Markets in 2012—Foresight with Insight
Deutsche Bank
Markets in 2012—Foresight with Insight
Deutsche Bank
Deutsche Bank The Markets in 2012 – Foresight with Insight
The Markets in 2012
Foresight with Insight
Deutsche Bank
Corporate & Investment Bank
Markets in 2012—Foresight with Insight
Deutsche Bank
Foreword
A broader view
The year 2012 looks set to be as
challenging as 2011 with many
open questions about the outlook
for the markets and the future of
the global economy.
It will be harder than ever for investors to make decisions that
strike a strategic balance between opportunity and risk, both in
the shorter and longer term.
More than ever, understanding the issues impacting the market
as a whole will be critical to investors' success in the year ahead.
Strategies based purely on expertise in a particular industry or
asset class will be insucient; developing a broader view is
essential to navigate the increasingly correlated environment.
With this publication, we aim to deliver exactly that
comprehensive overview to help you rene your perspective
across a host of markets, economies and industries.
We hope you nd it useful. On behalf of all of my colleagues,
we thank you for choosing to work with Deutsche Bank and

look forward to further partnership in the year ahead.
Anshu Jain
Head of the Corporate & Investment Bank
Member of the Management Board
1 Leaders
1.1 Global Economy
The outlook for 2012
1.2 The Renminbi
The world’s next reserve currency?
1.3 The Case for Equities
Is fundamental valuation dead?
1.4 US Elections
Presidential prospects and
implications
1.5 Investing in a Crisis
Tough times ahead but there will
be opportunities
Executive Viewpoints
1.6 Brazil
Economic prospects
1.7 Risk Monitor
Ten key risks to watch out for
1.8 Ination
Central banks looking the
other way?
1.9 Trade Finance
Back in fashion
2 Economics & Geo-Politics

2.1 The Eurozone Crisis

Fast track Europe’s road map
2.2 China
Soft or hard landing?
2.3 The US Dollar
Are we entering a post-dollar
world?
2.4 US
Green shoots or parched roots?
2.5 Growth Solutions
What Greece and Italy could learn
from Ireland
2.6 Emerging Markets
Can they decouple?
2.7 Africa
The next frontier: who to watch
2.8 Asia
Slowing but how much?
3 Markets

3.1 US Equities
It’s all about the multiple
3.2 European Equities
Time to be bold
3.3 Asian Equities
Focus on large caps
3.4 Emerging Market Equities
Dicult year ahead
3.5 Credit
Outlook for 2012
3.6 Commodities

Can they push higher?
3.7 FX
Prospects for key exchange rates
3.8 Rates
Two scenarios
3.9 ABS
Challenges and opportunities
4 Sectors & Corporate Strategy
4.1 Outlook for Corporates
Test of nerve
4.2 M&A
Outlook for 2012
4.3 Natural Resources
Valuation disconnect
4.4 Telecoms & Media
The digital revolution
4.5 Consumer Goods
Deals on the way
4.6 Industrials
Prospects for earnings
4.7 Financial Institutions
Deleveraging
4.8 Financial Sponsors
Shifting focus
4.9 Technology
Cloud computer land
4.10 Healthcare
What’s ahead for 2012?
5 Financing, Investment &
Risk Management:

5.1 Bond Market Outlook
Outlook for 2012
5.2 Equity Market Outlook
Prospects for issuers
5.3 Commercial Mortgage Backed
Securities
False boom, real dawn
5.4 Art
The waiting room
Financing, Investment &
Risk Management:
Research Viewpoints

5.5 The Ideal Portfolio
What to own
5.6 European Financial Risk
How to hedge systemic risk
6 Regulation & Trading Technology
6.1 Regulatory Change
What’s ahead
6.2 Electronic Trading
Trends to watch
6.3 Centralised Clearing
Adopt early or wait and see?
The Markets in 2012
Foresight with Insight
Contents
Articles marked with the ‘ ’ icon are based on Deutsche Bank Research.
1
Leaders

Global Economy
The Renminbi
The Case for Equities
US Elections
Investing in a Crisis
Markets in 2012—Foresight with Insight
Deutsche Bank
Markets in 2012—Foresight with Insight
Deutsche Bank
1.1
Leaders
1.1
Leaders
David Folkerts-Landau
Global Head of Research
Global Economy
The outlook for 2012
The year just ending was challenging for the world
economy – the US economy suered a signicant
slowdown, Japan was hit by a devastating earthquake
and Europe’s sovereign debt crisis deepened. Despite
these shocks, a strong growth performance in emerging
markets enabled the global economy to expand by
3.5% in 2011, a pace we expect to continue in 2012, as
a rebound in China’s growth and a continued recovery
in the US economy oset a likely recession in Europe.
In our view 2012 will see the turning
point in the European sovereign crisis.
Recent events have seen dramatic
political shifts in the peripheral euro

zone nations, especially Greece and
Italy, which should boost reform and,
ultimately, ensure that the region
emerges stronger and more stable. The
situation in Greece is stabilising, and the
changes now being made should remove
the country from the spotlight.
Italy is where the key risks and challenges
lie, in our opinion. We believe the country
is solvent: Italy has signicant economic
potential, low private sector debt, the
highest household wealth among the
G7 and a record of delivering primary
surpluses during the past decade. The
key challenge going forward will likely be
the ability of politicians to push though
growth-enhancing reforms in order to
unlock Italy’s potential. We note recent
changes in the government point in the
right direction.
We are particularly encouraged by
progress thus far in Spain, which has
demonstrated a strong commitment
to adjustment, as well as by Ireland’s
advances in competitiveness which have
turned around market sentiment. Ireland
has doubled its trade surplus since 2008
and robust export performance has more
than made up for the weakness in the
domestic economy.

We expect France to remain in the
spotlight in 2012, as elections approach
and doubts are raised about its ability
to hold on to its AAA status. In our
view, despite the government’s recent
announcement of additional spending
cuts, we believe more scal measures
will be required to avoid a downgrade,
as growth will likely be weak in 2012.
Indeed, we believe the eurozone
economy is sliding into recession which
at best will be mild and last only for a
couple of quarters, although there are
considerable downside risks. While the
scal austerity measures and reforms
being put in place are necessary for the
peripheral economies to regain market
condence and restore competitiveness,
they will likely have a negative impact on
growth. Growth will also suer from the
acceleration in bank deleveraging that
Basel 3 regulations will require in 2012.
We expect eurozone growth to decline
to 0.4% in 2012 from 1.5% in 2011. Even
the data out of Germany has turned
down recently. We expect the European
Central Bank (ECB) to continue reversing
the interest rate hikes of 2011 and see
another 25bp cut early in the New Year.
We also expect the ECB to continue

buying peripheral country bonds, albeit
at a measured pace, and to keep its
various liquidity taps open.
Fortunately, the United States appears
to be recovering, albeit slowly, after
a surprisingly weak rst half of 2011.
There has been a clear improvement
in the economic data in the past
couple of months, with consumers
showing surprising resilience and
rms maintaining a decent level of
investment. We expect the economy to
strengthen further in 2012, as some of
the headwinds from Europe abate, credit
growth picks up and the housing market
stabilises. The Fed has also signalled
that it will leave its ocial interest
rates close to zero through to mid 2013
at least, providing further support to
the economy. We have revised up our
forecast for US growth to 1.8% for
2011 and 2.3% in 2012. Key risks we
see facing the US economy are that
Congress fails to agree to stem some of
the near-term scal drag (2% of GDP in
2012) and, more importantly, that it fails
to agree on longer-term decit reduction
measures in the longer term to avoid
a more serious downgrade by ratings
agencies. We remain condent that

some agreement will be reached.
There has been much conjecture
recently about the other motor of the
world economy – China. Although we
believe the risks from the property,
banking and small business sectors are
overstated, we do see growth slowing to
an annualised 7% around the turn of the
year. We expect that the economy will
avoid a hard landing, however, and that
growth will accelerate to almost 9% by
H2 2012. Ination is now falling sharply
but we do not expect a major
policy stimulus to follow as a result.
The government is likely to launch
targeted measures in some parts of the
economy instead.
For the rest of emerging Asia we see a
slowdown in growth but, again, no hard
landing, as real interest rates are low
and domestic demand is still robust.
The landing could be a little harder
in a few economies as rapid property
price increases and high credit growth
potentially reverse in 2012. But while
authorities have already shifted policy
away from combating ination, as with
China, we don’t expect major policy
relaxation unless the growth or ination
outcomes are signicantly lower than

we forecast.
Japan, nine months after its devastating
earthquake and tsunami – which
damaged global supply chains – is likely
to have seen its economy contract by
around 0.5% in 2011, not helped by a
strong yen. We see growth of just over
1% in 2012, helped by further post-
quake reconstruction spending by the
government. But the strength of the yen
and the crisis in Europe could turn out
to be a bigger drag on the economy if
policymakers do not implement the
right measures.
Overall, we expect growth in 2012 to
hold up reasonably well. If the threat of
a systemic event in Europe fades in the
early part of next year, as we expect,
2012 could oer signicant upside
potential for risk assets.
Markets in 2012—Foresight with Insight
Deutsche Bank
Markets in 2012—Foresight with Insight
Deutsche Bank
1.2
Leaders
1.2
Leaders
Alan Cloete
Head of Global Finance &

Foreign Exchange
The Renminbi
The world’s next reserve currency?
The rise of the RMB may happen even
faster, if the past year is any guide.
Since July 2010, the monthly volume of
RMB-denominated trade settlements has
soared almost twenty-fold to RMB185
billion in August 2011, almost 9% of
China’s total monthly trade volume.
Hong Kong – once China’s nancial
window on the world – is now the world’s
back door for access to RMB. Daily
transactions on Hong Kong’s oshore
RMB spot market, opened in August
2010, now amount to about USD2 billion.
Demand for RMB is bound to accelerate,
given China’s commitment to liberalise
its capital and current account by the end
of 2015. Hardly a month goes by without
the People’s Bank of China further
loosening the restrictions on onshore
RMB trade settlements for foreign
investors and customers. For instance,
since August 2011 foreign businesses
have been able to settle contracts in RMB
in any province in China, a relaxation
of the rules that would have been
unimaginable even two years ago.
What all these developments signify

