VOLATILITYS RETURN: MARKET IMPLICATIONS? · ECONOMY IS GROWING STEADILY ECONOMY 10 th YEAR OF THE CYCLE SYNCHRONOUS GROWTH 79 % share of countries1 with growth >2% EMERGING-MARKET

Investor Education Summit 2018

Volatility’s return—A time to be offensive or defensive?

VOLATILITY’S RETURN:

MARKET IMPLICATIONS?

David Bianco—Chief Investment Strategist, Americas

For Institutional Investor Use Only. Not to be shared with the public.

MACRO & MARKETS OUTLOOK SYNOPSIS

Source: DWS Investment GmbH

Americas CIO View September 2018 | For Institutional client and registered representative use only. Not for public viewing and distribution. / 2

1Good confidence in no recession for at least another year. US and

global expansion expected to continue into 2020s. However, some

US and global deceleration expected in 2019-2020 with greater

deceleration risk upon trade conflicts.

2Inflation to stay sticky at about 2%, despite aging cycle and further

decline in US unemployment. Wage acceleration only upon improved

productivity, thus contained unit labor costs at 2%.

3Rising Fed Funds rate to at least 2.5% in 2019 (expect 2.5-2.75% by

March 2019), which we see as near or perhaps above the neutral

rate. 10yr Treasury yield expected to be 2.95-3.25% range bound.

But watching deficit as higher yield risk.

4Firm to modestly stronger dollar as Fed hikes and ECB waits well into

2019 to hike and global growth gradually decelerates. Euro=$1.15 in

late 2018-2019. Risk is to upside for dollar vs. Euro and RMB.

5Firm but range bound oil prices, WTI $60-70 average 2H18-2019 on

adequate production potential with relatively quicker or shorter-cycle

ramp up ability if needed. Stronger dollar and global deceleration

could keep oil closer to $60 than $70 or higher.

6Good, but not booming US investment spending (6-8%). More on productivity

enhancers than capacity additions. Positive but very slow construction

spending growth. We lean more toward productivity enhancing capex than

capacity expansion.

7A general preference for Growth stocks for the rest of cycle, provided

valuations vs. Value justify. Within Growth stocks, we tilt to high innovation

industries as indicated by high R&D/sales and R&D to profit ratios.

8US equity market seen as fairly valued with total return upside of ~7.5% over

12-months and on average rest of cycle. S&P expected to reach and exceed

3000 in 2019. Generally keep sector strategy close to beta=1. Unless good

tactical reasons for a material beta tilt. We think tactical risk will rise into the

Midterm elections, especially on trade issues.

9 Preferred Value play is big Banks over Energy. Currently prefer Tech over

Industrials (cyclical growth), yet Industrials are a good play for tactical beta

increase, watch Mfg. ISM/PMI trends and always valuation mindful. Secular

challenges at Consumer Growth stocks, generally prefer Health Care, but on

guard for political risk in 2019 depending on 2018 Midterm elections. REITs

preferred bond substitute. Underweights are currently well diversified.

10Biggest tilt and active risk is OW Banks and Capital Markets and UW Energy.

We acknowledge some near-term risk as this is against momentum, but

viewed as best positioning for 3 months or longer. We think Energy is already

over extended as its PE remains dependent on $75/bbl WTI oil.

POSITIVES AND KEY RISKS



_ Strong S&P EPS growth with or without tax benefit

_ Subsiding inflation concerns

_ 10yr Tsy yield still < 3%

_ No future escalation on trade conflict

_ WTI in the range of $65-75/bbl

_ Fed keeps on hiking despite risks abroad

_ U.S. Dollar climbs too high

_ Mid-term toss-up odds for House

_ Valuation ex. Tech stocks at 3-decade high except for late 1990s

_ Eurozone defragmentation (Italy, Brexit)

_ EM (China) slowdown worsened by tariff

RISKSPOSITIVES

A 5-9% dip is likely this autumn, but worse than that is also a possibility given the uncertainties.

For the next 12 months we are constructive on US and global equities.

OUTLOOK 2019: MORE VOLATILE

ENVIRONMENT BUT LOW RECESSION RISKS


Forecasts are based on assumptions, estimates, opinions and hypothetical models or analysis which may prove to be incorrect. Past performance is not a reliable indicator of future returns.

Source: DWS Investment GmbH as of August 2018

GROWTH

Economy has more

room to grow

INFLATION

Slowly increasing

MONETARY POLICY

Reduction of the stimulus

POLITICS

Focus on Italy &

U.S. protectionism

ALTERNATIVES

Diversification

via commodities

EQUITIES

Mid single-digit

returns expected

BONDS

Moderate yield increase

Limited returns

CURRENCIES

Main imbalances diminished

Waiting for triggers

2019: NO RECESSION IN SIGHT

Americas CIO View September 2018 | For Institutional client and registered representative use only. Not for public viewing and distribution.

1 DWS forecast for GDP growth 2019/Forecasts are based on assumptions, estimates, opinions and hypothetical models or analysis which may prove to be incorrect.

Sources: Bloomberg Finance L.P., DWS Investment GmbH as of June 2018

EUROZONEGDP growth1

+1.9%

Solid economic fundamentals

Impact of newgovernment in Italy

U.S.GDP growth1

+2.4%

Strong momentum, fiscal stimulus

Overheating & U.S. protectionism

CHINAGDP growth1

+6.3%

Consumption-driven growth

U.S./China trade disputes

GLOBALGDP growth1

+3.9%

Global synchronous recovery

Possible trade war

/ 5


1 IMF forecast 2018. 2 The five longest U.S. business cycles since 1953/Forecasts are based on assumptions, estimates, opinions and hypothetical models or analysis which may prove to be incorrect.

Sources: International Monetary Fund (IMF), Bloomberg Finance L.P., DWS Investment GmbH as of June 2018

FACTS END-OF-CYCLE REAL U.S. GDP GROWTH2

%, Last peak = 0%

ECONOMY IS GROWING STEADILY

ECONOMY

YEAR OF THE CYCLE10th

SYNCHRONOUS GROWTHshare of countries1 with growth >2%79%

EMERGING-MARKET SHARE1

of global GDP growth60%0

10

20

30

40

50

60

0 2 4 6 8 10 12

1960-1969

1990-2001

1981-1990

2001-2007

2008-?

Years since the last peak


1 DWS expectations. 2 Global GDP growth/Forecasts are based on assumptions, estimates, opinions and hypothetical models or analysis which may prove to be incorrect.

Past performance is not a reliable indicator of future returns. Source: DWS Investment GmbH as of June 2018

MARKETS STILL EXPECT CONTAINED “TRADE

CONFLICTS” WITHOUT A “TRADE WAR” POLITICS

PARTICIPANTS

GDP

FINANCIAL MARKETS

CORPORATIONS

ACTIONS

Bilateral

Less than -¼ %-points2

Correction

Decline in earnings

Isolated tariffs (temporary)

TRADE CONFLICT1

Multilateral

-1 to -1½ %-points2

Vicious circle → recession

Sharp earnings drop &

de-globalization

Break of the WTO system

(permanent)

TRADE WAR1

ALLOCATIONS FOR TAXABLE/USD CAPITAL


Source: DWS Investment GmbH as of August 2018, for illustrative purposes only.

FX

OVERWEIGHT

ALLOCATION Equities

63%

UNDERWEIGHT

ALLOCATIONFixed

income

32%

ALTERNATIVES 5%

Equity

HY Credit

IG Credit

10yr Tsy

Rf

0%

1%

2%

3%

4%

5%

6%

7%

8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

0 2 4 6 8 10 12 14 16

Tota

l ret

urn

and

risk

prem

ium

(%)

Risk (Vol, %)

Total return and risk premium

Total Return Risk Premium

RISK-ADJUSTED RETURNS & RISK PREMIUMS


Source: DWS Investment GmbH as of August 2018, for illustrative purposes only.

Expected after - tax real returns basis: Expected after-tax risk premium

Pretax Taxable Real

taxable

Expected

nominal

pre-tax return

Expected

after-tax

return

Expected real

returns

after-tax

After-tax

return

less Rf

Real after-tax

return

less Rf

Vol Pre-tax risk

premium

After-tax

risk premium

Pre-tax

risk premium/

Vol

After-tax risk

premium/Vol

(Sharpe ratio)

Fed Funds rate (Rf) 2.00% 1.40% - 0.70% 2.00% 1.40% - 0.70% 0.00% 0.00% 0% 0 0

2yr Treasury yield 2.65% 1.86% - 0.25% 2.55% 1.86% - 0.25% 0.46% 0.46% 3% 0.65% 0.46% 0.22 0.15


10yr TIPS yield 0.75% 2.00% - 0.11% 2.85% 2.00% - 0.11% 0.60% 0.60% 4% 0.85% 0.60% 0.21 0.15

Inflation breakeven 2.10%


Promised Credit Spreads

Corp IG 130 91 4.15% 2.91% 0.805% 1.51% 1.51% 7% 2.15% 1.51% 0.31 0.22

Corp HY 365 255.5 6.50% 4.55% 2.450% 3.15% 3.15% 12% 4.50% 3.15% 0.38 0.26

Muni bond spreadstax adj

AAA 0 0 2.85% 2.85% 0.75% 1.45% 1.45% 8% 1.45% 0.00 0.18

IG 50 71 3.35% 3.35% 1.25% 1.95% 1.95% 10% 1.95% 0.00 0.20

Expected Equity Risk Premium

S&P 500 450 360 7.35% 5.88% 3.8% 4.48% 4.48% 15% 5.35% 4.48% 0.36 0.30

R2000 400 320 6.85% 5.48% 3.4% 4.08% 4.08% 20% 4.85% 4.08% 0.24 0.20

SXXP (*different Rf 0%, 1% 10yr) 600 480 7.00% 4.6% 5.60% 17% 0.27 0.33

TOTAL RETURN AND RISK PREMIUM RISK ADJUSTED RISK PREMIUMS

EquityHY Credit

IG Credit

10yr Tsy

Rf

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0 2 4 6 8 10 12 14 16

Tota

l ret

urn

and

risk

prem

ium

(%)

Risk (Vol, %)

Risk adjusted risk premiums

Pre-tax risk premium / Vol After-tax risk premium / Vol

Equity

HY Credit

IG Credit

10yr Tsy

Rf

0%

1%

2%

3%

4%

5%

6%

7%

8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

0 2 4 6 8 10 12 14 16

Tota

l ret

urn

an

d r

isk

pre

miu

m (

%)

Risk (Vol, %)



Equity

HY Credit

IG Credit

10yr Tsy

Rf

0%

1%

2%

3%

4%

5%

6%

7%

8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

0 2 4 6 8 10 12 14 16

Tota

l ret

urn

an

d r

isk

pre

miu

m (

%)

Risk (Vol, %)



EquityHY Credit

IG Credit

10yr Tsy

Rf

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0 2 4 6 8 10 12 14 16

Tota

l ret

urn

an

d r

isk

pre

miu

m (

%)

Risk (Vol, %)



EquityHY Credit

IG Credit

10yr Tsy

Rf

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0 2 4 6 8 10 12 14 16

Tota

l ret

urn

an

d r

isk

pre

miu

m (

%)

Risk (Vol, %)



RISK OF ELEVATED TARIFFS IS RISING



THE CHANCE OF IMPLEMENTATION OF 10% TARIFF ON $200BN CHINA PRODUCTS IS RISING

No tariffs A risk Concerned Worried Panicked

Prob of 10% tariff on $200bn and some further escalation 0% 25% 50% 60% 70% 100%

S&P 500 (USD) 2,950 2,925 2,900 2,890 2,880 2,850

EuroStoxx 50 (EUR) 3,700 3,625 3,550 3,520 3,490 3,400

MSCI Asia xJ (USD) 800 775 750 740 730 700

Prior view of 25-50% chance, but shifting toward greater risk

PROBABILITY WEIGHTED JUNE 2019 EQUITY INDEX PRICE TARGET WITH A 50% AND 60% CHANCE

Probability of events June 2019 price target Probability

weighted

price target

June 2019 price target

10% tariff on

$200bn and

some further

escalation

No tariff on

$200bn

10% tariff on

$200bn and

some further

escalation

No tariff on

$200bn

Current Price 10% tariff on

$200bn and

some further

escalation

No tariff on

$200bn

Prob. Wtd.

Price target

S&P 500 (USD) 50% 50% 2,850 2,950 2,900 2,801 2% 5% 4%

EuroStoxx 50 (EUR) 50% 50% 3,400 3,700 3,550 3,455 -2% 7% 3%

MSCI Asia xJ (USD) 50% 50% 700 800 750 672 4% 19% 12%

-6.7% 7%

S&P 500 (USD) 60% 40% 2,850 2,950 2,890 2,801 2% 5% 3%

EuroStoxx 50 (EUR) 60% 40% 3,400 3,700 3,520 3,455 -2% 7% 2%

MSCI Asia xJ (USD) 60% 40% 700 800 740 672 4% 19% 10%

CHINA EXPORTS & IMPORTS


Source: China Customs, MSCI, DWS Investment GmbH

CHINA EXPORTS BY REGION IN 2017 MSCI CHINA EPS REVISION STILL UP 3% YTD IN CNY,

DOWNWARD REVISION ALL DUE TO FX

CHINA IMPORTS BY REGION IN 2017

21%

6%

22%

4%19%

6%

19%

1% 2% NIEJapanAsia ex. NIE & JapanAfricaEuropeLatin AmericaUSN.A. ex. USOceania

$2,280bn

20%

9%

27%4%

18%

7%

8%

1% 6% NIE

Japan

Asia ex. NIE & Japan

Africa

Europe

Latin America

US

N.A. ex. US

Oceania

$1,840bn

SECTOR COMPOSITION: S&P 500 VS. MSCI

ASIA EX JAPAN

Americas CIO View September 2018 | For Institutional client and registered representative use only. Not for public viewing and distribution.

Source: S&P and MSCI as of 09/12/2018 May not be indicative of future results.

/ 12

TOTAL RETURN AND FORWARD PE: S&P

500 VS. MSCI ASIA EX JAPAN


Source: S&P and MSCI as of 9/12/18 reflecting the date range of 11/30/2000 through 9/12/2018. S&P 500 represented by the S&P500 Total Return Index and MSCI represented by the MSCI AC Asia Ex Japan Net Total Return USD index.

TOTAL RETURN: S&P 500 VS. MSCI ASIA EX JAPAN

FORWARD PE: S&P 500 VS. MSCI ASIA EX JAPAN

GLOBAL GROWTH STILL EMERGING MARKETS LED

…AND INCREASINGLY MORE TECHNOLOGY LED


1 DWS Investment GmbH forecast, 2 P/E ratio, next 12 months, 3 Final consumption in % of GDP growth/Past performance is not a reliable indicator of future returns. Forecasts are not a reliable indicator of

future returns. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect.

