OUR 12-MONTH December 2020 - ECONOMIC & MARKET OUTLOOK - DWS.com

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OUR 12-MONTH December 2020 - ECONOMIC & MARKET OUTLOOK - DWS.com

December 2020
      OUR 12-MONTH
ECONOMIC & MARKET OUTLOOK

Content

Letter to Investors
Surprisingly optimistic for 2021 .............................................................................................................................. 4

Macro
The beginning of the pandemic's end? .................................................................................................................. 6

Fixed Income
The case for credit remains strong ........................................................................................................................ 8

Equities
2021 looks pretty good for equities ........................................................................................................................ 11
Valuations overview.............................................................................................................................................. 13

Alternatives
A Washington punchline, no more? ...................................................................................................................... 15

Multi Asset
Looking forward to a boring year ......................................................................................................................... 18
Allocation.............................................................................................................................................................. 21
Indicators: Sunny outlook with just a few clouds emerging ............................................................................... 22

ESG
The other sort of liquidity..................................................................................................................................... 24

Forecasts
All our forecasts at a glance ................................................................................................................................ 26

Glossary
Explanation of central terms ............................................................................................................................... 28

Quarterly CIO View
Letter to Investors

November 19, 2020

Surprisingly optimistic for 2021
As the year draws to a close, 2020's big risks start to look less bad, allowing investors to meet
2021 with optimism. We believe low interest rates will remain key.

 The pandemic is likely to restrict consumers and
companies for some months to come. But we expect
investors to look beyond these difficulties and focus on profit Stefan Kreuzkamp
growth and continuing loose monetary policy.
 Chief Investment Officer and
Head of Investment Division

W
ould our annual outlook for 2021 have looked dif- data and corporate results in the third quarter were surpris-
ferent if we had written it in mid-October? Yes, ingly positive. It has become apparent that many economies
but only in part. Little would have changed in our revived fairly quickly after the spring lockdown.
economic forecasts but our asset-class outlook would have
been different. What has taken place macro-economically has Other factors, too, have helped foment a far happier mood.
been very much in line with our forecasts. But the markets The European Union (EU) is moving toward a 750 billion euro
had big risks on their mind. Now those risks have eased, and coronavirus rescue package, and the world's major central
with them the fear of a major correction. We believe the new banks have committed themselves to not responding imme-
optimism should continue to sustain markets in the New Year. diately to any rise in inflation. Last but not least, the chance
of more constructive negotiations between the EU and the
It is news of the first Covid-19 vaccine, the outcome of the U.S. UK has probably increased, now that the domestic pressure
elections and quarterly economic and corporate figures that on Prime Minister Boris Johnson has become more intense
have changed the mood. The biggest market reaction was and his controversial chief advisor, Dominic Cummings, has
triggered by the news from Mainz, Germany, on the successful departed.
vaccine trial – and with good reason. Progress in the handling
of Covid-19 was the basis of our 2021 outlook but confirma- What this means for individual asset classes can only be under-
tion that a vaccine is effective and will soon be available is stood if we first consider the overall picture from an investor's
transformative. For the first time, consumers and companies perspective: It is only thanks to China that the global economy
can see light at the end of the tunnel, and we expect the pan- should be able to return to its 2019 output level in 2021. Never-
demic to be largely under control by the end of 2021. The U.S. theless, the world's stock markets1 are trading at record highs.
elections, meanwhile, went smoothly overall and delivered a How can this be explained? In our opinion, this is due to the
result that investors have been quick to welcome. America's expected strong recovery which, however, carries little risk of
trading partners are hoping for a more predictable trade pol- overheating and inflation as capacity remains very underuti-
icy under Joe Biden. America's companies, on the other hand, lized. The recession which has long been feared now seems
appear relieved that the Senate is likely to remain Republi- off the table for some time – because it has already occurred
can and probably will not approve any major tax increases. in 2020. And central banks have made policy even looser
A further boost for markets was that both macroeconomic while strengthening their commitment to avoiding monetary

1 On November 16, the MSCI AC World Index, for example, was trading approx. five percent above its historic high in February 2020. Source: Bloomberg Finance L.P.

All opinions and claims are based upon data on 11/16/20 and may not come to pass. This information is subject to change at any time, based upon economic,
market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are based on
assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. DWS does not intend to promote a particular outcome to the U.S. special
elections due to take place in January. Readers should, of course, vote in the election as they personally see fit. DWS Investment GmbH