– from Nigeria’s central bank vaults
to Hong Kong’s trading oors – is the
imminent arrival of the RMB as a reserve
currency that reects China’s economic
weight. That, in turn, will reduce
worldwide demand from central banks
for US dollars and euros, with forecasts
suggesting the dollar’s share of global
reserve currencies could fall from about
60% to 50% over the next decade.
The RMB’s international rise will bring
with it an end to the present restrictive
system of parallel foreign exchange
markets for China’s currency. The so-
called ‘non-deliverable’ oshore RMB
forward market has no long-term future of
its own, since companies can increasingly
nd ‘deliverable’ liquidity on Hong Kong’s
burgeoning RMB spot market.
Hong Kong’s near-monopoly of oshore
spot trading is also under threat:
Singapore is in negotiations with Beijing
to open a competing market.
So where does this leave the Hong Kong
dollar? My view is that it will merge
with the RMB to become one currency.
The rationale for a separate Hong Kong
currency is becoming increasingly weak,
as its economy merges with the mainland.
One sign of the times is the growing

number of Hong Kong-based companies
with operations in China that have begun
to pay their employees in RMB. Expect
more to follow.
But I do not expect the switch to take
place for the next two years at least
which opens up perhaps the biggest
question of all: what will happen to the
Hong Kong dollar between now and its
eventual merger with the RMB?
The Hong Kong dollar is already under
immense pressure: pegged to the US
dollar yet operating in an economic
environment with high ination, strong
growth and signs of an asset price
bubble, it is clearly undervalued.
But the Hong Kong Monetary Authority
faces a dicult challenge in resolving this
problem. If it aligns the Hong Kong dollar
to the RMB, it opens up China’s capital
account too quickly. If it moves the peg
from 7.8 to 7, speculation about further
changes will increase. But if it moves the
peg decisively from 7.8 to, say, 6, this
could destabilise the economy.
The saviour may turn out to be the global
economy. If growth slows signicantly,
easing pressure on asset prices, then
Hong Kong may be able to keep the peg
in place for a few more years until it is

ready to adopt the RMB. If it doesn’t,
we can expect continued pressure on
the Hong Kong dollar. Interesting times
ahead, either way.
To understand why the renminbi (RMB) will become a major reserve
currency in the next decade, you only have to follow the money. In
September, for instance, Chile’s central bank reported that 0.3% of
its international reserves are now held in RMB, while Nigeria said it
would add RMB to its mix of US dollars, euros and sterling. Within
10 years, the RMB could account for 15% of global currency reserve
holdings, according to US economist Barry Eichengreen.
Trades on market dislocation between onshore and oshore spot market
Date USD CNY USD CNH CNH Premium Trades for Corporates
19 –Oct–10 6.6446 6.4745 2.6% A corporate sold CNH at 6.4745 with 2.6% premium to onshore CNY spot rate.
This premium was realised by oshore exporters receiving payment in RMB when
exporting goods to China.
23–Sep–11 6.3883 6.5500 –2.5% A corporate bought CNH at 6.5500 with 2.5% discount to onshore CNY spot rate.
This discount was realised by oshore importers making payment in RMB when
importing goods from China. In reality, given the expectation of RMB appreciation,
onshore exporters always charge a premium for USD invoicing relative to RMB
invoicing to hedge their risk. It is much cheaper for oshore importers to use RMB
invoicing. The discount of using RMB invoicing and buying CNH oshore instead of
using USD invoicing would be close to 10%.
Trades on market dislocation between onshore and oshore forward market
CNH DF 12M CNY FWD 12M CNH DF 12M Premium Trades for Corporates
23–Sep–11 6.4890 6.3320 –2.5% Since the establishment of the oshore CNH DF market, CNH DF has always been
trading at a discount to onshore forward market, providing a cheaper RMB source
in the forward space. Corporates bought oshore CNH DF at 6.4890 with 2.5%
discount to onshore CNY forward. This discount was realised by oshore importers
making payment in RMB in 12 months time when importing goods from China.

Trades on market dislocation between CNH DF market and NDF market
USD CNH DF
12M
NDF 12M USD CNH
DF Premium (in %)
Trades for Financial Institutions (FI)
23–Sep–11 6.5810 6.4603 1.8% FI took the opportunity to migrate from the NDF market to the USD CNH DF market.
Instead of selling at 6.4603 in the NDF market, FI sold at 6.5810 in USD CNH DF
market, beneting from a 1.8% premium. Since the oshore market is deliverable,
FI also beneted from the positive carry of using the deliverable CNH to invest in
bonds. In this case, FI would be subjected to the spot basis risk between the CNH
spot and CNY xing. However, this basis would be mean–reverting.
Trades when CNH forward is in premium
Date USD CNH Spot USD CNH 12M
FWD
USD CNH 12M FWD
Premium
Trades for Corporates
26–Oct–11 6.4015 6.4085 0.1% With USD CNH forward trading at a premium, corporates raised CNH funding
through money market, certicates of deposits and bond issuance at very low yield
given the strong demand for CNH asset in Hong Kong. They then swapped this CNH
funding into USD funding via an FX swap. This ‘cheap’ USD funding oered in the
CNH market would provide a cheaper source of USD funding for corporates situated
in countries with wide CCS basis.
Market dislocation on bond market and trades for corporates
Onshore – Oshore bond basis Trades for Corporates
Mar—Oct–11 around 300 bps A corporate secured cheap CNH funding in Hong Kong by issuing oshore CNH
bonds at yields that are on average 300 basis points lower than onshore levels and
using FDI to bring the proceeds back into the onshore market.
Asset Swap trades

Bond Yield USD CNH 12M
Implied
Asset Swap Yield Trades for Corporates
1–Mar–11 Around 1% 1.4% 2.4% Corporates raised USD oshore and swapped it into CNH to invest in the CNH bond
market. Since the implied yield was as much as 1.4%, if the CNH bond yields around
1%, corporates enjoyed a return of approximately 2.4%.
Markets in 2012—Foresight with Insight
Deutsche Bank
Markets in 2012—Foresight with Insight
Deutsche Bank
1.3
Leaders
Garth Ritchie
Global Head of Equities
The Case for Equities
Is fundamental valuation dead?
Equities are, in my opinion, signicantly
undervalued. At the time of writing,
European equities are trading on a P/E
ratio of 11.2 and the S&P 500 at 12.8.
This is the lowest since the nadir of
March 2009.
The main reason for this undervaluation
is the low levels of allocations by real
money investors. After the crisis of
2008 many institutions slashed equity
allocations from 10% to 2% and moved
USD1 trillion into the credit markets.
But the investment tide is turning as
investors recognise that bonds are no

longer ‘risk-free’ in the wake of the
Greek default and unfolding European
debt crisis.
Investor appetite for equities should
intensify as developed world interest
rates start to increase, and as investors
seek to address the capital erosion in
their xed-income portfolios.
The fundamental case for equities is very
strong. First, the dividend yield on the
S&P 500 is 2.1% compared to 2.2% for
US government bonds. But dividends
are growing by 15% a year, while bond
coupons are static. On a cashow basis,
the S&P 500 ex-nancials is yielding
12%, 6% more than Baa-rated bonds.
Second, many large corporates are
sitting on cash and many are also
beneting from continued economic
growth in Asia and other emerging
markets. Prots at S&P 500 companies
are growing at 9% year-on-year.
But to take full advantage of the
opportunities, investors need to select
the right stocks and trade them in the
right way.
Over the past three years, many investors
have adopted a Mark To Market (MTM)
approach to equity investment. With the
markets in a ‘risk on, risk o mode’ and

a high degree of correlation between
geographic regions, this has been sensible.
But the recovery is likely to be much
more uneven, with dierent countries
recuperating at dierent speeds and
some failing to leave the sick bay. Bank
sector solvency and liquidity also varies
widely between countries.
In such a patchwork-quilt environment,
active management (i.e. alpha over beta)
will be the better option.
Emerging market growth is perhaps
the most compelling story. But it may
be best accessed via multinational
companies listed on exchanges in
Europe and North America rather than
via locally-listed local players which
are coming under increased margin
pressure, largely due to wage and
resource ination. But even emerging
market growth may slow from 2012,
presenting some risks.
In an environment in which access to
liquidity is critical, the use of advanced
electronic execution tools – including
Broker Crossing Systems and advanced
algorithms – enable investors to trade
more eciently at the same time as
managing their costs.
If investors are to successfully navigate

the challenges of multiple trading
platforms, fragmented markets, increased
volatility, and an increasingly complex
regulatory environment, they also need
to look to maximise their use of the
consultative services of their broker.
By supplementing electronic execution
with traditional OTC trading, investors
will nd it easier to amass sizeable equity
stakes and cope with other executional
challenges, including wider spreads.
Striking the right balance between the
traditional and the cutting-edge should
ensure that the alpha derived from
eective stock selection is not eroded by
clumsy trading.
Equities selected on the basis of fundamental
value analysis will deliver signicant upside in
2012 but investors will need to adopt the right
trading strategies to get the best returns.
Markets in 2012—Foresight with Insight
Deutsche Bank
Markets in 2012—Foresight with Insight
Deutsche Bank
US Elections
Presidential prospects and implications
The United States is now less than
a year away from presidential and
congressional elections which could
have a very signicant impact on the

future direction of the US economy and
nancial markets.
Clearly, markets are most focused on
the presidential elections. President
Barack Obama has informally launched
his re-election campaign and begun
signicant fundraising eorts. His goal is
to raise USD1 billion, the highest ever for
a presidential election.
Overall, observers believe President
Obama’s re-election will be a tough
road. The economic situation is one
of the worst in recent US history;
unemployment rates are hovering at 9%;
and the Iraq and Afghanistan military
campaigns remain unresolved.
Recent polls show President Obama’s
job approval ratings in the mid-40%
range. Only one president in modern
times has had ratings this low and gone
on to be re-elected: Ronald Reagan in
1984. But the economic outlook was
stronger then than it is now: having
decisively made the turn out of recession
and with recovery rmly on the horizon.
A better comparison may be 1980
when President Carter came up for
re-election just as the economy moved
into recession (and with the Iran hostage
debacle fresh in voters’ minds), and duly

lost to Reagan. The parallel is not precise.
In Q2 1980, the US economy declined
by 7.9%, its biggest fall since the great
depression. Barring a string of severe
tail-risk events such as a collapse of the
euro, it is hard to see the US economy
contracting by this amount in 2012.
Nevertheless, it seems likely that if the
economic situation does not improve
before mid 2012, Obama will face a
signicant challenge.
The biggest factor in President Obama’s
favour is the lack of sustained excitement
around the Republican candidates lining
up to run against him.
Former Massachusetts Governor
Mitt Romney has steadily kept in the
forefront of most polls but has failed to
fully engage voters. Other candidates
such as Texas Governor Rick Perry and
former pizza executive Herman Cain have
temporarily grabbed polls leads only to
recede back into the pack. Republican
primaries start on 3 January. We will
know the nal candidate by May.
While President Obama’s approval
ratings are low, Congress’ ratings are
lower – far lower. In fact, they have never
been worse. In a recent Gallup poll, just
13% of voters approve of Congress’

performance while 81% disapprove. If
this is a true indication of voter sentiment
and (once again) the economy does not
improve, we may see many voters vote
out the incumbent no matter what their
political aliation.
This would hit the Democrats harder
than the Republicans since 25 of the
33 state elections due next year are
currently held by Democrats. If they get
voted out, the Republicans would gain a
majority in the Senate.
If we don’t see a signicant improvement
in economic conditions by the summer,
President Obama will struggle to get re-elected.
The possibility of a Republican President, Congress
and Senate would bring signicant changes to US
economic policy and nancial regulation.
1.4
Leaders
Frank Kelly
Head of Communications and Public
Aairs, Americas
It is important to remember though that
there is still the better part of a year to go
until the elections and several signicant
events could change the dynamics
considerably.
First among these is the so-called
congressional ‘Super Committee’.

