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Deutsche Bank Group Markets Research

Global

Periodical

DB Today - Global/Macro

Date

11 April 2016

Monday 11 th April 2016

________________________________________________________________________________________________________________

Deutsche Bank Securities Inc.

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.

Amy Tan

Research Analyst

(+1) 212 250-5574

[email protected]

John Mcnamara

Equity Focus

(+1) 212 250-4727

[email protected]

Mairead Smith

Equity Focus

(+44) 20 754-71054

[email protected]

MACRO HIGHLIGHTS

Global Strategy - Asset Allocation - Binky Chadha Q1 saw a major growth scare and its reversal. With rapid dollar appreciation at the heart of many of the market concerns leading to the scare, the reversal was aided by a significant depreciation of the dollar (-6% peak to trough). The dollar’s depreciation added to positive US data surprises which have propelled the US equity recovery. It supported a rebound in oil prices from very cheap levels, which in turn saw energy-led credit concerns diminish. It was supportive of positive data surprises in and diminished risk from China, and combined with commodity prices saw solid EM performance.. Details on page 07 Global Strategy - db140 weekender - Stuart kirk Fed fighting – America has had more presidents than Federal Reserve heads since the central bank’s creation. The four surviving members of this exclusive club found scant to disagree about at an historic chinwag yesterday. Contrast this with the squabbling among current FOMC members since March. Actually, the hawkish tone of those disagreeing with Ms Yellen should not be a surprise. FOMC dissents during the tenure of each of the last six Fed chairs were skewed in favour of tighter policy, in aggregate by two to one. Details on page 08 US Strategy - US Equity Insights - David Bianco The S&P is 16.1x our 2016E S&P EPS ex. Energy. This PE should climb to 18 at 2016 end provided recession risk is low and that 5% long-term EPS growth is credible for the S&P ex. Energy. If inflation is 2%, then 5% EPS growth is 3% real, which is near long-term history. To sustain a steady-state PE (1/real CoE), real EPS growth + dividend yield must equal the real cost of equity. Given real bond yields near 0%, the S&P's real cost of equity shouldn't exceed 5.5%. Real EPS growth of 3% with a 2.25% dividend yield will cover a 5.0-5.5% real cost of equity. Details on page 09 Europe - Global Economic Perspectives - Peter Hooper In a process very familiar to followers of the ICT manufacturing evolution, robotic technology is rapidly becoming accessible and adaptable to a widening range of applications. While robots today are cost-competitive vis-à-vis industrial country labour, in the coming years more and more workers in emerging markets may find themselves displaced by robots.. Details on page 10 Continue on next page

GLOBAL MARKET WRAP

INDEX Close 1D YTD %Chg %Chg

S&P 500 2047.60 0.28 0.18

NASDAQ 4850.69 0.05 -3.13

DOW 17576.96 0.20 0.87

DJ STOXX 50 2936.19 0.83 -10.14

FTSE 100 INDEX 6216.99 0.20 -0.41

HANG SENG INDEX 20440.81 0.35 -6.72

MSCI Asia ex Japan 496.79 0.20 -0.63

BRAZIL BOVESPA 50292.93 3.67 16.02

RTS-2 INDEX 753.27 0.89 19.03

COMMODITY PRICES

COMMODITIES Close 1D YTD %Chg %Chg

West Texas 39.72 6.6 7.24

Brent 41.04 0.07 14.8

CRB 171.0406 2.519 -2.897

Copper 208.6 -0.048 -2.295

Gold (Spot) 1250.12 0.869 17.778

Alum. (LME) 1520 1.097 0.863

Baltic Dry 539 4.255 12.762

FOREIGN EXCHANGE PRICES

FOREX (vs US$) Close 1D YTD %Chg %Chg

HK$ 7.7578 0.0039 -0.0915

EUR 1.1392 -0.0176 4.9374

JPY 108.19 -0.1109 11.1193

GBP 1.4224 0.6795 -3.4745

Source: Bloomberg Finance Lp

DERIVATIVES

Current %-ile Value Rank

SPX 3M Mat ATM-Strike Imp Vol 14.96 50.20

SPX 3M Mat 90%-110% IV Skew 12.59 94.42

SPX 3M Mat Realized Vol 17.40 55.00

Source: Bloomberg Finance Lp,

CREDIT

Credit Close 1D YTD %Chg %Chg

CDX.NA.IG 82.33 0.00 -6.70

ITRX.Europe 80.97 1.88 5.08

CDX.NA.HY 102.02 0.00 0.77

ITRAX.XOVER 339.63 1.07 8.02

Source: Bloomberg Finance LP

11 April 2016



MACRO HIGHLIGHTS

Europe - Focus Europe - Mark Wall Four weeks after the ECB announced its extensive set of measures, financial markets of those countries who should have benefited the most are struggling. Both Spain and Italy have been affected by idiosyncratic factors. Spain is being held back by political impasse and a new election in June appears even more likely. In Italy concerns about the banking system have not faded. Details on page 11

Credit Strategy - Early Weekend Reid - Sukanto Chanda We begin this week's EWR with a note from our commodities research team discussing the risks posed by and potential outcomes of the upcoming OPEC negotiations in Doha. Thereafter we jump over to US credit markets with the latest US Credit Strategy note which examines the rebound in risk since mid-February against the backdrop of market technicals, valuations and fundamentals. Details on page 12

Credit Strategy - Early Morning Reid - Jim Reid We collaborate with our US strategists who have previously suggested that we need the combination of three conditions for us to be confident the next default cycle is imminent. We need the accumulation of excessive debt - preferably of deteriorating quality - an external shock/trigger and tighter monetary policy/flattening of yield curves. The pieces of the jigsaw are building. US corporate debt accumulation now compares with that seen prior to previous default cycles. Equity volatility has seen two spikes in the last year (August & early 2016). Details on page 13

Global Rates Strategy - European Fixed Income Research - Francis Yared Over the last two weeks, the data has confirmed the turn in the business surveys in the US and China and remained resilient in Europe, while the Fed was more dovish than expected. Valuations of core rates are rich, driven by low term premia in the US and low breakevens in Europe. The euro fixed income market does not display the excesses of a year ago in terms of dislocations or positioning. Following the recent repricing, peripheral markets are now less vulnerable from a valuation perspective Details on page 14

Global Rates Strategy - US Fixed Income Research - Dominic Konstam Near term, markets should seek some direction from both retail sales and CPI. We observe investors have become more keen to own inflation protection however this shows up disproportionately in terms of lower real yields given the absolute attractiveness of nominal yield levels. We also think it fits with a view that even if “true” inflation expectations are higher, there is diminished risk premium in our lackluster world of global growth. Retail sales will be just as interesting as the weak underbelly of US growth lies with the consumer. Details on page 15

FX Strategy - FX Daily - George Saravelos Japan's biggest problem with the current yen rally is that it is justified by fundamentals. Across most of our metrics USDJPY is still expensive or only just approaching fair value. US –Japan real rate differentials have narrowed significantly this year helped by Fed dovishness and the collapse of (actual and expected) inflation in Japan. The good news is that on real rates USD/JPY is close to fair value around 110.. Details on page 16

Commodities - Commodities Digest - Michael Hsueh From the perspective of US data, oil fundamental data are progressing along the path we expect to achieve the slow path of tightening towards the first quarterly deficits in the second half of next year. US production has declined by an average of 73 kb/d per month this year, and 66 kb/d per month since the July 2015 peak, a run rate consistent with a somewhat steeper decline than we have assumed,.. Details on page 17

Japan Strategy - Japan FI Morning Memo - Makoto Yamashita JGB yields were stable at low levels last week. The 10y JGB auction and auction for enhanced liquidity weighed, but the BoJ conducted three rounds of JGB purchases in the week, which supported supply/demand. Profit taking demand could emerge in response to the decline in stocks amid yen appreciation and a fall in Japanese share prices, but investors have likely become conscious of the difficulty in selling due to the external environment.. Details on page 18

US Economics - US Economics Weekly - Joseph LaVorgna Recent data have exhibited symptoms of secular stagnation. Real GDP growth has slowed, raising the risk that the output gap will not close before the onset of the next recession, a nearly unprecedented occurrence in post-WW II history. We also find increasing evidence on a key aspect of secular stagnation theory, the nexus of weak business investment, depressed aggregate demand and low real rates. Details on page 19

11 April 2016



MACRO HIGHLIGHTS

US Economics - US Daily Economic Notes - Joseph LaVorgna There are no economic releases of consequence either today or tomorrow. Wednesday is the first day of the week we get meaningful economic information. It comes in the form of retail sales, the producer price index (PPI), business inventories and the Fed's beige book. Of these aforementioned series, retail sales are the most important, because they provide us with information on the state of consumer spending, which accounts for nearly 70% of real output. Thus far, the Q1 expenditure data have been disappointing. Details on page 20

KEY COMPANY RESEARCH

ASIA

TSMC (2330.TW),TWD158.50 Buy Price Target TWD190.00

Michael Chou: We trim our 2016/17E EPS forecasts by 1%/2% to factor in NTD appreciation. We still expect that sales

will grow sequentially from 2Q16 to 4Q16. This should be driven by strong 16nm growth, sustainable 28nm demand for

mid-/low-end 4G smartphone chips, integrated fan out (InFO) ramp-up, and continuous market share gains. We reiterate