Source: FactSet Research Systems Inc., Bloomberg Finance L.P., DWS Investment GmbH; as of March 2018

EMERGING MARKETS

Earnings growth p.a.1

2018 & 2019

+15%

Valuation discount

Vs. developed markets2

-25%

BRAZIL

Inflation

INDIA

GDP growth

CHINA

Final consumption3

5000%1990s

3%2018

End of the recession &

high inflation

Reforms take effect More research & consumption

7.1%2016

7.5%20181

47%2013

65%2017

THE LATTER YEARS OF A LONG CYCLE FAVOR

GROWTH STOCKS


Past performance and forecasts are not reliable indicators of future returns. No assurance can be given that any forecast or target will be achieved.

Source: BEA, Office for National Statistics, S&P, DWS Investment GmbH as of August 2018

TECH, HEALTH CARE, AND FINANCIALS OUTPERFORMED IN THE LATTER YEARS OF LONG CYCLES

Annualized total returns

0%

10%

20%

30%

40%

50%

Financials Energy Materials Industrials Tech Cons. Disc. Cons.Staples

Health Care Utilities Telecom Real Estate S&P 500 10yr Tsy TR

1967-1972 1995-1998

_ UK had economic expansion for 16 years between 1992-2008. Economic cycles in developed economies have become longer in recent decades.

_ Only 4 profit recessions not during economic recession: 1967, 1985-86, 1998, 2015-2016. Cycles that survive profit recession have been long lasting.

_ Tech, Health Care, and Financials outperformed in the latter years of the 1960s and 1990s long cycles. Consumer Sectors did well too.

TECHNOLOGY IS THE GROWTH THIS CYCLE


1 Technology + includes internet retail from consumer discretionary; this information is intended for informational purposes only and does not constitute investment advice, a recommendation, an offer or

solicitation. Past performance is not a reliable indicator of future returns. Forecasts are not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, views and hypothetical models

or analyses, which might prove inaccurate or incorrect.

Source: Standard & Poor‘s, FactSet, Credit Suisse, DWS Investment GmbH; as of February 2018

ASIAN TECH GIANTS U.S. RETURN DECOMPOSITION (2014–17)1

Performance mainly driven by earnings

34.7

47.1

72.5

2015 2016 2017

Tencent Samsung Alibaba TSMC

1,547

801660

Net Earningsin bn USD

Market Capin bn USD

54%

46%

S&P 500 EX.TECHNOLOGY +

Contribution: EPS P/E

62%

38%

TECHNOLOGY +

+26% +88%

GROWTH TECHNOLOGICAL INNOVATION


1 Estimates from Cisco VNI Mobile, 2017 | Past performance is not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models or analysis which

August prove to be incorrect. Source: Cisco VNI Mobile, Bloomberg Finance L.P., DWS Investment GmbH; as of March 2018

FAST GROWING DATA VOLUMES IMPACTS ALL ECONOMIC ACTIVITIES & SECTORS

711

17

24

35

49

0

10

20

30

40

50

60

2016 2017 2018 2019 2020 2021

Exabyte per month (1 Exabyte = 1 billion Gigabyte)

Ø Growth p.a.

2016-2021

47%

Estimate1

Artificial Intelligence

Communication between the product &

the production facility

Autonomous Driving

Cars as rolling supercomputers, collecting and

transmitting data

Industry 4.0

Intelligent factories

Production facilities without human intervention

-6

-4

-2

0

2

4

1990 1994 1998 2002 2006 2010 2014 2018

Eurozone U.S.

1990 1994 1998 2002 2006 2010 2014 2018

CAPEX RECOVERY SHOULD CONTINUE


1 Output gap: Difference between the actual output of an economy and its potential output/Past performance is not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, opinions

and hypothetical models or analysis which August prove to be incorrect.

Source: IMF World Economic Outlook, October 2017, BEA, DWS Investment GmbH; as of 2Q 2018

OUTPUT GAP, IN %1 U.S. CAPEX VS. REAL GDP GROWTH

Under-utilization of capacity

Capacity limit

Shortage of capacity4

2

0

-2

-4

-6

_ Eurozone _ U.S.

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

2014

2018

Recession Real GDP Capex (Equip. + IPP) y/y % chg

y/y % chg

1992-99Productivitydriven IT capex boomGDP: 4.0%Capex: 10.3%

Avg 1951-1970GDP: 3.7%

Capex: 5.0%

Avg 1971-1990GDP: 3.2%

Capex: 5.7%

Avg 1991-2014GDP: 2.6%

Capex: 5.3%

1976-79Oil boomGDP: 4.3%Capex:10.4%

1962-69DomesticinfrastructureGDP: 4.7%Capex: 8.7%

1967capexslowdown

2003-07Asia / export/commodity capexGDP: 3.0%Capex: 6.3%

1985-87capexslowdown

Capexgrowth accelerates

COMMODITY PRICES ARE AN IMPORTANT DRIVER

OF CAPEX, ESPECIALLY LAST CYCLE


Source: CRB, Compustat, EIA, WSJ, Federal Reserve, EIA, BP Statistical Review of World Energy, DWS Investment GmbH as of July 2018

CRB AND S&P 500 CAPEX (Y/Y) US DOLLAR INDEX AND OIL PRICES

US OIL PRODUCTION GLOBAL OIL PRODUCTION, 1966-2015

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

50

150

250

350

450

550

650

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

CRB Commodity Price Index (lhs)

Capex y/y Growth (S&P 500 ex Fin., 3yr avg., 12m lag, rhs)

Weak

commodities,

weak capex

Weak oil but

strong Tech capex

Strong

commodities,

strong capex 0

20

40

60

80

100

120

140

60

70

80

90

100

110

120

130

140

150

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

Recession US Dollar Index USTW$ (lhs) WTI Crude (rhs)

-18%

-12%

-6%

0%

6%

12%

18%

24%

30%

4

5

6

7

8

9

10

11

12

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Oil production (SA, Mil. B/D) y/y (3mo avg. - rhs)

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

-

10

20

30

40

50

60

70

80

90

100

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Global oil production, mil. b/d (lhs) y/y (rhs)

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

50

150

250

350

450

550

650

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

CRB Commodity Price Index (lhs)

Capex y/y Growth (S&P 500 ex Fin., 3yr avg., 12m lag, rhs)

Weak

commodities,

weak capex

Weak oil but

strong Tech capex

Strong

commodities,

strong capex0

20

40

60

80

100

120

140

60

70

80

90

100

110

120

130

140

150

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017


0

20

40

60

80

100

120

140

60

70

80

90

100

110

120

130

140

150

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017


0

20

40

60

80

100

120

140

60

70

80

90

100

110

120

130

140

150

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017


-18%

-12%

-6%

0%

6%

12%

18%

24%

30%

4

5

6

7

8

9

10

11

12

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18


-18%

-12%

-6%

0%

6%

12%

18%

24%

30%

4

5

6

7

8

9

10

11

12

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18


-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

-

10

20

30

40

50

60

70

80

90

100

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015


-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

-

10

20

30

40

50

60

70

80

90

100

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015


NOW CAPEX IS BEING DRIVEN BY INVESTMENT IN NEW

TECHNOLOGIES, R&D AND INNOVATION


Source: IBES, BEA, Compustat, DWS Investment GmbH as of August 2018

S&P 500 TECH SECTOR SALES GROWTH (Y/Y) US INVESTMENT ON COMPUTERS & SOFTWARE

S&P 500 R&D US INVESTMENT ON R&D

-10%-5%0%5%

10%15%20%25%30%35%40%45%

1Q

13

3Q

13

20

13

2Q

14

4Q

14

1Q

15

3Q

15

20

15

2Q

16

4Q

16

1Q

17

3Q

17

20

17

2Q

18

EPS y/y growth2013-17 average:Tech: 13.5%S&P ex Tech: 5.1%

Tech S&P ex Tech

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

Recession IT Equip + Software y/y

0%

2%

4%

6%

8%

10%

12%

14%

16%

18% R&D / Sales

Ex. HC Providers and Services

-10%

-5%

0%

5%

10%

15%

20%

0

50

100

150

200

250

300

350

400

450

198

0

198

3

198

6

198

9

199

2

199

5

199

8

200

1

200

4

200

7

201

0

201

3

201

6

Recession R&D ($bn) y/y

-10%-5%0%5%

10%15%20%25%30%35%40%45%

1Q

13

3Q

13

20

13

2Q

14

4Q

14

1Q

15

3Q

15

20

15

2Q

16

4Q

16

1Q

17

3Q

17

20

17

2Q

18


Tech S&P ex Tech

-10%-5%0%5%

10%15%20%25%30%35%40%45%

1Q

13

3Q

13

20

13

2Q

14

4Q

14

1Q

15

3Q

15

20

15

2Q

16

4Q

16

1Q

17

3Q

17

20

17

2Q

18


Tech S&P ex Tech

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18


-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18


-10%

-5%

0%

5%

10%

15%

20%

0

50

100

150

200

250

300

350

400

450

198

0

198

3

198

6

198

9

199

2

199

5

199

8

200

1

200

4

200

7

201

0

201

3

201

6


-10%

-5%

0%

5%

10%

15%

20%

0

50

100

150

200

250

300

350

400

450

198

0

198

3

198

6

198

9

199

2

199

5

199

8

200

1

200

4

200

7

201

0

201

3

201

6


-10%

-5%

0%

5%

10%

15%

20%

0

50

100

150

200

250

300

350

400

450

198

0

198

3

198

6

198

9

199

2

199

5

199

8

200

1

200

4

200

7

201

0

201

3

201

6



1 The Phillips curve describes the relationship between wage or price-level changes and the unemployment rate/Past performance is not a reliable indicator of future returns.

Forecasts are based on assumptions, estimates, opinions and hypothetical models or analysis which may prove to be incorrect. Sources: Bloomberg Finance L.P., DWS Investment GmbH as of June 2018

FLAT PHILLIPS CURVE1 REASONS

Digitalization

Amazonification vs. retail

Rational Employers & Employees

Employees don’t dare to demand higher wages

Globalization

Cheap production abroad

INFLATION IN GOODS & SERVICES

STILL MODERATEECONOMY

0

2

4

6

8

10

2 4 6 8 10 12

1975–1983

1984–2009

2010–2017

U.S. unemployment rate, %

Ø Change in U.S. average hourly earnings, % year-over-year

2019: MODERATE INCREASE IN INFLATION AHEAD


1 Deutsche AM forecast 2 U.S. average hourly earnings, y/y %/Past performance is not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models or

analysis which may prove to be incorrect. Sources: Bloomberg Finance L.P., DWS Investment GmbH as of June 2018

U.S.: GROWTH VS. CORE INFLATION WATCH WAGES & UNIT LABOR COSTS

U.S. hourly earnings2, %%

0,0

0,5

1,0

1,5

2,0

2,5

3,0

-5

-3

0

3

5

2010 2012 2014 2016 2018

U.S. core inflation, 18 months lagged, r.h.s.

Real U.S. GDP growth

0,0

0,5

1,0

1,5

2,0

2,5

3,0

-5

-3

0

3

5

2010 2012 2014 2016 2018

U.S. core inflation, 18 months lagged, r.h.s.

Real U.S. GDP growth

TURNING POINT

Q4 2017

3,0

2,5

2,0

1,5

1,0

0,5

0,0

5

3

0

-3

-5

2010 2012 2014 2016 2018

U.S. unemployment rate, % 0

2

4

6

2 4 6 8 10

REASONS

_ Further decline in unemployment

_ Strongly rising wage pressure

20191

EUROZONE

2.0%

1.7%

U.S.

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

18

00

18

05

18

09

18

14

18

18

18

23

18

27

18

32

18

36

18

41

18

45

18

50

18

54

18

59

18

63

18

68

18

72

18

77

18

81

18

86

18

90

18

95

18

99

19

04

19

08

19

13

19

17

19

22

19

26

19

31

19

35

19

40

19

44

19

49

19

53

19

58

19

62

19

67

19

71

19

76

19

80

19

85

19

89

19

94

19

98

20

03

20

07

20

12

20

16

Recession Wars US Consumer Price Index y/y (2yr rolling average) 2%

1812

War

Civil

WarWorld

War I

World

War II

1800-2017 Average:

Overall: 1.4%

Out of wars: 0.5%

Out of wars & recessions: 1.2%

Out of wars & 1971-1982: 0.0%

Vietnam

War

Gulf

War

Iraq

War

Korean

War

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

18

00

18

05

18

09

18

14

18

18

18

23

18

27

18

32

18

36

18

41

18

45

18

50

18

54

18

59

18

63

18

68

18

72

18

77

18

81

18

86

18

90

18

95

18

99

19

04

19

08

19

13

19

17

19

22

19

26

19

31

19

35

19

40

19

44

19

49

19

53

19

58

19

62

19

67

19

71

19

76

19

80

19

85

19

89

19

94

19

98

20

03

20

07

20

12

20

16

Recession Wars US Consumer Price Index y/y (2yr rolling average) 2%

1812

War

Civil

WarWorld

War I

World

War II

1800-2017 Average:

Overall: 1.4%

Out of wars: 0.5%

Out of wars & recessions: 1.2%

Out of wars & 1971-1982: 0.0%

Vietnam

War

Gulf

War

Iraq

War

Korean

War

INFLATION IS NOT OFTEN ABOVE 2% OUT OF WARS


BLS, NBER, Federal Reserve Bank of Minneapolis, Index of Prices Paid by Vermont Farmers for Family Living, Consumer Price Index by Ethel D.

Hoover, Cost of Living Index by Albert Rees, DWS Investment GmbH; as of July 2018

2019: MONETARY POLICY


1 Terminal rate: When the terminal rate (the “neutral” interest rate) is reached, the Fed does not have to raise or lower it in a concurrent economy. 2 Mario Draghi, Benoît Cœuré & Peter Praet/Forecasts are

based on assumptions, estimates, opinions and hypothetical models or analysis which may prove to be incorrect.

Sources: Bloomberg Finance L.P., DWS Investment GmbH as of June 2018

FED

TERMINAL RATE1

3% should be reached by end of 2019

RATE HIKES

3 hikes expected in 2019

NEW COMMITTEE

Doves or hawks?