The Super Committee, composed of 12
hand-picked senators and congressmen,
is charged with nding at least USD1.2
trillion in decit cuts by 23 November
2011. If they reach an agreement, both
chambers of Congress (the House of
Representatives and the Senate) must
approve by 23 December 2011.
At the time of writing, the outcome of
both remained unknown. But failure
to reach an agreement will trigger
immediate cuts to national healthcare
programmes such as Medicare as well
as deep cuts to the defence budget, and
may lead to further rating downgrades.
It is dicult to predict which party would
be damaged more by this turn of events
but it would denitely increase the
likelihood of incumbents being voted out.
Washington is also beginning to watch
the direction of the various federal
legal challenges to President Obama’s
hallmark healthcare legislation. There is
growing likelihood that the US Supreme
Court will hear arguments from various
states over the constitutionality of
the proposed legislation as early as
January 2012.
If this happens, there is a strong
likelihood the Court will hand down

its decision next summer – perhaps in
late June. And if the initial decisions
by several junior federal courts are any
indication, there is signicant risk the
Supreme Court will strike down the law
dealing a setback to President Obama
only months before the election.
Finally, and perhaps most importantly for
nancial services, there is Dodd-Frank.
If a Republican wins presidential oce,
and the party retains their majority in
Congress and gains it in the Senate,
there is a strong possibility that Dodd-
Frank could get rolled back or perhaps
repealed altogether. If Obama is re-
elected, change seems unlikely.
Markets in 2012—Foresight with Insight
Deutsche Bank
Markets in 2012—Foresight with Insight
Deutsche Bank
1.5
Leaders
Rich Herman
Global Head of the Institutional
Client Group
Investing in a Crisis
Tough times ahead but there will be opportunities
In 2011, the markets were driven by macro
themes and events with very high levels
of correlation between asset classes.

In 2012 – barring a major shock such
as an EMU country exiting the euro,
which we do not expect – systemic
risk should ease and we should see
greater dispersion in returns. We could
also see fairly strong market rallies. The
equity and credit markets are currently
pricing in a severely negative market
environment for 2012. But calling the
bottom will, as ever, remain challenging.
Beta investors face some formidable
challenges. Fixed income yields are likely
to remain at their current low levels in
2012 as markets seem more concerned
about the spectre of deation than any
inationary pressures that quantitative
easing may stoke. The Federal Reserve
has committed to keeping ocial rates
low for as long as it takes, the European
Central Bank (ECB) is cutting rates
soon and the Bank of England has just
launched more quantitative easing.
And for US Treasuries, the traditional
safe haven, yields could actually be
negative. A recent study by Deutsche
Bank Research showed that if yields
revert to the mean, investors in 30-year
Treasuries will suer an annualised loss
of 3.3% over the next ve years and 1.3%
over the next 10. Those who buy the 10-

year benchmark bond will suer losses
of 4.3% and 2% respectively.
There is historic precedence for these
kinds of losses. After 1946, when gilt
yields were last this low, the bonds lost
75% of their value over the next three
decades in real terms, as ination took
its toll. And, as we know, the lower the
yield on an asset when bought, the lower
the long-term returns are likely to be.
If the world goes back into recession,
the past indicates that bonds will fare
much better than equities, although that,
in turn, was dependent on low ination,
something that is by no means certain
this time round.
The outlook for equities could be
promising for investors seeking capital
gains with several of our equity
strategists predicting signicant rises
for next year if the major tail risks do not
materialise. US dividend yields are now
higher than 10 year US Treasury yields,
something that has only been seen once
(briey in 2008 and 2009) since the mid-
1950s. But if 2011 is any guide, we can
expect sustained volatility and market
swings which could result in signicant
MTM moves.
So if the prospects for beta or index based

investment strategies are challenging,
where should investors focus in 2012?
In xed income, one potentially attractive
option is relative value trading – buying
one security and selling another to prot
from dierences in their performance (or
doing so synthetically via a swap).
During 2011, we saw some outstanding
trading opportunities in this area,
typically created by dislocations in the
market which led to some assets selling
o more than others.
A quick example: in June 2011, we saw
a major sentiment gap open up between
the equity and bond markets with equity
investors being relatively optimistic
about the short-term outlook and xed
income investors extremely nervous. By
going short the equity indices but long
the credit indices, investors were able to
make a positive return of 7% in less than
three months with carry of 1.77% a year.
One of the best things about this trade
was that in addition to oering a very
respectable return, it also provided a
very useful hedge against an increase in
eurozone sovereign credit risk, a dual-
purpose advantage that is often available
on many relative value strategies.
I am condent we will continue to see

opportunities like this in 2012 given the
probability of further market volatility.
In equities, some of the most exciting
openings could come in the eld of
thematic investment where you take a
view on a specic trend by buying stocks
that will be most aected.
Let’s say you believe that merger and
acquisition activity will increase in 2012.
You can buy a note or a swap linked to a
basket of stocks that have been specially
selected as likely takeover targets.
The range of thematic investment
products available has grown
signicantly in recent years and there are
now hundreds to choose from, including
large numbers that do not require bull
market conditions to perform well.
Some are based around specic events
such as political elections or the launch
of a new product (such as our own Apple
supplier basket). Others are around
longer-term economic trends such as an
increase in European exports to the US.
The advantage of these products
(particularly when done on a synthetic
basis) is that they capture macro trends
but can often be less volatile and more
liquid than straight long positions on
equity indices or individual stocks during

periods of high market volatility.
Both thematic investment and relative
value trading require fair amounts of
analysis on the part of investors and the
banks that they partner with, but hard
work will I suspect be the key to success
in 2012.
2012 will not be an easy year for investors but it
will not be a re-run of 2011: fundamentals will
play a more important part in asset valuation, and
there will be more opportunities to outperform.
1
Executive Viewpoints
Brazil
Risk Monitor
Ination
Trade Finance
Markets in 2012—Foresight with Insight
Deutsche Bank
Markets in 2012—Foresight with Insight
Deutsche Bank
1.6
Executive Viewpoints
Bernardo Parnes
CEO Deutsche Bank Latin America,
Chief Country Ocer Deutsche Bank Brazil
Brazil
Economic prospects
I expect growth to stay below potential
in 2012 with Brazil being particularly

sensitive to developments in China
where a slowdown could reduce demand
for Brazilian exports and cut commodity
prices which account for around 70% of
the country’s exports.
But despite the challenging global
economic environment, Brazil still oers
some great opportunities especially
for investors who can take a long-term
view. The economy’s potential is attested
by the sheer volume of foreign direct
investment (FDI): USD76 billion in the
last 12 months. Foreign companies are
actively pursuing M&A opportunities
in Brazil. Asian buyers have been
particularly aggressive, focusing on oil,
metals, mining and agribusiness.
The construction and infrastructure
sectors could benet from two important
developments. First, the mortgage
market remains very small in Brazil (a
mere 4% of GDP), but is growing very
fast due to the economy’s nancial
stabilisation and lower interest rates.
Given the pent-up demand for housing,
After growing 7.5% in 2010, the Brazilian
economy decelerated in 2011 due to the tighter
scal and monetary policies introduced by the
government to bring down ination and the
global slowdown. GDP growth for 2011 is likely

to be around 3%.
we expect further credit penetration in
the long term. Second, the government
is committed to boost investment on
infrastructure to eliminate bottlenecks
and to prepare for the 2014 FIFA World
Cup and the 2016 Olympic Games.
The retail sector oers interesting
opportunities too as it has beneted
enormously from the drop in
unemployment and strong expansion
in consumer credit observed over the
past six years. Even when the economy
contracted by 0.6% in 2009, private
consumption still grew a hefty 4.1%. We
expect consumption to remain buoyant in
2012 due to scal and monetary easing
and a sizeable minimum wage increase.
Banks may provide an interesting
investment opportunity as well, as
concerns about rapid credit expansion
are overblown. Although bank loans
have grown very fast over the past few
years, credit penetration (48% of GDP)
remains small by international standards.
The debt burden on consumers is very
high, but mainly reects the short loan
maturities and high interest rates.
Credit penetration is bound to increase
further as interest rates decline and

maturities increase. Moreover, Brazilian
banks are very well capitalised (their
capitalisation ratio is 17%), and the
Central Bank has plenty of room to
provide liquidity by cutting towering
reserve requirements on bank deposits
and interest rates, if necessary.
While interest rates are falling, real
rates remain relatively high and oer
interesting opportunities. Dollar-
denominated interest rates (‘cupom
cambial’) are particularly attractive
for foreign investors, as they have not
accompanied the decline in Brazil’s
risk premium (as measured by its CDS
spreads), mainly due to government
intervention in the FX market. Oshore
structured notes – obtaining a dollar
yield of approximately 2% to 3% for a
three-year maturity – oer an excellent
return, considering that interest rates in
developed economies are close to zero.
Ination is an important risk. Although
consumer prices rose 5.9% in 2010
and could increase approximately 6.5%
this year, the Central Bank has initiated
an easing cycle and is poised to cut
rates further, as the authorities seem
to be more sensitive to uctuations
in output than in prices. While the

global slowdown and resulting drop in
commodity prices will help the Central
Bank tame ination, prices could rebound
should the global economy recover faster
than expected. Investors can buy ination
protection through ination-linked bonds
issued by the Treasury.
All in all, 2012 looks set to be an
interesting year.
Markets in 2012—Foresight with Insight
Deutsche Bank
Markets in 2012—Foresight with Insight
Deutsche Bank
7. Liquidity crunch in commodity
trade nance
Commodity trade nance is highly
concentrated across ve European
banks, three of them French. In
aggregate, they provide an estimated
75% of the nancing for the big Swiss-
based commodity trading houses.
History suggests that the shorter
duration maturity of this market is at high
risk when banks deleverage (see Risk 6).
Just as in 2008, commodity prices could
fall sharply.
Hedges: reinforces case for downside
protection on commodities (see Risk 4).
European borrowers should diversify their
sources of funding into the US; investors