Buy on attractive risk/reward.. Details on page 21

India Steel Sector

Anuj Singla: We have witnessed a strong recovery in domestic steel prices post imposition of ‘Minimum Import Price’

(MIP) in Feb’16. However, 18-20% rise in domestic steel prices since MIP has been significantly lower than the 34%/49%

rebound in Chinese/CIS steel prices over a similar period. With domestic HRC prices now trading at a discount of ~5.5%

(INR1,700) to the landed cost of imports and extension of HRC safeguard duty until Mar’18, we believe that confidence in

a domestic price recovery has improved significantly... Details on page 22

Europe

British American Tobacco (BATS.L),GBP4,190.00 Buy Price Target GBP4,500.00

Gerry Gallagher: Tgt 4200p to 4500p. Translational FX has turned positive. Transactional FX may be a minimal drag (if

that) in FY17E. As a result, earnings momentum has turned positive. FY17E EPS forecasts +c2.5%. In addition, the shares

have not kept track with the increased earnings and valuation of Reynolds American. We sense BAT is at a positive

inflection point where ongoing strong fundamentals rather than FX increasingly dominate the investment debate. Details

on page 23

Mediaset & Vivendi

Laurie Davison: The core of the deal announced on Friday evening were as press reports had indicated. But in 2 regards,

the details look worse for Mediaset. Firstly, the lock-up on selling VIV shares requires discounting and a lower value for

the Mediaset stake. Secondly, the ownership restrictions also dampen any take-out case on Mediaset. The financials on

Premium are unknown, but we provide a sensitivity in this note based on our ests. Mediaset would see major upgrades,

but ex-Premium will trade at 8x EV/EBITDA on 2018E, still not below our target multiple. Details on page 24

North America

Data Networking

Vijay Bhagavath: In this ideas piece, we offer a thematic view on how clients could position their portfolios, as the

networking universe sees a secular shift from "boxes" to "systems" - i.e. architectural plays and business models involving

a combination of Hardware, Software, and Recurring Revenues. Buy-rated CSCO, AKAM, JNPR, ANET, COMM are

positively levered to our model transition view, while Hold-rated FFIV, BSFT, BRCD; XXIA,. Details on page 25

Semiconductors

Ross Seymore: After underperforming in January, the SOX rallied to an in-line performance with the broader market later

in 1Q as global recession fears receded and signs of stabilizing semi end-demand emerged. Such stability should (finally)

be reflected in semi earnings estimates in our eyes, and we expect 1Q to mark the first quarter in three with both in-line

prints and guides, a potential positive fundamental catalyst for the group. However, with valuations remaining ~19%

above avg, we still maintain our Neutral sector rating and advise investors to stay selective and focus on stocks with

unique "self-help" stories. Details on page 26

11 April 2016



TODAY’S HEADLINES

Markets: Equities end the week on a positive note, led by European bourses. Treasury yields up, oil stronger. Asian equities

mixed in midday trade Monday. AUD little changed.

USA: Wholesale inventories (Feb): Down 0.5%mom, weaker than expected

CAN: Employment up 40.6k in March, above mkt, jobless rate down 0.2pp to 7.1%.

CAN: Housing starts down 14.8k to 204.3k in March, above mkt.

UK: Industrial production down 0.3%mom/0.5%yoy in February, below mkt.

UK: Trade deficit narrows GBP0.4bn to GBP4.8bn in February.

DEU: Trade surplus (sa) widens EUR1bn to EUR19.7bn in February.

FRA: Bank of France Business sentiment up 1pt to 99 in March, above mkt.

FRA: Industrial production falls 1.0%mom in February, up 0.6%yoy.

FRA: Budget deficit at EUR25.6bn in February.

ESP: House transactions up 15.8%yoy in February.

CHE: Unemployment rate down 0.1pp to 3.6% in March, at mkt.

CHE: CPI up 0.3%mom in March, down 0.9%yoy, at mkt.

SWE: Household consumption down 0.3%mom in February, up 2.3%yoy.

DNK: Current account surplus narrows Kr1.2bn to Kr8.3bn in February.

CHN: CPI (Mar): Up 2.3%yoy, touch weaker than expected, PPI (Mar): Down 4.3%yoy, slightly smaller decline than

expected.

AUS: Housing finance (Feb): Up 3.8%mom (ex-refinancing) with both investor finance and owner-occupier finance posting

rises.

NZL: Electronic card transactions (Mar): Retail spending up 0.1%mom, touch weaker than expected.

JPN: Machine orders (Feb): Down 9.2%mom, a slightly smaller decline than expected.

THE DAY AHEAD.

USA: Fed's Dudley, Kaplan speak

ITA: Industrial production (Feb)

NOR: CPI (Mar), PPI (Mar)

DNK: CPI (Mar)

Source: Extract from DB Daily published on 11 April 2016

11 April 2016



Forecast G7 Quarterly GDP growth

% qoq saar/annual: % yoy

Q1 15 Q2 15 Q3 15 Q4 15F Q1 16F Q2 16F Q3 16F Q4 16F 2015F 2016F 2017F

US 0.6 3.9 2.0 1.5 0.5 1.0 1.2 2.4 2.4 1.4 2.2

Japan 4.6 -1.4 1.4 -1.1 -1.4 -0.7 0.8 1.5 0.5 -0.4 0.5

Euroland 2.3 1.6 1.2 1.3 1.5 1.4 2.1 2.1 1.5 1.4 1.5

Germany 1.6 1.6 1.1 1.1 1.8 1.4 2.1 2.1 1.7 1.7 1.6

France 2.6 0.2 1.5 1.3 1.1 1.1 1.4 1.8 1.2 1.2 1.5

Italy 1.7 1.2 0.8 0.4 1.3 1.3 1.4 1.0 0.8 1.1 1.1

UK 1.8 2.4 1.8 2.4 2.4 2.4 2.4 2.4 2.3 2.2 2.2

Canada -0.7 -0.4 2.4 0.8 1.7 2.0 2.3 3.0 1.2 1.8 2.5

G7 1.5 2.2 1.7 1.0 0.7 1.0 1.4 2.2 1.8 1.2 1.8 a) Euroland forecasts as at the last forecast round on 19/02/16. Bold figures signal upward revisions, bold, underlined figures signal downward revisions. (b)GDP figures refer to working day adjusted data, except Germany and Italy (adjusted for calendar days, Italy 2015 GDP growth was 0.6% yoy). (c) HICP figures for euro-zone countries and the UK (d) Current account figures for Euro area countries include intra regional transactions. e) The world aggregate has been calculated based on the IMF weights released in October 2015. Sources: National authorities, Deutsche Bank Research Data updated from Global Economics Perspective note published on 11 April 2016

Commodities: Energy Commodities & Precious Metals Price Forecasts

USD Q4 15 2015 Q1 16 Q2 16 Q3 16 Q4 16 2016 Q1 17 Q2 17 Q3 17 Q4 17 2017 2018

WTI (bbl) 43.6 49.2 33.0 40.0 43.0 47.0 40.8 50.0 50.0 54.0 54.0 52.0 65.0

Brent (bbl) 46.5 54.2 33.0 42.0 45.0 50.0 42.5 53.0 53.0 57.0 57.0 55.0 70.0

US Natural Gas (mmBtu)

2.30 2.66 1.95 2.20 2.35 2.50 2.25 2.65 2.73 2.61 3.01 2.75 3.30

Gold 1104 1161 1230 1150 1170 1230 1195 1250 1175 1210 1290 1231 1275

Silver 14.8 15.7 15.5 15.0 14.9 15.2 15.2 16.0 15.0 15.5 16.5 15.8. 16.5

Aluminium

USc/lb 67.8 75.5 69.9 70.8 69.4 69.0 69.8 70.3 71.7 73.5 74.0 72.4 77.1

USD/t 1494 1664 1540 1560 1530 1520 1538 1550 1580 1620 1630 1595 1700

Copper

USc/lb 221.9 250.1 212.1 222.3 204.2 199.6 209.6 204.2 208.7 217.8 226.9 214.4 237

USD/t 4890 5512 4675 4900 4500 4400 4575 4500 4600 4800 5000 4725 5223 Source: Deutsche Bank, Figures are period averages

CENTRAL BANK POLICY (%)