Quarterly CIO View
Letter to Investors

tightening. This leads us to expect low interest rates even by the European Central Bank. In emerging markets, too, we
beyond our forecast horizon. continue to see good opportunities in selected regions and
sectors, also against the background of stabilized raw-mate-
Earnings growth and a low interest-rate environment form rial prices and a generally sideways-trending dollar. We see
the basis for our optimistic view on equities and allow us to U.S. 10-year government-bond yields trading at around one
reduce the risk premium and increase our target price-to- percent, and we also expect German government bonds to
earnings ratio and. This results in further upside potential, in tend to move sideways, with only a slight upward trend.
the higher single-digit percentage range, and for Asia even
in the double-digit range. Asia has managed the pandemic We see further upside potential for gold, not least due to the
significantly better, even avoiding sharply increasing debt. It ongoing fiscal and monetary support, rising to a price of up
also has leading companies in our favored technology and to $2,100 an ounce. In the case of oil, we expect less upside in
Internet sector. Technology is even more prevalent in the price than the economic recovery might suggest. Saudi Arabia
U.S. market, which we still like despite its above-average val- and Russia in particular are in a position to expand their pro-
uation. Europe's markets may look more favorably valued at duction immediately at any time.
first glance, but we think their cyclical, export-oriented profile
won't inspire investors for long. We believe growth stocks are Real-estate markets have diverged significantly in 2020. Hous-
likely to remain structurally more attractive in the low-growth ing has done well but retail, hotel and leisure has suffered.
environment expected from 2022 onwards. We find sectors We remain cautious on the latter, and prefer industrial and
with a positive carbon balance, which are often identified by residential real estate and select office properties.
our ESG-led investment approach anyway, equally attractive.
We believe they should receive a further boost from the focus An optimistic capital-market outlook may come as a surprise
of European – and we think soon American – policymakers on in the middle of a pandemic. And, of course, there is no end of
a "green deal2." risks – among them ones that are predictable now. Accidents
around Brexit or in the wake of the U.S. elections as well as
There has been little change in bonds, with riskier segments setbacks in the fight against the pandemic cannot be ruled
also benefiting from the low-interest-rate environment. Some out. Neither can further natural disasters nor geopolitical
corporate bond indices have not yet returned to their pre-cri- conflicts. But we expect the markets to continue to be driven
sis levels since the market panic early in 2020. We expect primarily by profit growth and low interest rates. It's for this
significantly lower issuance in 2021, with demand remaining reason that we are quite optimistic for 2021.
more or less unchanged and, in the Eurozone, still supported

2 Broad term for policies aimed at minimizing greenhouse-gas emissions as to minimize global warming and climate change overall

Quarterly CIO View
Macro

November 24, 2020

The beginning of the pandemic's end?
We are increasingly confident in our constructive base case for the world economy in 2021 and
beyond, but plenty of question marks remain.

_ Learning to cope with the virus was always likely to be
an uneven process, but there are signs of progress.

_ So far, there are few signs of permanent economic scar-
ring one might expect from such a sharp contraction.

_ The economic rebound of recent months hints at a
bright future ahead, once lockdown measures are fully
lifted.
Johannes Müller
Head of Macro Research

W
e are increasingly confident in our constructive available. Trends for therapeutics appear encouraging. As
base case for the world economy in 2021 and with vaccines, there is, of course, still the potential for plenty
beyond. In part, that reflects recent economic of setbacks, not least in terms of how quickly policymakers
data. Around the world, the economic recovery after the will prove able to use them well.
collapse in spring has been quite impressive. This shows a
few things, notably that at least so far, there are few signs of Policymaking is one of the reasons why many question marks
permanent economic scarring one might expect from such remain. With the U.S. elections finally behind us, the likely
a sharp contraction. It is becoming increasingly clear that outcome of a Biden administration with a Republican Senate
there are now several ways of how daily life might return to has not significantly changed our forecasts. While there is a
something close to the pre-pandemic normal. These paths risk of fiscal-policy paralysis, the downside risk to economic
are no longer just potentially feasible but also increasingly forecasts is partly offset by the evidence so far that the U.S.
visible. That is more than could have been said with much economy has proved flexible enough to bounce back even
confidence three months ago. as infection rates continued to rise. The picture is murkier in
Europe. Still, the two-stage recovery we forecast this spring
Based on the experience of coronaviruses causing the com- has, if anything, underestimated the initial strength of eco-
mon cold, getting quickly towards first-generation vaccines nomic momentum somewhat. From now onward, we have
that might work was not a given.1 Given the vast resources penciled in a softening of momentum. We expect many of
deployed we hoped for as much, and had already included the measures to contain the virus to remain for months, not
some relief over the course of 2021 into our forecasts. Set weeks. That said, we do not expect a broad third or fourth
against this are the renewed, if somewhat more targeted, wave of nationwide lockdowns. We believe this strengthens
lockdown measures during the winter months in most of the the prospects of a year 2021 with above-potential growth, and
Northern Hemisphere. Learning to cope with the virus was even growth in 2022 could be decent. In our view, inflation
always likely to be an uneven process, but there are signs of should not be an issue of 2020 nor 2021.
progress. Alternative, quicker testing solutions have become

¹ https://www.nature.com/articles/d41586-020-02400-7

All opinions and claims are based upon data on 11/13/20 and may not come to pass. This information is subject to change at any time, based upon economic,
market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are based on
assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. DWS does not intend to promote a particular outcome to the U.S. special
elections due to take place in January. Readers should, of course, vote in the election as they personally see fit. DWS Investment GmbH