could look into one-year USD100 puts on
Brent or a one-year USD100 put on Brent
with a 1.2000 Knock-in on EUR/USD.
8. Declining universe of safe haven assets
The old adage – ‘nd safety in numbers’ –
did not nd consistently reliable friends in
Gold, the Swiss franc and yen in 2011. In
the peak volatility of August-September,
US Treasuries and Bunds proved more
reliable safe haven assets. However, the
rising debt obligations of both economies
(albeit for dierent reasons) may warrant
more prudent diversication strategies,
as well as protection against ination and
higher rates.
Hedges: diversify into a wider range of
AAA-rated assets such as supranational
bonds and gilts.
9. Ballooning US pension fund decits
When it comes to US pension fund
decits, rounding errors can be measured
in trillions. For US corporates, funding
gaps range from USD400 – 500 billion,
while comparable US public sector
decits are estimated at USD3 – 4 trillion
depending on discount rate assumptions.
Declining corporate protability, public
sector rating agency downgrades, and
unexpected funding crises could follow.
Continued low rates only exacerbate the

challenge. Fund outows from equities
to bonds could increase.
Hedges: for the companies involved,
ALM strategies such as receiver/payer
swaptions; for investors, puts on major
equity indices where premium is only
payable if rates rise. The rationale
here is that equity puts are somewhat
expensive, and the premium is only due
if rates rise, which is less likely than
implied by the forward market.
10. Better than expected economic growth
A large degree of downside risk is
being priced into markets; investors are
primarily focusing on further de-risking
of debt exposures. However, such an
environment introduces another risk
from the potential for upside surprises:
if Europe stabilises, both global growth
and risk asset prices could exceed
expectations.
Hedges: 10y/20y euro rates payer
spreads; long non-conforming mezzanine
debt; Short AUD v Long MXP.
1. Greece euro exit
We don’t believe this will happen but the
inconceivable is no longer unthinkable
after Merkel and Sarkozy crossed
the Rubicon at the G-20 Summit in
November. Return to the drachma would

involve a sharp redenomination lower
of all private sector assets, a larger debt
restructuring, the imposition of capital
controls, and a probable collapse of the
Greek banking system (at a cost >30%
of Greek GDP). For Europe, a run on
peripheral banking systems could follow.
Hedges: switch out of European assets
into safe havens such as gold or US
Treasuries; long volatility indices such
as VIX, CVIX or DB Tail Risk index; buy
protection on the Sovereign X credit
default swap index; go long the yen or
sterling which could benet from an
accompanying fall in the euro.
2. Italian and Spanish funding crises
Together, Italy and Spain are too big to
fail, too large to bail. The eurozone’s
third and fourth largest economies
have a combined EUR 2.7 trillion debt
outstanding (>30% of eurozone’s total).
Both are liquidity problems, not solvency
problems. A crisis of condence and
deep recession are the catalysts for
this risk. For Spain, watch the private
sector and banking system. For Italy, the
concern is politics and underperforming
growth. The European Central Bank, and
possibly global central banks, would
need to respond aggressively. At stake

would be the global nancial system and
the fate of the euro itself.
Hedges: as above plus short subordinated
bonds of French and British banks;
go short Eastern European currencies
that tend to track the euro but have
yet to price in ‘euro break up risk’ as
extensively as the euro itself; long
options on CDX.IG index.
3. US downgrade and/or double dip
recession
The rst quarter 2011 showed how
quickly large unexpected shocks can
translate to the real economy: GDP
growth slowed to 0.8% after political
change in the Middle East and the
earthquake in Japan. If Risk 1 or Risk 2
materialise, then a double dip is a very
real possibility. If the highly anticipated
scal cuts due 23 December 2011
disappoint, or growth underperforms,
there is a real risk that the US could
be downgraded once again. Though
treasuries could rally again, don’t expect
a simple repeat of the historic August
downgrade as a ripple eect to US
banks sector downgrades could follow
this time. To measure the impact, timing
could be everything.
Hedges: Issuers can protect themselves

by pre-funding; investors by going
overweight non-nancials and higher-
rated non-cyclicals or by entering into
payer swaptions that knock in when
equities drop below a certain level.
The premiums on these can be reduced
by as much as 70% by linking them to
rising rates.
4. China hard landing
For China, 5% to 6% growth would seem
like a recession. China growth could be
stimulated quickly but the global capital
markets would be left exposed to sudden
sharp declines in commodity prices and
global equities. But the declines may be
short lived. With USD3.2 trillion of FX
reserves, China has the power to stop
the slide quickly.
Hedges: a six month put option on a
basket of WTI crude oil and copper or a
six month worst-of option on WTI crude
oil, copper and gold. Upfront premium
costs are 10.5% and 1.95% of notional
respectively.
5. France loses AAA rating
Quite possible, in our view, given badly
delayed scal austerity in advance of the
Presidential election. With France trading
at a 20 year wide to Germany, the
downgrade risk may already be priced in.

More concerning would be the economic
impact of bank funding market pressures
and the more aggressive scal austerity
to follow. Implications for the European
Financial Stability Facility would also be
negative, and come at a very bad time.
Hedges: buy protection on French
sovereign CDS; buy best-of-put
options that provide a put over the
equity index that experienced the
best performance over the period: the
rationale being that when there is major
macro event, equity markets tend to
go down simultaneously; it provides a
cheaper, yet eective hedge for a global
correlated sell-o.
6. Aggressive, sustained European bank
deleveraging
The question is not if European banks
will deleverage aggressively in 2012,
but by how much. Current estimates
suggest as much as USD2 trillion
within 18 months. Strong headwinds
include a sovereign crisis, a recession,
closed funding markets and Basel 3. If
the negative feedback loop to the real
economy is not broken, look for funding
and capital markets to be the channels
for global contagion.
Hedges: look for protection on cyclical

industries, lower-rated credits and
nancials, particularly those with high
funding needs; go long volatility both in
equity and credit markets.
Risk Monitor
Ten key risks to watch out for
Figure 1: Composition of Debt/GDP
Across Selected Economies
Source: Central Banks
Financial
Non-Financial Business
Households
Government
500%
496%
393%
382%
353%
347%
333%
332%
264%
400%
300%
200%
100%
0%
Japan Spain Portugal US UK Greece Ireland Italy
Greece Gov’t Debt/GDP=160%
Figure 2: 2012 – 2014 European Bank

Debt Redemptions
Source: Deutsche Bank Research
2012
€ 845
€ 900 EUR billion
€ 800
€ 700
€ 600
€ 500
€ 400
€ 300
€ 200
€ 100
€ 0
€ 673
€ 583
2013 2014
Figure 3: Gold During the ‘Perfect Storm’
(August 5 – October 10, 2011)
Source: Bloomberg
1950 $
1900
1850
1800
1750
1700
1650
1600
1550
5‐Aug

12‐Aug
19-Aug
26‐Aug
2-Sep
9-Sep
16-Sep
23‐Sep
30-Sep
7-Oct
Oct. 10: Europe announces “Grand Plan”
Aug. 5: Historic US downgrade
1.7
Executive Viewpoints
1.7
Executive Viewpoints
Tom Joyce
CMTS Strategist
Ram Nayak
Global Head of Structuring
Markets in 2012—Foresight with Insight
Deutsche Bank
Markets in 2012—Foresight with Insight
Deutsche Bank
1.8
Executive Viewpoints
1.8
Executive Viewpoints
Michele Faissola
Head of Global Rates and Commodities
Ination

Central banks looking the other way?
For most of the past two decades, ination has not had a
major impact on the investment decisions of market players.
With the rise of independent central banks endowed with
strict ination ghting mandates, ination expectations
successfully converged towards central bank targets. This
low and stable ination environment was a key contributor
to the ‘great moderation’ period enjoyed during the past two
decades, a period of an unusually stable macroeconomic
environment for advanced economies.
The 2008 nancial crisis and its
aftershocks which continue to reverberate
across the world have forced investors to
question the stability of both ination and
growth in coming years. First, established
forecasting models failed to predict
accurately the rise in ination in 2011.
Second, high debt levels, weak growth
prospects and dicult market conditions
are making it challenging for central
banks to focus solely on ination targets,
with nancial stability and employment
increasingly taking precedence in their
objective functions.
Indeed, only one year ago, economists
and policy makers were preoccupied
by the spectre of deation. US core
ination fell to 0.6% in October 2010
and speakers at the Fed’s Jackson Hole
conference in August 2011 expressed

concerns about the risk of additional
price declines in the following year.
Instead, US core ination rose to 2%
while headline ination soared to almost
4% in September 2011. Similarly,
ination rates in the UK, China and in
the euro area have been rising more
quickly than anticipated and are currently
running at levels well above central
banks’ targets.
Against this backdrop, central banks
appear stuck in a low real rate trap.
Financial markets are more fragile than
ever, while public debt levels remain
perilously high. This makes it dicult
for monetary authorities to focus solely
on their ination mandates, as low real
policy rates may be required to keep
markets and economies aoat.
The European Central Bank (ECB) has
been alone among the major central
banks in ghting ination risks raising
interest rates twice earlier this year,
although it was forced to reverse course
recently. All other major central banks
have maintained extremely low interest
rates and have engaged in aggressive
quantitative easing, despite ination
rates above their targets.
The current environment and policy

actions are not without risks for the
ination outlook. The most visible
eect of record low policy rates is the
upward pressure on real asset prices
which – via commodities – has been a
major driver of this year’s acceleration in
global consumer price ination. Central
bank policies may also have impacted
domestic ination. Unconventional policy
measures are likely to have supported
ination expectations, which in turn may
have added some stickiness to ination
in the face of subdued demand.
With commodity prices unlikely to rise
at the frantic pace of 2011 and global
economic activity softening, ination
rates should come down in 2012.
However, the post 2008 experience
suggests that central banks will continue
to intervene aggressively in support
of economic growth and markets –
tolerating risks on the inationary side –
in particular in the US and the UK where
policy makers have made it clear they
stand ready to add additional support
if required. For most central bankers,
except perhaps the ECB, the risk of an
above-target ination rate is viewed as a
relatively low price to pay for nancial or
economic stability.

