Marketing material.
For MiFID Professional Investors (EU Directive 2004/39/ec) only.
Not for Retail Distribution.
CROCI Outlook 2016: This time is different; or is it?
Main Contributors: Francesco Curto, Colin McKenzie, Sarvesh Agrawal
Other CROCI Contacts: Markus Barth, Virginie Galas, Jean-Baptiste Mayer, Karan Mehta, Fabio Pinna, Dirk Schlueter, Chris Town
As we enter 2016, the question for investors is whether this
time is different. Valuation is rich by historical standards. On
the one hand, growth in earnings driven by a buoyant
economy could push it down. On the other hand, however,
our bottom-up analysis suggests that all is not well with the
global economy.
A disconnect between the top-down view and the bottom-up
view has happened before (2000 and 2007), and it was not
good for equity returns. Will this time be different?
Optimism may be justified. If central banks have learnt from
past mistakes, perhaps they will take a more cautious
approach. To be fair, the top-down data are strong. But it is
also fair to say that this differs substantially from what we
see from a bottom-up perspective.
There are two main factors to consider, in our opinion. First,
our bottom-up analysis suggests that we may be facing
global stagnation, thus implying that current economic
policies have been ineffective in generating sustainable
growth. Second, valuation is rich by historical standards and
investors are being asked to take on additional risk if they
want to generate returns in line with the recent past. We
know that this divergence in data has previously resulted in
poor returns for investors, so why should this time be
different?
The difficulty for value investors in 2015 was that
speculation had the upper hand. Yes, speculative factors
could potentially have another good year in 2016. Set
against that, though, the Economic price-to-book of the
most expensive third of the market is now 1.6x for a cash
return of half the cost of capital—a tough ask for value
investors.
The difficulty of resisting short-term dynamics has seldom
been greater. Over the long term, though, fundamentals
have always prevailed.
We believe that the major tail risk remains an EM rout
driven by a Chinese crisis, a function of over-investment
over the past decade.
There are three sections in the report. First, we provide a
bottom-up view of the world. Second, we analyse valuation.
Third, we look at the investment themes: concentrated
value strategies, diversified value strategies, and flexible
allocation between equities and cash. A summary of the
currency views from DB completes the report.
Deutsche Bank AG 2015. This paper has been produced by the CROCI® team of Deutsche Asset Management and represents the views of only the
CROCI® team. It does not constitute investment advice, investment recommendation or independent research. The CROCI® team bases its views
on the application of the CROCI valuation methodology as well as its own views on the financial markets. The CROCI® team does not manage client
portfolios. The CROCI Investment Strategy and Valuation Group is responsible for devising the CROCI strategy and
calculating the CROCI Economic P/E Ratios. The CROCI Investment Strategy and Valuation Group is not responsible for
the management of the funds and does not act in a fiduciary capacity in relation to the funds or the investors in the funds.
For Investors in Switzerland and Russia: For Qualified Investors only. Strictly private & confidential. Not for
distribution. Singapore and Hong Kong: This material is provided to Addressee Only who are Professional /
Accredited Investors in Hong Kong respectively (or equivalent classification in other jurisdiction). Further
distribution of this material is strictly prohibited. For Institutional Investors only. For business customers. Not
for distribution into the USA.
CROCI® Outlook 2016 | This time is different, or is it?
Important Information
This paper is intended for Professional Investors only, who understand the strategies and views introduced in this
paper and can form an independent view of them. CROCI represents one of many possible ways to analyse and value
stocks. Potential investors must form their own view of the CROCI methodology and evaluate whether CROCI and
investments associated with CROCI are appropriate for them.
Please see Glossary A for a brief introduction to CROCI and for definitions of key terms used throughout this piece.
Please see Glossary B for the definition of Real Value.
This paper does not constitute marketing of any product connected to CROCI Strategies or an offer, an invitation to
offer or a recommendation to enter into any product connected to CROCI Strategies. CROCI Investment strategies
under various wrappers may be marketed and offered for sale or be sold only in those jurisdictions where such an
offer or sale is permitted and may not be available in certain jurisdictions due to licensing and/or other reasons, and
information about these strategies is not directed to those investors residing or located in any such jurisdictions. This
material has been deemed falling under the MIFID definition of marketing material as not presented as an objective or
independent piece of research in accordance with Article 24 section 1.a (Article 19.2 in directive 2004/39/EG) of
implementation directive 2004/39/EC.
Past performance is not an indicator of future performance and any forecast or projection may not be realised. Any
current or past company metrics may not be indicative of future metrics. Any investment in equities can go down as
well as up and investor capital may be at risk up to a total loss.
In the data and charts presented throughout this document, “E” refers to financial years that are not yet reported.
Forecasts of accounting data for these years are based on market’s consensus estimates as reported by Bloomberg
Finance L.P. CROCI metrics for the forecast years are calculated by applying the CROCI model to these consensus
estimates. The CROCI team does not make any forecasts or projections of accounting data. Data for historical years
are derived from company reports and other publicly available sources.