Current Q2-16F Q416F Q4-17F

US 0.375 0.375 0.625 1.625

Eurozone 0.00 0.00 0.00 0.00

Japan -0.10 -0.10 -0.20 -0.20

UK 0.50 0.50 0.75 1.25

China 1.50 1.50 1.00 1.00

India 6.75 6.50 6.50 6.50 Source: The House View published on 16 March 2016

11 April 2016



FORECAST

FOREIGN EXCHANGE RATES Vs US Dollar vs. Euro

Countries Current Jun16 Dec 16 Dec 17 Current Jun16 Dec 16 Dec 17

United States - - - - 1.14 1.06 1.00 0.85

Japan 108.04 105 112 115 122.98 111 112 98

Euroland 0.88 0.94 1.00 1.18 - - - -

United Kingdom 0.71 0.73 0.78 0.87- 0.80 0.77 0.78 0.74-

Switzerland 0.96 1.05 1.12 1.33- 1.09 1.11 1.12 1.13-

Canada 1.30 1.40 1.43 1.45- 1.48 1.48 1.43 1.23-

China 6.47 6.73 7.00 7.00 7.37 7.13 7.00 5.95

India 66.36 69 68 69 75.55 73 68 59 * Sources: Deutsche Bank, Bloomberg, Datastream. Data last updated form ‘Macro Forecasts’ report published on 29 March 2016 Current rates taken from Bloomberg Finance Lp

GOVERNMENT RATES Current Q2-16F Q4-16F Q4-17F

US 10Y yield 1.72 1.50 1.50 1.75

EUR 10Y yield 0.21 0.45 0.75 1.50 Source: The House View published on 29 March2016 *Current Rates taken from Bloomberg Finance Lp

INDEX FORECASTS Current* 2015

DJ Stoxx 600 332.35 390

FTSE 100 6208.36 NA

Dax 600 9652.75 NA

MSCI AC World 393.83 NA

S&P 500 2047.60 2050

Source: : The Equity View published on 13 November 2015

*Current Rates taken from Bloomberg Finance Lp

CORPORATE ACCESS

UPCOMING CONFERENCES/TRIPS/EVENTS

Date Conferences

April 13, 2016 dbAccess Pan European Small & Mid Cap Series@ London

May 4-5, 2016 41st Annual Health Care Conference@ Boston

May 4-5, 2016 db Access Andean Region Conference@ London Source: Deutsche Bank For more details log on to www.conferences.db.com

11 April 2016



Asset Allocation Dollar Relief

Quarterly Themes and Trades Q1 saw a major growth scare and its reversal. With rapid dollar appreciation at the heart of many of the market concerns leading to the scare, the reversal was aided by a significant depreciation of the dollar (-6% peak to trough). The dollar’s depreciation added to positive US data surprises which have propelled the US equity recovery. It supported a rebound in oil prices from very cheap levels, which in turn saw energy-led credit concerns diminish. It was supportive of positive data surprises in and diminished risk from China, and combined with commodity prices saw solid EM performance. Ironically, the dollar's depreciation began with an opposite reaction to the same drivers that had driven its prior rapid appreciation, further BOJ and ECB easing, with 4pp of the 6pp of dollar depreciation around these initiatives and before the Fed's postponement of further rate normalization. Yen and euro appreciation and sharp Japanese and European equity underperformance both appeared to reflect the direct negative impacts of the monetary policy easing actions.

Themes and catalysts for Q2 5 reasons for the dollar pause to extend;

Can US equities break the 15-month range?

Gauging the Fed's data dependence: April is early but June is likely for the next hike;

All commodities no longer alike: Oil is somewhat cheap, copper and gold are expensive;

The case for increasing EM allocations continues to build.

Asset allocation and trades With slower global growth and accommodative central banks well priced in, if not excessively so, but the

ongoing pickup in inflation not, we remain overweight equities, underweight bonds and cash. Within equities

we remain overweight the US; we move Europe and Japan to underweight, with good reasons for monetary

policy easing having negative fundamental impacts that were clearly on display in Q1, but the ECB and BOJ

bent on further easing; we move EM to neutral from underweight. Within credit we prefer HY over HG. We are

slightly overweight the dollar and move commodities from underweight to neutral;

After challenging technicals near term, the range will break: Buy cheap longer dated calls on the S&P 500;

Waiting for the Fed’s K-turn: Short July Fed Fund futures;

Short gold: overvaluation levels (22%) reached only 3 times previously; spike to very long positioning during the

growth scare; positive data surprises and a rate hike would be negative catalysts.

Binky Chadha (+1) 212 250-4776

[email protected]

11 April 2016



db140 weekender Insights in 140 words

Macro Fed fighting – America has had more presidents than Federal Reserve heads since the central bank’s creation. The four surviving members of this exclusive club found scant to disagree about at an historic chinwag yesterday. Contrast this with the squabbling among current FOMC members since March. Actually, the hawkish tone of those disagreeing with Ms Yellen should not be a surprise. FOMC dissents during the tenure of each of the last six Fed chairs were skewed in favour of tighter policy, in aggregate by two to one. And discord is no bad thing. Since 1971 there is an inverse relationship between dissension and the subsequent three-year change in America’s misery index. For example, dissents hit their lows in 1973 and 2006, with the consensus proving misguided in hindsight. By contrast, disagreements surged in the early 1980s and 1990s, just before the good times rolled.

Strategy Stronger yen – Doke! That’s Japanese for “get out of the way.” After eyeing the nearest window, it is also one word investors short the yen are screaming after a nine per cent rally since early February. And there is more pain to come – positioning data does not suggest 107.74 against the dollar is the peak. In fact, Deutsche Bank’s Corax index shows investors becoming braver about adding to yen longs. Previously, net-non commercial positioning reversed as the yen neared 110. This week, however, positioning strengthened. Such confidence can be infectious. Since 2011, foreign inflows into Japanese assets typically had high currency hedge ratios while Japan outflows were unhedged to benefit from a falling yen. Any reversal could be significant. A ten percentage point move in the hedge ratio on Japan’s Y160tn of foreign equity assets is roughly one year’s current account surplus.

Stocks US airlines – The boss of Alaska Air probably only had one eye on his $2.6bn acquisition of Virgin America this week. The other would have been watching the United Airlines pay deal. About one-third of United’s staff is soon to enjoy a 30 per cent raise. If Virgin’s employees demanded the same, it would be equivalent to halving last year’s pre-tax earnings. And this after Alaska paid double Virgin’s undisturbed price. Investors seem worried; US airlines have seen their stock prices trend sideways for 18 months despite low fuel costs. What is more, US corporate profits – a leading indicator of airline malaise – are primed to fall this quarter. And for hawkish investors, history shows that airlines stocks tend to wane during Fed tightening cycles. On average, one year after the Fed begins to increase rates, airlines underperform the market by almost one-tenth.

Finance Arb strategies – The top-three hedge funds holding Allergan lost a hefty $550m when its $160bn deal with Pfizer collapsed. But don’t cry too much for merger arbitrage funds. For starters, they remain among the few profitable strategies around, generating two per cent in the last year versus minus five per cent for the hedge fund index. Moreover, arb spreads on US deals have doubled to 20 per cent on an annualized basis from two years ago, which means greater potential profit. Partly this is compensating the higher regulatory and complexity risk of ever-larger transactions. Last year saw triple the number of $10bn-plus deals compared with even the 2007 boom. But it may also signal pure opportunity. The notional spread of arb opportunities tripled to $90bn over the past 12 months, suggesting that prospects may be increasing faster than capital can be deployed.

Digestif Panama papers – Information contained within twelve million data files leaked from the world’s fourth-biggest offshore law firm will be dinner party fodder in every time zone this weekend. Here are some other facts about Panama to throw casually into the conversation. One of the most bio-diverse countries on earth, its name is said to mean “abundance of fish, butterflies and trees”. Panama also has more islands than the Maldives and more skyscrapers than Miami. Senator John McCain was born there but Panama hats are not (they are from Ecuador). The isthmus was under Spanish rule for 300 years; less well known is that Scotland’s disastrous attempt at colonization in 1698 contributed to its union with England soon after. Final fact: working on canals or in financial services makes you happy – for the past two years Panamanians have topped Gallup’s global well-being survey.

Stuart kirk (+44 )20-754-72432

[email protected]

11 April 2016



US Equity Insights What's a fair PE for 5% EPS growth?

Long-term S&P EPS growth of 5% ex. Energy justifies an 18 trailing PE The S&P is 16.1x our 2016E S&P EPS ex. Energy. This PE should climb to 18 at 2016 end provided recession risk is low and that 5% long-term EPS growth is credible for the S&P ex. Energy. If inflation is 2%, then 5% EPS growth is 3% real, which is near long-term history. To sustain a steady-state PE (1/real CoE), real EPS growth + dividend yield must equal the real cost of equity. Given real bond yields near 0%, the S&P's real cost of equity shouldn't exceed 5.5%. Real EPS growth of 3% with a 2.25% dividend yield will cover a 5.0-5.5% real cost of equity, which justifies a trailing PE of 18 on non GAAP S&P EPS ex. Energy.

Fair PE is driven by real EPS growth + dividend yield vs. real cost of equity Shareholders are compensated by capital gains and dividend yield. EPS growth drives capital gains over the long-term and EPS retention drives EPS growth (inflation aside). The opportunity cost of retained EPS is a forgone dividend. Thus, anytime a dividend yield is less than the real cost of equity, a company should generate long-term EPS growth that provides offsetting compensation. EPS growth is merely a dividend substitute and value neutral unless real EPS growth + dividend yield exceeds the real cost of equity. EPS growth above this threshold can be considered value added EPS growth or rising economic profit.

