countries that prove to be politically or economically unstable. Furthermore, in the case of investments in foreignsecurities or other assets, any fluctuations in currency exchange rates will affect the value of the investments and any restrictions imposed to prevent capital flight may make it difficult orimpossible to exchange or repatriate foreign currency.

Foreign Exchange/Currency - Such transactions involve multiple risks, including currency risk and settlement risk. Economic or financial instability, lack of timely or reliable financialinformation or unfavorable political or legal developments may substantially and permanently alter the conditions, terms, marketability or price of a foreign currency. Profits and losses intransactions in foreign exchange will also be affected by fluctuations in currency where there is a need to convert the product's denomination(s) to another currency. Time zonedifferences may cause several hours to elapse between a payment being made in one currency and an offsetting payment in another currency. Relevant movements in currencies duringthe settlement period may seriously erode potential profits or significantly increase any losses.

High Yield Fixed Income Securities - Investing in high yield bonds, which tend to be more volatile than investment grade fixed income securities, is speculative. These bonds are affectedby interest rate changes and the creditworthiness of the issuers, and investing in high yield bonds poses additional credit risk, as well as greater risk of default.

Hedge Funds - An investment in hedge funds is speculative and involves a high degree of risk, and is suitable only for "Qualified Purchasers" as defined by the US Investment CompanyAct of 1940 and "Accredited Investors" as defined in Regulation D of the 1933 Securities Act. No assurance can be given that a hedge fund's investment objective will be achieved, orthat investors will receive a return of all or part of their investment.

Commodities - The risk of loss in trading commodities can be substantial. The price of commodities (e.g., raw industrial materials such as gold, copper and aluminum) may be subject tosubstantial fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. Additionally, valuations of commodities may besusceptible to such adverse global economic, political or regulatory developments. Prospective investors must independently assess the appropriateness of an investment incommodities in light of their own financial condition and objectives. Not all affiliates or subsidiaries of Deutsche Bank Group offer commodities or commodities-related products andservices.

This document has been prepared for informational purposes only and is not an offer, or solicitation of an offer, to buy or sell any security, or a recommendation to enter into anytransaction relating to the products and services described herein. Before entering into any transaction, you should take steps to ensure that you understand and have made anindependent assessment of the appropriaten ess of the transaction in light of your own particular financial, legal and tax situation, investment objectives and level of risk tolerance, andyou should consult your legal and tax advisers to determine how these products and/or services may affect you.

This document contains forward-looking statements- that is, statements related to future, not past, events. In this context, forward-looking statements often address expected futurebusiness and financial performance, and often contain words such as expect, anticipate, intend, plan, believe, seek, or will. Forward-looking statements by their nature addressmatters that are, to different degrees, uncertain. Particular uncertainties that could adversely or positively affect future results include: the behavior of financial markets, includingfluctuations in interest and exchange rates, commodity and equity prices and the value of financial assets; continued volatility and further deterioration of the capital markets; thecommercial and consumer credit environment; the impact of regulation and regulatory, investigative and legal actions; strategic actions, including acquisitions and dispositions; futureintegration of acquired businesses; future financial performance of major industries; and numerous other matters of national, regional and global scale, including those of a political,economic, business and competitive nature. These uncertainties may cause actual future results to be materially different than those expressed in our forward-looking statements.

Although this document has been carefully prepared and is based on information from sources believed to be reliable, no representation is made that it is accurate and complete. Wehave no obligation to update or amend the information provided herein, and information is subject to change without notice.

Unless you are notified to the contrary, the products and services mentioned are not guaranteed by the FDIC (or by any governmental entity) and are not guaranteed by or obligations ofDeutsche Bank. These products are subject to investment risk, including possible loss of principal. The past performance of a product or service does not guarantee or predict its futureperformance.

Disclosures

Investment Strategy GroupLarry Adam, CFA, CIMAChief Investment StrategistTelephone (410) 895-4135

Facsimile (410) [email protected]

Megan HornemanInvestment StrategistTelephone (410) 895-4148


Ben SonleyInvestment Strategy AnalystTelephone (410) 895-4282


Jared McDaniel, CFAInvestment StrategistTelephone (212) 454-6814


Deutsche Bank means Deutsche Bank AG and its affiliated companies. Deutsche Bank Alex. Brown is the private client business of Deutsche Bank Securities Inc., asubsidiary of Deutsche Bank AG, which conducts investment banking and securities activities in the United States. Deutsche Bank Securities Inc., is a member of FINRA,NYSE and SIPC. Deutsche Bank AG. All rights reserved.
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2010 global outlook ten themes+-+db

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