Please refer to the important information at the end of this document.
4th January 2016
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 2
CROCI® Outlook 2016 | This time is different, or is it?
Summary View
This time is different; or is it?
Global equities are trading on an Economic Price to Book
ratio of 1.68x for a cash return of 6%, giving an Economic
PE ratio of 28.2x. Since 1970, when equity valuations have
been in the top decile, subsequent 10 year returns have
been negative 77% of the time. Perhaps this time will be
different and investors will be able to make a good return on
equities, notwithstanding valuation.
It is certainly possible to build a bullish outlook for equities.
The DB Global Markets Research team has just published
their outlook for 2016 (The House View Special, Fed:
Taking the plunge 9th December 2015) and they recognise
the risks posed by a policy set on increasing interest rates.
However, they argue that the economy is strong enough to
withstand the higher rates and they expect ‘risk assets [to]
be resilient in 2016 if this repricing is gradual and orderly’.
Our bottom-up analysis instead suggests a more cautious
approach. There are plenty of indications in the following
pages that the world may be heading for economic
stagnation. There is little revenue growth in listed equities.
This lack of growth suggests that companies may continue
to be cautious with their investments and hiring. On the
positive side, such a cautious outlook means that economic
policies may continue to be loose in nature and that central
bank support should continue. The recovery may continue
to be fragile, suggesting continuous support for risk takers
from governments and central banks. A fall in the equity risk
premium, driven by higher risk appetite, would result in
positive equity returns. In the end, lower economic growth
brings lower real yields and higher valuation.
However, the most likely scenario, in our view, is predicated
on a tightening cycle, assuming we are on the path back to
normality. Investors should consider that, in the past, when
there has been divergence between central banks’
economic outlook and apparent micro-economic reality,
poor equity returns have generally resulted. Witness the
Fed hiking interest rates three times in early 2000, for
example, or the optimism expressed by the Fed about the
sustainability of house prices in the face of the rising
interest rates of the 2005-2007 period. The question today
is how the Fed can think that the US economy is getting
stronger when, in 2015, one in two non-financial companies
in the S&P had negative revenue growth?
One could also question the sustainability of the path
defined by current economic policies. Central bank policies
have been very important in stabilising economies around
the world, but the associated rise in asset prices has only
benefited a minority. At the same time, many economists
are turning a blind eye to the fundamental changes that the
world economy is undergoing. Sixteen years since the TMT
bubble, we are now witnessing the full-fledged effects of the
internet revolution, requiring less capital, less labour and
generating less tax, a challenge in the current environment.
An economic path benefiting the few at the expense of the
many is fundamentally not sustainable and we are seeing
the first signs of stress, with defaults running at their highest
level since 2009.
Investors also need to consider the full implications of a
further structural fall in investments in China. The
rebalancing process in China may now be fully underway,
but most investors we have met do not realise the full
implications of a normalisation in the pace of investments in
China on certain parts of the economy (see section 1.4).
The flaw in the bullish investment case lies in ignoring the
risk profile of equities. The concept of Flexible Allocation
(presented in CROCI Flexible Allocation: Allocating
Between Cash & Equities, October 2015) would today lead
a traditional equity investor to an equity allocation of around
5%, based on an expected return of 5.4% and an
associated risk appetite of no higher than 19%.
Investors would today need to take an extra 290bps of risk
to achieve an equity allocation of 61%—around the same
average equity allocation as during the 2004–2015 period.
The effect of taking 290bps of additional risk is best
exemplified by the drawdown seen back in 2008/09.
Investors with a lower risk appetite would only have been
down 15%, whilst investors with this higher risk appetite
would have been down 32%. The irony is that during 20042015 the total return of the two investors would have been
almost identical, at around 9% annualised for both.
The moral is that taking the extra risk on the grounds that
“this time is different” did not pay off. But, as we know, past
performance is not necessarily a good indication of future
performance. In any case, we would not be surprised if the
main topic of discussion for 2016 turned out to be the risk of
making an investment, rather than the return on that
investment. Whatever your decision, happy investing.
London, December 2015
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 3
CROCI® Outlook 2016 | This time is different, or is it?