Quarterly CIO View
Macro

With gloomy headlines on the rise again now, all this might future ahead, once lockdown measures are fully lifted – "a
sound a bit too good to be true, by the time you read this. transitional phase back to normalcy," to use Shiller's wording.
We would certainly not wish to downplay the role of senti- Still, we would warn readers not to place too much reliance
ment effects, merely suggest that in another three months, on any particular bit of news, whether it appears positive or
the headlines and the sentiment might already be very differ- negative. It is far too early to say whether any of the first gen-
ent. In his book "Narrative Economics," the economist Robert eration of vaccines will offer sterilizing immunity – that is pre-
Shiller describes how perceptions and the stories we tell each vent those vaccinated not just from getting sick but also from
other can drive economic events.2 Some of his most striking spreading the virus.3 Worse still, as Nassim Taleb pointed out
and timely examples concern "the 1918 flu pandemic, often 15 years ago, investors are not the only ones to be frequently
called the Spanish flu, [which] cost more lives than World War "Fooled by Randomness."4 When it comes to complicated sci-
I" (p.108). Prior to Covid-19, the period from 1920 to 1921 was entific matters such as late-stage clinical trials, journalists and
"the sharpest depression (meaning the fastest decline and especially their headline writers may sometimes make pretty
recovery) in U.S. history since the advent of modern statistics," elementary mistakes. A perennial favorite is to confuse the
Shiller writes (p. 242). In marked contrast to perceptions of the absence of evidence with the evidence of absence.
Great Depression a decade later, this "Forgotten Depression"
was swiftly followed by a sharp recovery, starting in 1921. It Early results of the first large-scale vaccine trials were widely
was seen as "a transitional phase back to normalcy after a war touted with eye-catching headlines. However, these were
and an influenza epidemic," Shiller concludes (p. 252). interim and partial results, released via press release. The
data had been collected a mere seven days after the second
What to make of any such historic analogy? Clearly, not too dose was administered. It revealed 94 symptomatic cases, of
much at the outset of a once-in-100-years crisis. As far as the which 86 appear to have been in the group that had been
U.S. is concerned, that "Forgotten Depression" of 1920 con- given the placebo instead of the vaccine.5 The next release
stituted a sample size of one – not enough, as any first-year suggested that effectiveness might be even higher than ini-
undergraduate of statistics will know, to draw meaningful tially thought, as did data from a competing vaccine also
inferences from. The picture becomes quite bleak, once the under development.6 Rather than focusing on the specific per-
experience of other industrialized countries during the 1920s centages and small changes in how high effectiveness seem
is considered alongside the economic boom in the U.S. (where in any particular cohort, this should serve as a reminder of the
it soon came known as "The Roaring 20s," as chronicled by F. role randomness necessarily plays in such trials. Pharmaceu-
Scott Fitzgerald in "The Great Gatsby"). tical companies structure their trials so as to extract as much
information as possible from early data. Still, we believe it will
Clearly, a lot has changed since then but not, perhaps, the take quite a bit of time, and a lot more data, to see whether
capacity of economic commentators to be led astray by the any one particular vaccine will prove both safe and "highly
most recent data or the moment's most compelling narrative. effective." Let alone mark a decisive turning point in the fight
The economic rebound of recent months hints at a bright against Covid-19.7

2
Shiller, R. (2019) "Narrative Economics: How Stories Go Viral and Drive Major Economic," Princeton University Press
3
https://www.statnews.com/2020/08/25/four-scenarios-on-how-we-might-develop-immunity-to-covid-19/
4
Nassim Nicholas Taleb (2004), "Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets," 2nd edition, Thomson Texere.
5
https://www.pfizer.com/news/press-release/press-release-detail/pfizer-and-biontech-announce-vaccine-candidate-against
6
https://www.pfizer.com/news/press-release/press-release-detail/pfizer-and-biontech-conclude-phase-3-study-covid-19-vaccine and https://investors.modernatx.
com/news-releases/news-release-details/modernas-covid-19-vaccine-candidate-meets-its-primary-efficacy
7
See, for example, the overview of recent vaccine developments in:
https://www.economist.com/briefing/2020/11/14/an-effective-covid-19-vaccine-is-a-turning-point-in-the-pandemic

Quarterly CIO View
Fixed Income

November 27, 2020

The case for credit remains strong
A lot has changed, but readers familiar with our previous annual outlook might experience a
strange sense of déjà vu.

_ In our opinion, corporate bonds and other credit asset
classes look set to offer an exceptional risk-reward pro-
file as we head into 2021.

_ Rates on government bonds are likely to remain low
for even longer than we thought a year ago as central
banks try to contain the damage of the Covid crisis.

_ We expect little movement in currencies and think that
it is still too early to count out the dollar just yet. Jörn Wasmund
Head of Fixed Income/Cash

W
hat a year it has been! Economies have coped corporate bonds will offer an exceptional risk-reward profile as
surprisingly well with what will hopefully prove we head into 2021 – hopefully, without the roller coaster ride
a once-in-a-century pandemic. In recent weeks, we saw in 2020.
Covid-19 infection rates in the United States and Europe have
increased once again, leading to partial lockdowns. As cynical With central banks likely keeping their foot on the gas pedal,
as it sounds, this seems to be good news for asset prices as we continue to expect interest rates to remain low for longer.
it forces central banks to continue with their bond-purchase Compared to the summer, our rates outlook is unchanged in
programs for a very long time. Further support is provided by Europe, the UK and Japan. For the U.S., we expect somewhat
three factors: (1) Encouraging (but preliminary) data from late- steeper yield curves at the long end (10- to 30-year bonds) as
stage vaccine trials. (2) The likely outcome of the U.S. election the very long end should return to more normal levels as news
with chances of the incoming Biden administration enacting about the economic recovery arrive. Still, we think negative
major changes to the corporate tax code having receded. (3) real interest rates will continue for pretty much all government
The pandemic recovery fund established by the European bonds that can meaningfully be considered risk-free. In Japan
Union (EU) is finally paving the way towards more fiscal inte- and much of the Eurozone, even nominal interest rates have
gration. long been negative, and look set to remain so. For example,
the European Central Bank (ECB) has clearly signaled that it
So, what to make of all this? Broadly, and to paraphrase the Ital- remains vigilant and still targets additional quantitative easing
ian novelist Giuseppe Tomasi di Lampedusa, a lot has had to (QE), leaving little if any upside potential in Eurozone yields.
change, only so that everything could stay the same, at least in (Incidentally, the words "upside potential" are a bit of a mis-
terms of the implications for fixed-income asset classes. Read- nomer. We see German Bunds a year from now at ̵0.5% for
ers familiar with our previous annual outlook might experience 10-year Bunds and ̵0.1% even for 30-year Bunds, so "rising"
a strange sense of déjà vu: we still like credit, probably more yields would mean them becoming less negative, thus inflict-
than ever. This time around, we are even more convinced that ing capital losses on top of negative yields.)