EXIT FROM QE

No new asset purchases

RATE HIKES

First hike since 2011 expected

NEW EXECUTIVE BOARD2

3 new members, including Draghi

ECB

ECB OUTLOOK: FIRST RATE HIKE IN H2 2019


1 Quarterly data from Q4 2018 until Q2 2021, 2 quarterly periods/Past performance is not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models

or analysis which may prove to be incorrect. Sources: Bloomberg Finance L.P., DWS Investment GmbH as of July 2018

MONEY MARKET IS PRICING IN FIRST RATE HIKE1

%

-0.29-0.25

-0.09

0.08

0.26

0.44

Euribor 3-month forward curve

Q4 2019

1. RATE HIKE

IN THE PAST

Markets were too pessimistic

NOW

Markets should be right:

Inflation picked up & growth is still solid

EXPECTATIONS

First ECB rate hike by the end of 2019

MONETARY POLICY REMAINS SUPPORTIVE


1 DWS Investment GmbH forecast/Past performance is not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models or analysis which July prove to

be incorrect. Source: Bloomberg Finance L.P., DWS Investment GmbH; as of March 2018

CENTRAL BANK BALANCE SHEETS TOPICS FOR 2018

(In bn. USD)

0

4000

8000

12000

16000

2006 2008 2010 2012 2014 2016 2018

Fed ECB BoE BoJ

Forecast1

FED

Slight balance-sheet reduction

2 more rate hikes

ECB

End of bond purchases

No rate hikes

BOJ

Further bond purchases

No rate hikes

NOMINAL AND REAL 10 YEAR TREASURY YIELDS


Source: S&P, FRB, FRBPHIL, DWS Investment GmbH as of 8/27/2018

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1900

1903

1906

1909

1912

1915

1918

1921

1924

1927

1930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

10yr Treasury Yield Real 10yr Yield (TIPS yield from 2003) 10yr Yield Avg (5.0%)

10yr Yield Avg ex 1970-90 (3.8%) Real 10yr Yield Avg (2.5%) Real 10yr Yield Avg ex 1970-90 (2.0%)

-6%

-4%

-2%

0%

2%

4%

-6%

-4%

-2%

0%

2%

4%

1934

1937

1940

1943

1946

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

2018

Recession 10yr yield - Fed Funds effective rate Avg (1.2%) Avg ex 1970-90 (1.5%)

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1900

1903

1906

1909

1912

1915

1918

1921

1924

1927

1930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017



-6%

-4%

-2%

0%

2%

4%

-6%

-4%

-2%

0%

2%

4%

1934

1937

1940

1943

1946

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

2018


-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1900

1903

1906

1909

1912

1915

1918

1921

1924

1927

1930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017



-6%

-4%

-2%

0%

2%

4%

-6%

-4%

-2%

0%

2%

4%

1934

1937

1940

1943

1946

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

2018


-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1900

1903

1906

1909

1912

1915

1918

1921

1924

1927

1930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017



-6%

-4%

-2%

0%

2%

4%

-6%

-4%

-2%

0%

2%

4%

1934

1937

1940

1943

1946

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

2018


-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1900

1903

1906

1909

1912

1915

1918

1921

1924

1927

1930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017



-6%

-4%

-2%

0%

2%

4%

-6%

-4%

-2%

0%

2%

4%

1934

1937

1940

1943

1946

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

2018


-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1900

1903

1906

1909

1912

1915

1918

1921

1924

1927

1930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017



-6%

-4%

-2%

0%

2%

4%

-6%

-4%

-2%

0%

2%

4%

1934

1937

1940

1943

1946

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

2018


-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1900

1903

1906

1909

1912

1915

1918

1921

1924

1927

1930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017



-6%

-4%

-2%

0%

2%

4%

-6%

-4%

-2%

0%

2%

4%

1934

1937

1940

1943

1946

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

2018


-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1900

1903

1906

1909

1912

1915

1918

1921

1924

1927

1930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017



-6%

-4%

-2%

0%

2%

4%

-6%

-4%

-2%

0%

2%

4%

1934

1937

1940

1943

1946

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

2018


-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1900

1903

1906

1909

1912

1915

1918

1921

1924

1927

1930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017



-6%

-4%

-2%

0%

2%

4%

-6%

-4%

-2%

0%

2%

4%

1934

1937

1940

1943

1946

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

2018


U.S FEDERAL DEFICIT VS. UNEMPLOYMENT RATE


Source: BLS, US Treasury, DWS Investment GmbH forecasts for FY 2018 and 2019, DWS Investment GmbH as of 2/23/2018

2

3

4

5

6

7

8

9

10

11

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

1949 1955 1961 1967 1973 1979 1985 1991 1997 2003 2009 2015

% o

f labor fo

rce

% o

f G

DP

Fiscal years

Federal deficit (lhs) Unemployment rate (rhs)

Vietnam War

Korean War

An unusual time for large and rising deficits

U.S. 3% BOND CERTIFICATE: 1791


Source: New York Stock Exchange Collection

New Country, New Currency, No Maturity Date

U.S. YIELD CURVE NOT YET IN CAUTIONARY TERRITORY


Past performance is not a reliable indicator of future returns. Forecasts are not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses,

which might prove inaccurate or incorrect. Source: Bloomberg Finance L.P., DWS Investment GmbH; as of March 2018

US yield curve suggests Fed Funds rate closer to neutral, more so than economy closer to a recession

STEEPNESS OF THE U.S. YIELD CURVE OTHER POSSIBLE RISKS

-2

-1

0

1

2

3

1987 1992 1997 2002 2007 2012 2017

Recessions

U.S. yield curve (10y - 2y U.S. Treasuries), in %

NORMAL

INVERTED

1989 2000 2007

-2

-1

0

1

2

3

1987 1992 1997 2002 2007 2012 2017

Recessions

U.S. yield curve (10y - 2y U.S. Treasuries), in %

INVERTED

YIELD CURVE

EQUITY-

MARKET PEAK

Ø10Months later

RECESSION

Ø15Months later

Protectionism

Restrictions on world trade (tariffs)

Currencies

Massive exchange-rate fluctuations (EUR/USD)

Rapid rise in inflation

Weighs on asset values

FED TIGHTENING AND EASING CYCLES


Source: Federal Reserve, S&P, DWS Investment Management Americas as of Apr 2018

IS IT EARLY OR LATE CYCLE FED HIKING?

Consider:

_ Shape of curve

_ Implied inflation expectations

_ Unit Labor Costs, core CPI & PCE

_ Years since last recession

_ Productivity

_ Capital discipline

(i.e. returns on capital, loan quality, balance sheets of corporations,

households and government, etc.)

Equity market correction during Fed tightening:

(1) 10/83-7/84, (2) 2/94-4/94, (3) 2/97-4/97, (4) 10/97, (5) 7/98-8/98,

(6) 7/99-10/99.

SUMMARY OF THE 15 FEDERAL RESERVE RATE

HIKE CYCLES SINCE 1965


* 1971, 1977, 1983, 1994, and 2004 are the first hike after recessions* The hikes that started in 1965, 1971,1974,1977,1980,1982 and 1997 started under late cycle conditions, despite 1971 and 1977 being the first hikes after a recession. * The hikes that started in 1983 and 1994 stopped before reaching late cycle conditions. All other hikes started in early-cycle conditions and continued into late-cycle conditions.** Three signs of late cycle conditions: 1 inverted yield curve; 2 high inflation; 3 more than 5 years since recession.*** Initial reaction is the S&P price change from 1 month high before the date of first rate hike to the 1 month low after.Note: For the 7 Fed hike cycles since 1983, the S&P performance are for 1m, 3m, 6m, and 12m after the initial reaction. For the other cycles, the S&P performance are based on monthly prices.Source: Federal Reserve, BLS, DWS Investment GmbH as of Apr 2018

Start Date

of Fed

Rate

Hike *

Date of

Reaching

Late

Cycle **

Late

Cycle

Signals

**

End Date

of Fed

Rate Hike

Fed

Funds

Effective

Rate (%)

Duration

of Rate

Hike

(Months)

Peak

Fed

Rate

Total

Rate

Hike

1yr

Yield

(%)

10yr

Yield

(%)

CPI

y/y

Unit

Labor

Cost y/y

UE

(%)

PE at

Start

of Hike

PE at

End

of Hike

PE

Chg

Avg

PE

during

Hike

10yr -

1yr

(%) at

Start of

Hike

10yr -

1yr

(%) at

End of

Hike

Chg in

10yr-

1yr (%)

Before

Reach-

ing

Late

Cycle (ar)

After

Reach-

ing

Late

Cycle (ar)

3m

before

Hike

Initial

React-

ion ***

1m 3m 6m 12m Date of

First Hike

Dec-65 Dec-65 1 Nov-66 4.10 12 5.76 1.66 4.37 4.45 1.7% -0.2% 4.1 18.4 14.6 -3.8 15.9 0.1 -0.4 -0.5 -14.1% 0.6% 0% -3% -8% -13%

Aug-67 Dec-67 1,3 Aug-69 3.79 25 9.19 5.40 5.01 5.16 2.9% 3.1% 3.8 17.8 16.4 -1.4 17.6 0.2 -0.9 -1.0 9.3% -0.6% 0.9% 3% 0% -5% 6%

Apr-71 Apr-71 2 Aug-71 3.71 5 5.56 1.85 3.69 5.70 4.4% 1.0% 6.0 19.2 18.6 -0.6 18.9 2.0 0.8 -1.2 -13.5% 0.5% -4% -8% -9% 4%

Mar-72 Mar-73 1,2 Sep-73 3.29 19 10.78 7.49 4.27 6.08 3.8% 2.2% 5.7 18.7 14.1 -4.6 17.1 1.8 -1.2 -3.0 4.0% -5.5% 1.0% 0% 0% 3% 4%

Mar-74 Mar-74 1,2 Aug-74 8.97 6 12.01 3.04 6.88 6.96 10.0% 7.1% 5.2 11.8 8.3 -3.5 9.9 0.1 -1.3 -1.4 -47.0% 3.1% -4% -8% -32% -11%

Feb-77 Feb-77 2 Apr-80 4.61 39 17.61 13.00 5.29 7.21 5.2% 5.5% 7.5 10.3 6.9 -3.4 8.2 1.9 -1.8 -3.8 2.0% 1.4% -1% -4% -3% -13%

Aug-80 Aug-80 1,2 Jun-81 9.03 11 19.10 10.07 8.65 10.25 13.2% 11.5% 7.8 8.1 8.8 0.7 8.9 1.6 -1.4 -3.0 8.7% 2.1% 3% 15% 7% 0%

Jan-82 Jan-82 1,2 Feb-82 12.37 2 14.78 2.41 12.85 13.72 8.9% 7.2% 8.5 8.1 7.4 -0.6 7.7 0.9 -0.3 -1.2 -52.7% 1.1% -6% -3% -11% 21%

Apr-83 Aug-84 8.50 17 11.44 2.93 9.04 10.51 3.6% 2.6% 10.3 12.1 10.0 -2.2 11.3 1.5 0.9 -0.6 1.0% 10.8% -1.7% 10% 10% 10% 3% 3/31/1983

Jan-87 Aug-87 3 Oct-87 5.88 10 7.31 1.44 5.87 7.11 1.2% 3.0% 6.6 14.8 13.6 -1.3 17.2 1.2 1.9 0.7 37.3% -80.2% 1.4% 0.4% 11% 19% 21% 3% 1/5/1987

Apr-88 Dec-88 1,2,3 Mar-89 6.52 12 9.75 3.23 6.71 8.37 3.8% 2.9% 5.7 12.5 11.8 -0.7 12.0 1.7 -0.2 -1.9 9.6% 27.1% 8.9% -5.6% 2% 6% 6% 15% 3/30/1988

Feb-94 Feb-95 3.00 13 6.00 3.00 3.54 5.75 2.5% 1.5% 6.6 17.7 15.4 -2.3 15.7 2.2 0.8 -1.4 4.3% 5.4% -3.9% -4% -1% 3% 5% 2/4/1994

Mar-97 Apr-97 3 Apr-97 5.25 2 5.50 0.25 5.53 6.42 3.0% 1.1% 5.2 19.3 19.0 -0.3 18.5 0.9 0.9 0.0 97.6% 8.8% -9.3% 12% 24% 32% 51% 3/25/1997

Jul-99 Mar-00 1,3 Jun-00 4.76 12 6.50 1.74 5.10 5.90 2.0% 0.7% 4.3 29.7 26.1 -3.6 27.6 0.8 -0.1 -0.9 19.8% -11.2% 5.1% -0.8% 1% -3% 5% 6% 6/30/1999

Jul-04 Jan-06 1,2 Jul-06 1.01 25 5.25 4.24 2.12 4.73 3.2% 0.8% 5.6 18.4 15.6 -2.8 17.0 2.6 -0.1 -2.7 10.5% -0.5% 3.1% -5.2% 2% 1% 8% 14% 6/30/2004

FED FUNDS RATE AND LABOR MARKET CONDITIONS


Source: BLS, FRB, DWS Investment GmbH as of 2Q2018

UNIT LABOR COSTS & AVERAGE HOURLY EARNINGS VS.

FED FUND RATE

UNIT LABOR COSTS VS. PRODUCTIVITY

FIXED INCOME


Past performance is not a reliable indicator of future returns. Source: DWS Investment GmbH as of June 2018

Summary

YIELDS

Rising due to late cycle

_ Active duration management

_ Italy offers tactical opportunities

CURRENCIES

Dollar strength

_ Active currency management

_ Hedging, if Dollar strengthens beyond our target

FOCUS

Floater & EM bonds

_ Floater to participate in rising interest rates

_ Opportunities mainly in selected EM bonds

CREDIT SPREADS


Source: S&P, IBES, Bloomberg Finance LP, DWS Investment GmbH as of August 2018

INVESTMENT GRADE & HIGH YIELD CORP CREDIT SPREADS U.S. IG MUNI YIELD AND 20YR TREASURY YIELD

S&P 500 IMPLIED EQUITY RISK PREMIUM VS. IMPLIED BOND

RISK PREMIUM

SPREAD BTW IMPLIED ERP (S&P EPS YIELD – 10YR TIPS YIELD)

VS. IMPLIED BRP (CREDIT SPREADS)

Decent spreads, but low RF rate is a risk difficult to decouple, stocks

offer highest risk premium

OPPORTUNITIES IN EMERGING-MARKET BONDS


Past performance is not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models or analysis which may prove to be incorrect.

Sources: IMF World Economic Outlook, Bloomberg Finance L.P., DWS Investment GmbH as of July 2018

6.36.1

3.63.4

0

1

2

3

4

5

6

7

Sovereign bonds Corporate bonds

Yield, unhedged Yield, hedged

STILL ATTRACTIVE YIELDS

%

DIVERSIFICATION IS KEY

SELECTION

Differences between countries

SOUND FUNDAMENTALS

Mostly solid GDP growth,

low external debt & low inflation

ATTRACTIVE RETURNS

Even on an hedged basis

FIXED INCOME: EMERGING MARKETS


1 J.P. Morgan emerging markets indices forecasts are not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove

inaccurate or incorrect. Source: J.P. Morgan DWS Investment GmbH; as of February 2018

High diversification and good opportunities in emerging markets

THE GROWING INVESTMENT UNIVERSE OF EMERGING MARKETS

8

81

1995 2017

Number of countries in

emerging-markets indices1:

Solid GDP growth, reforms

Low external balances

Sound

macro/politics

1 One major export good

Exposed to political noise

High commodity

exposure

Carry plays, attractive yields

Unsustainable growth model

Higher

risk/return

THE DOLLAR HAS COME A LONG WAY


1 The Trade-Weighted Euro Index tracks the performance of the euro relative to other world currencies/Past performance is not a reliable indicator of future returns. Forecasts are not a reliable indicator of future

returns. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect.

Sources: Bloomberg Finance L.P., DWS Investment GmbH as of July 2018

DOLLAR WEAKNESS IS FULLY RECOVERED1

Waiting for additional impulses

Invert

ed

Th

ousand c

ontra

cts

1.16

YIELDS VS DEFICIT

Yield spread at record high.