Figure 1: Global Equities P&L and Valuation
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Economic P / E (x)
23.8
20.9
23.5
20.1
19.2
21.4
23.7
24.7
29.4
27.3
24.2
Accounting P / E (x)
16.6
15.4
15.5
13.1
12.8
13.6
15.3
17.0
18.0
16.7
15.1
Yield (%)
2.3
2.6
3.1
2.8
3.0
3.0
2.8
2.6
2.7
2.7
2.9
P / BV (x)
2.7
2.5
1.8
1.9
2.1
2.0
2.2
2.6
2.5
2.3
2.1
149.5
123.6
121.3
121.2
114.9
117.2
129.9
143.6
156.5
151.6
141.8
8.6
7.7
7.4
7.0
6.9
7.3
8.0
8.8
9.2
8.6
7.9
29.5
30.6
17.9
19.3
23.5
28.6
28.4
28.5
26.8
22.0
18.7
1.8
1.6
1.3
1.4
1.4
1.4
1.5
1.7
1.6
1.6
1.5
Avg. Market Cap. (bn)
22,620
19,325
16,109
19,184
20,909
21,472
24,552
27,306
26,465
26,330
26,311
Enterprise Value (bn)
25,733
23,535
20,424
23,328
25,343
26,223
29,178
32,027
31,211
30,868
30,176
Key Ratios
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Revenue Growth
12.6
10.7
-11.6
14.3
14.6
1.4
0.4
-0.7
-10.6
2.1
4.5
Revenue Growth (Median)
21.0
19.7
7.9
30.9
20.2
6.1
10.6
4.9
0.2
5.5
5.3
Adj. Net Profit Pre-Min. Growth
14.9
-11.6
-14.0
41.9
10.4
-3.8
1.6
-0.6
-8.7
7.2
10.8
Adj. EBDIT Mgn
17.4
16.1
16.4
17.4
16.6
16.1
16.2
16.3
17.0
17.5
18.0
Adj. EBIT Mgn
12.4
11.2
10.7
12.2
11.8
11.3
11.2
11.1
11.3
11.8
12.3
Adj. Net Prof. Pre-Min. Mgn
8.5
6.7
6.6
8.1
7.8
7.4
7.5
7.5
7.7
8.1
8.6
Depreciation / Sales
5.2
5.5
6.0
5.5
5.1
5.3
5.4
5.8
6.2
5.8
5.7
Capex / Sales
7.8
7.9
7.7
7.4
7.6
8.0
8.0
8.0
8.1
7.5
7.0
Free Cash-Flow / Sales (Post-Tax)
5.1
4.0
6.8
6.3
4.9
4.1
4.6
5.0
5.8
6.9
7.6
Dividends / Sales
3.3
3.6
3.0
2.8
3.0
3.2
3.1
3.4
4.2
3.4
3.5
EV / Sales (%)
EV / Adj. EBDIT (x)
EV / Free Cash Flow (x)
EV / Capital Employed (x)
Interest Cover (x)
12.5
10.4
8.1
10.7
11.7
11.2
11.1
11.0
9.9
10.5
12.0
-37.7
-48.1
-39.8
-34.5
-36.9
-36.8
-36.2
-39.3
-40.4
-32.9
-24.5
Return on Stated Equity
16.4
12.7
11.7
14.8
14.9
13.4
13.2
13.3
12.6
13.4
13.8
Return on Cap. Employed (Post-Tax)
10.8
10.2
8.5
10.4
10.7
9.8
9.5
9.3
8.6
9.0
9.6
Net Debt (-) Cash (+) / Equity
P&L (USD bn)
Turnover
Adjusted EBDIT
Depreciation
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
17,210
19,045
16,835
19,251
22,065
22,379
22,467
22,302
19,938
20,363
21,278
2,989
3,075
2,759
3,343
3,665
3,604
3,651
3,625
3,386
3,569
3,838
895
1,042
1,014
1,053
1,129
1,194
1,211
1,283
1,243
1,178
1,218
Adjusted EBIT
2,129
2,139
1,798
2,346
2,601
2,519
2,526
2,470
2,246
2,395
2,621
Pre-Tax Profit
1,883
1,540
1,395
1,943
2,133
1,947
1,992
1,936
1,772
2,067
2,311
626
610
456
612
707
696
674
645
559
605
676
Income Tax
Stated Net Profit Pre-Min.
1,412
967
1,170
1,513
1,573
1,431
1,662
1,477
1,325
1,564
1,748
Adj. Net Profit Pre-Min.