Shiller PE vs. Bianco PE Update: S&P Shiller PE is 26.0, S&P Bianco PE is 17.1 The Shiller PE doesn’t account for EPS growth that should come from retained earnings. This is a major pitfall because dividend payout ratios have declined tremendously from 1900-1950 levels. The lower the dividend payout ratio the more EPS growth should exceed inflation. We modify Shiller’s PE by making an equity time value adjustment (ETVA) to historical S&P EPS. We raise each past year’s EPS by a nominal cost of equity estimate less that year’s dividend yield. On this basis, today’s avg. 10yr trailing ETVA non GAAP S&P EPS is $119.5 vs. $99 for inflation only adj. 10yr trailing non GAAP S&P EPS. Shiller’s 10yr avg. trailing inflation only adjusted GAAP EPS is even lower at $80.

Treasury actions appear more about passport stripping than earnings stripping Treasury’s notice regarding tax deduction limits on transfer cost based interest expense on intracompany debt applies only to non US domiciled firms. Only 25 S&P 500 firms are non US domiciled. We also suspect this aims at previous US domiciled companies recently inverted or otherwise redomiciled. But with additional justifications companies can still take the deductions by pointing to market based interest rates and principal repayment terms. Or US subsidiaries of foreign domiciled parents could issue bonds directly from their US entity or borrow from banks. Interest expense remains fully tax deductible per US law.

Prefer Health Care & Tech over Financials & Energy, prefer Banks over Energy 1Q reporting disappointment risk is greatest at Energy & Banks, but should be good elsewhere. S&P PE ex. Energy & Financials has upside on low real yields, but valuations remain demanding at Energy, Banks much more undemanding.

David Bianco (+1) 212 250-8169

[email protected]

11 April 2016



Global Economic Perspectives

Cometh the robot

In a process very familiar to followers of the ICT manufacturing evolution, robotic technology is rapidly

becoming accessible and adaptable to a widening range of applications. While robots today are cost-

competitive vis-à-vis industrial country labour, in the coming years more and more workers in emerging

markets may find themselves displaced by robots. At the same time, these robots will create opportunities for

perhaps millions of higher-skilled workers to build, manage and work with them.

The automotive industry has paved the way for industrial applications – electronics manufacturing is now

catching up – but large segments of global manufacturing and logistics has yet really to begin to automate in a

meaningful way.

The combination of more accessible and cost-effective robots with the ability to have these machines collect

vast amounts of data, analyze it and share it – the core of the Industry 4.0 concept – promises to revolutionize

manufacturing in both advanced and emerging economies.

Consumers have demonstrated a readiness to accept robotic technology in the home, just as they have

modified their lives to adjust to advances in information and communication technology. Millions of

households already have robots working for them and playing with their children. The mass production of

personal robots and other household devices may yet prove to be the spark to ignite another way of

manufacturing growth – and exports – in Asia.

There are undoubtedly robot systems that augment labour, creating new employment opportunities enhancing

the productivity of human co-workers. But equally assuredly, many robot systems replace labour. Large labour

surplus economies will be able to compete for some time to come. But the faster the world, including China,

adopts robots, the harder it will be for India, for example, the match China's record in raising per capita

incomes through manufacturing.

Peter Hooper (+1) 212 250-7352

[email protected]

11 April 2016



Focus Europe Can’t relax

Four weeks after the ECB announced its extensive set of measures, financial markets of those countries who should have benefited the most are struggling. Both Spain and Italy have been affected by idiosyncratic factors. Spain is being held back by political impasse and a new election in June appears even more likely. In Italy concerns about the banking system have not faded.

The ECB is not powerless, but it cannot solve structural issues. The slower unemployment fall in the euro area relative to the US has in part been driven by an increasing participation rate, a positive development. However, high youth and long-term unemployment do not bode well for future productivity. The answer should be structural reforms and more integration but we do not expect significant progress on either. This implies heightened vulnerability to shocks and dependence on monetary policy. The ECB can't relax.

We judge a return of Grexit fears as unlikely over the coming weeks. The European partners have probably no appetitive to re-open the Grexit Pandora box given the ongoing migration crisis and looming Brexit referendum. Still, ongoing disagreements between Greece, the IMF and European creditors suggest that there remains some way to go until agreement is reached.

Some of the provisions in China's WTO accession protocol will expire in December 2016, triggering a debate about the EU's future approach to anti- dumping policies. Options on the table range from sticking to the status quo to allowing for full market economy treatment. The outcome matters for both Europe and China as it could have ramifications on their trade relations.

In Germany the domestically driven growth momentum remains intact. We estimate that, due to the end of oil countries' golden age, exports to that region will fall 10% in 2016. Despite the favorable fundamentals for residential construction, the outlook is limited by land shortage and regulatory hurdles.

In Finland, after a citizens' initiative, the parliament will in late April start to discuss a possible referendum on its EMU membership. However, polls do not show sufficient public support and there is virtually no support in parliament.

In the UK, household debt ratios have fallen since the crisis, though by less as a proportion of earned versus total income. Studies have linked excessively high levels of debt with slower trend growth. But as we show with our 'credit impulse', borrowing could be an important support for economic growth.

Mark Wall (+44) 20 754-52087

[email protected]

11 April 2016



Early Weekend Reid DB Macro Research Highlights

We begin this week's EWR with a note from our commodities research team discussing the risks posed by and potential outcomes of the upcoming OPEC negotiations in Doha. Thereafter we jump over to US credit markets with the latest US Credit Strategy note which examines the rebound in risk since mid-February against the backdrop of market technicals, valuations and fundamentals.

We head over to Europe for our next set of notes. First up we have two notes from our European economists: the first discussing the latest on European PMIs, and the second focusing on the volatile political situation in Spain. Thereafter we turn to equity markets with the latest European Equity Strategy Snapshot which discusses the risks posed by oil prices, bank weakness and the rally in capital goods equities. Finally we have the latest Euroland Strategy note that navigates rates markets amidst growing skepticism about central banks' ability to influence inflation expectations.

Zooming in on the UK, we have two notes focused on the risk of Brexit. The first note from our UK Chief Economist George Buckley discusses the baseline view for the economy given that the UK remains a member of the EU; however it also highlights the risks posed by an exit. Thereafter we have the latest UK strategy piece from our rates research team that examines how Brexit is a growing theme for UK fixed income with the EU referendum now only three months away.

We switch our focus to EM FX markets for our final note this week with a special report outlining a framework to identify undervalued currencies that are also poised for appreciation. The team discusses the filters within the framework in detail while further identifying potential longs based on the underlying criteria.

Sukanto Chanda (+44) 20 754-52461

[email protected]

11 April 2016



Early Morning Reid Macro Strategy

This morning we have published our 18th annual default study. In last year's study we speculated how the next full default cycle could materialise in 2017-2018, 12 months on and our late cycle fears continue to build even if we still live in a low default world for now.

We collaborate with our US strategists who have previously suggested that we need the combination of three conditions for us to be confident the next default cycle is imminent. We need the accumulation of excessive debt - preferably of deteriorating quality - an external shock/trigger and tighter monetary policy/flattening of yield curves. The pieces of the jigsaw are building. US corporate debt accumulation now compares with that seen prior to previous default cycles. Equity volatility has seen two spikes in the last year (August & early 2016), bank equity is falling (a lead indicator of lending?) and global yield curves continue to flatten.

Our current scenario analysis suggests annual US HY defaults around 9-11% by YE '17 and '18 - 6-8% ex-Energy. For Europe it's currently hard to see a peak above 5-7% in these years. This would be notably above current numbers but well below previous peaks.

The good news is that spreads are not tight and adequately compensate buy-and-hold investors across the vast majority of historical default scenarios at a top-down level. This may not give mark-to-market investors any comfort when the next cycle hits but at least prices reflect some of the risks that are likely around the corner over the next two to three years. The report should be in your inbox an hour before this note. Let me know if you don't have a copy.

Speaking of cycles, one which has crept up on markets rather quickly is US earnings season where this evening we'll see Alcoa unofficially kick off proceedings after the closing bell. It's hard to argue against overall street expectations for this quarter being particularly low and the interesting reports this week will more than likely come out from the Banks which are expected to be a front runner for negative earnings growth this period. In fact Q1 EPS growth expectations as per Bloomberg are running at -10.1% yoy for the S&P 500. DB's US equity strategist, David Bianco, is a touch more optimistic but still has a headline -7.9% yoy decline forecast for the index. David highlights that it's Energy and Banks where we are most likely to see the greatest disappointment risk and he forecasts for S&P 500 ex Energy and Financials EPS growth of -0.5% yoy.

All that to look forward but for now we're switching our focus over to the latest in Asia this morning where there's some important inflation numbers out of China data to digest. CPI for the month of March has printed at +2.3% yoy which was a smidgen below expectations (of +2.4%) but flat on the prior month which was then the highest since July 2014 and will likely provide for some comfort that the data is stabilising. Meanwhile the latest PPI numbers continue to show improvement after printing at -4.3% yoy (vs. -4.6% expected), and up six-tenths from the prior month. While factory gate prices remain yet again in negative territory, the +0.5% mom reading is the first positive monthly rise in prices since 2013.