In this environment, ination markets
oer attractive opportunities for
investors. Breakeven ination rates –
the ination compensation priced in
by ination-linked and conventional
government bonds – have been
negatively aected by several factors:
ight-to-quality into more liquid nominal
bonds; concerns about downside risks
to growth; and ocial intervention, such
as central bank purchases of UK gilts or
Italian BTP. In most markets valuations
anticipate ination rates to run below
policy targets for the coming years. As
such, investors can switch from nominal
to ination-linked bonds, generate a
prot if ination turns out to be on
average at the central bank target and
get an ination insurance for free.
Markets in 2012—Foresight with Insight
Deutsche Bank
Markets in 2012—Foresight with Insight
Deutsche Bank
1.9
Executive Viewpoints
Werner Steinmüller
Head of Global Transaction Banking
Trade Finance
Back in fashion
Over the past three years, transaction banking

has been recognised as a key strategic pillar
of global wholesale banking. Indeed, since the
nancial crisis broke in 2008, the world’s leading
international banks have increased their focus on
this business as a stable form of revenues in a
very uncertain business environment.
Within transaction banking, trade
nance products (invariably traditional,
well developed products) have become
particularly fashionable as clients have
sought to diversify their funding sources.
Regulatory discussions, most notably
around Basel 2 and Basel 3, have cast
something of a cloud on these products.
Trade nancing products are user-
friendly – and in the aftermath of the
rst stage of the crisis, so vital to oil the
wheels of trade – but over-regulation
has threatened to stie their use and,
ultimately, make them more expensive
for clients.
Deutsche Bank and other major
players in the trade nance market led
discussions with regulators over the
need to ensure trade products do not
become too expensive for clients. G20
leaders also expressed concern about the
impact of an over-aggressive regulatory
regime on trade-related products,
especially given its importance to fast-

growing developing countries.
The International Chamber of Commerce
(ICC) provided rm evidence of the
relatively low-risk nature of this business.
The ICC’s recently released data revealed
that in over USD2 trillion trades, over a
ve year period, there were only 3,000
defaults. These statistics covered 65% of
the world’s trade nance transactions.
The Basel Committee eventually relaxed
the Basel 3 regulatory capital adequacy
framework for trade nance by issuing
two waivers relating to letters of credit.
Firstly, the committee is waiving the
one-year maturity oor for certain trade
nance instruments under the advanced
internal ratings-based approach for credit
risk. This applies to issued and conrmed
letters of credit and reduces the risk-
adjusted capital charge on those assets.
Secondly, the committee is waiving
the so-called sovereign oor for certain
trade-nance related claims on banks
using the standardised approach for
credit risk – in other words, on trade
loans to businesses in countries where
the sovereign debt is unrated. This
applies to standardised and Foreign
Investment Review Board (FIRB) risk-
based approaches. These decisions

are important for the market and
demonstrate that the Basel Committee
recognises the crucial role played by
trade nance in low income countries –
particularly in the current climate.
It is important to realise that if the cost
of capital of a relatively low-risk, low-
margin activity like trade nance is the
same as a higher-risk, higher-margin
activity, banks will naturally gravitate
towards the higher-margin business.
This is exactly what the Basel Committee
is trying to avoid in its far-reaching
directives. Therefore, an unintended
consequence of Basel 3 may have been
a negative eect on business models
and clients’ access to the trade nance
solutions oered by banks.
These waivers represent only two of the
concerns that the trade nance industry
has over Basel. There will be further
discussions. But trade nance will play
a key role in the eventual recovery of the
global economy, however slow that now
may be. All relevant parties should be
aware that overbearing regulation could
choke its progress.
Markets in 2012—Foresight with Insight
Deutsche Bank
Markets in 2012—Foresight with Insight

Deutsche Bank
2
Economics & Geo-Politics
The Eurozone Crisis
China
The US Dollar
US
Growth Solutions
Emerging Markets
Africa
Asia
The articles marked with this
icon are based on Deutsche
Bank Research.
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Markets in 2012—Foresight with Insight
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2.1
Economics & Geo-Politics
2.1
Economics & Geo-Politics
The Eurozone Crisis
Fast track Europe’s road map
Gilles Moec & Mark Wall
Co-Heads of European
Economics Research
While we continue to believe that the
eurozone’s authorities will do whatever
it takes to hold the euro together,

the urgency of the need to act has
risen sharply. The G20 summit in
Cannes in October failed to meet the
great expectations it had stirred and
was almost entirely overshadowed
by the market chaos sparked by the
suggestion of a referendum in Greece
and the subsequent departure of George
Papandreou, the Greek Prime Minister.
The eurozone economy now appears to
be sliding into recession which we hope
will only last for a couple of quarters,
although we admit something worse
could happen, especially if politicians and
central bankers fail to respond rapidly to
the deteriorating situation.
Given the market's entrenched
scepticism, what is needed now is a big
‘Grand Bargain’, way beyond anything
we've had so far. Indeed, this is the
price Europe is having to pay for lacking
enough will to date. Unfortunately,
the actions required are complex and
politically contentious and so will likely
be prone to scepticism from markets. The
bigger the intended action, the bigger the
risk that things go wrong when rigorous
implementation is needed.
In our opinion, three radical steps are
now required. First and foremost of these

is a large nal buyer of government
debt. We believe the European Central
Bank (ECB) is the only credible source.
The ECB is not allowed to buy primary
issuance from governments but can
buy bonds on the secondary market,
as it has been doing in recent months,
while noting it may not be entirely
content with that course of action. True,
signicant purchases could be seen as
a contradiction of the ECB’s statute. But
the German Constitutional Court recently
dismissed lawsuits taking this line.
We think the ination risk of such
purchases is negligible, given the
looming credit crunch and recession in
the eurozone. Ination is not Europe's
number one problem right now. We
believe deationary pressure should
be more of a concern. The ECB could
pledge to purchase a set volume of
bonds, say EUR200 billion worth over the
next 12 months. That on its own appears
enough to nance Italy through 2012. It
would be dicult for the ECB to say it is
only buying Italian debt but there is no
technical reason why it cannot commit
to purchasing a set volume of bonds in
the secondary market, exactly as it is
doing right now with covered bonds.

We believe the second step needed is
a big, deliverable and rapid structural
reform package from Italy to convince
markets it can pull through the crisis.
The package needs to be proven immune
from the vagaries of the economic or
political cycles.
Third, we need to see rapid and clear
signs from the EU that scal integration,
involving changes to treaties, is
coming. We believe there has to be
some sacrice by member states of
sovereignty. An example would be giving
the European Council the right to veto
national budgets. This is the sort of
quantum leap in governance reform that
the ECB is asking for.
The ECB will likely demand that if it is to
launch signicant bond purchasing, it
has to see the second and third actions
outlined above. If it launches this action
without demanding any conditions,
the eurozone may look weak because
it would be seen to be printing money
without credible political change or scal
control. We note that would likely be
poorly received by markets.

But time is short. So the ECB, in our view,
will have to make a leap of faith and

step up its intervention on the basis of a
statement of intent from the eurozone's
governments. Even a treaty revision
under enhanced cooperation limited
to the 17 EMU members would take
several months since it would need to
follow national ratication procedures.
A replication of the EFSF drama is likely,
with heated discussions in at least
Finland, the Netherlands and Slovakia.
ECB intervention will likely have to be
particularly large around the key dates for
national debates. Even if governments
strive to get the new treaty sorted as
fast as possible, we think the summer of
2012 is probably the earliest date.
In the meantime, we believe we
need to move from implicit to explicit
conditionality. Indeed, in its current form,
the ECB’s bond purchasing follows an
implicit conditionality with contacts
between the ECB and the governments
which never are as comprehensive and
publicly debatable as memoranda of
understanding (MoUs) signed with
the IMF.

This likely creates two symmetric
risks. First, that public opinion in
the core countries consider that the

commitments of the peripheral countries
are insucient to warrant an indenite
increase in the ECB's balance sheet. And
second, that peripheral countries resent
the transformation of the ECB into a
benevolent economic dictator triggering
ultimately a rejection of its support.
From a practical point of view, we think
that an emergency European Council
should be organised as soon as possible
to deliver the letter of intent which could
allow the ECB to step up its interventions
and act as lender of last resort.
Europe remains deeply mired in its sovereign
debt crisis, something that is likely to dominate
markets in the year ahead, and not just in Europe.
The whole world has an interest in the resolution
of a crisis that deepened dramatically through the
fourth quarter, and enveloped more and more major
economies putting European leaders on the back
foot as events threatened to overwhelm them.
Markets in 2012—Foresight with Insight
Deutsche Bank
Markets in 2012—Foresight with Insight
Deutsche Bank
2.2
Economics & Geo-Politics
China
Soft or hard landing?
Jun Ma

Chief Economist, Greater China
For the year as a whole, we expect
China’s GDP growth to be 8.3% in 2012,
down from 9.1% in 2011. CPI ination
is also likely to decline sharply to 3%
in the rst half of 2012, from 5% in Q4
2011, as a result of falling agriculture and
commodity prices.
The three main factors driving the
deceleration of Chinese economic growth
will be the eurozone sovereign debt crisis,
falling volumes in the local real estate
market and ongoing credit tightening.
The contraction of the eurozone economy
as a result of the sovereign debt crisis
and the deleveraging of the global
banking sector will have a signicant
impact. Given the decline in external
demand from the EU and the US, we
expect China’s nominal export growth
to slow from 20% in 2011 to 10% in
2012. The rst half of 2012 may see even
weaker single-digit rate export growth.
The fall in Chinese property transaction
volumes and the resulting deceleration
in investments by developers will also
be important. Developers’ investment,
which accounts for 16% of the total
investment in China, is likely to slow
from 30% year-on-year to sub-10% in

Q1 2012. This will lead to weakness in
demand for materials.
The ongoing credit tightening, which
has resulted in the suspension of 70%
of the railway construction projects and
constrained the production of many
small enterprises, will only be relaxed
gradually in the coming months.
We expect the government to ease
macro policy in the nal months of 2011
and early 2012 in reaction to ination
and GDP data.
November 2011’s CPI ination (due to
be reported in mid-December) is likely
to show a fall to less than 5%. Q4 GDP
growth (due to be reported in mid-
January 2012) is likely to be around 9%,
with export growth falling to 10% or less
in Q1 2012.
Together with persistent weakness in
property sales and investments, this
data should convince the government
that the priority should be shifted
towards supporting growth rather than
restraining ination.
The response from the People's Bank
of China (PBOC) and the government
is likely to be to permit an increase in
monthly net lending to around RMB700
billion per month (from the current