1,455
1,285
1,105
1,568
1,732
1,666
1,693
1,683
1,537
1,648
1,826
61
49
48
66
70
65
65
52
51
57
63
Minorities
Cash Flow (USD bn)
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
EBIT before stock options
2,143
2,077
1,789
2,339
2,590
2,457
2,498
2,408
2,211
2,472
2,704
895
1,042
1,014
1,053
1,129
1,194
1,211
1,283
1,243
1,178
1,218
NWC and Provisions
-129
-150
187
-66
-170
-159
-127
-50
-31
-29
-44
Operating Cash Flow
2,909
2,969
2,990
3,326
3,549
3,492
3,582
3,641
3,423
3,621
3,878
Proceeds from Share Issues
-278
-166
108
-31
-254
-189
-369
-281
-51
-9
0
Dividends Paid
-569
-689
-502
-530
-665
-713
-692
-768
-847
-699
-734
Depreciation
Capex
-1,337
-1,509
-1,300
-1,416
-1,675
-1,788
-1,790
-1,782
-1,606
-1,520
-1,498
Net Other Investments
-372
-496
-342
-342
-402
-173
-74
-309
-429
-3
0
Change in Net Debt (-) Cash (+)
-634
-607
245
156
-370
-162
-141
-130
-174
572
767
Balance Sheet (USD bn)
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
529
611
466
512
652
695
690
588
596
613
645
Net Financial Debt (-) Cash (+)
-3,289
-3,907
-3,664
-3,586
-3,959
-4,111
-4,253
-4,384
-4,557
-3,985
-3,218
Gross Tangible Fixed Assets
Net Working Capital
15,178
15,518
16,977
18,326
19,303
19,982
20,805
20,255
20,244
21,022
21,776
Net Tangible Fixed Assets
7,369
7,542
8,120
8,695
9,255
9,734
10,164
9,915
9,900
10,240
10,526
Other LT Assets
1,054
1,075
1,085
1,167
1,233
1,279
1,397
1,409
1,436
1,448
1,464
Stated Shareholder's Equity
8,297
7,709
8,736
9,859
10,179
10,591
11,161
10,611
10,700
11,553
12,550
416
414
467
523
558
577
587
533
567
574
583
Minorities
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of companies in CROCI’s global
coverage. Data in USD as on 16 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 4
=
Net Capital Invested*
30000000
14%
9.0%
25000000
Net Capital Invested
8.0%
CROCI %
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
2%
0%
10000000
CROCI ex Goodwill
99
01
03
05
CROCI cum Goodwill
07
09
COC
11
13
15E 17E
89
Implied LT CROCI
97
99
GW
01
03
05
07
09
11
Growth in Infl. Adj. NCI
200000
-8%
0
13 15E 17E
89
18.0%
0.80x
16.0%
0.70x
14.0%
12.0%
0.50x
10.0%
0.40x
8.0%
0.30x
6.0%
4.0%
0.20x
2.0%
0.10x
0.0%
03
95
97
99
01
03
05
07
09
11
13
15E 17E
Implied Long Term Earnings
800000
700000
600000
2.5x
2.0x
1.5x
500000
400000
300000
200000
100000
1.0x
0
0.5x
-100000
0.00x
01
93
Economic Profit & Implied EP ex Goodwill
3.0x
0.60x
91
Real Economic Earnings (in today's money)
Organic Growth in NCI
3.5x
EV / NCI and CROCI / COC
0.90x
Sales / GCI
Cash Flow Margins
95
600000
-6%
Value & Returns ex Goodwill
20.0%
91 93 95 97 99
CROCI Cash Flow Margin
93
Infl. Adj. NCI ex GW
CROCI Drivers
89
91
800000
400000
-4%
Economic Profit
97
1000000
-2%
0
95
1200000
4%
15000000
0.0%
93
1400000
6%
5000000
91
1600000
10%
8%
20000000
1.0%
89
12%
Growth
10.0%
Economic Earnings & Implied Economic Earnings*
1800000
Economic Earnings
x
CROCI cum and ex Goodwill & Implied CROCI
0.0x
05 07 09 11 13 15E 17E
Sales / Gross Capital Invested (RHS)
-200000
89
91
93
95
EV/NCI range
97
99
01
EV/NCI spot
03
05
07
09
EV/NCI average
11
13 15E 17E
CROCI / COC
89 91 93
Economic Profit (EP)
95 97 99
Implied EP
01 03 05 07 09
11
13 15E 17E
Implied EP (3 Months Ago)
Implied EP (spot)
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Enterprise Value (USD bn)
9117
11122
14625
17664
15817
14723
14963
17572
19468
22318
27370
25253
22121
25111
27274
28181
31200
34097
34291
32803
32163
Market Cap (USD bn)
7377
9212
12483
14893
12701
11017
11247
13809
15669
18249
22620
19325
16109
19184
20909
21472
24552
27306
27614
26330
26311
EV/NCI Ex. GW
1.59x
1.75x
2.08x
2.31x
1.95x
1.62x
1.48x
1.61x
1.70x
1.74x
1.86x
1.66x
1.34x
1.43x
1.46x
1.43x
1.52x
1.72x
1.75x
1.63x
1.56x
Economic PE
27.4x
35.2x
36.8x
33.2x
31.9x
29.6x
24.2x
21.7x
19.6x
21.4x
23.8x
20.9x
23.5x
20.1x
19.2x
21.4x
23.7x
24.7x
30.3x
27.3x
24.2x
Accounting PE
22.4x
27.1x
31.0x
27.2x
28.2x
21.5x
16.7x
15.3x
15.2x
15.5x
16.6x
15.4x
15.5x
13.1x
12.8x
13.6x
15.3x
17.0x
18.8x
16.7x
15.1x
Cost of Capital
4.89%
4.82%
4.63%
4.65%
5.06%
5.21%
5.24%
5.10%
5.05%
5.00%
4.82%
5.18%
5.48%
5.45%
5.45%
5.35%
5.20%
5.07%
5.01%
5.01%
5.01%
CROCI Ex. GW
5.8%
5.0%
5.7%
7.0%
6.1%
5.5%
6.1%
7.4%
8.7%
8.1%
7.8%
7.9%
5.7%
7.1%
7.6%
6.7%
6.4%
7.0%
5.8%
6.0%
6.4%
Implied CROCI
7.8%
8.4%
9.6%
10.7%
9.9%
8.4%
7.8%
8.2%
8.6%
8.7%
9.0%
8.6%
7.4%
7.8%
8.0%
7.6%
7.9%
8.7%
8.8%
8.2%
7.8%
Implied Economic Earnings/ Economic Earnings
134%
170%
170%
154%
161%
154%
127%
111%
99%
107%
115%
108%
129%
110%
105%
115%
123%
125%
152%
137%
121%
Deutsche Bank AG 5
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of companies in CROCI’s global coverage. Data in USD as on 16 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are subject to risks and uncertainties that
may cause actual results to differ materially. See page 2 for important information.