All opinions and claims are based upon data on 11/17/20 and may not come to pass. This information is subject to change at any time, based upon economic,
market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are based on
assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. DWS does not intend to promote a particular outcome to the U.S. special
elections due to take place in January. Readers should, of course, vote in the election as they personally see fit. DWS Investment GmbH

Quarterly CIO View
Fixed Income

With such unappealing "risk-free" alternatives, it should not be quick Covid testing. On economic policy, though, a few words
a surprise that the hunt for yield continues. Within sovereign of caution are in order.
bonds in the Eurozone, we keep a close eye on the EU periph-
ery. For example, due to the more constructive outlook on Italy The run-off elections of two Georgia Senate seats on January
by the major rating agencies, these bonds remain attractive 5th could yet deliver unified Democratic control in Washing-
on current spread levels, given roll-down and carry, even with ton. In any case, investors should be wary of extrapolating
limited further tightening potential. from electoral events to the likelihood of just the right mix of
targeted fiscal stimulus in the short term and fiscal conserva-
This lack of alternatives has led to a bizarre situation in the tism being delivered in the longer-term. Politics is a messy and
euro-denominated investment-grade (IG) corporate-bond unpredictable business. And, in U.S. economic history, the
market. The share of IG bonds with negative nominal yields quick and effective fiscal response to the economic shutdown
is back to a whopping 35%.1 Increasingly, we are seeing highly of 2020 was very much an outlier, probably owing to a fairly
rated IG bonds replacing sovereigns as the anchor asset class unique set of political circumstances. "Legislative responses
in various client asset allocations. On the high-yield (HY) side to financial crises and economic downturns have generally
we have seen that even issuers badly hurt by the pandemic been limited and delayed," three leading political scientists
continue to get their refinancings done, which limits the likeli- noted in an invaluable book published after the events of
hood of future defaults. We expect default rates to stay low in 2008.2
the Eurozone and probably decline in the U.S. because of fiscal
support packages and the circumstance that jeopardized busi- Heading into 2021, Washington gridlock would only be good
ness models have already gone bankrupt. The positive news news for the markets in case there would be no need for leg-
of vaccines has lifted the tide further; even high-yield laggards islative action. Sanguine market assessments are based on
in Covid-hit sectors have lately recovered nicely on both sides the idea that monetary and fiscal policy have effectively intro-
of the Atlantic. duced a put onto bonds, and will swiftly come to the rescue
if and when required. This idea of such an effective put might
Meanwhile, Asia in general and China in particular appears well be tested in the coming months, if, for example, more
well on its path towards recovery. wide-spread virus containment measures were to squeeze
The China locomotive and the Asian free-trade agreement corporates once again.
together with stable oil prices and a stable U.S. dollar should
be highly supportive for our other preferred asset class – We would probably tend to see such bouts of nervousness
emerging-market (EM) and Asian bonds. We expect higher as buying opportunities. Overall, we have never been as con-
yielding names in particular to benefit from the reduced tail vinced that credit will work out as we are for 2021. Of course,
risk and the hunt for yield. there are always individual idiosyncrasies to consider, focusing
on balance-sheet strength, as well as local monetary policies
Could things still go wrong? Well, yes. Markets have taken the for bonds, for example by emerging-market issuers, denom-
Covid vaccine news and the likely U.S. election results as a inated in local currency. On major currency pairs, we expect
sign of reduced tail risk for credit. We will leave it to medical little movement. While we think that it is too early to count
and public-health experts to assess the likelihood of negative, out the dollar just yet, steady policies on all sides appear more
or indeed further positive, surprises on vaccines, therapeutics likely to deliver comparative tranquility, rather than big swings.
and the impact of the increasingly wide-spread deployment of

1 Bloomberg Finance L.P. as of 11/17/20
2 McCarty, N., Poole, K.T. and Rosenthal, H., 2013. Political bubbles: Financial crises and the failure of American democracy. Princeton University Press. See esp.
pp. 153-183.

Quarterly CIO View
            Fixed Income

CURRENT BOND SPREADS IN A HISTORICAL CONTEXT
For most fixed-income asset classes, current spreads remain higher than at the end of last year, putting bonds at the cheaper end
of historical valuations during the last 5 years.
% of time spent at or below current spreads in the preceding 5 years
100
 90
80                                                                                                              328
 70                                                                                 378         404
                                   457                               468
 60
                                                      116                                                                      163
 50
                                                                                                                   257
40
 30
                       119
 20                                    321                                          308                                           133
                       104                                                                      296                                              77
 10
                                                      91             330                                                                          66
  0
                   Euro           Euro            U.S.           U.S.            EM            EM             Asia            Italy          Spain
                    IG*           HY*             IG**           HY**          credit**    sovereigns**      credit**       10-year*        10-year*

   Current spread (11/17/20)                   Spread percentile year-end 2019

* Data labels show spreads vs. German Bunds
** Data labels show spreads vs. U.S. Treasuries
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 11/17/20

All opinions and claims are based upon data on 11/17/20 and may not come to pass. This information is subject to change at any time, based upon economic,
market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are based on
assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. DWS does not intend to promote a particular outcome to the U.S. special
elections due to take place in January. Readers should, of course, vote in the election as they personally see fit. DWS Investment GmbH

                                                                              10

Quarterly CIO View
            Equities

November 25, 2020

2021 looks pretty good for equities
Earnings growth and "low-for-even-longer" interest rates imply a lower risk premium and higher
valuations for equities.