RMB500 billion per month), consider
a cut in the reserve requirement ratio,
introduce some more tax cuts to
support SMEs and the service sectors,
and expand the local government
bond issuance programme to support
infrastructure nancing.
Changes in ocial interest rates are not
necessary in our view and the RMB is
likely to continue its appreciation at 4 –
5% against the US dollar in 2012.
Thanks to this policy easing, we expect
China’s GDP growth to recover on a
quarter-on-quarter basis from Q2 2012,
begin to rise on a year-on-year basis from
Q3, and reach 9% on an annualised qoq
basis in H2 2012.
We are also relatively optimistic about
Chinese equities. While in the short-term,
the European uncertainty and the fear of
China’s economic slowdown are likely
to generate signicant market volatility,
on a 12-month basis we believe China’s
equity index is likely to deliver one of the
best performances in emerging markets.
The Chinese economy is likely to visibly decelerate in
early 2012, amid a signicant drop in export growth and
weakening real estate activities. We expect annualised
quarter-on-quarter GDP growth to fall to 7% (or slightly
below) in Q1 2012, before recovering in the remainder

of the year towards 9%.
Markets in 2012—Foresight with Insight
Deutsche Bank
Markets in 2012—Foresight with Insight
Deutsche Bank
2.3
Economics & Geo-Politics
Sanjeev Sanyal
Global Strategist
The US Dollar
Are we entering a post-dollar world?
The ongoing economic crisis has called into
question many of the fundamentals of the world
economic system, with growing talk of how the
US dollar will be or should be replaced as the
world’s anchor currency.
Governor Zhou Xiaochuan of the
People’s Bank of China has called
for “creative reform of the existing
international monetary system”. Many
prominent economists agree with a
UN panel, headed by Joseph Stiglitz,
recommending a ’Global Reserve System’
(essentially an expanded SDR) to replace
the dollar’s hegemony.
1
While there are
good reasons, in my view, to suggest that
we may in future see a broader range of
reserve currencies including the CNY, as

Alan Cloete argues in his article, the long
history of global currencies suggests that
the US dollar will remain the anchor for
many years to come.
During Roman times, India ran a large
trade surplus with the empire with Pliny
the Elder (23–79 AD) writing that "not a
year passed in which India did not take
fty million sesterces away from Rome".
The trade decit meant that there was
a continuous drain in gold and silver
coins that in turn created shortages of
these metals in Rome. In modern terms,
the Romans faced a monetary squeeze.
Rome responded by reducing the gold/
silver content (the ancient equivalent of
monetisation) which led to a decline in
the real value of the coins and ination.
Yet, frequent ndings of Roman coins
in India suggest that Roman coinage
continued to be accepted for a long time
after it must have been obvious that the
gold/silver content had fallen.
Fast forward 1,000 years or so to the
16th century when Spain emerged as
a super-power following its conquest
of large parts of Latin America and
with it abundant silver mines. Between
1501 and 1600, 17 million kg of silver
and 181,000 kg of gold owed to

Spain which it spent on wars in the
Netherlands and elsewhere. This
increase in the supply of precious metals
caused a sustained bout of ination.
Prices rose at least four-fold in Spain over
the course of the 16th century.
Despite its wealth, Spain became
increasingly unable to service its war
debts, eventually defaulting four times
and went into geo-political decline. Yet
Spanish silver coins (known as ‘pieces
of eight’ or Spanish dollars) continued to
be the key currency used in world trade
right up to the American Revolutionary
War. In fact, they remained legal tender
in the US untill 1857 – long after Spain
itself had ceased to be a major power.
By the middle of the 19th century, the
world was functioning on a bi-metallic
system based on gold and silver.
However, following Britain’s lead, most
major countries shifted to a gold-standard
by the 1870s. The Bank of England would
convert a pound sterling into an ounce
of (11/122 ne) gold on demand. The
US Treasury was similarly committed to
convert an ounce of gold at USD4.86.
2
The system was nally disrupted by
World War One. Then in the Great

Depression, the Bank of England was
forced to choose between providing
liquidity to the banks and honouring
the gold peg. It opted for the former on
20 September 1931. Yet pound sterling
continued to be a major world currency
till well after World War Two. Even in
1950, 55% of foreign exchange reserves
were held in sterling and many countries
continued to peg themselves to it. Note
that this was more than half a century
after the US had replaced Britain as the
world’s largest industrial power.
Three things should be clear to the
reader by now. First, a global monetary
system based on precious metals does
not resolve the fundamental imbalances
of a global economic system. Second,
precious metals do not even resolve the
problem of ination. Third, the anchor
currency and the underlying eco-system
of world trade will often outlive the geo-
political decline of the anchor country.
A new economic order was established
after World War Two with the United
States as the anchor country. Dubbed
the Bretton Woods system, it involved
the US dollar being linked to gold
at USD35/ounce and with other
currencies being linked to the dollar

(although allowed occasionally to make
adjustments). A aw in the system
was that while it underpinned global
economic expansion as long as the US
was willing to provide dollars by running
up decits, these same decits would
eventually undermine the ability of the
US to maintain the USD35/ounce gold
price. In the 1960s, the US responded by
creating a ‘Gold Pool’ that obliged other
countries to reimburse the US for half of
its gold losses. This soon began to breed
discontent with France leaving the Gold
Pool in 1967, and the Bretton Woods
system collapsing in 1971.
Or did it collapse? Despite the problems
of the 1970s, the US dollar remained the
world’s dominant currency, with a new
generation of Asian countries – most
notably China – pegging their currencies
to it. Deutsche Bank’s David Folkerts-
Landau, Peter Garber and Michael
Dooley dubbed the resulting relationship
as Bretton Woods Two. In common with
its older version, the system allowed
the peripheral economy (China) to grow
rapidly even as the anchor economy (US)
enjoyed cheap nancing. Note how the
relative rise of China did not diminish the
role of the US dollar and may even have

enhanced it. Indeed, like the Japanese
during their period of high growth,
the Chinese until recently resisted the
internationalisation of the renminbi.
So, are we entering a post-dollar world?
Despite the pain caused by the great
recession, there is no sign that the world
will forsake the dollar. The world is still
willing to nance the US at a low interest
rate and the nominal trade-weighted
index of the dollar has not collapsed. It
declined signicantly before the crisis
but has since stabilised. History shows
that once an anchor currency has
established itself, it can be very resilient
and often outlasts the economic and
geo-political dominance of its country of
origin. It is possible (albeit not certain)
that China will replace the US as the
world’s largest economy within a decade
but we feel that US dollar will remain the
dominant global currency for a long time
afterwards.
1.
nancial+crisis&Cr1=
2. ‘The Gold Standard in Theory & History’, Barry Eichengreen
and Marc Flandreau, Routledge 1985.
Markets in 2012—Foresight with Insight
Deutsche Bank
Markets in 2012—Foresight with Insight

Deutsche Bank
2.4
Economics & Geo-Politics
US
Green shoots or parched roots?
Peter Hooper
Co-Head of Global Economics
The broad consensus expectation,
and our own, is that real GDP growth
will struggle to rise much above its
trend rate of about 2.5%. This means
that unemployment is likely to remain
uncomfortably high near 9%. The high
unemployment, in turn, should help
to quell ination pressures and hold
the underlying rate of ination a bit
below the Fed’s informal target of just
under 2%.
This projection reects the eects of
two sets of countervailing forces. On the
positive side are several key drivers of
growth, including pent-up demand for
durables and structures, strong corporate
sector balance sheets, and household
deleveraging. Spending on consumer
durables and business equipment, as
well as investment in business structures
and housing, in the aggregate, is still
running near historic lows as a share of
GDP. This spending will add an extra 5%

to the level of GDP in the years ahead as
it returns to levels needed to keep the
stock of homes and durables expanding
in line with a growing population.
Corporate prots are at all-time highs
relative to output, and corporate net
worth is robust; this nancial strength is
underpinning the recovery of business
spending on equipment and new
structures. Consumer spending will be
supported by the signicant progress US
households have made in deleveraging,
reducing their debt service burdens to
below normal levels.
On the negative side are several drags
on growth, including scal drag and
ongoing uncertainties about economic
policies in the US and Europe, continued
weakness in the US housing sector, and
the negative eects of depressed home
and stock prices on household wealth
and consumer spending.
The wind-down of various stimulus
programmes is slated, in our view, to
subtract as much as two percentage
points from GDP growth over the
year ahead. At the same time, the US
Congress will likely have to implement
a much more far-reaching decit and
debt reduction programme to put the US

scal outlook on a sustainable path and
avoid a more serious downgrade of US
Treasury debt.
Uncertainties on this front, as well as
on the euro front have been weighing
on sentiment, holding both consumer
condence and stock market valuations
to levels normally associated with
recessions. In the housing market,
an excess stock of vacant homes and
large number of foreclosures continues
to weigh on home prices. These asset
price developments will be a depressant
osetting the positive developments on
the debt side of household balance sheets.
2012 is likely to mark the fourth year of a painfully
sluggish recovery of the US economy from
the recession of 2008. However, the range of
uncertainty around the central expectation of slow
to moderate growth is unusually wide thanks
to the crucial role that politics will be playing in
determining the course of economic events.
Absent the drags, the economy would
be expanding at a robust pace; absent
the drivers, it would be headed into
recession. Either extreme is possible
depending on how political forces shape
the resolution of US scal challenges
over the year ahead and the resolution of
scal and nancial challenges facing the

eurozone. Given the relatively subdued
central projection and the wide range of
risks, we expect the Fed to continue with
its extraordinarily stimulating monetary
stance over the year ahead and not to
adopt further quantitative easing unless
the economy edges toward recession.
Markets in 2012—Foresight with Insight
Deutsche Bank
Markets in 2012—Foresight with Insight
Deutsche Bank
2.5
Economics & Geo-Politics
2.5
Economics & Geo-Politics
Growth Solutions
What Greece and Italy could learn from Ireland
Torsten Slok
Chief International Economist
Studies by organisations such as the
World Bank have shown that business
regulation (such as red tape, taxes,
labour laws and how long it takes to
start a business) is a key factor behind
GDP growth.
For this reason, progress on this front (or
the lack of it) will be a useful yardstick
for institutions seeking to understand the
eurozone sovereign debt crisis in 2012.
The World Bank in early 2011 collected

data for 183 countries for the time
to start a business, dealing with
construction permits, getting electricity,
registering property, getting credit,
protecting investors, paying taxes,
trading across borders, enforcing
contracts, and enforcing insolvency.
This study (see Figure 1) came up with
some interesting ndings. Ireland, for
example, ranks signicantly higher than
other peripheral European economies
and many core European ones too; while
Italy and Greece come well below many
developing nations.
The solution to Italy and Greece’s current
dilemmas may not just lie in debt reduction.
Improving business regulation is also key –
currently, it is seriously dampening economic
growth at a time when growth is urgently required.
On the key issue of the length of time it
takes to establish a business, Portugal
ranks well ahead of Italy and Greece (see
Figure 2). This would suggest, by this
yardstick at least, that Portugal could nd
it easier to secure the growth it needs to
meet its debt obligations than some of
its peripheral neighbours.
But on the issue of the cost of starting
a business, Ireland scores best with
Greece and Italy both lagging a long

way behind. Together with its strong
showing in the ‘time spent paying tax’
and ‘strength of legal rights’ categories
(see Figure 3), this helps to explain why
Ireland has managed to recover from
the 2008 nancial crisis better than
other peripheral European nations. We
are expecting the Irish economy to
grow by 0.8% in 2012 compared to a
2.2% contraction in Greece and a 0.2%
contraction in Italy.
Any improvements in the business
environment in Greece and Italy should
help support growth in those countries
Figure 1: Rankings on ease of doing business for selected countries
Source: World Bank
Rank Economy Rank Economy Rank Economy
1 Singapore 21 Latvia
2 Hong Kong 99 Yemen, Rep.
3 New Zealand 28 Belgium 100 Greece
4 United States 29 France 101 Papua and New Guinea
5 Denmark 30 Portugal
6 Norway 31 Netherlands 119 Cape Verde
7 United Kingdom 120 Russian Federation
8 Korea, Rep 43 Puerto Rico (US) 121 Costa Rica
9 Iceland 44 Spain
10 Ireland 45 Rwanda 125 Bosnia and Herzegovina
11 Finland 126 Brazil
12 Saudi Arabia 86 Mongolia 127 Tanzania
13 Canada 87 Italy

