The House View – September Struggle : Deutsche Bank’s Global Strategy Group

The global economy is gaining momentum. The Eurozone has emerged from its longest recession on record,
China’s slowdown appears to have stabilised, while US data continues to support our view of a strengthening
recovery. With the major regions exhibiting signs of stability, the risks of an economic dislocation has fallen
However, the recovery brings its own concerns. Global rates have spiked following Bernanke's May 21 speech
to Congress, which opened the door to a reduction, or ‘tapering’, of the Fed’s Quantitative Easing bond
purchases. Central banks are increasingly turning to ‘forward guidance’ as a tool to keep rates low to prevent
headwinds to the recovery. Nevertheless, volatility in some markets has picked-up amid fears of a liquidity
withdrawal. Emerging Markets, a key beneficiary of the abundant liquidity environment, have seen the most
dramatic moves as capital has exited the region amid general risk aversion and as investors chase higher
rates in developed markets. The weakness has been broad-based, although countries with current account
deficits have been hit disproportionately, especially the BIITS (Brazil, India, Indonesia, South Africa and
Turkey). However, so far the sell-off is consistent with a slowdown, not a collapse.
September, which is historically the worst month for stocks, has a minefield of possible event risks for the
market. In addition to a decision on Fed tapering, this month also sees the commencement of US budget
negotiations ahead of the impending debt ceiling and possibly the nomination of the next Fed Chair. We also
have federal elections in Germany. In the Middle East, tensions could escalate given the potential for imminent
military action in Syria. All of these risks are likely to keep volatility elevated in the near-term.
Ultimately, we do not see a systemic threat emerging from these events and expect any ‘September struggle’
to be short-lived. Over the long term, we remain positive on equities and retain our bias towards developed
markets, and expect earnings expectations will rise along with the economic recovery
David Folkerts-Landau, Group Chief Economist

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Expect global growth to pick-up led by the US and supported by
recoveries in Europe and China
 Expect Fed to begin tapering QE purchases from Sep
and end QE by mid-2014, subject to continued strong
data. Expect no asset sales or rate hikes until 2015
 ECB on hold with easing bias. Unprecedented ‘rates
low for long’ guidance; more dovish than expected
 BoJ delivering on its promise of aggressive easing
 BoE on hold with easing bias, ‘forward guidance’ also
adopted as a policy tool
 PBoC on hold; additional financial reforms possible
 EM mostly on hold with some countries tightening to
defend currency amid capital outflows
 Monetary policy shock: disorderly end of policy easing
stokes higher rates and volatility that undermines
growth
 Geopolitical tensions escalate: push up oil prices or
slow economic activity, e.g., escalation of Syria conflict
 Crisis returns to Europe: political breakdown raises
tensions e.g., snap election in Italy
 China / EM growth slowdown: lack of structural reform
limits growth potential
 Global growth of 2.8% in 2013, 3.8% in 2014
 US growth of 1.6% in 2013 and 3.2% in 2014.
Recovery remains intact, with 3%+ growth in H2 and
2014 on housing, and labour market strength, and
slower pace of fiscal tightening
 Eurozone growth revised up to -0.4% in 2013 (from -
0.6%) and 1.0% in 2014, Germany up to 0.5% from
0.1% on strong H1 2013
 EM growth of 4.7% in 2013 and 5.6% in 2014. Capital
outflows, lack of structural reforms and limited policy
flexibility to keep a lid on growth
 Normalisation of monetary policy: Fed to begin tapering
on Sep 18; yields to rise, but only gradually
 Syria: limited but punitive strikes against military /
government targets likely
 Euro crisis: expect election will deliver a Merkel-led
coalition in Germany. Key risk is a snap election in Italy.
Progress on crisis resolution to remain slow
 China reforms: reforms from Communist Party
Congress meeting in November will be crucial for future
growth and ongoing rebalancing efforts

Downside risks
— Monetary policy shock: disorderly end of policy easing
stokes higher rates and volatility that undermines growth
e.g., rate rise slows growth, EM sell-off intensifies
— Geopolitical tensions escalate and push up oil prices or
slow economic activity, e.g., escalation of Syria conflict
— Crisis returns to Europe: return to recession; political
breakdown raises tensions e.g., snap election in Italy
— China / EM growth slowdown: lack of structural reform
limits growth potential; financial crisis in China
— US growth slowdown: unexpected slowdown in data
— Global ‘currency war’: e.g., rate cuts, tariffs, capital controls
in EM economies in response to monetary easing in DM
Upside risks
— Global growth upside surprise: limited fiscal drag in the US,
sharper-than-expected recovery in Europe, reforms and
stronger growth in EM, effective policy stimulus in Japan