CROCI® Outlook 2016 | This time is different, or is it?
Figure 2: Global Equities CROCI
CROCI® Outlook 2016 | This time is different, or is it?
This page has been intentionally left blank
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 6
CROCI® Outlook 2016 | This time is different, or is it?
Section 1
A Bottom-up View of the Global Economy
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 7
CROCI® Outlook 2016 | This time is different, or is it?
1. A bottom-up view of the global economy
Within this section we focus on the main messages that emerge out of the world economy when one analyses company
aggregates. This kind of analysis has been a core activity of the CROCI team since the late 1990s.
The message emerging from a bottom-up analysis appears to be in contrast with the most optimistic views generally
emerging from economists using top-down analysis.
The official view from the Deutsche Bank Global Markets Research team (World Outlook 2016: Managing with less
liquidity, 8th December 2015), is cautiously optimistic ‘we expect the world economy and financial markets to weather this
(the normalisation in US monetary policy) reasonably well.’ (page 3). The economic backdrop should allow for this gradual
pace of policy normalization, at least initially’ (page 4).
Our bottom-up analysis tends to be more cautious, as we see the benefits brought to the consumer by low inflation rates
fading away, while company aggregates suggest:
1.1 Real risks of global economic stagnation;
1.2 Low fixed capital requirements amongst listed companies;
1.3 Ambiguity with regard to the net aggregate benefits of the Internet to the overall economy;
1.4 Excessive optimism and lack of appreciation of the full implications of an investment slowdown in China.
1.1 The risk of economic stagnation
Someone looking at the charts in this section might be
tempted to conclude that the world is heading for (or indeed
is already in) economic stagnation.
Figure 3: Proportion of companies with negative sales
growth by region
Figure 4: Median sales growth by region
2011
2013
2014
2015E
2016E
US
9.8%
3.2%
4.4%
-0.3%
3.5%
Europe
6.8%
0.3%
0.3%
3.6%
2.7%
Japan
0.3%
12.0%
5.2%
2.3%
2.4%
EM
12.8%
4.6%
4.0%
0.9%
4.3%
7.4%
3.0%
3.0%
1.1%
3.2%
2011
2013
2014
2015E
2016E
US
14%
31%
28%
51%
16%
Global
Europe
23%
46%
47%
37%
16%
Japan
49%
6%
17%
32%
20%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and
CROCI. The table shows the median sales growth by region in CROCI’s
coverage. Data as on 17 November 2015.
EM
19%
27%
36%
47%
16%
Global
21%
32%
34%
44%
17%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and
CROCI. The table shows the proportion of companies with negative sales
growth in CROCI’s coverage. Data as on 17 November 2015.
One in two US and EM companies had negative revenue
growth in 2015. Things are a little better in Europe and
Japan, but one should not forget the significant stimulus
given to both these economies through QE and currency
devaluation.
Analysts are optimistic about 2016, but their forecasts may
err on the bullish side. First, we note that the current
forecast level of downgrades in 2016 revenue growth are in
line with last year’s 2015 downgrades, suggesting the most
recent stimuli are not having the effects that were hoped for.
Second, we are aware that 2015 forecasts were similarly
bullish at the end of 2014. At the beginning of 2015, only
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 8
CROCI® Outlook 2016 | This time is different, or is it?
20%1 of companies were forecast to have negative revenue
growth. At the time of writing2, that number is now 44%!
Figure 5: Evolution of median sales growth forecasts for
listed global equities
5,0%
2016: -92 bps
Sales growth
4,0%
2015: -46 bps
3,0%
2,0%
1,0%
0,0%
Jan-14
May-14
Sep-14
Jan-15
2015
May-15
Sep-15
Only in Health Care and Consumer Discretionary have
companies managed to generate median revenue growth of
more than 4%; assumptions for 2016 appear realistic for
these sectors, commensurate with what they have delivered
over the past few years.