Jim Reid (+44) 20 754-72943

[email protected]

11 April 2016



European Fixed Income Research Improving data vs. technicals and geopolitical risk

Over the last two weeks, the data has confirmed the turn in the business surveys in the US and China and

remained resilient in Europe, while the Fed was more dovish than expected

Valuations of core rates are rich, driven by low term premia in the US and low breakevens in Europe. The euro

fixed income market does not display the excesses of a year ago in terms of dislocations or positioning.

Following the recent repricing, peripheral markets are now less vulnerable from a valuation perspective

The supply/demand perspective remains favourable for core rates. Geopolitics have not changed materially,

but the risks have increased at the margin

European financials equities have underperformed recently, but ECB policy should continue to provide a

backstop to senior financials

Developments in Japan have contributed to the general risk off, but the macro environment should be

supportive of further policy response on the fiscal and monetary policy side

We maintain our key macro trades, long EUR10Y breakevens (in cash), EUR2s5s flatteners and short EDZ8.

We also stay neutral periphery for now

The widening in peripheral spreads has not been accompanied by a widening in broader credit spreads. This is

most probably related to the upcoming deadline for some of the smaller banks in Italy to raise additional

capital.

In the UK, Brexit continues to represent the dominant theme. However, in the case of a vote to Brexit, the

market is pricing too lengthy a delay before the MPC acts, with the sonia curve troughing in December. On

the other hand in the event of a vote to remain, the money market curve should steepen aggressively. As a

result, we recommend August-December MPC date steepeners

Further out the curve, the EU referendum has led to a front loading of supply this quarter which should

generate some concession at the long end. We move short 50Y spreads into this month's syndication

With ABN Amro issuing a EUR 2.25bn 15Y covered bond, the largest ABN covered bond ever and the largest

new issue in around 4 years, investor demand remains strong. While spreads of peripheral sovereign bonds

widened, peripheral covered bonds remained relatively stable. Lloyds Bank issued a EUR 1.25bn 7Y covered

bond at ms+28bp, both providing a relatively high new issue premium

Announcement of Towd Point Mortgage Funding 2016-GR1 the mammoth GBP 6 billion securitisation of the

Granite portfolio sale has been heralded as a positive for the market. On the structure, for market

development purposes, we would like to have seen a mix of longer duration (5-7 yr) bonds in the cap structure

over the mooted 3 yr call

Francis Yared +44-020-754-54017

[email protected]

11 April 2016



US Fixed Income Research US Fixed Income Weekly

Near term, markets should seek some direction from both retail sales and CPI. We observe investors have

become more keen to own inflation protection however this shows up disproportionately in terms of lower

real yields given the absolute attractiveness of nominal yield levels. We also think it fits with a view that even

if “true” inflation expectations are higher, there is diminished risk premium in our lackluster world of global

growth. Retail sales will be just as interesting as the weak underbelly of US growth lies with the consumer.

We still like the market. Fearing 1 ½ percent before 2 percent. We are disinclined to be too cute on the curve.

There is still almost one too many hikes priced this year by the Fed.

We are constructive on real yields because of the Fed relent as a part of the new weaker-dollar FX regime.

Real yields fall on Fed relent because for any given demand for inflation protection, reduced nominal rate

expectations must imply lower real yields. Demand for inflation protection may also go up which amplifies the

move lower in real yields.

Risk off concerns abound from Italian NPLs to oil and dollar yen. However we think real yields are the King of

all and, as they undermine the dollar, so central bank liquidity is slowly restored. Bottom line is a stronger euro

and yen at worst only temporarily disrupts equities. We demonstrate the fallibility of beggar thy neighbor

policies.

With slowly improving liquidity, risk assets don’t need to do well but they can tread water for a bit while we

determine to what extent nominal growth can recover globally, led by the US.

Although labor force participation has recently increased, in the long run demographic forces are likely to

cause it to decline further. Our saving rate model suggests that, as a result, the saving rate could be driven

well above its recent historical average. This would pose considerable downside risk to consumption.

Dominic Konstam (+1) 212 250-9753

[email protected]

11 April 2016



FX Daily Fair value in USD/JPY is...

Japan's biggest problem with the current yen rally is that it is justified by fundamentals. Across most of our metrics USDJPY is still expensive or only just approaching fair value. US –Japan real rate differentials have narrowed significantly this year helped by Fed dovishness and the collapse of (actual and expected) inflation in Japan. The good news is that on real rates USD/JPY is close to fair value around 110. The bad news is that on more medium-term frameworks USD/JPY remains significantly overvalued. Taking the average of three Deutsche Bank valuation models (PPP, BEER, FEER), we come up with a USD/JPY equilibrium value of 97, more than 10% below current levels. There are two main implications of this analysis.

First, it is unlikely that Japanese FX intervention is going to be very successful in pushing USD/JPY significantly higher - there is no misalignment to correct in the first place. The very public commitments the G20 have made against competitive devaluations make large-scale, sustained intervention even less likely.

Second, unless the BoJ can convince the market that it is able to bring inflation expectations back up (and real yields down) it is unclear what can be done to reverse the yen rally. On the one hand, the market is likely to challenge the reflationary impact of further rate cuts into negative territory. On the other hand, an expansion of JGB purchases seems more straightforward, but it is not clear how many more marginal JGB holders are left to squeeze out into other (foreign) assets. In recognition of these limits we revised our Q2 USD/JPY forecast down to 105 back in February.

Going forward, large-scale BoJ equity purchases and renewed fiscal stimulus may be the only near-term hope left. But if current trends persist a new round of ground-breaking policy experimentation may be required. We are exceptionally focused on the Japanese reaction to what is happening this year, because it is likely to foreshadow the market's perception of the next round of policy innovation by global central banks.

George Saravelos (+44) 20 754-79118

[email protected]

11 April 2016



Commodities Digest Oil fundamentals on track

Crude Oil : From the perspective of US data, oil fundamental data are progressing along the path we expect to achieve the slow path of tightening towards the first quarterly deficits in the second half of next year. US production has declined by an average of 73 kb/d per month this year, and 66 kb/d per month since the July 2015 peak, a run rate consistent with a somewhat steeper decline than we have assumed, Figure 1. US inventories are also running below our expectations, helped in the last week by a drop in imports down to 7.3 mmb/d, the lowest since the first week of February.

Outside the US, we also see signs of declining production in countries which were formerly sources of growth, among them Canada and Colombia as of February data, Figure 3. This is in addition to Mexico and Kazakhstan where governments have officially lowered production forecasts as a result of reduced investment.

One sign of possible supply upside, however, is that the U.N.-backed unity government (Government of National Accord, GNA) in Libya shows signs of gaining ground, although support appears uneven both among ministers in Tripoli and the eastern government in Tobruk. If the GNA can capitalize on progress then a rehabilitation of Libya's damaged oil infrastructure may become more likely. Libyan production stands at -1.2 mmb/d below its inferred OPEC quota and -1.1 mmb/d below its 2012 rate of production.

Demand is holding up well with Chinese apparent consumption running at +380 kb/d in January and February and US product demand picking up in the last week on the back of a 660 kb/d rise in Other Oils. This category, which comprises 21% of total product demand, includes aviation gasoline, naphtha-type jet fuel, kerosene and natural gas liquids.

US Natural Gas Balances tightened by 300 mcf/d in the last week as dry gas production fell by 500 mcf/d and residential and commercial demand rose, offsetting a decline in utility demand. Natural gas storage also showed a second consecutive, although tiny, contraction in the surplus down to 16.8% of capacity. Production growth now runs at +230 mcf/d yoy which if continued would narrow the surplus faster than we have forecasted for the year.

Platinum vs. Gold: Time for a re-rating: We remain cautious on the outlook for platinum. In our view, the market will be balanced to slightly over-supplied over the next three years without active supply management from the South African producers. This means that the ample above ground stocks will not be depleted in any meaningful way. However, we accede that the market is finely balanced, and the signs of demand are surprising on the upside. Firstly, the sponge – ingot premium is now nudging USD2/oz, suggesting that Autocat demand is strong. Secondly, European car sales continue to surprise on the upside, with limited erosion of diesel market share. March registrations were up 5% in March, with a Q1 growth rate of +7%. The strong start in Q1 with a SAAR of 14.1 million units/year prompted our European Auto team to up their full year forecast from 13.6m to 13.9m units. Given that the SAAR is still well below pre crisis levels, we think there is room for further upgrades. In contrast, we think the near term positive catalysts in gold are limited. Although platinum's fortunes will still be heavily influenced by the South African Rand and the direction of gold, the current discount of over USD280/oz looks stretched in the near term. We expect platinum to rerate versus gold.