    _ Various risks that weighed on markets lost their bite at
      the end of 2020, emboldening investors.
    _ Vaccines that should bring the pandemic under control
      and a persistent low-interest-rate environment are the
      basis for our optimistic view on equities.
    _ Our preferred region is Asia, our preferred sector tech-
      nology. We expect recent rallies in cyclical and value
      stocks to be short-lived.
                                                                                                Dr. Thomas Schüssler                      Andre Köttner
                                                                                                 Co-Head of Equities                    Co-Head of Equities

A
         s we shape our equity-market forecasts for 2021, we                       than previously assumed. But a number of factors suggest equi-
         see a world plagued by the worst pandemic in a cen-                       ties can make the ascent into even thinner air. The likely gridlock
         tury, which has upended everybody's lives as well as                      in the newly-elected U.S. Congress could become a "goldilocks"
entire business sectors and weighed heavily on consumer and                        environment. Inflationary pressure should remain limited as we
corporate spending alike. And yet stock markets have reached                       believe the probable Republican Senate majority will accept only
new highs, on the basis of record-high valuations. It sounds like                  downsized fiscal stimulus and will prevent a sweeping reversal
the perfect combination for a market correction, and therefore                     of tax reforms. We believe global trade prospects, too, should
for skepticism. Yet we are not pessimistic. Why? The arrival of                    benefit from the new political set-up in Washington. However,
effective Covid-19 vaccines looks set to allow a return to a more                  we expect markets outside the U.S. to continue trading at
"normal life" by the end of 2021. That, in turn, should support                    above-average valuation discounts to the U.S., mainly due to
an economic recovery that we expect governments and cen-                           their lower relative weight of high-growth stocks. Nevertheless,
tral banks to also be eagerly nurturing. We therefore forecast a                   we have mid-single-digit total-return expectations for European
25-30% earnings-per-share (EPS) recovery for most markets and                      and Japanese equities for 2021.
"low-for-even-longer" interest rates, with 10-year U.S. Treasury
yields staying below or only slightly exceeding 1.0% by year-                      We forecast double-digit returns for emerging-market equi-
end 2021. Then a constellation of two factors, T(here) I(s) N(o)                   ties and upgrade both Asia (excluding Japan) and emerg-
A(lternative) and F(ear) O(f) M(issing) O(ut), in alignment with                   ing markets as a whole to overweight. Asia is our preferred
rebounding economic activity, should support further market                        region for 2021. China has successfully handled the Covid
upside for equities. Our December 2021 targets are 3,800 for the                   challenges without amassing significant new government
S&P 500 and 14,000 for the Dax.                                                    debt, which bodes well for long-term growth prospects. It is
                                                                                   now the second time (the first time was the Global Finan-
To get there, we believe investors will have to accept even lower                  cial Crisis) that China has led the world economy out of the
equity risk premiums and higher price-to-earnings (PE) ratios                      slump. Rebounding European and Japanese exports to China

All opinions and claims are based upon data on 11/17/20 and may not come to pass. This information is subject to change at any time, based upon economic,
market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are based on
assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. DWS does not intend to promote a particular outcome to the U.S. special
elections due to take place in January. Readers should, of course, vote in the election as they personally see fit. DWS Investment GmbH

                                                                              11

Quarterly CIO View
Equities

are the proof of that now. We believe the geopolitical rise of proven even in 2020 that it can produce superior and grow-
China will become even more visible in the coming years. ing free-cash-flow streams to shareholders. Therefore we
China remains on track to add technological leadership to its stick to our overweight in the IT sector. In our view, the main
military- and economic-superpower position. We expect EPS operational risk for now remains more legal or governmental
levels for the MSCI AC Asia ex Japan Index to surpass pre- antitrust interventions. China has just recently taken its first
Covid levels already in 2021, well before the U.S. and Europe. measures against its own tech behemoths. It remains to be
seen whether the new U.S. administration will follow suit or
Making money by switching investment styles might be diffi- allow its own tech giants to grow further – partly in order to
cult in 2021. We expect several short-lived 'cyclical' and 'value' keep Chinese rivals at bay. Where real estate is concerned,
rallies as some institutional investors exit the herd of 'growth' working from home and the rising share of ecommerce in
investors and try out something supposedly new. However, retail spending keeps us on the sidelines; we prefer an under-
we believe interest rates and economic growth prospects weight in this sector.
are likely to remain too low to make these rallies sustainable
and we keep a modest preference for the 'growth' camp for We believe 2021 will see several new "green-deal1" initiatives
the time being. Most value stocks are biased towards phys- across the globe that should create thematic investment
ical and financial balance-sheet assets. Growth stocks, on opportunities in climate technology in many sectors. We have
the other hand, remain beneficiaries of the global spread of therefore decided to upgrade utilities from underweight to
digital technologies that are based on intangible assets. This neutral and focus on renewable energy within the sector. Our
sector, with many of its biggest members benefiting from ESG team favors avoiding sectors with high environmental
positive network effects of their vast social platforms, has externalities, like oil, materials and airlines.

CLOSE CORRELATION BETWEEN VALUATION MULTIPLES AND (INVERTED) REAL INTEREST RATES.
Plenty of fundamental factors speak for equities in 2021 but their valuation hinges more than ever on the level of interest rates.
real interest rates (inverse) in % PE (next twelve months)
̵1.0 24

22
̵0.5

20
0
18
0.5
16

1.0
14

1.5 12
2014 2015 2016 2017 2018 2019 2020

U.S. real yields (20-year TIPS*) S&P 500 price-to-earnings ratio (right axis)

* Treasury inflation-protected securities
Sources: FactSet Research Systems Inc., DWS Investment GmbH as of 11/12/20

1 Broad term for policies aimed at minimizing greenhouse-gas emissions as to minimize global warming and climate change overall

Quarterly CIO View
Equities / Valuations

Valuations overview
UNITED STATES: NEUTRAL (NEUTRAL)*
If the economic recovery in the U.S. continues without being However, growth stocks are unlikely to repeat their marked 2020
thrown off course again by the pandemic, we expect earnings outperformance, not least because we expect short rallies in
per share in 2021 to exceed their level in 2019. We continue to cyclical stocks. Negative real interest rates are an important
prefer growth stocks, and especially technology, to value stocks. driver, especially for U.S. equities.