14 Sweden 88 Jamaica 131 West Bank and Gaza
132 India
18 Malaysia 90 Uruguay 133 Nigeria
19 Germany 91 China
20 Japan 92 Serbia
Figure 3: A lot of time spent paying
taxes in Brazil; less time spent in Ireland
Source: World Bank
2600
150
100
50
450
400
350
300
250
200
2590
hrs/yearhrs/year Paying taxes,
time spent for businesses
(hours per year)
Brazil
China
Japan
Russian Federation
Italy
Portugal
India
Greece

Germany
Spain
United States
France
Canada
United Kingdom
Ireland
0 2580
2600
398
330
290
285
275
254
224
221
187
187
132
131
110
76
Figure 2: It takes a long time to start a
business in Brazil, a short time in Italy,
US, Canada and Portugal
Source: World Bank
days
Brazil
China

Russian Federation
India
Spain
Japan
Germany
Ireland
United Kingdom
Greece
France
Italy
United States
Canada
Portugal
80
60
40
20
0
100
120
140
80
60
40
20
0
100
120
140
Time to start a business (days)

119
38
30
29
28
23
15
13
13
10
7
6
6
5
5
Markets in 2012—Foresight with Insight
Deutsche Bank
Markets in 2012—Foresight with Insight
Deutsche Bank
Figure 4 : Minimum wages high in Canada, UK, and Italy;
low in China, Russia, and India
Source: World Bank
Country Minimum wages for a 19-year-
old worker or an apprentice
(USD/month)
Ratio of minimum wage to value
added per worker
Canada 1,904 0.34
UK 1,655 0.34
Italy 1,614 0.37

Japan 1,548 0.29
Ireland 1,536 0.31
USA 1,243 0.21
Germany 1,146 0.21
Spain 1,044 0.27
Greece 987 0.29
Portugal 790 0.29
France 782 0.14
Brazil 300 0.26
China 183 0.37
Russian Federation 139 0.12
India 30 0.17
but the slow speed with which politicians
in those countries appear to be reforming
is worrying to us.
The analysis also oers useful insights
into the long-term prospects for BRIC
economies with Brazil, Russia, India
and China having signicant room for
improvement. The high growth rates of
these countries in recent years (with the
exception of Russia) might indicate that
this improvement is not necessary.
But in reality, the growth has been
driven by their low production costs (see
Figure 4). Italian wages are about 20
times higher than in India – to make just
one comparison.
BRIC countries still have a signicant
amount of ‘catch-up’ to do before

their costs of production are even
remotely near the costs of production
in the G7 countries.
But, what the World Bank data does
suggest is that if the regulatory
environment in these countries is not
improved, growth rates will slow in the
medium term and they will nd it hard to
make the leap from low-cost to value-
added economic activity. Second – and
perhaps counter-intuitively – the data
also indicates that growth rates in these
countries could be signicantly higher if
eorts were made to remove red tape.
Many other insights can be drawn
from these statistics but the general
conclusion is very clear: with the global
economy still struggling with lack of
demand, it is vital that countries improve
their business regulation, in particular
in Greece, Italy, Spain, and Portugal,
which all have signicant room for
improvement.
Implementing more business-friendly
regulation in Southern Europe would
not only raise GDP growth and hence
living standards but would also make
economies more resilient in the face of
future shocks.
For investors, the implications are also

clear; countries that in 2012 make
it easier to do business are likely to
outperform those that do not.
2.5

Economics & Geo-Politics
Markets in 2012—Foresight with Insight
Deutsche Bank
Markets in 2012—Foresight with Insight
Deutsche Bank
2.6
Economics & Geo-Politics
2.6
Economics & Geo-Politics
Emerging Markets
Can they decouple?
Gustavo Canonero
Head of Latin America and EEMEA
Economics Research
Fundamentals are supportive for growth
across emerging markets (EM) and,
for the most part, these economies are
much less constrained by sovereign
and private sector debt than those of
OECD counties. In addition, emerging
economies have more room to implement
counter cyclical policies, particularly
monetary policy. This more benign
backdrop is evidenced, for example,
in the stable consumption growth of

recent quarters, even in the smaller open
economies, where historically the decline
in exports would have been expected
to lead to at least a modest softening of
consumption growth.
Consequently, the ‘two-speed’ nature of
the global economy we highlighted last
year is actually reinforced in our new
2012 outlook, with the growth dierential
in favour of EM remaining comparatively
high. We caution, however, that a further
worsening outlook in the advanced
world might be increasingly challenging
for EM, at least within the next year.
Even a shallow recession in the US and/
or Europe would likely elicit a strong
response in EM – especially in the
smaller, more open economies – due
to reversals of capital ows as well as a
temporary contraction in exports to the
region in recession that would render the
relationship between US/EU growth and
EM growth non-linear.
Nonetheless, based on a muddling
through scenario for the main
economies, with growth staying at
around 1.5%, we project EM economic
growth to advance 5.7% in 2012 from
an estimated 6.2% this year. To some
extent this is due to the greater resilience

of the largest countries in Asia – China,
India, and Indonesia, and the associated
strength of Latin American economies.
Emerging market resilience
Emerging economies have so far
weathered the slowdown in the US/EU
better than might have been expected,
and we are inclined to expect this
resilience to continue. A key element of
this outperformance is the robust growth
process in the major countries in Asia, the
increasing intra-EM integration, and the
fact that commodity prices – especially
oil and soft commodities – have been
higher than expected during most
of this year. Indeed, the fact that our
commodities team has maintained stable
price forecasts for 2012 lends support to
our expectation that Latin America could
weather the extended period of weaker
US growth reasonably well.
In addition to high and relatively stable
commodity prices, it is also the case that
outside Latin America, central banks
had been slow to ‘normalise’ monetary
policy, with the result that in Asia and
most of EMEA real interest rates have
been declining over the past year and
in many cases are again in negative
territory. We think this declining interest

rate environment has helped to support
consumption growth beyond what would
have historically been the case given the
slowdown in exports.
In emerging Asia, the most recent
forecast revisions have been less than
what a simple application of historical
‘growth betas’ would have suggested,
although changes have been much
larger in some of the smaller economies.
Hong Kong, Singapore and Thailand, had
already reported a GDP decline,
and Taiwan barely grew, during 2Q11.
For the region as a whole, it certainly
helps that three of the largest economies
– China, India and Indonesia – have
historically been quite immune to
uctuations in US and European growth.
Since July, we have lowered our China
and India growth forecasts but at 8.3%
and 8.0%, respectively, growth in these
two economies remains robust and
helps to underpin a positive view on the
whole region.
EMEA is the emerging region most
vulnerable to weaker growth in the
core economies. Most of the region’s
economies are relatively small and open,
and most have strong trade and nancial
linkages within the eurozone. Public and

private sector balance sheets are also
generally weaker than in Latin America
and Asia, providing less room for policy
adjustment to support growth. As in Latin
America, the commodity price outlook
supports the Russian, Kazakhstan and
Middle East forecasts. Most of the other
economies, however, are very exposed to
the slowdown in Europe, suggesting an
almost unit elasticity between growth in
the two regions.
Vulnerability and risks
The previous arguments notwithstanding,
there are a number of valid concerns
about this somewhat optimistic picture.
For example, a potential new global
equilibrium where the big savers of
emerging Asia would have to consume
more and export less could pose a risk
for growth in EM. Some economists
believe that the fast growth of emerging
Asia in the past few years (an impulse
that is more necessary than ever
before in the new global conjuncture
to prevent a global downturn) has been
facilitated by large production of tradable
goods. Shifting a large country like
China away from this specialisation in
manufacturing could slow its medium-
term growth by more than 200bp a year,

reecting the inherent instability of the
current global balance.
Another concern about the current
conjuncture is related to the political
economy equilibrium that demands a
slow process of rebalancing. The rise
of protectionist rhetoric in the US and
Europe is the most evident expression
of such concern. Disillusion with the
prevailing international order was
probably the main cause of the end of
the previous large wave of globalisation,
largely precipitated by the Great
Depression. Furthermore, even after
a few years of political stability in EM,
future political shocks cannot be entirely
ruled out.
All this notwithstanding, at the present
juncture, the major risk for EM seems
to be a dislocation in European markets
that could trigger a global recession.
Although that is not our most likely
scenario, it is not a negligible risk.
Although emerging market economies
are bound to be adversely aected by the
subdued outlook for growth in the US and
Europe, we remain relatively constructive
towards the asset class.
EM cyclical coupling and trend
decoupling (% YoY)

EM Trend G7 Trend
EM Cycle G7 Cycle
Source: Deutsche Bank
-6
-4
-2
0
2
4
6
8
1980 1985 1990 1995 2000 2005 2010
Markets in 2012—Foresight with Insight
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Markets in 2012—Foresight with Insight
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2.7
Economics & Geo-Politics
2.7
Economics & Geo-Politics
Africa
The next frontier: who to watch
The small size and illiquid local capital
markets, however, continue to deter
many mainstream debt and equity
investors. For example, while the
Johannesburg Stock Exchange is among
the largest in the world with market
capitalisation of about USD665 billion,
this is eight times larger than the other

bourses in sub-Saharan Africa combined.
This should change with time. Capital
market development and economic
growth tend to go hand in hand, and the
prospects for the latter look relatively
bright (see Figure 1).
We identify eight strongly-performing
economies in sub-Saharan Africa that
seem to oer the strongest potential
for foreign investors. Our list comprises
Angola, Ghana, Kenya, Nigeria, Senegal,
Tanzania, Uganda, and Zambia, which
make up 45% of the region’s population,
61% of its economic activity, and have a
combined output roughly equivalent to
the size of the Polish economy. Over the
past decade, growth in our eight frontier
sub-Saharan markets has accelerated to
6.6% from 3.0% over the previous two
decades and is set to be sustained at
close to these levels over the next ve
years. This matches the 6.6% expansion
in the BRICs, tops the 4.9% growth seen
in the rest of emerging Asia, and is well
in excess of growth of around 3.5% in
South Africa (see Figure 2).
While we think frontier markets in North
Africa also oer potentially attractive
returns over the longer term, bumpy
political transformations are likely to

weigh on condence and economic
activity for many months to come. For
the year ahead, therefore, we think the
growth prospects south of the Sahara
are better.
As in other emerging regions, their
economies have been bueted by
headwinds from the global nancial
crisis over the past three years. But
in contrast to past global slowdowns,
Africa has not been left behind as the
current global recovery has unfolded.
In part this reects improved policies.
Most countries have done a better job
in recent years of banking the dividends
from stronger economic growth. Foreign
reserves have increased and debt
levels have been reduced, helped in
some cases by debt relief from ocial
creditors. These buers enabled many
countries to ease policies during the
recent downturn (see Figures 3 & 4).
Stronger linkages with China and other
rapidly growing markets have also
added impetus to growth. Almost half
of sub-Saharan African exports now go
to emerging and developing markets
compared with less than one-quarter
in 1990 with China alone accounting
for about 17% of the region’s trade.