Michael Hsueh (+44) 20 754-78015

[email protected]

11 April 2016



Japan FI Morning Memo Yields face downward bias due to risk of yen appreciation

Yields face downward bias due to risk of yen appreciation

JGB yields were stable at low levels last week. The 10y JGB auction and auction for enhanced liquidity weighed, but the BoJ conducted three rounds of JGB purchases in the week, which supported supply/demand. Profit taking demand could emerge in response to the decline in stocks amid yen appreciation and a fall in Japanese share prices, but investors have likely become conscious of the difficulty in selling due to the external environment. We see the risk of the yen gradually appreciating ahead of the G7 Summit in late May because the government is unlikely to conduct yen selling intervention before then. We expect three events to put downward pressure on JGB yields through May: 1) the tendency for JGB supply/demand to tighten around the time of the long public holiday in May, 2) the risk of continued yen appreciation until the G7 Summit in May, and 3) and the possibility that postponing a consumption tax hike could be viewed as difficult depending on the result of the Lower House by-election in Hokkaido on 24 April. However, we think these events will provide the opportunity to buy on dips because we expect yields to bounce back after each downturn. Expectations for additional easing by the BoJ could also provide support, but we do not expect the Bank to cut rates further. Expectations for further easing could help boost stocks and prevent yen appreciation but are unlikely to have much impact on JGB yields if investors only expect the BoJ to take measures such as expanding the ETF purchasing framework.

We expect the 30y JGB auction on the 14th to draw demand from only a portion of investors because yield levels are very low. We will be watching for whether yields adjust higher ahead of the auction. Basically, we expect the auction to be smoothly absorbed due to short-covering by dealers and buying for BoJ trades. The 10y inflation-indexed bond auction on the 12th has an offering amount of about JPY400bn, which is JPY100bn less than the previous auction. It looks cheap relative to BEI, but we doubt the auction will go smoothly given the limited range of investors. We think the BoJ should adjust the distortion in the purchase ratio of nominal and inflation-indexed bonds. Elsewhere, the Hokkaido 5th district Lower House by-election (voting day 24 April) will be officially announced on the 12th. We cannot rule out the risk that the LDP candidate will lose because the opposition parties have united behind one candidate. Secretary General Sadakazu Tanigaki will naturally provide support, but a focus through to the 23rd will be whether PM Shinzo Abe makes an appearance in Hokkaido. It would likely be extremely damaging for the government if the LDP candidate loses despite a personal showing from Abe. Overseas, US retail sales for March (13th) and the NY Fed's Empire State Manufacturing Index (15th) will be closely watched. It looks increasingly likely that the US Jan-Mar growth rate will be less than 1%, but the focus is whether the economy turns up towards Apr-Jun. Investors will be keen to assess the direction given leading indicators are mixed. Naturally, the PPI (13th) and CPI (14th) will also be a focus. Following Fed Chair Janet Yellen's speech, the market is not just looking at US employment and inflation, but also worldwide economic and financial market conditions. However, it is also true that the Fed will probably have to hike rates if US inflation takes off. The market will also be watching NY Fed Reserve President William Dudley's speech on the 11th. China will release Jan-Mar GDP on the 15th and a meeting of oil producing countries will be held on the 17th. Crude oil prices have bottomed temporarily, but a freeze on increased production is likely the minimum requirement for an uptrend. The BoJ is expected to announce its Benchmark Ratio..

Makoto Yamashita (+81) 3 5156-6622

[email protected]

11 April 2016



US Economics Weekly Secular stagnation concerns looming larger

Overview: Recent data have exhibited symptoms of secular stagnation. Real GDP growth has slowed, raising the risk that the output gap will not close before the onset of the next recession, a nearly unprecedented occurrence in post-WW II history. We also find increasing evidence on a key aspect of secular stagnation theory, the nexus of weak business investment, depressed aggregate demand and low real rates. Thus far, the secular stagnation hypothesis is winning out. Will the optimists at the Fed stay the course or capitulate further on their projected path of policy rates?

The ongoing economic expansion has been characterized by sluggish growth, raising fears of secular stagnation. For example, inflation-adjusted GDP growth has averaged just 2.1% since the end of the recession, compared to 3.5% between 1947 and 2007. The chart below shows that the output gap, the difference between realized and potential output, remains depressed by historical standards at -2.0%. Of course, some degree of weakness in growth might have been expected due to the structural damage inflicted by the crisis, which was the worst economic downturn since the Great Depression. On the flip side, however, output was growing from a relatively low base at the end of the recession, and has been buoyed for seven-plus years by unprecedentedly accommodative monetary policy. Therefore, it is of no little concern that, as illustrated in the chart, the closing of the output gap in recent years has been entirely due to downward revisions to potential growth by the CBO. This is broadly consistent with the secular stagnation hypothesis.

Joseph Lavorgna (+1) 212 250-7329

[email protected]

11 April 2016



US Daily Economic Notes What you need to know for the week ahead

Commentary for Today: There are no economic releases of consequence either today or tomorrow. Wednesday is the first day of the week we get meaningful economic information. It comes in the form of retail sales, the producer price index (PPI), business inventories and the Fed's beige book. Of these aforementioned series, retail sales are the most important, because they provide us with information on the state of consumer spending, which accounts for nearly 70% of real output. Thus far, the Q1 expenditure data have been disappointing. For example, the level of February real spending is up only 1.7% at an annualized rate compared to its Q4 2015 average. This pace, if sustained in March, would be the weakest for inflation-adjusted consumer spending growth since Q1 2014 (1.3%). We are projecting flat headline retail sales because of softness in unit motor vehicle sales, but retail sales excluding autos should be up modestly (+0.3% estimate vs. -0.1% previously).

While we are generally constructive on the state of consumer spending—the job market has been healthy and household deleveraging has been completed—it is the non-consumer portion of the economy that investors should worry about. Currently, the ratio of nonfinancial corporate debt to national income is nearly 45%, an elevated reading that suggests corporate balance sheets are not in particularly good shape. The situation is exacerbated by what appears to have been another quarter in which corporate profit growth and profit margins were under pressure. The nearly 2% increase in employment growth last quarter, combined with our expectation of just a 0.5% increase in Q1 economic output, points to a second consecutive quarter of negative productivity growth readings. Of course, real GDP growth could rebound later this year—our view is that the snapback will be modest and the economy will simply muddle through. But if activity strengthens, the labor market would tighten further and the likelihood of faster wage growth would increase. In turn, this would engender more Fed rate hikes. This would not necessarily be good news for the corporate sector because in this environment, the labor share of income would be rising while the corporate share of income would be declining. At present, it is hard to see a sharp upturn in capital spending even if energy prices have bottomed and are on the mend.

The March PPI (+0.2% vs. -0.2%) is released alongside retail sales and should be up due to higher energy prices. Meanwhile, the core PPI (+0.2% vs. Unch.) is slated to increase on the back of stronger services prices. Business inventories, which are released later in the morning, are likely to decline (-0.2% vs. Unch.). We are looking for a relatively large inventory correction in Q1—we estimate that de-stocking could take roughly one percentage point off output.

On Thursday, we get the March consumer price index (CPI). Similar to the PPI, the headline CPI (+0.2% vs. -0.2%) should be boosted by the recent rebound in energy. However, we expect a smaller increase in the core (+0.1% vs. +0.3%) because of significantly weaker apparel prices, which had risen by a record amount in the previous two months. While the CPI is a top-tier indicator for the financial markets, the near-term data may be somewhat less relevant given Chair Yellen's recent emphasis on the broader global economy. We finish the week with the April NY Fed Empire survey (+1.0 vs. +0.6), March industrial production (-0.5% vs. -0.5%) and April preliminary University of Michigan consumer sentiment (91.0 vs. 91.0) reports on Friday. On balance, these data are expected to be relatively soft.

Joseph Lavorgna (+1) 212 250-7329

[email protected]

11 April 2016



TSMC Buy Reuters: 2330.TW Exchange: TAI Ticker: 2330

Fundamentals set to improve in 2Q16; Buy

Price (TWD) 157.50

Price target (TWD) 190.00

52-week range (TWD) 162.00 - 115.00

Market cap (USDm) 125,755

Shares outstanding (m) 25,930.3

Net debt/equity (%) -25.0

Book value/share (TWD) 52.76

Price/book (x) 3.0

FYE 12/31 2015A 2016E 2017E

Sales (TWDm)

843,497 922,914 1,033,846

Net Profit (TWDm)

306,576.8 304,516.7 348,896.1

DB EPS (TWD)

11.82 11.74 13.46

PER (x) 11.8 13.4 11.7

Yield (net) (%)

4.3 3.9 4.4

Fine-tuning our estimates

We trim our 2016/17E EPS forecasts by 1%/2% to factor in NTD appreciation. We

still expect that sales will grow sequentially from 2Q16 to 4Q16. This should be

driven by strong 16nm growth, sustainable 28nm demand for mid-/low-end 4G

smartphone chips, integrated fan out (InFO) ramp-up, and continuous market share

gains. We reiterate Buy on attractive risk/reward.

1Q16 should mark the bottom; seasonal 2Q16

Sales growth remained flattish QoQ in 1Q16 (-8% YoY), 1% higher than our

estimate. We estimate that EPS will reach NT$2.44 in 1Q16 (-13% QoQ and -20%

YoY). We expect sales to grow 12% QoQ and GM to rise 2.9ppt QoQ to 48.3% in

2Q16. We project that the communication, consumer, and industrial segments will

be the areas of growth in 2Q16.