%
14
12
10
8
6
4
2
0
̵2
11/2018 04/2019 09/2019 02/2020 07/2020

Relative valuation (P/E ratio): S&P 500 vs. MSCI AC World Index
Relative performance: S&P 500 (in dollars) vs. MSCI AC World Index (in local currency)

EUROPE: NEUTRAL (NEUTRAL)*
European equities should continue to benefit from the recovery normalized lackluster pace of growth we expect in Europe, the
in Asia and the U.S. due to their higher weighting of cycli- lack of major growth stocks could once again hamper European
cal stocks and high proportion of export-oriented producers. stock markets. We have more confidence in individual sectors,
Should Europe's economy accelerate as well, European stocks such as the beneficiaries of various "green deals."
might even lead the global market in 2021. However, at the

%
4
2
0
̵2
̵4
̵6
̵8
̵10
̵12
̵14
̵16
11/2018 04/2019 09/2019 02/2020 07/2020

Relative valuation (P/E ratio): Stoxx Europe 600 vs. MSCI AC World Index
Relative performance: Stoxx Europe 600 (in euros) vs. MSCI AC World Index (in local currency)

* Our assessment is relative to the MSCI AC World Index, the last quarter's view is shown in parentheses.
Sources: FactSet Research Systems Inc., DWS Investment GmbH; as of 11/20/20

All opinions and claims are based upon data on 11/18/20 and may not come to pass. This information is subject to change at any time, based upon economic,
market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are based on
assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. DWS does not intend to promote a particular outcome to the U.S. special
elections due to take place in January. Readers should, of course, vote in the election as they personally see fit. DWS Investment GmbH

Quarterly CIO View
Equities / Valuations

JAPAN: NEUTRAL (NEUTRAL)*
Japanese stocks are well positioned for an economic recovery political environment (the new Premier Yoshihide Suga is busi-
due to their high export ratio. In addition, most companies have ness-friendly) and good management of the pandemic. Japan's
solid balance sheets, are continuing to improve their corpo- proximity to China and the remaining mainland of Asia is also
rate governance and should continue to benefit from a reliable a particular advantage at the moment.

%
0

̵4

̵8

̵12

̵16

̵20
11/2018 04/2019 09/2019 02/2020 07/2020

Relative valuation (P/E ratio): MSCI Japan Index vs. MSCI AC World Index
Relative performance: MSCI Japan Index (in yen) vs. MSCI AC World Index (in local currency)

EMERGING MARKETS: NEUTRAL (OVERWEIGHT)*
The emerging markets, and especially Asia, are our favorite pick to focus on efforts to become less dependent on imported tech-
for 2021. China, South Korea and Taiwan have on the whole come nology and export markets. The region should also benefit from
through the pandemic well without needing to ratchet up big stabilized raw material prices, continuing low U.S. interest rates
increases in government debt. China's new 5-year plan is likely and a dollar that is unlikely to strengthen further.

%
8
4
0
̵4
̵8
̵12
̵16
̵20
̵24
11/2018 04/2019 09/2019 02/2020 07/2020

Relative valuation (P/E ratio): MSCI Emerging Markets Index vs. MSCI AC World Index
Relative performance: MSCI Emerging Markets Index (in dollars) vs. MSCI AC World Index (in local currency)

* Our assessment is relative to the MSCI AC World Index, the last quarter's view is shown in parentheses.
Sources: FactSet Research Systems Inc., DWS Investment GmbH; as of 11/20/20

Quarterly CIO View
Alternatives

December 8, 2020

A Washington punchline, no more?
For spending on U.S. infrastructure, the 2020 elections could mark a fairly decisive turning
point.

_ After decades of underinvestment, U.S. infrastructure
remains in need of additional spending, creating poten-
tial opportunities for investors.
_ Overall, we would expect strong cross-party support
on infrastructure, with a narrowly divided Senate likely
playing a key role.
_ This highlights the complex interplay of economic and
political considerations in determining the legislative
details. Hamish McKenzie Gianluca Minella
Head of Head of Infrastructure
Infrastructure Research, Alternatives

W
hen it comes to U.S. politics, plenty remains uncer- Already, there are strong underlying economic forces pushing
tain. One area, where the 2020 elections look towards decarbonization, such as electricity renewables reaching
likely to mark a fairly decisive turning point con- grid parity. Somewhat independently from policyma-
cerns spending on U.S. infrastructure. Of course, hopes for king, transport electrification has also continued to
bipartisan cooperation on infrastructure have failed to come proceed during the Trump presidency, with the spread of rech-
to fruition before. In recent years, the very term "Infrastruc- arging stations for electric vehicles. In our view, policy alignment
ture Week" became something of a long-running joke among at the federal level is likely to reinforce these trends.
Washington insiders.1 Still, we are cautiously optimistic that
things might be different in the next four years. That said, the barbed exchanges concerning oil and gas explo-
ration during the final weeks of the presidential campaign
Most obviously, the world’s leading economy may now sup- serve as a reminder that the new administration may need to
port decarbonization, by re-joining the Paris agreement on tread carefully. Fossil fuels in general and shale in particular
climate change.2 Under President-elect Joe Biden, the next remain important economic engines in key battleground sta-
administration is likely to bring a fresh focus to the energy tes, as well as for the U.S. economy as a whole. Existing infra-
transition and fostering renewable sources. As a result, we structure remains pivotal in supporting the energy transition
would expect more investment in grids, battery storage, and process over the coming years, in particular the role of gas.
a stronger promotion of transport electrification. Attempts However, the bulk of the flow of new capital may gradually
to reduce emissions, and support a nascent low-carbon eco- transition towards a greener infrastructure platform.
nomy will probably start in early 2021, in so far as they concern
regulatory actions. However, most will only unfold over the The picture is likely to be similarly nuanced in other areas,
medium term. reflecting the interplay of economic and political considera-