But unlike EU, U.S. posts a twin deficit

POLITICS

Italy, but also U.S. politics suggests caution,

Midterm elections ahead

POSITIONING

Net long Euro positioning shrinking

GLOBAL EQUITY INDEX OUTLOOK


1 DWS Investment GmbH forecast; past performance is not a reliable indicator of future returns. Forecasts are not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, views

and hypothetical models or analyses, which might prove inaccurate or incorrect. Source: FactSet Research Systems Inc., Bloomberg Finance L.P., DWS Investment GmbH; as of June 2018

June 2019F Targets1

Index June 2019F Total Return NTM Earnings Growth Target PE

S&P 500 2,900 7.5% 12.9% 17.5x

EuroStoxx 50 3,550 8.2% 8.0% 13.5x

MSCI Japan 1,080 6.5% 7.0% 14.0x

MSCI Asia xJ 740 10.6% 11.5% 13.0x

MSCI LatAm 2,500 7.1% 10.1% 13.0x

EQUITIES


1 DWS forecast/Past performance is not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models or analysis which may prove to be incorrect.

Sources: FactSet Research Systems Inc., Bloomberg Finance L.P., DWS Investment GmbH as of June 2018

Peak earnings growth but not peak EPS

EARNINGS-PER-SHARE GROWTH 2018 & 20191

%

20%

9%

7%

13%

7%8%

7%

12%

0%

5%

10%

15%

20%

25%

S&P 500 Stoxx 600 Dax MSCI EM

2018 2019

EARNINGS GROWTH

Decelerating, but still growing

REGIONS

Synchronous earnings growth in the Untied States,

Europe & Asia

SECTORS

Optimistic company feedback

SECTOR EPS OUTLOOK


1 DWS Investment GmbH forecast; Past performance is not a reliable indicator of future returns. Forecasts are not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, views

and hypothetical models or analyses, which might prove inaccurate or incorrect. Source: FactSet Research Systems Inc., Bloomberg Finance L.P., DWS Investment GmbH; as of August 2018

2018: Expected Earnings Growth Per Share, S&P 500 by Sector1

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

S&P 500 Energy Financials Materials Industrials Tech Cons. Disc. Telecom Health Care Cons. Staples Utilities Real Estate

2018 Operational EPS Growth 2018 EPS Growth from Tax Benefit

21.9%

82.6%

30.3% 26.5%

21.6% 21.5%19.2% 15.7%

14.4%11.1%

6.3% 5.6%

Strong EPS growth even before tax cut benefit, robust with the cut

S&P 500 ANNUAL EPS OUTLOOK


Past Performance and forecasts are not reliable indicators of future returns. No assurance can be given that any forecast or target will be achieved.

Source: IBES, S&P, DWS Investment GmbH as of 8/23/2018

Bottom-up consensus (IBES) DWS view Normalized 2018*

2011A 2012A 2013A 2014A 2015A 2016A 017A y/y 2018E y/y 2019E y/y 2018E y/y 2019E y/y ($) % of 2018

S&P 500 EPS (historical constituents) $97.82 $103.75 $110.39 $118.82 $118.19 $119.08 $132.96

S&P 500 EPS (current constituents) $100.90 $104.47 $112.10 $117.42 $117.37 $118.43 $132.87 12.2% $162.80 22.5% $179.35 10.2% $161.00 21.9% $171.00 6.0% $160.6 100%

Sector ($ bn)

Consumer Discretionary 73.7 79.3 89.1 92.7 103.9 113.2 117.4 3.7% 138.4 17.8% 155.3 12.2% 140.0 19.2% 149.0 6.4% 138.4 99%

Consumer Staples 76.7 77.1 80.8 82.5 81.5 84.2 87.8 4.2% 97.2 10.8% 103.5 6.5% 97.5 11.1% 101.5 4.1% 97.5 100%

Energy 121.6 115.6 105.6 103.3 42.6 9.8 38.3 292.7% 74.5 94.2% 90.4 21.4% 70.0 82.6% 77.0 10.0% 74.7 107%

Financials 127.5 154.9 180.0 173.5 188.7 184.6 195.7 6.0% 258.8 32.2% 283.5 9.5% 255.0 30.3% 270.0 5.9% 258.7 101%

Health Care 115.0 117.9 124.2 143.0 158.4 166.7 177.9 6.7% 202.8 14.0% 219.7 8.4% 203.5 14.4% 215.0 5.7% 197.6 97%

Industrials 86.9 94.7 104.4 112.4 110.5 107.1 109.0 1.8% 133.5 22.5% 150.1 12.5% 132.5 21.6% 139.0 5.3% 128.5 97%

Information Technology 160.1 160.1 180.2 196.0 206.4 220.8 263.4 19.3% 319.4 21.3% 354.7 11.0% 320.0 21.5% 344.0 7.5% 320.0 100%

Materials 28.6 26.6 27.5 28.3 27.0 25.7 27.6 7.4% 35.6 28.8% 38.0 6.7% 35.0 26.5% 35.3 1.0% 33.9 97%

Real Estate 16.2 18.9 21.6 25.4 28.9 32.0 34.3 7.3% 36.2 5.5% 38.3 5.6% 36.3 5.6% 38.0 4.8% 36.3 100%

Telecommunication Services 22.8 24.0 24.9 30.2 35.8 37.8 38.5 1.8% 45.2 17.5% 46.6 3.1% 44.5 15.7% 45.0 1.1% 37.8 85%

Utilities 29.7 30.2 31.0 33.5 33.7 36.3 37.7 3.9% 40.1 6.3% 42.1 5.0% 40.1 6.3% 41.9 4.5% 40.1 100%

S&P 500 ($ bn)

S&P ex. Financials & Real Estate ($bn)

858.8

715.2

899.3

725.6

969.4

767.8

1020.8

821.8

1017.4

799.8

1018.1

801.5

1127.7

897.6

10.8%

12.0%

1381.6

1086.6

22.5%

21.1%

1522.1

1200.3

10.2%

10.5%

1374.3

1083.0

21.9%

20.7%

1456.2

1148.0

6.0%

6.0%

1363.4

1068.4

99%

99%

S&P ex. Energy ($bn) 737.2 783.7 863.9 917.5 974.8 1008.3 1089.3 8.0% 1307.2 20.0% 1431.7 9.5% 1304.3 19.7% 1379.2 5.7% 1288.7 99%

S&P ex. Tech ($bn) 698.7 739.2 789.2 824.8 811.0 797.3 864.3 8.4% 1062.2 22.9% 1167.4 9.9% 1054.3 22.0% 1112.2 5.5% 1043.5 99%

Energy & Financials & Real Est ($bn) 265.3 289.4 307.2 302.2 260.2 226.3 268.4 18.6% 369.5 37.7% 412.1 11.5% 361.3 34.6% 385.0 6.6% 369.7 102%

S&P ex. Energy & Financials/RE ($bn) 593.5 610.0 662.3 718.6 757.2 791.7 859.3 8.5% 1012.1 17.8% 1110.0 9.7% 1013.0 17.9% 1071.2 5.7% 993.7 98%

DWS PROFIT INDICATOR


Source: ISM, Census, DOL, WSJ, DWS Investment GmbH as of August 2018

Signaling strong EPS growth

38

41

44

47

50

53

56

59

62

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

S&P 500 EPS (q/q % chg in trailing 4-qtr EPS, a.r - lhs) DB Profit Indicator (qtrly avg. - rhs)

Profit RecessionFeared inearly 1996

SPX EPS growth = 0.0217* DB Profit Indicator -1.061Rsq = 47%

1985-86Profit Recession

1998Profit Recession 2015-16

Profit Recession

S&P 500 QUARTERLY EPS REVISION


Source: S&P, IBES, DWS Investment GmbH as of 8/24/2018

0%

2%

4%

6%

8%

10%

12%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

Recession S&P 500 GAAP Net Margins Non-GAAP Net Margins

Cyclical but not mean reverting

6%

8%

10%

12%

14%

16%

18%

20%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

Recession S&P 500 Net Margins(lhs) ROE (rhs)

Since mid 1990s, ROE has been flattish while net margin has got structually higher.

S&P MARGINS ARE NOT MEAN REVERTING


Source: S&P, IBES, Reuters Global, Compustat, DWS Investment GmbH as of 2Q2018

S&P 500 NET MARGINS ARE CYCLICAL, BUT NOT MEAN REVERTING S&P 500 NET MARGIN VS. ROE

S&P 500 EPS GROWTH S&P 500 EFFECTIVE TAX RATE

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

S&P 500 EPS y/y growth

2011-17 average: 7.5%

2Q18 pretax

income growth:

14.7%

0%

2%

4%

6%

8%

10%

12%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17



0%

2%

4%

6%

8%

10%

12%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17



0%

2%

4%

6%

8%

10%

12%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17



6%

8%

10%

12%

14%

16%

18%

20%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

1971

19

73

19

75

19

77

1979

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17


Since mid 1990s, ROE has been flattish while net margin has got structually higher. 6%

8%

10%

12%

14%

16%

18%

20%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17



6%

8%

10%

12%

14%

16%

18%

20%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17



-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18


2011-17 average: 7.5%

2Q18 pretax

income growth:

14.7%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18


2011-17 average: 7.5%

2Q18 pretax

income growth:

14.7%

15%

20%

25%

30%

35%

40%

45%

50%

55%

15%

20%

25%

30%

35%

40%

45%

50%

55%

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

Statutory Corporate Tax Rate S&P 500 Effective Tax Rate (3yr rolling)

2Q18 effective tax rate: 19.7%

15%

20%

25%

30%

35%

40%

45%

50%

55%

15%

20%

25%

30%

35%

40%

45%

50%

55%

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17



15%

20%

25%

30%

35%

40%

45%

50%

55%

15%

20%

25%

30%

35%

40%

45%

50%

55%

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17



WAGES, OIL AND FFR NO THREAT TO MARGINS


Source: BLS, IBES, Reuters Global, Compustat, DWS Investment GmbH as of 2Q2018

COMMODITY PRICE VS. S&P 500 NET MARGIN FED FUNDS RATE VS. S&P 500 NET MARGIN

AVERAGE HOURLY EARNINGS VS. S&P 500 NET MARGIN UNIT LABOR COSTS VS. S&P 500 NET MARGIN

0

100

200

300

400

500

600

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

Recession S&P 500 Net Margins(lhs) CRB Commodity Price Index (rhs)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

Recession S&P 500 Net Margins(lhs) Fed Funds Rate (rhs)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

Recession S&P 500 Net Margins(lhs)Average Hourly Earnings y/y (rhs) 2yr Average

Misconception: net margin is usually higher when average hourly aernings are higher. This is because of higher productivity.

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

Recession S&P 500 Net Margins(lhs)Unit Labor Cost y/y (rhs) 2yr Average

It's better to watch unit labor cost on margin pressure.

0

100

200

300

400

500

600

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17


0

100

200

300

400

500

600

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17


0

100

200

300

400

500

600

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17


0

100

200

300

400

500

600

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17


0

100

200

300

400

500

600

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

Recession S&P 500 Net Margins(lhs) Fed Funds Rate (rhs)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17



0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17



0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17



0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17



-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17



-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17



-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17



-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

0%

2%

4%

6%

8%

10%

12%

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17



U.S. BANKS NET INTEREST MARGIN, LOAN LOSS

PROVISIONS, AND LOAN GROWTH


Source: FDIC, DWS Investment GmbH as of 2Q 2018

NET INTEREST MARGIN LOAN LOSS PROVISIONS

2.8%

3.0%

3.2%

3.4%

3.6%

3.8%

4.0%

4.2%

4.4%

4.6%

$0

$20

$40

$60

$80

$100

$120

$140

$160

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

Net Interest Income ($bn, lhs) Net Interest Margin (%, rhs)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

Loan Reserves Loss Provisioning a.r. Net Charge-offs a.r.

BANK LOAN GROWTH VS. NOMINAL US GDP GROWTH

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

Recession Loan growth Loan growth Avg = 8.4% Nominal GDP GDP Avg = 6.5%

y/y % chg

S&L crisis and poor commercial RE

2003-07GDP: 5.8%Loans: 9.2%

1992-99GDP: 5.9%Loans: 7.1%

1984-89GDP: 7.2%Loans: 8.9%

1962-69GDP: 7.5%Loans: 10.5%

2011-nowGDP: 4.1%Loans: 4.5%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016


y/y % chg


2003-07GDP: 5.8%Loans: 9.2%

1992-99GDP: 5.9%Loans: 7.1%

1984-89GDP: 7.2%Loans: 8.9%

1962-69GDP: 7.5%Loans: 10.5%

2011-nowGDP: 4.1%Loans: 4.5%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016


y/y % chg


2003-07GDP: 5.8%Loans: 9.2%

1992-99GDP: 5.9%Loans: 7.1%

1984-89GDP: 7.2%Loans: 8.9%

1962-69GDP: 7.5%Loans: 10.5%

2011-nowGDP: 4.1%Loans: 4.5%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016


y/y % chg


2003-07GDP: 5.8%Loans: 9.2%

1992-99GDP: 5.9%Loans: 7.1%

1984-89GDP: 7.2%Loans: 8.9%

1962-69GDP: 7.5%Loans: 10.5%

2011-nowGDP: 4.1%Loans: 4.5%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016


y/y % chg


2003-07GDP: 5.8%Loans: 9.2%

1992-99GDP: 5.9%Loans: 7.1%

1984-89GDP: 7.2%Loans: 8.9%

1962-69GDP: 7.5%Loans: 10.5%

2011-nowGDP: 4.1%Loans: 4.5%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016


y/y % chg


2003-07GDP: 5.8%Loans: 9.2%

1992-99GDP: 5.9%Loans: 7.1%

1984-89GDP: 7.2%Loans: 8.9%

1962-69GDP: 7.5%Loans: 10.5%

2011-nowGDP: 4.1%Loans: 4.5%

2.8%

3.0%

3.2%

3.4%

3.6%

3.8%

4.0%

4.2%

4.4%

4.6%

$0

$20

$40

$60

$80

$100

$120

$140

$160

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18


2.8%

3.0%

3.2%

3.4%

3.6%

3.8%

4.0%

4.2%

4.4%

4.6%

$0

$20

$40

$60

$80

$100

$120

$140

$160

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18


5

7

9

11

13

15

17

19

21

23

25

5

7

9

11

13

15

17

19

21

23

25

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Recession Banks (GICS III) Financials (GICS I) S&P 500

5

7

9

11

13

15

17

19

21

23

25

5

7

9

11

13

15

17

19

21

23

25

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018


5

7

9

11

13

15

17

19

21

23

25

5

7

9

11

13

15

17

19

21

23

25

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018


5

7

9

11

13

15

17

19

21

23

25

5

7

9

11

13

15

17

19

21

23

25

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Recession Banks (GICS III) Financials (GICS I) S&P 500 -10%

-5%

0%

5%

10%

15%

20%

25%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1995

1995

1996

1997

1998

1999

2000

2000

2001

2002

2003

2004

2005

2005

2006

2007

2008

2009

2010

2010

2011

2012

2013

2014

2015

2015

2016

2017

2018

Recession P/B of Banks (lhs) P/B of Financials (lhs)

ROE of Banks (rhs) ROE of Financials (rhs)