Questions for management

TSMC will hold the 1Q16 earnings conference on April 14, 2016. We believe that

investors will be interested in the following questions: First, what will be the 16nm

portion in 2016 (guidance for 20%+ of sales)? Second, does management foresee

10nm demand upside in 2017? We expect that Apple, MediaTek, HiSilicon, and

Spreadtrum will adopt TSMC’s 10nm for high-end smartphone chips in 2017 due to

intensified competition. Third, what is the 7nm progress? As we highlighted in our

previous note, all key foundry customers are working with TSMC for 7nm rather

than with Samsung given TSMC’s rapid 7nm R&D progress. We anticipate that

TSMC will have greater dominance in 7nm in 2018/19 than in 10/16nm for the

corresponding periods. Last, does management foresee more customers adopting

InFO in 2017? We expect TSMC’s InFO to be adopted by Apple, MediaTek,

HiSilicon, and Spreadtrum in 2017 due to its better form factor, lower system cost,

and better performance (speed, power consumption, and heat dissipation

efficiency).

Catalysts, valuation, and risk

Our target price of NT$190 is based on 3.4x 2016/17E average P/B, in line with the

fair 3.4x P/B generated by the Gordon Growth Model. The stock may see some

headwinds in the near term due to lower-than-expected margins in 1Q16, which we

would view as an especially attractive buying opportunity. Downside risks relate to

16nm progress, ASP, capex, currency, and demand.

Michael Chou (+886) 2 2192 2836

[email protected]

11 April 2016



India Steel Sector Strong steel price momentum continuing in the domestic market

Strong steel price momentum continuing in the domestic market

We have witnessed a strong recovery in domestic steel prices post imposition of ‘Minimum Import Price’ (MIP) in

Feb’16. However, 18-20% rise in domestic steel prices since MIP has been significantly lower than the 34%/49%

rebound in Chinese/CIS steel prices over a similar period. With domestic HRC prices now trading at a discount of

~5.5% (INR1,700) to the landed cost of imports and extension of HRC safeguard duty until Mar’18, we believe that

confidence in a domestic price recovery has improved significantly. We raise our FY17 forecasts by 5-6% and

target prices by 21-38% as we raise our target multiples in line with expansion in valuations of global peers. Top

pick: JSW Steel.

Indian steelmakers to report an improving profitability trajectory

We remain confident of an improving profitability trajectory for Indian steel players over the next two quarters

(4Q’FY16 and 1Q’FY17). We also remain optimistic on the domestic steel demand outlook supported by

government's thrust on infrastructure build out and renewed focus on reviving rural demand, which has remained

subdued in the past couple of years on account of weak monsoons. We believe that the discount of domestic

prices to landed costs should narrow as visibility on domestic steel demand acceleration improves.

JSW Steel (JSTL) – remains our preferred pick in the sector

We maintain our preference for JSTL within the sector driven by: (1) volume benefits as JSTL ramps up its

recently commissioned capacity of ~4m tonnes while high-cost players lose market share; (2) improving product

mix with increasing contribution from high margin auto grade steel. We raise our target price for JSTL to

INR1,575/share (INR1,301 earlier, details on page 6).

Tata Steel – potential sale of UK assets could be a long-term positive

As we have highlighted in our earlier notes as well, we remain positive on the earnings outlook for Tata Steel’s

India business and our Hold rating has primarily been driven by a weak earnings outlook in Europe. Given this

backdrop, we see the recent announcement regarding the potential sale of loss making UK assets as a long-term

positive. However, near-term stock price impact will be determined by the deal dynamics and potential

shutdown/asset transfer costs, which we will analyse in detail in a separate note. We retain our Hold rating with a

new target of INR296/share (vs. INR215 earlier, page 7).

SAIL – implementation delays and rich valuations underpin our Sell rating

We retain our Sell rating on SAIL as the execution of the ambitious modernisation and expansion programme

continues to lag our expectations. We believe that demonstration of timely project execution remains critical for

SAIL to revive investor confidence, which can drive valuation expansion. As we still await visibility on improving

project execution, we retain our target multiple. Also, SAIL remains the most expensive steel stock globally, which

poses a significant downside risk in case of earnings disappointment. Maintain Sell with a target price of

INR25/share.

We use EV/EBITDA as the primary valuation methodology

Risks include raw material and steel price volatility, removal of regulatory support by the government, significant

rise in domestic utilisation rates, and weak demand. This report changes target prices and estimates for several

companies under coverage.

Anuj Singla (+91) 22 7180 4172

[email protected]

11 April 2016



British American Tobacco Buy Reuters: BATS.L Exchange: LSE Ticker: BATS

Tgt 4200p to 4500p. Inflection

Price (GBP) 4,190.00

Price target (GBP) 4,500.00

52-week range (GBP) 4,190.00 -

3,355.50

Market cap (GBP)(m) 77,916.5

Shares outstanding (m) 1,865

Free float (%) 100

FTSE 100 INDEX 6,204.4

FYE 12/31 2015A 2016E 2017E

Revenue (GBPm)

13,104 13,938 14,657

DB PBT (GBPm) 4,565 4,603 4,993

Stated PBT (GBPm)

4,619 4,438 4,828

DB EPS (GBP) 208.37 227.33 246.96

DPS (GBP) 154.00 160.16 168.17

P/E (DB EPS) (x) 17.5 18.4 17.0

FX, earnings and valuation inflection

Translational FX has turned positive. Transactional FX may be a minimal drag (if

that) in FY17E. As a result, earnings momentum has turned positive. FY17E EPS

forecasts +c2.5%. In addition, the shares have not kept track with the increased

earnings and valuation of Reynolds American. We sense BAT is at a positive

inflection point where ongoing strong fundamentals rather than FX increasingly

dominate the investment debate. Our conservative DCF (perpetuity growth -1%)

sees our price target rise to 4500p. Buy.

FX and associates

A tobacco analyst can be many things: an expert in FX tends not to be one of them.

Irrespective, for the last c3 years BAT has been seen as a play on EM currencies:

continuing strong industry and operational fundamentals have been a secondary

driver of the shares. Not only is translational and (very importantly) transactional FX

moving in BAT’s favour, so too is the value of associates (Reynolds American);

neither can be ignored in our view. We sense an FX, EPS and valuation inflection.

EPS and valuation

FX has moved from a -1% drag for FY16E to a c+2% positive. In addition,

transactional FX pressures (more for FY17E) are easing as EM currencies recover

against the US$. Operationally BAT has delivered over the last three years but FX

has stood in the way. Perhaps no more: EPS momentum has turned positive. Finally

the shares have failed to keep pace with expansion of Reynolds American’s P/E and

its contribution to group profits: we see up to c500p upside from this dynamic

alone. BAT’s FY16E P/E ex associates is 16x, against a headline c18x. Some may

argue, as a tobacco stock, BAT appears expensive vs. staples. Ignoring the chronic

failings of such an argument in our view, we again note the influence of BAT’s

associates: the headline P/E differential with staples is c3.8 points; ex associates it

is 6.0.

Valuation and risk

We value BAT via DCF (WACC 7.0%; year’s 5-10 cash flow growth 5.0% p.a.;

terminal growth -1% as per DBe for all cigarette companies). Risks include:

regulation, excise changes, volume declines, FX, litigation and M&A.

Gerry Gallagher (+44) 20 754-50251

[email protected]

11 April 2016



Mediaset & Vivendi Mediaset Premium deal - first thoughts

Companies Mentioned

Mediaset (MS.MI),EUR3.5 Hold Price Target EUR4

Vivendi SA (VIV.PA),EUR18.42 Hold Price Target EUR21

Deal details look disappointing for Mediaset versus press reports

The core of the deal announced on Friday evening were as press reports had

indicated. But in 2 regards, the details look worse for Mediaset. Firstly, the lock-up

on selling VIV shares requires discounting and a lower value for the Mediaset

stake. Secondly, the ownership restrictions also dampen any take-out case on

Mediaset. The financials on Premium are unknown, but we provide a sensitivity in

this note based on our ests. Mediaset would see major upgrades, but ex-Premium

will trade at 8x EV/EBITDA on 2018E, still not below our target multiple. The deal

terms for VIV should not surprise, but the downgrades would be sizeable; -19% on

'16E EPS, -8% on ‘18E.

The core details of the deal are as expected

The core of the agreement is the acquisition by Vivendi of 100% of Mediaset

Premium, Mediaset’s pay-TV unit, based on a mutual 3.5% share exchange. The

terms of which had been widely reported in the press beforehand (Milano Finanza,

5 April 2016).

But the new detail delays Mediaset’s cash crystallization…

The Friday announcement included a 3 year lock up on share sales, meaning it will

be September 2019 earliest before Mediaset can sell down its Vivendi shares. The

downside risks for VIV stock are large and need discounting. So, even with 3yrs of

dividends, the discounted value looks lower than the E878m which press reports

had primed the market for. Discount at 10% and the NPV is E721m.

…and puts at least a material delay on any take-out case by VIV

The other material new detail was the prohibition on Vivendi buying directly, or

indirectly, any Mediaset shares in Year 1 and >5% in years 2 and 3. Also the

emphasis on long-term partnership in the deal announcement between Mediaset

and Vivendi negates the need for VIV to raise its stake to effect strategic &

management change as it has pursued with Telecom Italia.