Information Technology deserves a coda of its own. There
are significant changes happening in the sector. The
industry structure has changed significantly over the past
decade, and further changes are likely. At an aggregate
level, the median company has been struggling for a few
years and forecasts are bullish as they suggest a sharp
reversal in this trend. We are witnessing the emergence of
the IT conglomerate, with software, hardware and revenuegenerating consumer platforms all being provided by the
same group of companies. The forecasts are ambivalent on
this.
2016
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and
CROCI. The chart shows the median sales growth of companies in
CROCI’s global coverage. Data as on 17 November 2015.
Looking at revenue dynamics across the GICS economic
sectors, we note that the revenue problem is widespread.
The significant fall in commodity prices had a large negative
impact on the aggregate level; unsurprisingly Materials and
Energy were the two worst-hit sectors. Analysts are
expecting commodity price stabilisation in 2016.
Nevertheless, there is also an absence of growth in
Telecoms, Utilities, Industrials and Staples, where the
median company has revenue growth of around 1% or less.
Figure 6: Median sales growth by sectors
2011
2013
2014
2015E
2016E
C. Discretionary
7.3%
5.1%
4.8%
4.1%
4.4%
C. Staples
7.2%
1.8%
1.4%
0.8%
2.7%
Energy
26.4%
0.9%
-2.9%
-29.0%
3.6%
Health Care
6.2%
4.5%
5.5%
6.3%
4.9%
Industrials
7.5%
2.5%
2.6%
1.1%
2.6%
IT
6.6%
3.7%
5.8%
2.3%
3.2%
Materials
10.9%
0.4%
1.4%
-5.2%
3.1%
Telecom
4.1%
0.6%
1.7%
0.8%
1.4%
Utilities
3.4%
4.0%
4.5%
-0.9%
1.0%
Figure 7: Proportion of companies with negative sales
growth by sector
2011
2013
2014
2015E
2016E
C. Discretionary
22%
23%
27%
25%
9%
C. Staples
16%
32%
41%
42%
9%
Energy
4%
45%
65%
96%
22%
Health Care
18%
24%
19%
19%
11%
Industrials
20%
30%
30%
45%
18%
IT
37%
37%
29%
41%
17%
Materials
13%
46%
43%
65%
18%
Telecom
25%
43%
43%
45%
27%
Utilities
30%
23%
30%
55%
40%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and
CROCI. The table shows proportion of companies with negative sales
growth in CROCI’s coverage. Data as on 17 November 2015.
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and
CROCI. The table shows the median sales growth of companies in
CROCI’s coverage. Data as on 17 November 2015.
1
2
CROCI Global Outlook 2015, 9th January 2015
End of November 2015
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 9
CROCI® Outlook 2016 | This time is different, or is it?
1.2 Listed companies do not need to increase their capex
One big conundrum for economists and policy-makers is the
significant cash position of certain listed companies, and
their reluctance to use it. Based on our bottom-up analysis,
the simple answer is that companies do not currently need
to invest. Over the past few years, companies have been
growing their capital above inflation-adjusted depreciation.
Since the 2012 peak, the pace of investment may have
slowed, but it is still above the lows of 2002, 2003 and 2009.
Figure 8: Global capex to inflation-adjusted depreciation
1,4
1,2
1,0
0,8
below 2007 levels (except for US IT). This phenomenon is
particularly pronounced in Emerging Markets, something we
discuss in the next section. The simple conclusion is that it
makes little sense for companies to expand their asset
base, when recent investments have not been able to
generate higher sales and earnings.
The following chart clearly shows that cash returns have
been under pressure, but the drivers of profitability (Figure
11) illustrate that cash returns would have fallen even
further had the fall in productivity not been offset by higher
margins. Corporate focus on margins is another strong
indicator of stagnation—companies tend to focus on
profitability when they can no longer grow their businesses.
Figure 10: Cash returns have been under pressure
0,6
10%
0,4
8%
0,0
89 91 93 95 97 99 01 03 05 07 09 11 13 15E
CROCI %
0,2
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and
CROCI. The chart shows the ratio of capex to inflation-adjusted
depreciation (a proxy for replacement capex) of the companies under
CROCI coverage for which we have comparable data going back to 1989.
Data shown are aggregates and are as available on 20 November 2015.
Figure 9: Substantial capital accumulation has resulted in
little earnings growth since 2007
4%
2%
0%
89
93
97
01
CROCI ex Goodwill
05
09
13
COC
17E
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and
CROCI. The chart shows aggregate cash returns of the companies
covered by the CROCI team. Data as on 18 December 2015.
Growth (07-16E)
Ec. Earnings
MSCI World
-1.1%
13%
-2%
S&P 500
-0.9%
32%
20%
NASDAQ-100
2.7%
85%
110%
TOPIX 100
-2.5%
48%
-15%
Euro STOXX
-2.2%
19%
-17%
Figure 11: Asset productivity has fallen whilst margins have
improved
20%
Companies have reacted to the fall in capital
productivity by focusing on margins. However, there
is a natural limit to the benefits from that.