Jan 2003 - Dec 2007:Avg bank ROE: 15.3%Avg bank P/B: 2.0Implied real CoE: 7.8%

Jan 2011 - Now:Avg bank ROE: 7.5%Avg bank P/B: 0.95Implied real CoE: 8.1%

-10%

-5%

0%

5%

10%

15%

20%

25%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1995

1995

1996

1997

1998

1999

2000

2000

2001

2002

2003

2004

2005

2005

2006

2007

2008

2009

2010

2010

2011

2012

2013

2014

2015

2015

2016

2017

2018





-10%

-5%

0%

5%

10%

15%

20%

25%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1995

1995

1996

1997

1998

1999

2000

2000

2001

2002

2003

2004

2005

2005

2006

2007

2008

2009

2010

2010

2011

2012

2013

2014

2015

2015

2016

2017

2018





-10%

-5%

0%

5%

10%

15%

20%

25%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1995

1995

1996

1997

1998

1999

2000

2000

2001

2002

2003

2004

2005

2005

2006

2007

2008

2009

2010

2010

2011

2012

2013

2014

2015

2015

2016

2017

2018





-10%

-5%

0%

5%

10%

15%

20%

25%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1995

1995

1996

1997

1998

1999

2000

2000

2001

2002

2003

2004

2005

2005

2006

2007

2008

2009

2010

2010

2011

2012

2013

2014

2015

2015

2016

2017

2018





BANKS STILL CHEAP ON STEADY-STATE P/E OR P/B


Source: S&P, IBES, Company Reports, Compustat, DWS Investment GmbH as of 8/28/2018

FORWARD PE OF BANKS, FINANCIALS, AND S&P 500 P/B AND ROE OF BANKS, FINANCIALS, AND S&P 500

5

7

9

11

13

15

17

19

21

23

25

5

7

9

11

13

15

17

19

21

23

25

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018


-10%

-5%

0%

5%

10%

15%

20%

25%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1995

1995

1996

1997

1998

1999

2000

2000

2001

2002

2003

2004

2005

2005

2006

2007

2008

2009

2010

2010

2011

2012

2013

2014

2015

2015

2016

2017

2018





CORRECT PB FORMULA VS. COMMONLY USED “WRONG” FORMULA

Correct Incorrect

Growth based fair PB: ROE - g

PB = * Real incremental ROE PB = COE - g

Steady-state based fair PB: Accumulated ROE ROE

PB = PB = COE

DPS

Growth based fair PE: PE = COE - growth / EPS

Steady-state based fair PE: 1 1

PE = real COE PE = COE

Incremental real ROE - real growth

Real COE - real growth

Accumulated ROE

Real COE

S&P 500 IS NOT U.S. GDP


Source: Company Financial Reports, DWS Investment GMBH as of August 2018

MANY DIFFERENCES BETWEEN US GDP & S&P 500

US GDP S&P 500

Domestic Global

Consumption Driven Investment Driven

Short Oil Long Oil

Service Oriented Manufacturing Oriented

Net Importer Net Exporter

Prefers strong dollar Prefers weak dollar

Net borrower Net saver

Captive to US taxes Countries compete to attract

S&P 500 PROFITS BY REGION

60%

17%

8%

15%

US

Europe

Other DM

EM

_ Operating exposures and drivers of S&P EPS go beyond US GDP

_ Outside of recessions, S&P EPS can vary from negative to double-digit growth rates

when U.S. GDP is anywhere between 2-4%

_ About 1/3 of S&P sales and 40% of net profits, including exports, are generated

abroad. About 25% of total S&P profits are earned in foreign currency

_ Excluding Financials, S&P EPS is more sensitive to global GDP than U.S. GDP

_ The S&P is more sensitive to manufacturing and investment spending than the U.S.

economy, which is more sensitive to services and consumption spending

_ The S&P is more of a commodity producer than a commodity user

_ Reinvestment of earnings is bigger driver of EPS growth than GDP

S&P 500 FOREIGN REVENUE AND FX PROFITS BY SECTOR (BASED ON 2014 RESULTS)

S&P 500 IS NOT U.S. GDP


Source: BEA, OECD, S&P, Compustat, DWS Investment GmbH as of 2Q18 (global GDP as of 1Q18)

REAL GDP VS. REAL S&P EX FINANCIALS EARNINGS GROWTH NOMINAL US GDP GROWTH VS. S&P 500 EPS GROWTH

NOMINAL US GDP VS. S&P EX FINANCIALS EARNINGS GROWTH NOMINAL US GDP GROWTH VS. S&P EX FINANCIALS EARNINGS

GROWTH (EX. RECESSIONS AND 2 YEARS AFTER RECESSIONS)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Recession US GDP Global GDP

Real S&P ex. Fin net income vs. real

GDP (4-qtr sum y/y)

7yr rolling RSQ

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1967

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007

2011

2015

Recession Nominal GDP S&P 500 EPS

y/y % chgCorrel: 0.22

2H1993-1999GDP: 5.9%EPS: 11.6%

2004-1H2007GDP: 5.9%EPS: 14.7%

2H2011-nowGDP: 4.0%EPS: 7.9%

1977-79GDP: 12.1%EPS: 15.6%

1985-89GDP: 6.8%EPS: 7.2%

y = 1.94x - 0.04R² = 0.17

-30%

-20%

-10%

0%

10%

20%

30%

40%

-5% 0% 5% 10% 15%

S&

P 5

00 e

x. F

in. N

et In

com

e 4-

qtr

Sum

(y

/y)

Nominal GDP 4-qtr Sum (y/y)

y = 1.46x + 0.01R² = 0.09

-30%

-20%

-10%

0%

10%

20%

30%

40%

3% 5% 7% 9% 11% 13% 15%

S&

P 5

00 e

x. F

in. N

et In

com

e 4

-qtr

Sum

(y

/y)

Nominal GDP 4-qtr Sum (y/y)

1967-2018 (ex. recessions and the 2 years after recessions)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18



GDP (4-qtr sum y/y)

7yr rolling RSQ

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18



GDP (4-qtr sum y/y)

7yr rolling RSQ

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18



GDP (4-qtr sum y/y)

7yr rolling RSQ

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1967

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007

2011

2015



2H1993-1999GDP: 5.9%EPS: 11.6%

2004-1H2007GDP: 5.9%EPS: 14.7%

2H2011-nowGDP: 4.0%EPS: 7.9%

1977-79GDP: 12.1%EPS: 15.6%

1985-89GDP: 6.8%EPS: 7.2%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1967

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007

2011

2015



2H1993-1999GDP: 5.9%EPS: 11.6%

2004-1H2007GDP: 5.9%EPS: 14.7%

2H2011-nowGDP: 4.0%EPS: 7.9%

1977-79GDP: 12.1%EPS: 15.6%

1985-89GDP: 6.8%EPS: 7.2%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1967

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007

2011

2015



2H1993-1999GDP: 5.9%EPS: 11.6%

2004-1H2007GDP: 5.9%EPS: 14.7%

2H2011-nowGDP: 4.0%EPS: 7.9%

1977-79GDP: 12.1%EPS: 15.6%

1985-89GDP: 6.8%EPS: 7.2%

S&P 500 PE AND IMPLIED EQUITY RISK PREMIUM



Source: Federal Reserve, S&P, DWS Investment GmbH as of 8/28/2018

0%

2%

4%

6%

8%

10%

12%

0

5

10

15

20

25

30

35

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

Recession Trailing PE (lhs) Implied ERP (rhs)

Avg ERP = 4% Avg ERP ex 1975-82 = 3.5% Avg PE = 15.9

Overstated EPS from inflation distortions Return to

normal

Low offered ERP contributes to crash

Long-term growth optimism

0%

2%

4%

6%

8%

10%

12%

0

5

10

15

20

25

30

35

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

Recession Trailing PE (lhs) Implied ERP (rhs)

Avg ERP = 4% Avg ERP ex 1975-82 = 3.5% Avg PE = 15.9

Overstated EPS from inflation distortions Return to

normal

Low offered ERP contributes to crash

Long-term growth optimism

Red dot shows implied ERP if 10 yr. TIPs yield was 1.5%

PE/VIX: WHERE VALUATION MEETS MARKET EMOTION


Source: S&P, CBOE, DWS Investment GmbH as of 8/28/2018

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

S&P 500 Trailing PE / Qtrly Avg VIX

Crash

Skeptical or

Denial

Realistic &

Disciplined

Complacency

Mania

Exaggerated caution signal

as depressed EPS raised

PE & PE/VIX

Very high PE, so complacent

equity market , but cautious

derivatives market

PE reasonable, but very low

VIX. A complacent

derivatives market

PE / Daily VIX on

Aug 28: 1.51

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

S&P 500 Trailing PE / Qtrly Avg VIX

Crash

Skeptical or

Denial

Realistic &

Disciplined

Complacency

Mania

Exaggerated caution signal

as depressed EPS raised

PE & PE/VIX

Very high PE, so complacent

equity market , but cautious

derivatives market

PE reasonable, but very low

VIX. A complacent

derivatives market

PE / Daily VIX on

Aug 28: 1.51

S&P 500 SECTOR AND INDUSTRY VIEWS

Source: DWS Investment GmbH; As of 8/23/2018

Market

Weight (%)

Allocated

Weight (%)

Sector 2017

PE

2018

PE

Overweight 2017

PE

2018

PE

Equal weight 2017

PE

2018

PE

Underweight 2017

PE

2018

PE

Over-weight 14.1% 18.1% Financials 17.0 13.5 Banks 15.7 12.7 Consumer Finance 13.1 11.1

Capital Markets 18.2 14.3 Diversified Financial Services 32.5 23.2

Insurance 15.7 11.9

26.1% 29.6% Information

Technology

24.6 19.9 Internet Software & Services 34.5 26.6 Communications Equipment 18.5 17.6

IT Services 26.3 22.3 Electronic Equipment 22.4 20.3

Semiconductors 18.4 13.3

Software 33.3 26.5

Technology Hardware Storage & 18.5 16.3

14.4 17.9 Health Care 19.4 17.1 Biotechnology 14.4 13.7

Pharmaceuticals 17.2 15.7

Health Care Technology 27.5 25.8

Health Care Providers & 19.9 16.2

Life Sciences Tools & Services 34.2 26.2

Health Care Equipment & 28.2 23.6

2.8% 3.3% Real Estate 20.7 18.2 REITs 20.8 18.2

Real Estate Mgmt. & 19.1 15.1

Electric Utilities 18.4 16.8

2.9% 3.4% Utilities 19.2 17.2 Independent Power Producers 21.2 11.2

Multi-Utilities 20.3 18.6

Water Utilities 29.7 26.2

Equal-weight 1.9% 1.9% Telecom 13.7 10.6 Diversified Telecommunication Services 13.7 10.6

Under-weight 12.7% 10.7% Consumer

Discretionary

24.8 22.4 Diversified Consumer Services 12.1 10.4 Media 16.0 15.8 Auto Components 10.9 11.8

Hotels Restaurants & Leisure 25.9 19.8 Automobiles 5.6 6.4

Distributors 20.8 16.6

Household Durables 12.5 10.8

Internet & Direct Marketing 150.9 75.5

Leisure Products 25.7 55.8

Multiline Retail 18.6 16.1

Specialty Retail 21.5 20.6

Textiles Apparel & Luxury Goods 26.8 26.1

9.7% 7.2% Industrials 21.0 17.7 Airlines 10.2 10.6 Construction & Engineering 23.0 18.2 Aerospace & Defense 24.9 19.9

Air Freight & Logistics 21.4 16.3 Professional Services 25.9 23.4 Building Products 21.0 15.3

Road & Rail 26.5 19.9 Commercial Services & Supplies 34.2 24.7

Electrical Equipment 21.6 20.5

Industrial Conglomerates 17.5 17.7

Machinery 20.3 15.2

Trading Companies & 24.8 17.7

6.8% 4.8% Consumer

Staples

19.2 18.0 Food & Staples Retailing 18.7 16.8 Beverages 22.4 21.3

Food Products 17.7 15.7

Household Products 20.3 20.0

Personal Products 35.2 25.2

Tobacco 15.2 15.4

2.5% 1.0% Materials 19 16 Container & Packaging 21.1 13.6

Metals & Mining 16.9 10.1

Chemicals 17.9 17.7

Construction Materials 34.4 23.9

6.1% 2.1% Energy 39.2 20.1 Energy Equipment & Services 58.6 29.3

Oil Gas & Consumable Fuels 37.0 19.1

Aggregate PE: DWS View Overweight 20.8 17.3 Equal weight 17.8 14.9 Underweight 24.8 20.2

2856.98 2017 & 2018 EPS 132.0 161.0 2017 & 2018 PE 21.6 17.7

Bottom-up Cons. EPS 132.9 162.8 Bottom-up Cons. PE 21.5 17.5

2017 & 2018 Ex Energy PE 20.8 17.6

Btm-up Cons. Ex Energy PE 20.8 17.5

Macro tilts:

Cyclicals -2.50%

Defensive 2.50%

Value -4.25%

Growth 4.25%

Consumer -4.00%

Services/experience 0.75%

Disc. Goods -2.75%

Retailing -1.65%

Durables -0.85%

Staples Goods/Retail -2.00%

Commodity -5.25%

Energy -4.00%

Metals/Chemicals -1.25%

Capex -2.00%

Capacity additions -3.75%

Productivity 1.75%

Health Care 3.50%

Innovation 1.75%

Marketers 1.00%

Insurers 0.50%

Financials 4.00%

Up rates/low spreads 3.00%

Capital Markets 1.00%

Insurance 0.00%

Bond Substitutes 1.00%

Weak FX $ plays -1.00%

High R&D plays 5.75%

Transports 0.75%

Geopolitical risk -3.50%

Weak oil prices 0.00%

Inflation shock -9.50%

Domestic GDP 1.00%

Global GDP -2.75%

Consumer TMT 1.25%

Trade sensitive -3.75%


S&P 500 FAIR VALUE BY SECTOR


Past Performance and forecasts are not reliable indicators of future returns. No assurance can be given that any forecast or target will be achieved.