Implications for estimates

We await Monday’s conference call before enacting any changes (11 April at 0800

CET; dial in: +44(0) 20 3427 1916, access code 4711589. But on our ests for MS

Premium of EBITA losses of E106m/E86m/E42m losses from Mediaset Premium

(see Fig.2, p.9), MS would see net income rise from E61m to E151m in ’16 and

from E53m to E83m in ’18. But even with this, Italian TV operations would not be

below our 8x EV/EBITDA target multiple on ‘18. We are below company

consensus; on ’18 consensus, Italian operations would be at 7x. For Vivendi, the

assumption of Premium losses would be a 21%/18%/10% EPS downgrade on

2016/17/18 and for Reuters consensus 19%/17%/8%.

Key issues for the Monday conference call

The MS Premium financials are still a black box since it stopped reporting in 2011

and are the major variable in the above sensitivity. This is the major issue to clarify.

Also, with reference to the joint content creation, merger of on-demand/streaming

platforms and the expansion into new geographies; is there both potential extra

investment and savings to be made over the coming years? Will Vivendi seek to

retain Champions League rights and current SerieA coverage, or move to more of

an entertainment focused offer similar to Whatchever? What is the horizon for

share sell-down for both groups?

Laurie Davison (+44) 20 754-75849

[email protected]

11 April 2016



Data Networking Networking Transition to Software and Recurring Revenues

Companies Mentioned

Cisco Systems (CSCO.OQ),USD27.69 Buy Price Target USD33.00

Juniper Networks (JNPR.N),USD24.93 Buy Price Target USD31.00

Akamai Technologies (AKAM.OQ),USD52.38 Buy Price Target USD75.00

Arista Networks (ANET.N),USD65.01 Buy Price Target USD80.00

Commscope (COMM.OQ),USD27.64 Buy Price Target USD33.00

Broadsoft (BSFT.OQ),USD40.57 Hold Price Target USD33.00

CSCO is our Top Mega Cap Idea In this ideas piece, we offer a thematic view on how clients could position their portfolios, as the networking universe sees a secular shift from "boxes" to "systems" - i.e. architectural plays and business models involving a combination of Hardware, Software, and Recurring Revenues. Buy-rated CSCO, AKAM, JNPR, ANET, COMM are positively levered to our model transition view, while Hold-rated FFIV, BSFT, BRCD; XXIA, Sell-rated BLOX are likely to see slower than expected growth. CSCO is our Top Idea on our model transition thesis. We are calling for a “rerating” of the multiple, as CSCO shifts an increasing % of its portfolio to Software and Recurring Revenues.

Portfolio Manager Summary (Core insights in our FITT): IT Spending Efficiencies and Slow Growth Environment: Catalysts for our

Model Transition Thesis:

CEO, CFO, and CIO focus on structurally lowering IT spending through

use of Pay as You Go “Cloud Scale IT” explains the IT preference for

cost-efficient Software Networking platforms, and use of Recurring

Revenue models for Security (AKAM DDOS, CSCO Sourcefire), Network

Management (CSCO Meraki), etc.

A slow growth IT spending environment is motivating networking

vendors such as CSCO to drive new “higher growth” and “higher

margin” revenue streams using Software based Platforms and Recurring

Revenue models.

The vendors’ Software Platforms and Recurring Revenue models are

solidly aligned with CxO goals for “opex efficient IT”. .

CSCO Rerating Call: CSCO is our Top Mega Cap Idea on our model transition

thesis. Our core thesis, exemplified via our proprietary scenario analysis

model, argues for a "rerating" of CSCO's multiple, heading into 2017 i.e.

from ~9x ex cash DB FY17e to "mid teens", based on investors starting to

value CSCO as a "systems" business - i.e. a platforms company with an

accelerating Software and Recurring Revenues.

Secular Winners: Buy rated CSCO, AKAM, ANET, JNPR

Secularly Challenged: Hold rated BRCD, FFIV, BSFT; Sell rated BLOX

Private Companies: AVI Networks, Cumulus, Viptela, Soha.io, Pica8, Illumio,

Cyphort, Kumu

Sector Valuation and Risks Stocks in our networking universe trade at a modest premium to the market given the networkers’ above average growth rates. Key risks: 1) unanticipated shifts in Enterprise, Carrier, Web 2.0 IT spending; 2) new product launches and technology disruptions causing share shifts among peers.

Vijay Bhagavath (+1) 415 617-3324

[email protected]

11 April 2016



Semiconductors 1Q16 Preview: Stability on the horizon?

Companies Mentioned

Broadcom Limited (AVGO.OQ),USD156.15 Buy Price Target USD180

Maxim Integrated Pdts (MXIM.OQ),USD36.65 Buy Price Target USD40

NXP Semiconductors (NXPI.OQ),USD82.74 Buy Price Target USD110

MaxLinear (MXL.N),USD18.31 Buy Price Target USD22

Apple Inc. (AAPL.OQ),USD108.66 Hold Price Target USD105

Samsung SDI (006400.KS),KRW99700 Hold Price Target KRW113000

Is in-line fine?

After underperforming in January, the SOX rallied to an in-line performance with

the broader market later in 1Q as global recession fears receded and signs of

stabilizing semi end-demand emerged. Such stability should (finally) be reflected in

semi earnings estimates in our eyes, and we expect 1Q to mark the first quarter in

three with both in-line prints and guides, a potential positive fundamental catalyst

for the group. However, with valuations remaining ~19% above avg, we still

maintain our Neutral sector rating and advise investors to stay selective and focus

on stocks with unique "self-help" stories (AVGO, MXIM, MXL, NXPI).

Likely stabilizing end-markets (save for PCs) and ests

Semi co’s issued better-than-feared 4Q prints and 1Q guides as China-driven

inventory concerns began tailing off, potentially foreshadowing demand stability

heading into 1Q reporting season. Recall by end-market, in 4Q Computing showed

strength (+3% q/q) primarily on Skylake, while Comms appeared better than

feared (flat q/q). Auto (+1% q/q) paused (mostly due to seasonality), while Wireless

(-11% q/q), Industrial (-5% q/q), and Consumer (-17% q/q) all weakened on tepid

macro demand, inventory burn, and customer-specific adjustments (mostly AAPL).

Looking to 1Q16, weakness is evident in both Computing (-11% q/q) given

negative PC build data and Consumer (-12% q/q) given seasonality. We see

weakness in Wireless as well (-27% q/q) but would not be surprised by end-market

upside given solid Samsung GS7 sales and post-iPhone-6S AAPL stability. More

positively, Auto (+6% q/q), Comms (+10% q/q), and Industrial (+2% q/q) should all

grow nicely, reflecting secular content trends and generally improving PMIs. With

generally better-than-feared fundamentals, consensus CY17 rev/EPS ests for the

top 50 semi co’s could begin to stabilize (currently down –1%/–3% YTD) after three

consecutive quarters of decline.

Supply still high (co’s & in channel), posing some headwind for 2Q

After concerns over China’s abrupt 2H15 slowing, aggregate 2015 year-end

inventory at the top-50 semi companies stood at ~$24b, roughly matching 2Q15’s

all-time high. Potentially weighing on 2Q top-line acceleration, inventory also

stands above historical averages on a days basis, both weighted (87 days vs 5-yr

average of 84 days) and un-weighted (99 vs 98 days). We see such levels likely

remaining into 2Q given macro concerns, a choppy PC climate, and overall tepid

end-demand.

Valuations expanding for the umpteenth time; staying Neutral

A broad sigh of relief over global recession potential has spurred the SOX to a

+1% gain YTD after underperformance in January and early February. Though

moving roughly in-line with the broader market YTD, semi stocks’ valuations have

elevated to roughly +19% above their 5-year averages once again (from +5% pre-

4Q earnings), calling for greater stock-picking discernment as positive alpha

potential begins to lessen. Overall, amid industry maturity and little chance for

broad-based demand acceleration, we recommend investors focus on self-help

stories—namely AVGO, MXIM, MXL, and NXPI. Our valuations are based on

comparable-peer P/E, and key risks include supply/demand fluctuations,

cost/pricing pressures, market share losses, product ramps, technology changes,

and acquisition integration.

Ross Seymore +1-415-617-3268

[email protected]

11 April 2016



Appendix 1

Important Disclosures

Additional information available upon request

*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification

This report covers more than one security and was contributed to by more than one analyst. The views expressed in this report accurately reflect the views of each contributor to this compendium report. In addition, each contributor has not and will not receive any compensation for providing a specific recommendation or view in this compendium report

Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.

Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock

Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.

Newly issued research recommendations and target prices supersede previously published research.

46 % 48 %

7 %35 % 31 %

18 %0

200

400

600

800

1000

1200

1400

1600

Buy Hold Sell

Global Universe

Companies Covered Cos. w/ Banking Relationship

Regulatory Disclosures

1.Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the

"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2.Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are

consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the

SOLAR link at http://gm.db.com.

11 April 2016



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