1 https://www.nytimes.com/2019/05/22/us/politics/trump-infrastructure-week.html
2 https://www.cnbc.com/2020/11/20/biden-to-rejoin-paris-climate-accord-heres-what-happens-next-.html

All opinions and claims are based upon data on 11/30/2020 and may not come to pass. This information is subject to change at any time, based upon economic,
market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are not a reli-
able indicator of future performance. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. Alternative
investments may be speculative and involve significant risks including illiquidity, heightened potential for loss and lack of transparency. Alternatives are not suitable
for all clients. DWS does not intend to promote a particular outcome to the U.S. special elections due to take place in January. Readers should, of course, vote in the
election as they personally see fit. DWS Investment GmbH

Quarterly CIO View
              Alternatives

tions at state, local and national levels. For example, private                         19.5 Historically, the energy sector has represented the largest
capital is already flowing based on digitalization trends,                              share of both projects and capital flow, with most transactions
with investment in fiber cables, datacenters and 5G mobile                              closing in the midstream6, liquefied natural gas, power, util-
networks. Demand for connectivity and data volumes con-                                 ities and renewables sectors.
tinues to accelerate, supporting the outlook for investment in
fiber and datacenters. However, the private sector can only                             The municipal-bond market, as a competitive source of fund-
proceed on its own where the economics add up. For new                                  ing, has limited the involvement of private capital in transpor-
investments, this still often means relatively dense, as well                           tation and social infrastructure, particularly compared to other
as wealthy parts of the country. As a result, rural broadband                           developed markets, such as Europe. However, transportation
has emerged as a key topic in plenty of Congressional and                               and social infrastructure are gradually maturing, following the
Senate races. The Biden administration might be well advised                            removal of barriers to private capital. In recent years, all U.S.
to reach out to Republicans in Congress and at the state level,                         states have developed legal frameworks for Public Private
who ran on promises of making rural broadband a priority.                               Partnerships (PPPs), cooperative arrangements between two
                                                                                        or more public and private sectors, typically of a long-term
More traditional infrastructure, particularly transporta-                               nature. Given the deep damage the pandemic has done to
tion, roads, bridges, airports and water networks, already                              finances at the state and local level, we may well see an accel-
saw a strong push to accelerate spending during the out-                                eration in PPPs in the 2020s.
going administration, as part of President Trump's "Rebuild
America" agenda. An area of focus at the state and local level                          Overall, we see a decent chance for sufficient cross-party sup-
has been social infrastructure, which can be broadly defined                            port for infrastructure spending, not least as a way to support
as the construction and maintenance of facilities that serve                            the economy and employment, in line with President-elect
as the backbone for communities and societies. Examples                                 Biden’s "Build Back Better" agenda. Once again, however,
include hospitals, education, from schools to universities, and                         changes will take some time, and the final outcome of any bill
public facilities, such as community housing and prisons.                               will be subject to compromise and negotiations.

As we previously explored in detail, much of that infrastructure                        That brings us to one key remaining area of uncertainty. Con-
remains in desperate need for maintenance, after decades                                trol of the Senate is still in balance until the two January 5 run-
of underinvestment.3 According to the American Society of                               off elections in Georgia. Control of the Senate is likely to be
Civil Engineers, U.S. transportation and social infrastructure                          closely divided whatever the outcome. The results may matter
currently see a 2 trillion dollar investment gap over the next                          less for the broad policy direction than the specific legislative
decade; low public investment has led to deferred main-                                 details in how it gets implemented. In particular, that comes
tenance, with the conditions of U.S. infrastructure being                               down to what measures or mix of measures, from tax credits,
"mostly below standard."4                                                               public capital or guarantees, will be used to boost infrastruc-
                                                                                        ture investments. Needless to say that it is precisely such spe-
To put this in perspective, infrastructure equity transactions                          cifics that we believe determine the economics of emerging
worth some 53 billion dollars have reached financial close by                           opportunities and that we will be watching closely.
end of November in 2020, showing resilience despite Covid-

3   For further details, see our October 2018 report, "Understanding U.S. Infrastructure Opportunities and Challenges for Private Investment Strategies"
4   ASCE, Infrastructure Report Card 2017
5   Infrastructure Journal database as of 12/1/20, includes only equity transactions, excludes projects exposed to the upstream or downstream Oil & Gas sector
6   Midstream is a term used to describe one of the three major stages of oil and gas industry operations. It includes the processing, storing, transporting and
    marketing of oil, natural gas, and natural gas liquids

All opinions and claims are based upon data on 11/30/2020 and may not come to pass. This information is subject to change at any time, based upon economic,
market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are not a reli-
able indicator of future performance. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. Alternative
investments may be speculative and involve significant risks including illiquidity, heightened potential for loss and lack of transparency. Alternatives are not suitable
for all clients. DWS does not intend to promote a particular outcome to the U.S. special elections due to take place in January. Readers should, of course, vote in the
election as they personally see fit. DWS Investment GmbH

                                                                                   16

Quarterly CIO View
Alternatives

HISTORICAL INFRASTRUCTURE TRANSACTIONS IN THE UNITED STATES BY SECTOR
Traditionally, the energy sector has represented the largest share of both projects and capital flow, while transportation and
social infrastructure has been underdeveloped.
Number of projects

800

700

600

500

400

300

200

100

0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Power Renewables Transport Water Social & defence Midstream
Telecoms LNG Other

Source: Infrastructure Journal database as of 8/27/20

Quarterly CIO View
Multi Asset

December 3, 2020

Looking forward to a boring year
After a rollercoaster 2020, chances for a more "normal" 2021 are good. Economic recovery and
central-bank support can serve as a safety net.