Source: DWS INVESTMENT GmbH as of 8/23/2018

Assuming a ~5.50% real COE for overall S&P 500

Market

Value

($bn)

Current

2018 PE

2018E

Earnings

($bn)

Normal

Ratio

Normal

2018E

Earnings

Accounting

Quality

Adjustment

Fully

Adjusted

Earnings

Real

CoE

Steady

State

Value

Growth

Premium

2018 Start

Fair Value

($bn)

2018E

Dividend

Yield

2018 End

Fair Value

($bn)

2018 End

Fair

Value PE

2018 end

Upside

%

Consumer Disc. 3,142 22.4 140.0 99% 138.4 -7% 128.7 5.50% 2,340 5% 2,457 1.3% 2,609 18.6 -17%

Consumer

Staples

1,753 18.0 97.5 100% 97.5 -7% 90.7 5.25% 1,727 0% 1,727 3.0% 1,800 18.5 3%

Energy 1,410 20.1 70.0 107% 74.7 -7% 69.5 5.75% 1,208 0% 1,208 3.1% 1,265 18.1 -10%

Financials 3,433 13.5 255.0 101% 258.7 -8% 238.0 6.00% 3,967 0% 3,967 1.9% 4,208 16.5 23%

Banks 1,566 12.7 123.5 103% 127.2 -10% 114.5 6.50% 1,761 0% 1,761 2.3% 1,871 15.1 19%

Health Care 3,479 17.1 203.5 97% 197.6 -7% 183.8 5.25% 3,501 0% 3,501 1.7% 3,695 18.2 6%

Industrials 2,340 17.7 132.5 97% 128.5 -7% 119.5 5.50% 2,174 0% 2,174 2.2% 2,289 17.3 -2%

Technology 6,376 19.9 320.0 100% 320.0 -7% 297.6 5.50% 5,410 10% 5,951 1.4% 6,317 19.7 -1%

Materials 562 16.1 35.0 97% 33.9 -7% 31.5 5.75% 547 0% 547 2.2% 578 16.5 3%

Real Estate 658 18.2 36.3 100% 36.3 -7% 33.7 5.00% 674 0% 674 3.5% 698 19.3 6%

Telecom 472 10.6 44.5 85% 37.8 -15% 32.2 5.25% 612 -15% 521 5.9% 527 11.9 12%

Utilities 691 17.2 40.1 100% 40.1 -7% 37.3 5.00% 746 0% 746 3.7% 770 19.2 12%

S&P 500 ($ bn) 24,315 1374.3 99% 1363.4 -7.4% 1262.4 5.50% 22,906 2% 23,472 2.0% 24,756 2%

S&P 500

Index ($/sh)

2856.98 17.7 161.0 100% 160.65 -7.8% 148.1 5.50% 2693.6 0% 2693.6 1.9% 2843.8 17.7 0%

>5%

between -5% and 5%

<-5%

SECTOR STRATEGY: PER KEY MACRO PLAYS



GOODS CONSUMPTION PLAYS

COMMODITY PLAYS

SERVICE CONSUMPTION PLAYS CAPEX PLAYS

GROWTH

VALUE

CYCLICALSDEFENSIVES

UW

EQ

OW

Rates & Credit Plays:

REITS, Utilities

& Telecom

Financials

S&P 500 INTRINSIC VALUATION MODEL




S&P 500 capitalized EPS valuation S&P 500 cost of equity & fair book multiple

DWS 2018E S&P 500 EPS $161.00 Fair long-term nominal return on S&P 500 index 7.50%

Components of estimated fair S&P 500 return:

DeAM' s "normal 2018E" S&P 500 EPS $160.65 + Long-term real risk free interest rate 1.50%

"Normal 2018E" EPS/2018E EPS 100% + Long-term fair S&P 500 equity risk premium* 4.00%

= Long-term real S&P 500 cost of equity 5.50%

Accounting quality adjustment to proforma EPS $12.50 + Long-term inflation forecast 2.00%

= S&P 500 nominal cost of equity 7.50%

Normal 2018 E S&P 500 EPS fair to capitalize $148 * S&P 500 ERP usually 300-400bps, w/real CoE @5% - 6.5%

Key principle: steady-state value = normal EPS/real CoE

Fair S&P 500 Market Value and Book Value Multiple

S&P 500 EPS Capitalization Valuation 2017 end S&P 500 book value per share $825

Normal EPS/(real CoE - (EM/payout) - EM): Fair PB = Fair PE* normal aggregate ROE 3.27

S&P 500 intrinsic value at 2018 start 2694 Fair PE = (inc ROE-g)/(inc real ROE* (real CoE-real g)) 18.2

S&P 500 intrinsic value at 2018 end 2841 Implied S&P 500 fair value of book at 2018 start 2694

Implied fair fwd PE in early 2018 on 2018E $161 EPS 16.7 Steady-state PB = normal agg. ROE/real CoE 3.27

Implied fair trailing PE at 2018 end on 2018E $161 EPS 17.6 Confirmed by fair steady-state PE = 1/real CoE 18.2

S&P 500 Dividend discount model S&P 500 long-term EPS & DPS growth

DWS 2018E S&P 500 DPS $55.00 DWS‘s 2018E S&P 500 aggregate ROE 19.5%

2018E dividend payout ratio 34% 2017 end S&P 500 book value per share $825

DB' s "normal 2018E" S&P 500 DPS $55.00 DeAM's "normal 2018E" S&P 500 aggregate ROE 18.0%

Normal dividend payout ratio 37%

S&P EPS retained for true reinvestment

Estimated ROE on reinvested S&P EPS

Economic margin (EM) or RO E-Co E

43%

7.50 %

0.00 %

EPS directed to net share repurchases

Normal share repurchase payout ratio

Total payout of S&P 500 EPS

Total payout ratio of normal and quality adj. EPS

$30.00

20%

$85.00

57%

Sources of long-term earnings growth:

+ Long-term inflation forecast

+ Fair return on true reinvestment

+ Value added return on true reinvestment

= Long-term earnings growth

2.00%

2.34%

0.00%

4.34%

S&P 500 DPS Discount Model

Normal DPS/(nominal CoE - DPS growth):

S&P 500 intrinsic value at 2018 start

S&P 500 intrinsic value at 2018 end

Implied fair forward yield on 2018E DPS of $55.0

Implied fair trailing yield on 2018E DPS of $55.0

2694

2841

2.04%

1.94%

+ Growth from net share repurchases 1.11%

= Long-term S&P 500 EPS/DPS growth 5.46%

+ Fair normal dividend yield

= Total long-term return at constant PE

2.04%

7.50%

Normal EPS/(real CoE-value added EPS growth) 2694 DPS discount model using true DPS (all payout) 2694

Value added growth premium in fair value est. 0% Normal 2018E economic profit per share $102.77

NORMAL 2018E S&P 500 EPS

$150 $155 $160.65 $165 $170

Real co

st

of

Eq

uit

y

5.00% 2888 2995 3115 3209 3316

5.25% 2754 2856 2971 3060 3163

5.00% 2633 2730 2841 2926 3023

5.75% 2522 2615 2721 2803 2896

6.00% 2420 2510 2612 2690 2780

S&P 500 EPS DISCOUNT MODEL 5 STEPS TO VALUE

_ Estimate normalized S&P 500 EPS

_ Adjust normalized EPS for pro forma accounting quality

_ Estimate a fair long-term real return on S&P

500 ownership (CoE)

_ Capitalize normalized and accounting quality adj.

EPS at real CoE

_ Consider long-term potential for value added

growth opportunities

ALLOCATION TABLES AND S&P 500 OUTLOOK



DWS View Current Long-term Considerations

Fixed Income 32% 35% Projected return/risk

Treasury/Agency 13% seek neg. correlation

Municipals 10% > return, < liquid

Corp. Credit 9% selective HY > IG

Equities 63% 55% Projected return/risk

U.S. Equities 37% 40%

S&P 500 34% 35% S&P is global + Tech

Small Caps (R2) 3% 0-10% Beyond beta booster?

Foreign DM Equities 16% 15% Unique? Valuation?

Financials 3% 3%

Non-Financials 13% 12%

Foreign EM 10% 0-10%

Alternatives 5% 10% Is it truly uncorrelated?

Real Estate/Private Equity

Commodities/FX/Vol/Alpha

DARE TO ASK

2017 end: 2674 Why not 3000 for the S&P by 2019 end?

3000 = 17.5x 2019E EPS of $1702018 end target: 2800

S&P 500 to reach 3000 by 2019 end on a long expansionary cycle of

moderate growth.

2016A 2017E 2018ES&P AVG. TRAILING 4QTR PE

S&P EPS $119 $133 $161 1960-2016 16.0

PE on

trailing EPS

18.8 20.1 17.4 1985-2016 17.5

DPS $46 $49 $55 1995-2016 18.5

DPS/EPS 38% 37% 34% 2005-2016 16.0

"S&P PE stands on the shoulders of bonds"

S&P QUARTERLY EPS MOST FAVORED SECTORS

1Q17 $31.00 1Q18A $38.10 Financials, Healthcare, Tech

2Q17 $32.50 2Q18E $40.50

3Q17 $33.50 3Q18E $40.50 LEAST FAVORED SECTORS

4Q17 $36.00 4Q18E $42.00 Energy, Consumer Staples

Level Tactical View Jun ‘19 F - 1W YTD

Rates Percentage points

GER 2yr - 0.59 - 0.10 0.60 0.04

GER 10yr 0.35 1.00 0.05 - 0.07

GER 30yr 1.02 1.60 0.05 - 0.24

UK 10yr 1.29 1.75 0.05 0.10

UST 2yr 2.62 3.00 0.02 0.74

UST 10yr 2.84 3.25 - 0.02 0.43

UST 30yr 2.99 3.45 - 0.03 0.25

JGB 10yr 0.10 0.10 0.00 0.05

Spreads Basic points

EUR IG Corp 129 95 0 35

EUR HY 355 300 - 9 77

US IG Corp 107 100 1 18

US HY 338 370 -4 -5

EM Credit 339 330 3 53

EM Sovereign 359 350 -6 74

Italy 10yr 278 200 -3 120

Spain 10yr 104 70 -11 - 10

Currencies

EUR vs USD 1.16 1.15 0.02 - 0.04

IUSD vs JPY 111 111 0.77 -1.42

EUR vs GBP 0.903 0.90 0.01 0.02

EUR vs JPY 129 128 2.95 - 5.93

GBP vs USD 1.29 1.28 0.01 - 0.06

USD vs CNY 6.83 6.50 -0.04 0.33

Equity & Commodities

S&P 500 2,865 2,900 0.8% 7.1%

Stoxx 600 383 390 0.5% - 1.5%

Euro Stoxx 50 3,422 3,550 1.3% - 2.3%

DAX 30 12,352 13,500 0.9% - 4.4%

SMI 9,038 8,850 0.4% - 3.7%

FTSE 100 7,572 7,800 0.2% - 1.5%

MSCI EM 1,048 1,150 2.5% - 9.5%

MSCI AC Asia xJ 660 740 2.3% - 7.5%

MSCI Latam 2,481 2,500 -0.8% - 12.3%

MSCI Japan 1,012 1,080 0.1% - 5.8%

Gold 1,199 - 1,290 1.3% - 7.9%

Crude Oil (WTI) 70 - 60 6.2% 15.1%

DWS MACRO AND ASSET CLASS

FORECASTS & TACTICAL VIEWS


Past Performance and forecasts are not reliable indicators of future returns. No assurance can be given that any forecast or target will be achieved. Source: Bloomberg Finance LP, DWS Investment GmbH as of 8/24/2018

= underweight; = neutral; = overweight//(3) F = Forecast

Economic forecasts 2017 2018E

Global GDP 3.9% 3.9%

U.S. GDP 2.3% 2.7%

Capex 4% 8%

Fed Funds rate* 1.25 - 1.50 2.50 - 2.75

DXY 92 95

Euro* 1.20 1.15

Oil/bbl (WTI)* 60 60

Interest rates 2017 2018E

2yr Treasury* 1.88% 3.00%

10yr Treasury* 2.40% 3.25%

10yr TIPS* 0.43% 1.25%

LT IG Muni* 3.15% 3.00%

IG Corp* 3.47% 4.25%

HY Corp* 6.15% 6.95%

Equities 2016 2017 2018E

S&P 500 2239 2674 2800

Price return 19.4% 5%

Dividend yield 2% 2%

S&P total return estimate 22% 7%

Next 5%+ price move: Down

Risk of near-term correction: Moderate

CYCLICALLY ADJUSTED PE


Source: Robert Shiller (Yale University), Cowles Commission, S&P, DWS as of 8/28/2018

Bianco PE vs. Shiller PE

AVG 10YR EPS: SHILLER ADJUSTED EPS SIGNIFICANTLY

UNDERSTATES CURRENT NORMAL EPS

S&P 500: BIANCO PE VS. SHILLER PE_ Time value adjustments to EPS should reflect both inflation and

EPS retention

_ A problem with Professor Shiller’s approach is that it doesn’t

account for expected EPS growth from retained earnings. Also

Shiller’s PE uses GAAP EPS instead of non-GAAP EPS

_ Our equity time value adjustment (ETVA) properly accounts for

both inflation and the opportunity cost of retained earnings

_ As of 2017, Shiller’s 10yr avg inflation only adjusted EPS is $85,

too low to represent normalized S&P EPS. Bianco’s 10yr avg

ETVA EPS is $128. Actual 2017 S&P non-GAAP EPS is $133

_ As of August 2018, Bianco PE is 21.7, suggesting a 38% premium

vs. the average since 1960, while Shiller PE is 32.2 and suggests

a 61% premium

BIANCO PE


Source: S&P, MSCI, IBES, Haver, MIC, Statistical Office of the European Communities, Bloomberg Finance, DWS Investment GmbH as of 8/28/2018. Past performance August not be indicative of future results.

Note: Equity time value adjusted (ETVA) EPS is to raise past earnings by inflation and earnings retention ratio * real CoE.

Summary across regions: Training EPS, 10 yr avg ETVA EPS,

Traling PE, Bianco PE and ROE

S&P 500 EUROPE JAPAN EM ASIA EX JAPAN

Trailing

EPS

10yr Avg

ETVA

EPS

Trailing

PE

Bianco

PE

ROE Trailing

EPS

10yr Avg

ETVA

EPS

Trailing

PE

Bianco

PE

ROE Trailing

EPS

10yr Avg

ETVA

EPS

Trailing

PE

Bianco

PE

ROE Trailing

EPS

10yr Avg

ETVA

EPS

Trailing

PE

Bianco

PE

ROE Trailing

EPS

10yr Avg

ETVA

EPS

Trailing

PE

Bianco

PE

ROE

1995 37.68 31.23 16.3 19.7 18.0% 46.70 15.7 13.54 70.9 3.3% 21.28 21.5 3.7%

1996 41.03 34.23 18.1 21.6 17.4% 51.76 16.8 16.11 27.72 56.3 32.7 4.1% 20.14 23.6 6.0%

1997 45.03 37.00 21.6 26.2 18.1% 54.24 19.5 11.96 26.82 64.4 28.7 3.0% 20.26 20.4 4.5%

1998 44.33 39.09 27.7 31.4 16.9% 58.19 23.0 13.7% 8.91 24.03 78.2 29.0 2.2% 11.32 26.4 2.7%

1999 51.02 42.14 28.8 34.9 17.2% 54.41 55.23 28.0 27.6 13.1% 9.36 19.91 108.5 51.0 2.4% 13.37 36.6 3.3%

2000 57.09 46.75 23.1 28.2 17.2% 58.61 56.38 23.5 24.4 11.9% 21.13 17.48 38.3 46.3 4.9% 20.20 16.5 8.9%

2001 45.22 51.31 25.4 22.4 13.9% 46.20 57.69 23.5 18.8 10.2% 12.46 15.35 52.3 42.4 2.3% 24.32 13.1 11.3% 12.18 16.3 8.4%

2002 47.98 55.20 18.3 15.9 15.1% 42.31 59.87 20.5 14.5 9.0% 14.24 14.77 36.9 35.6 3.8% 28.61 10.2 13.2% 15.64 11.4 11.6%

2003 55.44 59.37 20.1 18.7 15.3% 58.42 63.12 20.0 18.5 10.5% 22.96 16.01 27.8 39.9 6.1% 33.46 30.32 13.2 14.6 13.4% 16.38 15.6 11.3%