In some respects, this is just another
manifestation of the secular boom in
commodities resulting from the rise of
emerging markets over the last decade.
Africa’s abundance of natural resources
makes it an obvious beneciary of this
super cycle. But growth has also been
strong in countries that do not depend so
heavily on commodity exports, such as
Tanzania and Uganda (see Figures 5 & 6).
Next year is likely to be a dicult one for
global markets and African economies
will also need to overcome their share
of challenges. Low incomes, rapidly
growing urban populations, ethnic
divisions, pervasive corruption, and long
histories of armed conict, continue to
leave some countries susceptible to bouts
of social unrest and political tension, as
reected in our political risk indicators.
Encouragingly, elections in 2011 in
Nigeria, Uganda and Zambia, passed o
smoothly. And polls in Ghana in 2012
are expected to further underscore the
country’s already strong reputation for
political stability. Kenya’s elections,
however, will be a signicant test of its
democratic credentials and ability, under
a new constitution, to avoid a repeat of
the protracted stand-o following the

disputed 2007 elections, with all but
the bravest of investors likely to remain
sidelined until transition to the next
administration is complete (see Figure 7
on next page).
Robert Burgess
EEMEA Chief Economist
Marion Mühlberger
Economist
Figure 1: Local capital markets are small
Source: Bloomberg Finance LP,
National Stock Exchanges, Deutsche Bank
Market capitalisation
(% of South African market)
*all SSA equity markets
with a capitalisation > USD 2bn
Nigeria
Kenya
Mauritius
Cote d’Ivoire
Botswana
Uganda
Tanzania
Ghana
Zambia
3
2
1
7
6

5
4
0
Figure 2: African growth is catching up
Africa frontier BRICs
Source: IMF, World Bank, Deutsche Bank
2.0
8.0
7.0
6.0
5.0
4.0
3.0
Real GDP (%)
81-85 86-90 91-95 96-00 01-05 06-10 11-15
1.0
Figure 3: African growth has not been
left behind in this recovery
Current cycle (t=2009)
Average last three cycles
(1982, 1991, 2001)
Source: Deutsche Bank
Real GDP growth (%)
1.5
7.5
6.5
5.5
4.5
3.5
2.5

0.5
t-4 t+4t+3t+2t+1t-3 t-2 t-1 t
Figure 4:
Rebuilding policy buers
Reserves (excl. Nigeria) (lhs)
Public debt (rhs)
Source: Deutsche Bank
12
11
10
9
18
17
16
15
14
13
30
90
80
70
60
50
40
GDP (%) GDP (%)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
8
20
Figure 5: Trade diversication towards
emerging markets

EU US
Emerging Markets
Source: Source: IMF DOTS,
Deutsche Bank
% of total SSA trade (exports + imports)
10
70
60
50
40
30
20
0
1993 201120081996 1999 2002 2005
Figure 6:
High commodity dependence
Main commodity exports in % of total exports (2011 estimate)
Source: Deutsche Bank
Angola 97% oil
Ghana 39% gold, 26% oil,
17% cocoa
Kenya 19% tea, 12% horticulture
Nigeria 90% oil
Senegal 11% sh, 11% phosphate
Tanzania 37% gold
Uganda 18% coee
Zambia 84% copper
Africa’s economic revival has been rightly hailed in
many quarters and looks set to continue in 2012.
Markets in 2012—Foresight with Insight

Deutsche Bank
Markets in 2012—Foresight with Insight
Deutsche Bank
2.7
Economics & Geo-Politics
2.8
Economics & Geo-Politics
Taimur Baig
Chief Economist India, Indonesia
and Philippines
Asia
Slowing but how much?
A lacklustre 2011 is likely to be followed by an equally,
if not more, challenging 2012 for Asian economies.
The debt crisis in peripheral Europe, a renewed sluggish
recovery in the US, and anaemic growth in Japan will
likely continue to drag down demand for Asia’s exports.
Financial market uncertainty, stemming
primarily from Europe, could also
adversely impact fundraising and
system of payments, adding an extra
layer of downside risk. Given this cloudy
outlook, it is logical to expect a slowing
of growth in Asia. Our Asia (ex Japan)
growth forecast for 2012 is about half
a percentage point lower than in 2011
(7.2% vs. 7.6%). There are considerable
downside risks to this forecast, and
they stem not just from weak external
demand (and its subsequent impact

on local investment and consumption),
but also from the outlook for food and
energy prices.
Recent oods in Thailand could have
adverse implications for rice prices in the
region going into 2012. With respect to
energy, global supply bottlenecks, poor
inventory levels, and sustained emerging
market demand suggest a continuation
of high prices.
These two factors could keep ination at
elevated levels in many countries, thus
reducing the room available for interest
rate cuts. Unlike 2009, when a sharp
slowdown in the global economy was
accompanied by a collapse in commodity
prices, allowing central banks around
the world to cut rates aggressively, the
situation appears to be less clear cut for
2012. We expect ination to average
about 4% in the region next year, lower
than 2010 and 2009, but not low enough
to allow for sizeable policy easing.
Moreover, other than China and India,
money and credit conditions are already
rather loose in most countries, so rate
cuts or liquidity measures may not have
much traction in any case.
General government debt
India Indonesia Malaysia Philippines

South
Korea Thailand
G20
Advanced EU UK US
115
100
85
70
55
40
25
10
China
% of GDP
17 68.1 26.1 53.1 61.9 31.9 41.6 102.9 91.2 77.1 96.8
With the exception of India, Asian
economies tend to be characterised
by sizeable balance of payments
surpluses, which has in recent years led
to sustained exchange rate appreciation
pressure. Currencies may not appreciate
substantially in the coming year though,
as trade surpluses are on track to shrink
and capital ow volatility is likely to
continue. We therefore expect regional
exchange rates to either remain steady
or to show only mild appreciation
tendencies in the coming year.
The outlook could be even worse had
it not been for the fact that household,

corporate, and public sector balance
sheets in Asia economies are by and
large stronger than their Western
counterparts. There is clearly some room
available for scal and monetary stimulus
if economic weaknesses exacerbate. The
chart below shows that public sector
indebtedness in the region is strikingly
lower than in the Western economies.
At a time when sovereign debt crises are
dominating the headlines, this is indeed
a key dierentiating element.
Perhaps because of their scal and
balance of payments strengths,
consumer and business condence
in Asian economies have remained
robust this year, despite a sharp drop
in trade and a surfeit of negative
external developments. Short of a major
exacerbation of the global economy and
nancial markets, Asia could continue
to generate growth rates that would be
several hundred basis points higher than
their Western counterparts. Decoupling
remains unachievable for now, but Asia’s
intrinsic balance sheet strength should
still allow for 2012 to be a year of no
more than only a modest slowdown in
a world fraught with economic risks.
Ination has accelerated to about 11%

over the past four to ve months from
a low of 7% a year ago, reecting rising
international food and fuel prices and a
reticence in some countries to roll back
accommodative policies put in place
after the last crisis. In East Africa,
these pressures have been exacerbated
by a severe drought and weaker
exchange rates, which have pushed
ination to 19% in Kenya, 17% in
Tanzania, and 31% in Uganda. Central
banks have responded with aggressive
rate hikes in the last few months. This
should help to restore macroeconomic
stability and prop up their currencies, but
is likely to hold back economic growth in
the short term.
Africa’s exposure to commodity
markets, which has driven its terms of
trade to record highs, could also prove
to be a double-edged sword. Global
growth of much below 3% would likely
be associated with weaker oil and
industrial metals prices, which would be
negative news for the region’s major oil
producers, Angola and Nigeria, as well
as Zambia given its reliance on copper
exports. On the other hand, continued
negative real interest rates in core
markets may continue to provide support

for gold, which could help to mitigate
some of the negative eects of a global
slowdown on Ghana and Tanzania.
Further ahead, the durability of the
economic revival in Africa will also
depend on how countries manage their
commodity revenues. Nigeria’s recent
experience has underscored that, if not
appropriately managed, oil revenues
can lead to wildly pro-cyclical spending
patterns and macroeconomic volatility.
Going forward, we are more optimistic
that the government will be able to rein
in public spending, which, should in turn,
bring some stability back to the foreign
exchange market and pave the way for
continued strong growth.
The newest kid on the block is Ghana,
where new oil production is set to
push economic growth up to about
14%, making it easily one of the fastest
growing economies in the world this
year. Ghana’s framework for managing
oil wealth has only recently been
approved but includes several useful
elements, including a strong emphasis
on transparency and the creation of oil
savings funds designed to insulate the
economy against volatile movements
in oil prices and to preserve some oil

wealth for future generations. Consistent
implementation of this framework
through both good and bad times should
help to further lock in Ghana’s growing
reputation as of one of the continent’s
brightest long term prospects.
Figure 7: Diering degrees of political risk
Fragility Resilience
Score: 24=worst, 0=best
Source: Deutsche Bank
Kenya
Uganda
Tanzania
Angola
Nigeria
Zambia
Ghana
Senegal
Ivory Coast
South Africa
Botswana
Pakistan
Bangladesh
Lebanon
Egypt
Serbia
Sri Lanka
0 5 10 15 20 25
Note: The political instability index is composed of two sub‐indices. The fragility sub- index gauges a country's vulnerability according to socio ‐
economic factors, while the resilience sub‐index measures the capacity of a country to mitigate political risk and withstand economic shocks.

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