11 December 2017 Special Report EMFX Outlook 2018: Growth-led Revaluation Equity allocations near historical lows still Em•egung Afmkist$ tun Etre/010 WeIgn 51'15104r CI.,. .7-4 fl ea:W:0, 22 21 20 10 10 17 16 15 14 13 12 i 11 2008 Fa 2010 2011 2012 2013 2014 201$ 2016 2017 Se.50t 4/417 4444.inann.k4414, mon., Ainl, arn ETI4 Sway Onsals8•11. EPFlt stun, nAgen am/An andET44 . 2. EM FX valuations are still attractive According to our preferred DBeer model (which models FX as a function of inflation, terms of trade and productivity) EM r< is needy urid,,,Norued in aggregate (chart). The overall undervaluation of EM currencies despite their appreciation relative to the USD reflects EM FX's loss of ground relative to the EUR (and other GI0 currencies). Accordingly, on a trade-weighted basis (which underpins valuation estimations) the rally has been limited this year. More importantly, periods of significant undervaluation tend to be corrected amidst higher EM growth and more restrictive monetary conditions - both of which we expect will be in place next year as real rates also seem to have bottomed in EM. EM EX is still significantly undervalued 12 4 0 Ciate •••••renentIlli7 boos. •4 AE — EMEA St 1. EM FX unilinithad . .1•11/1111 rt • 1 .12 01 02 03 04 06 06 07 08 00 10 11 12 13 14 15 16 17 Sarno Ontath• an Nor. EA✓I f X sonviilb. 4••• • inward •••••••••••••• • no In addition, USD strength and hedging demand feeil unlikely to disrupt EM FX revaluation. DB foresees EUR/USD at 1.20 in 2018 and higher in 2019. If anything, more synchronized and faster growth Page 4 reduces policy imbalances (supporting ECB catch-up), which has been associated with EUR strength (chart). Absent USD strength, FX-hedging demand should remain subdued as long as US inflation is contained - a risk likely to increase later in the year, however. The USD could still be supportive in 2013 Coe of war. of supsOr r1 •1