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

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

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

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.

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

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 &

– 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

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.

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

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

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

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’.

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.

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

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

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

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

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

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

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.

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

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

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

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

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

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.
Markets in 2012—Foresight with Insight
Deutsche Bank
Markets in 2012—Foresight with Insight
Deutsche Bank
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,

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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)

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

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

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

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

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

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%

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

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