0,80x
18%
0,75x
16%
0,70x
14%
FTSE 100
-5.7%
54%
-23%
China
-9.0%
129%
-29%
12%
MSCI EM
-5.4%
38%
-48%
10%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and
CROCI. The table shows change in CROCI, Net Capital Invested (NCI)
and Economic Earnings of the companies covered by CROCI in respective
indices. Data as on 27 November 2015.
In Figure 9, we note that Net Capital Invested may have
risen since 2007, but economic earnings levels are now
Sales / GCI
NCI
Cash Flow Margin
 in CROCI
(07-16E)
(2016E)
6%
0,65x
0,60x
89
93
97
CROCI CF Margin
01
05
09
13
17E
Sales / Gross Capital Invested (RHS)
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and
CROCI. The chart shows the drivers of cash returns of the companies
covered by the CROCI team. CROCI Cash Flow is the economically
adjusted post-tax EBDIT. Data as on 18 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 10
CROCI® Outlook 2016 | This time is different, or is it?
1.3 Ambiguity over the extent to which the Internet benefits the overall economy
In our 2015 outlook, we argued that a possible explanation
for low revenue growth could be related to the lukewarm
growth in purchasing power for the average household
since 2009.
It could be argued that average growth in revenue for listed
equities and growth in purchasing power for households are
two sides of the same coin—in other words, one cannot
grow without the other.
Looking back at 2015, companies with low capital and
labour have been strong performers in the market at the
expense of traditional businesses with much higher
requirements in terms of physical capital and employment.
Figure 14: Internet & Catalog Retail require less capital and
labour compared to other retailing sectors
Other
Retailers
Figure 12: Median Household Net Worth in the US (USD)
Sales / GCI
Quintiles
2000
2011
73,874
68,828
1st
-905
-6,029
2nd
14,319
7,263
3rd
Total
Food &
Staples Internet &
Retailing Catalog
Cable &
Satellite
1.24
2.17
1.49
0.65
11.6%
6.1%
10.9%
31.4%
Tax rate
37%
33%
26%
38%
CROCI
10.2%
8.4%
20.4%
9.6%
EBITDA Margin
73,911
68,839
th
187,552
205,985
Economic P/E
27.5
23.6
45.3
34.6
th
569,375
630,754
EV / NCI
2.81
1.99
9.23
3.33
EV / Employee (USD '000)
292
149
1,841
1,578
Sales / Employee ('000)
210
266
499
527
4
5
Source: US Census Bureau: Distribution of Household Wealth in the U.S.:
2000 to 2011. Figures are in 2011 dollars.
A second theme, highlighted at the beginning of 2015,
relates to the increasing divergence of wealth within society:
the rich becoming richer, but with the average household
seeing no real increase and the poorest witnessing a further
decrease in wealth. A similar phenomenon is visible in
financial markets, where a few companies have managed to
increase their wealth at the expense of the majority using
very little capital invested and labour.
Figure 13: Internet & Catalog Retail has outperformed other
retailing sectors in the S&P 500 Index
Rebased to 2012 = 100
450
350
250
150
50
12
13
Retailing
Internet & Catalog
14
15
Food & Staples Retailing
Cable & Satellite
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and
CROCI. The chart shows performance of the retailing sectors in the S&P
500 Index. Sector indices are rebased to 100 using prices at the beginning
of 2012. Data as on 9 December 2015.
Source: Company reports, CROCI, Deutsche Bank. The table shows
agglomerated data of the companies covered by CROCI in each of the
sectors. Data as on 30 November 2015.
Throughout 2015, there was a significant divergence in
performance between internet-based business models and
more traditional ones. Given how internet companies are
taking market share from labour- and capital-intensive
companies, one wonders whether the increasing
concentration of wealth within society reflects a broader
change, whereby individuals with little capital and labour
can generate an abnormal level of wealth.
The reader should not think that we are arguing that an
internet-based economy brings no benefits with it. There are
plenty of studies showing the importance of the internet for
the real economy. However, the distribution of wealth
created by the new economy is another matter altogether.
We have seen very little analysis regarding its net benefits
either to physical investment or to employment levels.
We also wonder why such a disruptive force to the economy
ought to capture advantageous taxation. After all, if all trade
were to go through internet, less labour and capital would
be required. Relinquishing labour and capital is fine in a
world of limited supply, but not in a world requiring greater
employment and more taxation.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 11
CROCI® Outlook 2016 | This time is different, or is it?
1.4 Excessive optimism and a lack of appreciation of risk from a slowdown in China
Long-term equity investors should be sceptical by nature,
particularly when it comes to excessive levels of optimism
over future demand. Such euphoria can lead to excessive
investments, which ultimately result in poor return on capital
invested. In economic theory, this is best known as the
capital cycle.
Our bottom-up analysis suggests that there has been far too
much excitement in about future growth prospects
Emerging Markets. This euphoria in turn generated
excessive investment in fixed capital, which has resulted in
an oversupply of capital investment and poor levels of
profitability. The problem has been particularly acute in
China where investments have consistently made up more
than 45% of GDP growth (based on World Bank data).