2004 67.10 64.64 18.1 18.7 16.0% 83.19 68.03 16.6 20.3 13.0% 34.50 18.71 20.3 37.4 8.3% 47.92 33.46 11.3 16.2 15.8% 25.43 11.5 14.7%

2005 76.28 70.40 16.4 17.7 16.6% 104.44 74.65 14.1 19.7 16.2% 44.61 22.14 22.4 45.2 9.2% 55.76 37.16 12.7 19.0 16.5% 25.60 13.6 13.6%

2006 88.18 76.93 16.1 18.4 17.5% 134.50 84.17 14.2 22.7 17.0% 52.54 26.31 20.2 40.4 9.8% 65.17 42.47 14.0 21.5 16.5% 28.89 15.7 13.4%

2007 84.56 82.45 17.4 17.8 16.8% 156.38 96.34 13.6 21.9 16.1% 57.77 31.90 16.3 29.5 10.3% 78.35 50.31 15.9 24.8 17.6% 35.71 17.4 14.8%

2008 61.85 85.31 14.6 10.6 16.3% 124.76 104.90 8.8 10.5 15.6% 38.75 36.19 13.7 14.7 8.1% 65.32 59.52 8.7 9.5 15.4% 26.50 10.9 11.5%

2009 62.02 85.40 18.0 13.1 11.7% 91.03 109.84 15.8 13.1 10.5% 10.75 36.66 53.0 15.5 2.3% 58.76 67.44 16.8 14.7 12.0% 26.88 18.0 10.8%

2010 85.49 87.76 14.7 14.3 14.5% 117.83 117.73 12.4 12.4 12.9% 33.47 36.94 16.8 15.2 6.8% 84.61 77.62 13.6 14.8 14.5% 38.50 34.59 14.7 16.4 13.2%

2011 97.83 95.08 12.9 13.2 15.9% 120.55 129.74 10.4 9.7 13.4% 31.44 39.80 14.2 11.2 6.7% 89.76 88.49 10.2 10.4 14.7% 40.19 39.18 11.4 11.7 13.0%

2012 103.59 102.63 13.8 13.9 15.3% 116.48 141.60 12.4 10.2 12.6% 28.89 42.15 18.4 12.6 5.7% 87.44 98.25 12.1 10.7 13.3% 41.68 43.17 13.1 12.7 11.5%

2013 109.59 109.43 16.9 16.9 15.2% 113.98 148.97 15.4 118 11.9% 45.01 45.50 17.9 17.7 7.4% 86.51 107.39 11.6 9.3 12.8% 43.82 47.58 12.6 11.6 11.9%

2014 118.83 115.55 17.3 17.8 16.0% 107.41 149.60 15.0 10.7 11.8% 54.38 48.82 16.0 17.8 8.0% 78.49 113.03 12.2 8.5 12.0% 43.96 49.80 12.8 11.3 11.1%

2015 118.20 119.65 17.3 17.1 15.9% 96.20 146.54 15.8 10.4 11.3% 60.71 50.36 15.5 18.6 8.7% 65.33 116.36 12.2 6.8 11.3% 39.76 51.55 12.6 9.7 10.5%

2016 119.07 122.19 18.8 18.3 15.4% 87.89 139.26 16.7 10.6 10.5% 55.18 50.30 16.6 18.2 8.1% 64.51 116.10 13.4 7.4 11.1% 37.49 52.08 13.7 9.9 10.2%

2017 132.95 127.66 20.1 20.9 15.9% 108.25 131.30 16.6 13.7 11.2% 68.73 51.18 15.6 21.0 9.0% 80.53 114.66 14.4 10.1 12.1% 47.97 52.71 14.9 13.5 11.3%

Aug-18 148.55 133.30 19.3 21.7 17.8% 114.68 131.36 15.1 13.2 12.5% 77.40 49.82 13.3 20.7 10.1% 83.84 116.57 12.8 9.2 12.8% 49.63 53.61 13.5 12.5 11.5%

vs S&P - 23% - 39% - 32% -5% - 35% - 58% - 31% - 42%

Median 18.0 18.3 16.0% 15.8 13.7 12.3% 20.3 28.9 6.7% 13.4 10.7 12.1% 13.6 11.6 11.5%

vs S&P - 12% - 25% 13% 58% - 26% - 41% - 24% - 36%

S&P 500 VS. MSCI EUROPE


Source: IBES, S&P, MSCI, DWS Investment GmbH as of 8/28/2018. Past performance may not be indicative of future results.

Valuation and weight differences by industry group

S&P 500 EUROPE

LTM EPS

weights

NTM EPS

weights

Mkt Cap

Weights

LTM

PE

NTM

PE

LTM EPS

weights

NTM EPS

weights

Mkt Cap

weights

LTM

PE

NTM

PE

NTM PE

Premium/

Discount

to S&P

EPS weights

vs. S&P

Auto & Compo 1.5% 1.3% 0.6% 7.3 7.4 6.5% 6.3% 3.0% 7.1 6.7 -10% 5%

Banks 8.8% 9.1% 6.1% 14.2 11.9 14.8% 14.7% 10.0% 10.1 9.4 -21% 6%

Capital Goods 6.9% 6.9% 6.8% 19.7 17.0 8.0% 8.1% 9.7% 18.3 16.5 -3% 1%

Commer & Prof Services 0.5% 0.5% 0.6% 24.5 22.5 1.4% 1.4% 1.9% 20.1 18.8 -16% 1%

Cons Durables & Apparel 1.2% 1.2% 1.2% 20.4 17.3 2.6% 2.7% 4.0% 22.8 20.1 17% 2%

Consumer Services 1.5% 1.5% 1.7% 21.6 19.0 1.0% 1.0% 1.2% 18.8 17.1 -10% 0%

Div Financials 5.9% 6.0% 5.3% 18.2 15.2 3.4% 3.4% 3.4% 15.0 13.6 -10% -3%

Energy 4.9% 6.0% 6.3% 25.1 16.8 8.7% 9.7% 8.2% 14.1 11.7 -30% 4%

Food & Staples Retail 1.4% 1.4% 1.4% 20.4 18.6 1.0% 1.0% 1.1% 17.3 15.3 -18% 0%

Food, Beverage & Tobacco 4.0% 3.8% 4.0% 18.6 16.9 6.4% 6.4% 8.7% 20.3 18.8 11% 3%

Health Care Equip & Services 6.2% 6.1% 6.3% 20.8 18.2 1.3% 1.3% 2.2% 25.1 23.2 27% -5%

Household & Personal Prod 1.4% 1.4% 1.6% 20.9 19.6 2.5% 2.5% 3.7% 22.4 21.0 7% 1%

Insurance 3.4% 3.6% 2.4% 14.1 11.5 7.2% 7.5% 5.5% 11.4 10.2 -12% 4%

Materials 2.7% 2.8% 2.6% 18.4 15.6 9.2% 8.8% 8.3% 13.6 13.0 -17% 6%

Media 2.5% 2.5% 2.3% 17.1 15.3 1.5% 1.4% 1.6% 15.7 15.1 -1% -1%

Pharma Biotech & Life Sci 9.6% 9.1% 7.8% 16.8 15.3 10.0% 9.7% 10.8% 16.1 15.3 0% 1%

Real Estate 1.4% 1.2% 2.9% 38.2 40.1 1.1% 1.1% 1.4% 19.4 18.2 -55% 0%

Retailing 3.5% 3.8% 7.2% 40.7 33.1 0.8% 0.7% 0.9% 17.8 16.7 -49% -3%

Semi & Semi Equip 5.3% 5.1% 4.0% 15.0 13.5 1.1% 1.2% 1.7% 23.0 20.1 49% -4%

Software & Services 11.5% 11.4% 16.0% 27.7 24.1 1.8% 1.8% 3.2% 26.2 24.0 0% -10%

Tech Hardware & Equip 6.9% 6.9% 6.0% 18.4 16.0 0.5% 0.6% 0.9% 24.2 21.2 33% -6%

Telecom Services 3.4% 3.2% 2.0% 11.7 10.7 3.7% 3.5% 3.2% 13.0 12.9 20% 0%

Transportation 2.5% 2.5% 2.1% 17.9 15.1 1.4% 1.4% 1.6% 17.0 15.5 3% -1%

Utilities 3.2% 2.9% 2.9% 17.7 16.7 3.9% 3.7% 3.6% 13.7 13.3 -20% 1%

Index PE 20.0 17.2 15.0 13.8 - 20%

S&P industry PE applied to MSCI Europe EPS weights 17.8 15.2 - 12%

EQUITIES


Source: IBES, S&P, MSCI, DWS Investment GmbH as of 8/28/2018. Past performance may not be indicative of future results.

S&P 500 vs. Europe

EUROPE’S INDUSTRY VS. REGIONAL DISCOUNT: Europe usually

~5% discount to S&P owing to different industry earnings contributions

plus a ~6% discount owing to regional residual. Its industry discount is

now 10%, and its regional discount is 7%.

EUROPEAN DISCOUNT TO THE S&P IS LARGER THAN HISTORY

OWING TO REGIONAL RISKS (yellow line is where Europe should be)

7

9

11

13

15

17

19

21

23

25

7

9

11

13

15

17

19

21

23

25

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

2013

201

4

201

5

201

6

201

7

201

8

Forward PE

Recession S&P 500 MSCI Europe S&P 500 IG PE applied to MSCI Europe IG earnings weights

Europe discount owing to regional risks

We expect the valuation gap to close up as European regional risks subside

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

Recession

Industry discount: S&P 500 IG PE applied to MSCI Europe IG earnings weights vs. S&P 500

Avg = 0.95

Regional discount: MSCI Europe vs. S&P 500 IG PE applied to MSCI Europe IG earnings weights

Avg = 0.94

Europe discount owing to regional risks

DOES ANY REGION HAVE ECONOMIC EPS

GROWTH THIS CYCLE?


Source: S&P, MSCI, IBES, Statistical Office of the European Communities, DWS Investment GmbH as of July 2018. Past performance August not be indicative of future results.

7-YEAR ROLLING ECONOMIC EPS GROWTH: U.S., EUROPE,

JAPAN, EM, ASIA EX JAPAN

ECONOMIC EPS GROWTH: U.S., EUROPE, JAPAN, EM, ASIA

EX JAPAN

-60%

-40%

-20%

0%

20%

40%

60%

-60%

-40%

-20%

0%

20%

40%

60%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Economic EPS growth (real EPS growth - earnings retention ratio * real CoE)

S&P 500 MSCI Europe MSCI Japan MSCI EM MSCI AC AxJ

-20%

-10%

0%

10%

20%

30%

40%

-20%

-10%

0%

10%

20%

30%

40%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

7-year rolling economic EPS growth

S&P 500 MSCI Europe MSCI Japan MSCI EM MSCI AC AxJ

EQUITIES STILL OFFER ATTRACTIVE TRIPLE-NET

RETURNS VS. HISTORY


Source: ICI, IRS, Tax Policy Center, DWS investment GmbH as of 2016

TRIPLE-NET EQUITY RETURN: OUR OUTLOOK VS.

HISTORICAL NORM

10 YEAR ROLLING S&P 500 NOMINAL AND

TRIPLE-NET RETURNS

_ We suggest examining historical and expected future returns on a triple-net basis: 1) after fees, 2) after taxes and 3) after inflation.

_ The order of deductions matters because fees are usually tax deductible, but taxes must be paid even on the part of the nominal gain that is merely inflation.

_ Gains on a triple net basis are usually modest and difficult to achieve with low risk investments. Investors that bought Treasury bills earned an annualized total return of 4.8% since

1960. However, during that period inflation was 3.8%. If the bills were held in a taxable account they earned ~3% after taxes, which is a negative real return after taxes.

_ Despite the S&P’s 20% forward PE premium vs. history, we think the index will deliver a ~7% long-term nominal return from today. A nominal return of 7%, less ~0.5% fees, less

~20% tax, less ~2% inflation, equates to a 3.2% triple-net return. This is better than the 2.5% compounded average since 1960.

Historical norm since 1960 Outlook

Nominal gross return 10.0% Nominal gross return 7.0%

less fees (~1.5%) 8.5% less fees (~0.5%) 6.5%

less tax (~25%) 6.4% less tax (20%) 5.2%

less inflation (4%) 2.4% less inflation (2%) 3.2%

Triple-net equity return

Investment fees ~1.5% Investment fees ~0.5%

Tax rate on equity returns ~25% Tax rate on equity returns 20%

Inflation 4.0% Inflation 2.0%

FEES AND TAX RATE ON EQUITY RETURNS

ARE MUCH LOWER TODAY


Source: ICI, IRS, Tax Policy Center, DWS investment GmbH as of August 2018

TOP MARGINAL INCOME TAX RATE, CAPITAL GAIN AND

DIVIDEND TAX RATE

AVERAGE FEE AND EXPENSE RATIO OF EQUITY

MUTUAL FUNDS

S&P SEASONALITY AND PULLBACKS


Source: S&P, DWS investment GmbH as of August 2018

STATISTICS ON HISTORIC S&P 500 PERFORMANCE 1960–2017

Time

Period

All Years Non-recession Years Mid-term Election Years Non-recession Mid-term

Years Election

Avg Std Max Min Avg Std Max Min Avg Std Max Min Avg Std Max Min

Jan 0.9% 5.0% 13.2% -8.6% 1.0% 4.6% 13.2% -7.1% -2.0% 3.4% 3.3% -7.6% -1.1% 3.1% 3.3% -6.2%

Feb 0.2% 3.7% 7.1% -11.0% 0.3% 3.2% 7.1% -9.2% 1.0% 4.0% 7.1% -6.1% 1.4% 3.9% 7.1% -3.0%

Mar 1.2% 3.4% 9.7% -10.2% 1.5% 2.9% 9.7% -4.6% 1.1% 3.1% 5.9% -4.6% 1.7% 3.4% 5.9% -4.6%

Apr 1.3% 3.8% 9.4% -9.0% 1.3% 3.3% 8.5% -6.2% -0.7% 4.6% 8.5% -9.0% 0.2% 4.2% 8.5% -6.2%

May 0.2% 3.7% 9.2% -8.6% 0.2% 3.6% 9.2% -8.6% -1.7% 5.0% 9.2% -8.6% -1.9% 4.5% 5.0% -8.6%

Jun -0.2% 3.3% 5.4% -8.6% 0.1% 3.2% 5.4% -8.2% -2.1% 3.4% 3.9% -8.2% -2.0% 4.0% 3.9% -8.2%

Jul 0.6% 4.1% 8.8% -7.9% 0.7% 4.0% 8.8% -7.9% 0.1% 5.2% 7.3% -7.9% 0.4% 5.0% 6.9% -7.9%

Aug 0.1% 4.7% 11.6% -14.6% 0.4% 4.2% 10.6% -14.6% -0.6% 7.4% 11.6% -14.6% -0.6% 6.5% 7.1% -14.6%

Sept -0.6% 4.3% 8.8% -11.9% 0.1% 3.8% 8.8% -11.0% -1.8% 6.1% 8.8% -11.9% -1.3% 6.1% 8.8% -11.0%