_ Thanks to good vaccine news, economic recovery seems
probable in 2021.
_ With central banks still offering plenty of support this results
in a scenario much appreciated by investors.
_ This situation has not gone unnoticed with investors well
positioned for this risk-on environment. That is one of the Björn Jesch
reasons why we enter the year well diversified. Global Head of Multi Asset
& Solutions, CIO EMEA

I
n 2020, finding the right balance between participating in We have little doubt that in 2021 central banks will again
the market rally and hedging for possible downturns was stand ready to protect markets. But we believe there may
the challenge. Given the global pandemic and the hotly be little reason for them to intervene massively again. The
contested U.S. elections, markets always seemed vulnera- outlook seems much better now than it did only a few weeks
ble. In 2021, too, that balancing act could again be difficult. ago. The basis for our investment strategy are the following
And there will be other challenges, such as figuring out assumptions: economic and market tail risks have dimin-
which of the market patterns and cross-asset correlations ished, given the results of the U.S. elections and recent
that were prevalent in 2020 could persist in a year in which progress with several effective coronavirus vaccines. Excep-
the grip of the pandemic should loosen and life become tionally high fiscal support and already ultra-accommoda-
more normal. The U.S. dollar has been central to one typical tive central-bank policy provide a favorable economic-policy
pandemic market pattern: for the better part of 2020 it has backdrop as 2021 begins. This should provide support for
reacted predominantly to changes in risk appetite and aver- most areas of equity and fixed-income asset classes, even
sion. That might change, eventually. Another, more familiar though some risks remain.
challenge for 2021 will be to assess to what extent markets
respond to the verbal reassurance offered by central banks – In equities we believe that emerging markets (EM) can main-
or whether only perceived changes in the volume and pace tain the strong relative performance they have displayed for
of support (in the form of liquidity) affects them. Inflation some time. We particularly like Asian equities for a mix of
expectations, too, and their impact on different asset classes short- and long-term factors. Short-term positives include
will also have to be carefully monitored. And after the strong the circumstance that many Asian EMs have recovered
rally in almost all markets that we have seen in 2020, we are, quickly from the pandemic. Longer-term positives include
from a multi-asset perspective, weighing carefully in which lower debt levels and the prevalence of high tech in some
assets it still makes sense to chase a few extra points, and Asian EM equity indices.
where it makes more sense to protect gains.

All opinions and claims are based upon data on 11/25/20 and may not come to pass. This information is subject to change at any time, based upon economic,
market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are based on
assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. Alternative investments may be speculative and involve significant risks
including illiquidity, heightened potential for loss and lack of transparency. Alternatives are not suitable for all clients. DWS Investment GmbH

Quarterly CIO View
Multi Asset

At a global level we still favor growth over cyclical and value marked, both over U.S. HY and euro IG, because we think it
stocks, although we believe that the current market rotation has the potential to catch up during the recovery. Meanwhile,
into value has not yet come to an end. We therefore prefer although it lacks direct central-bank support, EM debt, both
a more balanced allocation in terms of styles. Markets are sovereign and corporate, looks most appealing to us now. It is
positioning for an economic upturn but economic growth benefiting from both the good news on vaccines and the U.S.
could wane again in the course of 2021, reinforcing the case election outcome, which we expect to have positive implica-
for companies that have proven able to deliver growth even tions for liquidity in the coming year. Within the EM space, we
in a difficult, low-economic-growth environment. We are well prefer high-yield issuers over investment grade, given where
aware that we are not alone in taking a positive view of equi- valuations are.
ties and we are keeping a close eye on investor flows and
positioning. Most investors are prepared to look through the Although we do not expect consumer-price inflation to be
current wave of Covid. But they might lose their nerve if the a major issue in 2021 some industrial commodities might
pace of recovery slows again because of negative health or benefit further from the economic upswing, especially given
economic developments. reduced investment on the supply side this year. Among pre-
cious metals, gold could still appeal in a negative-rates envi-
Sovereign bonds, on the other hand, have lost most of their ronment, even though it is now struggling in the risk-on envi-
appeal, given that yields are more than likely to remain very ronment as economic sentiment improves. For currencies we
low or even negative. Corporate-bond spreads have tightened have become more cautious on the U.S. dollar and prefer the
so much since the initial Covid spike in March that the out- Japanese yen. Since March 2020, many currencies have been
look for 2021 is much less promising. But corporate bonds driven more by overall changes in risk-on/risk-off market sen-
will, we believe, be supported by lower supply and continued timent than by economic or policy fundamentals. Continued
demand, not least from central banks. We continue to pre- risk-on sentiment could temporarily weaken the U.S. dollar
fer euro over U.S. dollar investment-grade (IG) bonds given over the next few months, while the Japanese yen might act
the European Central Bank's dominant role as a price-insen- as a shock absorber at times of unexpected market stress.
sitive buyer. Our preference for euro high yield (HY) remains

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