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One Trump does not a summer rally make

Trump took everyone by surprise and gave the stock market wings. We doubt this euphoria will last until the end of 2017 and therefore remain only moderately positive.

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Editorial

Equities

Is it really so surprising that U.S. shares were the big winner of the U.S. election? Investors should have seen this coming. After all, in his victory speech, Donald Trump not only repeatedly said he would make America great again, but he also promised to double domestic economic growth. This, in fact, is what U.S. companies desperately need because organic growth is still quite meager overall, as was demonstrated again by the latest quarterly reporting season. We currently expect U.S. gross domestic product to grow 2.2 percent in the coming year. We are not yet sure for which year we should raise our projection to over 4 percent. Trump owes this detail to investors and economists. He has been equally vague on the structuring and refinancing of the economic package that has done so well to fuel investor imaginations.

It would also help American companies' planning security if they could learn something more tangible about Trump's dream of a more American America. For example, which imported goods will be made more expensive by the new tariffs? How easy will it be for companies to hire qualified foreign personnel? And what type of production locations abroad may be sanctioned? Although Trump made an effort to tone down several of his promises just shortly after the election, it doesn't appear he's willing to back away from these issues. Here you can see some parallels to Great Britain where Prime Minister Theresa May quickly turned the attention from the Brexit vote to the issue of migration, at least on the domestic front. Trump will also have to deliver some hard facts to his core followers – and soon. Generally, we believe U.S. companies could stand to profit in the near term from a Trump presidency (lower foreign competition, tax relief, deregulation) but could suffer under this agenda in the long term (counterattacks from trading partners, difficulty in recruiting personnel). The stronger U.S. dollar is an immediate headwind. However, we think the pieces of the program alluded to so far are too vague for building an investment strategy.

Equity strategy 2017

Even though the new U.S. government's urge for immediate action will almost certainly be broadly supported by a Republican-dominated Congress and boost the U.S. economy, in our view, this should not be nearly enough to continue to fuel the markets in 2017. The U.S. stock markets are trading close to historical highs. We see little potential for margins to expand further whether because of wage pressures or the stronger U.S. dollar. In addition, refinancing costs should increase as a result of rising interest rates. We therefore see no reason to increase our valuation parameters, which means the U.S. stock market, like almost all markets, is already close to our target levels. We believe returns will once again be generated largely through dividends. At the same time, we continue to see better opportunities in individual stocks and sectors. We have raised our outlook for the healthcare and energy sectors, which places them among our preferred sectors next to the technology sector. We are skeptical when it comes to utilities and defensive consumer-goods stocks. With two more anticipated interest-rate increases from the U.S. Federal Reserve on the horizon, a reduction in bond purchases by the European Central Bank from April 2017 onwards, and a persistently high level of political uncertainty on both sides of the Atlantic, we expect to see volatile stock markets that should continue to provide enough of a window for tactical positioning.

" Based on the high expectations attached to the United States and the comparatively low expectations for Europe, we believe the surprise potential in 2017 could lie in Europe. "

Thomas Schuessler, designated Global Co-Head of Equities

Looking at multiples, the U.S. is already great again

There are some good reasons why U.S. equities are more expensive than those in the emerging markets; low volatility is one. We believe that valuation spreads are largely justified.

Looking at multiples, the U.S. is already great again

Sources: FactSet Research Systems Inc., Bloomberg Finance L.P., Deutsche Asset Management Investment GmbH; as of 11/2016

Valuations overview

Equities United States

Even though Donald Trump's election victory has caused some turbulence for U.S. equities, particularly at the sector level, we consider it premature to significantly adjust our forecasts. Although the repatriation of U.S. profits held abroad could again inspire share buybacks, this should, at the same time, be countered by rising interest rates.

Equities United States

Sources: FactSet Research Systems Inc., Deutsche Asset Management Investment GmbH; as of 11/30/16

Equities Europe

European equities profited from the improving economic environment and subsiding concerns about the health of the financial sector. However, political risks continue to exist and export dependency could in turn at least dampen sentiment in light of the anti-globalization rhetoric of Donald Trump.

Equities Europe

Sources: FactSet Research Systems Inc., Deutsche Asset Management Investment GmbH; as of 11/30/16

Equities Japan

We are retaining our positive view of Japanese equities due to the long-term improvement in corporate governance and the ability to finance increasing payouts from profits and liquidity reserves. The end to the yen strength may give further impetus to Japan's exporters.

Equities Japan

Sources: FactSet Research Systems Inc., Deutsche Asset Management Investment GmbH; as of 11/30/16

Equities Emerging Markets

The progressing economic recovery in the emerging markets as well as the prospect of seeing profit growth for the first time in four years are factors in favor of this region. However, we also see a risk that either the implementation of Donald Trump's anti-trade plans or rising U.S. yields could have negative effects in the region.

Equities Emerging Markets

Sources: FactSet Research Systems Inc., Deutsche Asset Management Investment GmbH; as of 11/30/16

Forecasts

We do not fear an interest-rate reversal

2017 to offer moderate upside potential. Our earnings forecasts are below market expectations. Politically driven volatility opens up sector opportunities.

The hope of an extensive fiscal package tied to Trump's victory drove U.S. yields higher in a matter of days and set off a pro-cyclical sector rotation. We believe these trends could reverse in the course of the year. Altogether, we consider the rumored economic plans emerging from Trump’s entourage to be too vague to use as a basis for our investment strategy. Still, our initial approach is to not bet against the market; we expect the U.S. economy to experience positive overall momentum.

On a sector level, we are raising the energy sector to overweight. The supply-demand profile in the oil market has improved significantly, and oil producers have reduced their cost base to the extent that sustainable dividends already appear to be on the horizon.

Healthcare is the second sector we have raised to overweight, after underperforming for close to a year. The relative valuation parameters have improved as a result. The sector's political risk has also declined with Clinton's defeat.

Forecasts

  Equity markets (index value in points) Current* Dec 2017F Total Return (exp.)**

Forecast

%

Expected earnings growth(%)

P/E impact (%)

Dividend yield in %

United States (S&P 500 Index)

2,262

2,350

5.5

8

-4

2.1

Europe (Stoxx Europe 600 Index)

359

370

7.0

6

-3

3.5

Eurozone (Euro Stoxx 50 Index)

3,250

3,300

5.6

9

-6

3.6

Germany (Dax)1

11,366

11,800

4.6

5

-3

3.0

United Kingdom (FTSE 100 Index)

6,999

7,000

3.8

16

-14

3.3

Switzerland (Swiss Market Index)

8,214

8,250

4.4

6

-5

3.3

Japan (MSCI Japan Index)

931

950

4.7

10

-6

2.3

MSCI Emerging Markets Index (USD)

859

890

4.3

11

-9

2.7

MSCI AC Asia ex Japan Index (USD)

519

550

6.9

9

-5

2.6

MSCI EM Latin America Index (USD)

2,255

2,350

3.5

19

-16

2.9

* Source: Bloomberg Finance L.P., FactSet Research Systems Inc.; as of 12/15/16

** Expected total return includes interest, dividends and capital gains where applicable.

F refers to our forecasts as of 12/15/16.

1 Total-return index (includes dividends)

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