Oct 1.1% 5.9% 16.3% -21.8% 0.9% 5.1% 10.8% -21.8% 3.9% 6.1% 16.3% -9.2% 2.9% 5.0% 8.6% -9.2%

Nov 1.4% 4.4% 10.2% -11.4% 1.5% 3.9% 10.2% -8.5% 2.5% 4.1% 10.2% -5.3% 2.6% 3.9% 10.2% -4.0%

Dec 1.5% 3.1% 11.2% -6.0% 1.7% 3.1% 11.2% -6.0% 1.1% 3.4% 6.5% -6.0% 0.8% 3.6% 6.5% -6.0%

Q1 2.3% 7.7% 21.6% -12.1% 2.9% 6.4% 20.5% -8.4% 0.1% 6.7% 13.5% -8.6% 2.0% 6.9% 13.5% -6.2%

Q2 1.4% 7.4% 16.9% -21.3% 1.6% 6.7% 16.9% -21.3% -4.2% 9.3% 7.1% -21.3% -3.4% 9.4% 7.1% -21.3%

Q3 0.2% 8.3% 15.8% -26.1% 1.1% 6.6% 15.0% -17.6% -2.1% 12.3% 15.8% -26.1% -1.5% 9.3% 10.7% -17.6%

Q4 4.0% 7.7% 20.9% -23.2% 4.3% 6.8% 20.9% -23.2% 7.6% 6.7% 20.9% -6.3% 6.4% 7.3% 20.9% -6.3%

Jan – Apr 3.6% 7.9% 27.3% -11.4% 3.8% 7.0% 19.1% -9.4% -0.6% 7.8% 14.6% -11.4% 2.1% 7.5% 14.6% -8.8%

May – Sep 0.6% 9.7% 21.1% -29.6% 1.0% 8.2% 18.2% -24.3% -6.0% 11.3% 5.9% -29.6% -5.3% 10.1% 5.9% -24.3%

Oct – Dec 4.0% 7.2% 20.9% -23.2% 4.5% 6.3% 20.9% -23.2% 7.6% 6.7% 20.9% -6.3% 6.4% 7.3% 20.9% -6.3%

Whole Year 8. 1% 16. 0% 34. 1% -38. 5% 10. 7% 8. 6% 34. 1% -23. 4% 0. 6% 16. 2% 26. 7% -29. 7% 3. 0% 15. 5% 26. 7% -23. 4%

HOW OFTEN DOES 5%+ DIPS HAPPEN?

INFLATION STAYS NEAR THE U.S. FED’S 2% TARGET



1. Low inflation is the U.S. norm. Since 1800, the average U.S. inflation rate is 1.4%. Outside of wars, U.S. inflation is 0.5% on average. Outside of wars and 1971-1982 the

average is 0.0%.

2. Inflation over the long-term exists only because the Fed wants it to exist. The U.S. economy has a long history of good productivity trends or rising output per worker and per capita.

Fortunately, chronic supply shortages have never been a problem for the U.S. economy.

3. When economic potential meets demand, the Fed engineers inflation by managing and generally increasing the money supply. In the late1800s, before the Fed, there were periods

of productivity surges from agricultural advancements and industrialization causing episodes of supply boom driven deflation. It is not always possible for a change in the velocity of

money to accommodate economic growth. Deflation under such conditions can be damaging to an economy, because any price instability interferes with the effectiveness of price

signals, crucial to market based economies, business planning and contracts.

4. Central Banks generally desire low, but positive and stable inflation rates. Because some inflation encourages either the spending or depositing of money into productive savings.

This keeps the stock of money efficiently deployed. The Fed’s current inflation target is 2%.

5. It’s normal for the economic cycle to cause temporary deviations in inflation from the Fed’s target. But such deviations are generally moderate and are rarely sudden jumps

or plunges of several percentage points with the exception of inflationary jumps upon wars and plunges upon sharp recessions. Classically, cyclical inflation affects savings

vs. consumption.

6. Persistent deviation from an inflation target would represent ineffective monetary policy. Because the U.S. has never suffered chronically inadequate supply-side induced inflation,

the bouts of U.S. inflation well above target for multiple years was a function of inappropriate monetary policy under tight cyclical as well as dysfunctional or irrational business

conditions. Generally, supply-side shock driven inflation shouldn’t be met with tighter monetary policy.

7. If there is any clear signal or definition of inflation it is unit labor costs. While oil is in a lot of things, labor is in everything. But realize that wage growth is not inflationary if fueled by

rising productivity. Productivity driven wage growth is prosperity. That said, it’s irrational for employers to increase employee pay more than their productivity justifies as this would

reduce profits. It’s more likely that if the labor supply diminishes that growth would slow.

8. If employers irrationally increase wages more than productivity justifies, they would need to pass the cost forward to customers as price hikes to maintain profits. This is difficult in a

competitive economy and a big irrational risk to take. If such a wage-price spiral did take hold, as it did in the 1970s, it’s unlikely that the Fed would tolerate such price instability.

9. In the past 30 years, the highest monthly inflation spike was 6.3% in 1990. Anyone born after January 1983 hasn’t experienced double-digit inflation in the U.S.

10.If inflation stays contained this year, the Fed is likely to signal that hikes in 2019 are not a given as the neutral Fed Funds rate might be below 3%, probably between 2-3%. We

expect a hike on Wednesday, but the next hike to be in December and then March of 2019. Pausing for several meetings after March would likely be appropriate if inflation is still

near 2% and the 10yr yield not much above 3%. As hiking above 2.5% would then likely flatten the curve.

BULL MARKET


Forecasts are based on assumptions, estimates, opinions and hypothetical models or analysis which August prove to be incorrect. Past performance is not a reliable indicator of future returns.

Source DWS Investment GmbH; as of February 2018

We are always on the lookout for what can end the bull market

4 THINGS THAT COULD END THE BULL MARKET

RECESSION?

GLOBAL RECOVERY

FED: TOO AGGRESSIVE?

MODERATE YIELD INCREASE

VALUATION BUBBLE?

STRONG EARNINGS GROWTH

GEOPOLITICAL

ESCALATION?

NO ESCALATION

CHALLENGE OF BEATING THE MARKET

WITHOUT TECH TITANS


Note: Year-to-date stock returns are annualized for 2018.


NUMBER OF S&P 500 STOCKS OUTPERFORMING THE INDEXCONTRIBUTION TO S&P 500 RETURN FROM TOP STOCKS

VS. BOTTOM STOCKS

0%

5%

10%

15%

20%

25%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Contribution to S&P 500 return from top stocks vs. bottom stocks

Top 25 vs. Bottom 25 Top 5 vs. Bottom 5

0

50

100

150

200

250

300

350

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Number of S&P 500 stocks outperforming the index

# of stocks outperforming the index # of stocks outperforming by 5%+

THE TRINITY OF ALPHA



Not all alpha is equal

Positive

Reliable Uncorrelated

to BM

Contra indicators?

0Tracking

Error

Better to

raise beta?

Delivering

alpha trinity

No Value

Information Ratio

Passive

Market cap weighted

index replication

Enhanced Passive

Modified index

replication

Systematic Active

Rules-based approach

to securities selection

Active pursues benchmark outperformance that

can’t be attributed to risk factors.

Positive

Negative

Discretionary Active

Securities selection

at PM’s discretion

US. STOCK MARKET SINCE 1900


Source: DWS (December 2017)

David Bianco, Americas CIO

(212) 250-8169 | [email protected]

©2018 Deutsche Bank AG. All rights reserved. CC189637 R-049601-2 (4/18)

20 INVESTMENT STRATEGY PRINCIPLES



1. The value of a stock is the present value of all its future free cash flows. Do not rely on any valuation methodology that does not reconcile with this concept.

2. S&P is not U.S. GDP. Long-term S&P EPS growth ≠ U.S. GDP growth. The S&P 500 is global. EPS growth is a function of retained EPS and incremental returns.

3. Perception of normalized EPS can drive short-term S&P 500 performance, but actual EPS through the cycle will drive most S&P 500 long-term performance. S&P 500 margins

exhibit cyclicality, but not secular mean reversion. Assess normal EPS with rigorous fundamental analysis, be leery of simple shortcuts.

4. True EPS is usually between GAAP and non-GAAP measures. True earnings will equal FCF when no investment is made for growth. At steady-state, EPS = FCF/sh. = DPS. Prefer

EPS yield over FCF yield, unless a difference other than investment recurs.

5. Equities are real assets. Long-term growth will equal inflation when EPS=DPS. The fair PE on normalized steady-state EPS = 1/ a fair long-term real stock return. If expected long-

term real EPS growth + dividend yield = fair real CoE then a steady-state exists. EPS & DPS yields are real; compare them to real interest rates.

6. A secular decline in yields is good for stocks, but a cyclical decline is bad. It can take hindsight to differentiate. Fed influence is secular like, if ahead-of-the-curve.

7. Uncertainty is a very uncertain variable. Mean reversion is a fair assumption.

8. Only economic profit growth justifies a PE greater than 1/real CoE. Consider long-term growth potential along with the investments required to support it.

9. GDP growth affects the fair PE only to the extent that it affects the ability of a company to earn returns above its cost of capital. Slow GDP growth often best.

10.Value investors seek stocks with normalized earnings greater than market expectations. Growth investors seek stocks with economic profit growth potential greater

than market expectations. No rule against seeking both.

11.The market has predicted 9 of the last 5 recessions. Avoid panic selling. It usually takes a recession to stop a bull market (exceptions: 1966, 1987, 1998).

12.Natural disasters are less market damaging than manmade disasters. U.S. military strike preparations can pressure stocks, but typically rally on military action.

13.Investor panic subsides when policy setter panic begins. Respect the Fed’s firepower, but its arsenal will be exhausted if inflation (ULCs) is a problem.

14.Flows follow returns, not vice versa, so stay return focused and don’t follow.

15.Lack of patience is the market’s most reliable inefficiency.

16.Seek truth with scientific method: Theory first, then observation and experience.

17.Trends will continue until they don’t. Valuation doesn’t matter until it does.

18.Confront market/sector PE extremes vs. historical averages, but respect industry/stock PE extremes.

19.The market is an imperfect price mechanism, but superior to all others. Those who improve its function earn gains slowly, those who don’t can lose suddenly.

20.Diversification comes from the correlation of stocks, not the number of stocks. Don’t substitute diversification for diligence.

CONTACT


For purposes of ERISA and the Department of Labor’s fiduciary rule, we are relying on the sophisticated fiduciary exception in marketing our services and products through intermediary institutions, and nothing

herein is intended as fiduciary or impartial investment advice.

DWS does not render legal or tax advice, and the information contained in this communication should not be regarded as such. The comments, opinions and estimates contained herein are based on or derived

from publicly available information from sources that we believe to be reliable. We do not guarantee their accuracy. This material is for informational purposes only and sets forth our views as of this date. The

underlying assumptions and these views are subject to change without notice.

Past performance is not indicative of future returns.

Forecasts are based on assumptions, estimates, opinions and hypothetical models that August prove to be incorrect. Investments come with risk. The value of an investment can fall as well as rise and your

capital August be at risk. You might not get back the amount originally invested at any point in time.

The brand DWS represents DWS Group GmbH & Co. KGaA and any of its subsidiaries, such as DWS Distributors, Inc., which offers investment products, or DWS Investment GmbH Inc. and RREEF America

L.L.C., which offer advisory services.

David Bianco 212 250-8169, [email protected]

Ju Wang 212 250-7911, [email protected]

Jamie A. Serio 212 454-0554, [email protected]

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IMPORTANT INFORMATION


The brand DWS represents DWS Group GmbH & Co. KGaA and any of its subsidiaries, such as DWS Distributors, Inc., which offers investment products, or DWS Investment

Management Americas, Inc. and RREEF America L.L.C., which offer advisory services.

This document has been prepared without consideration of the investment needs, objectives or financial circumstances of any investor. Before making an investment decision,

investors need to consider, with or without the assistance of an investment adviser, whether the investments and strategies described or provided by DWS Group, are appropriate, in

light of their particular investment needs, objectives and financial circumstances. Furthermore, this document is for information/discussion purposes only and does not and is not

intended to constitute an offer, recommendation or solicitation to conclude a transaction or the basis for any contract to purchase or sell any security, or other instrument, or for DWS

Group to enter into or arrange any type of transaction as a consequence of any information contained herein and should not be treated as giving investment advice. Deutsche Bank

does not give tax or legal advice. Investors should seek advice from their own tax experts and lawyers, in considering investments and strategies suggested by DWS Group.

Investments with DWS Group are not guaranteed, unless specified. Although information in this document has been obtained from sources believed to be reliable, we do not

guarantee its accuracy, completeness or fairness, and it should not be relied upon as such. All opinions and estimates herein, including forecast returns, reflect our judgment on the

date of this report, are subject to change without notice and involve a number of assumptions which August not prove valid.

Investments are subject to various risks, including market fluctuations, regulatory change, counterparty risk, possible delays in repayment and loss of income and principal invested.

The value of investments can fall as well as rise and you may not recover the amount originally invested at any point in time. Furthermore, substantial fluctuations of the value of the

investment are possible even over short periods of time. Further, investment in international markets can be affected by a host of factors, including political or social conditions,

diplomatic relations, limitations or removal of funds or assets or imposition of (or change in) exchange control or tax regulations in such markets. Additionally, investments denominated

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documentation relating to the investment and not the summary contained in this document.

IMPORTANT INFORMATION (CONTINUED)


This publication contains forward looking statements. Forward looking statements include, but are not limited to assumptions, estimates, projections, opinions, models and hypothetical

performance analysis. The forward looking statements expressed constitute the author’s judgment as of the date of this material. Forward looking statements involve significant

elements of subjective judgments and analyses and changes thereto and/or consideration of different or additional factors could have a material impact on the results indicated.

Therefore, actual results August vary, perhaps materially, from the results contained herein. No representation or warranty is made by DWS as to the reasonableness or completeness

of such forward looking statements or to any other financial information contained herein. We assume no responsibility to advise the recipients of this document with regard to changes

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No assurance can be given that any investment described herein would yield favorable investment results or that the investment objectives will be achieved. Any securities or financial

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RISK WARNING


© September 2018 DWS Investment GmbH I-056870-4 (9/18) IES I-061037-1

Investments are subject to investment risk, including market fluctuations, regulatory change, possible delays in repayment and loss of income and principal invested. The value of investments can fall as well as rise and

you might not get back the amount originally invested at any point in time.

Investments in Foreign Countries – Such investments may be in countries that prove to be politically or economically unstable. Furthermore, in the case of investments in foreign securities or other assets, any

fluctuations in currency exchange rates will affect the value of the investments and any restrictions imposed to prevent capital flight may make it difficult or impossible to exchange or repatriate foreign currency.

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currency where there is a need to convert the product's denomination(s) to another currency. Time zone differences may cause several hours to elapse between a payment being made in one currency and an

offsetting payment in another currency. Relevant movements in currencies during the settlement period may seriously erode potential profits or significantly increase any losses.

High Yield Fixed Income Securities – Investing in high yield bonds, which tend to be more volatile than investment grade fixed income securities, is speculative. These bonds are affected by interest rate changes and

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