The median cash return of EM companies under CROCI’s
coverage has fallen by 424 bps since 2010, leading to 60%
of them reporting a fall in their inflation-adjusted Economic
Earnings (see table below). This is by far the largest
number in any region and is directly related to the growth in
invested capital, which has increased at an annualised rate
of 4.3% over this period.
Since 2011 we have regularly written about these issues
and the risks they pose to global equities. The deterioration
in fundamentals has now accelerated and, although there is
a broader consensus about them, we believe they are still
not fully reflected in the share prices.
Figure 15: Main EM messages to emerge from our analysis
since 2011
1. Overinvestment in Emerging Markets is diluting returns
and resulting in poor inflation-adjusted earnings growth
2. Earnings growth in China is only coming from
Financials. Non-Financial sectors have seen a collapse
in profitability
3. Central banks’ attempts to stimulate the economy
increase the risk of a further misallocation of capital
4. State-Owned Enterprises in China are primarily
responsible for the overinvestment observed in the
region
5. Value in EM may only be illusory
6. A fall in corporate capital accumulation could translate
into an Emerging Market slowdown
7. A lower pace of investment in China is likely to have an
abnormal impact on specific industries, especially those
at the commodity end of the market.
8. Lower Emerging Market GDP growth is likely to create
oversupply in Energy and Materials
Source: Deutsche Bank, CROCI
Figure 16: Growth in Capital has diluted profitability and earnings of the EM companies
Economic Earnings
Growth in Ec. Earnings
Growth in NCI
Growth in CROCI
Coverage
Ratio of
companies
with 2016 <
2010
Ratio of
companies
with 2016 <
2007
Median
company
2016 vs
2010
Median
company
2016 vs
2007
Median
company
2016 vs
2010
Median
company
2016 vs
2007
Brazil
10
80%
80%
-5.4%
0.1%
-1.2%
1.5%
-488 bps
-807 bps
China & Hong Kong
48
58%
54%
-2.1%
6.8%
6.8%
10.4%
-320 bps
-572 bps
Korea
15
67%
47%
-4.4%
4.5%
4.0%
5.9%
-519 bps
-162 bps
Taiwan
14
57%
43%
0.6%
2.2%
6.1%
6.6%
-550 bps
-759 bps
South Africa
20
60%
75%
-1.2%
10.7%
3.1%
2.4%
-309 bps
-516 bps
EM
135
60%
59%
-1.6%
4.3%
4.9%
5.9%
-424 bps
-532 bps
US
332
35%
37%
3.6%
6.2%
2.4%
2.5%
46 bps
22 bps
EU
229
45%
40%
0.8%
7.6%
2.3%
2.2%
-75 bps
-120 bps
JP
95
44%
49%
2.8%
7.5%
5.2%
4.1%
-105 bps
-272 bps
World
829
44%
44%
1.7%
6.3%
2.9%
3.0%
-75 bps
-143 bps
Median
Median
company
company
2016 vs 2010 2016 vs 2007
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. Data as on 23 November 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 12
CROCI® Outlook 2016 | This time is different, or is it?
The primary tail-risk, in our opinion, is still a disorderly
adjustment following a collapse in investments in China
The analysis suggests that Chinese Financials look better
but it could be because of under-provisioning for bad loans
Most investors expect the pace of economic growth in
China to slow down, but investors do not realise that a
structural slowdown in investments will create mayhem in
certain industries as they face structural oversupply for a
decade or more. In the concluding part of this section, we
analyse the inconsistencies we find from our bottom-up
perspective.
The sceptical investor will question why the return on equity
(ROE) of Chinese banks is so healthy, however. It is
especially surprising given the significant amount of
corporate debt sitting on Bank’s balance sheets, as well as
the significant troubles we have seen in large financial
institutions operating in the region (such as Standard
Chartered).
Figure 17: Chinese GDP growth vs. Chinese corporate
earnings and capital growth
200
160%
Unsustainable
120%
80%
40%
0%
Central govt.
160
Local govt.
(LGFVs
included)
Household
Corporate
(LGFVs
exculded)
120
Source: Deutsche Bank, NAO, NBS and CEIC. Data for 2014 and is as
available on 19 August 2015.
80
40
0
2007 2008 2009 2010 2011 2012 2013 2014 2015E
Chinese GDP
Real Economic Earnings
Real NCI
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and
CROCI. The chart shows the growth in Chinese GDP and aggregate
Economic Earnings of the companies covered by the CROCI team in
China. Data as on 09 December 2015.
The cash return of the non-financial part of the Chinese
equity market has been fading
The divergence in growth between earnings and
investments is a function of cash returns. Non-financial
Chinese companies have seen their level of profitability
come under pressure over the past decade. It peaked at
14.3% in 2005 and since then has fallen by three-quarters
to an estimate of 3.5% last year. This has largely been on
account of rapid growth in capital (+220% over this period)
resulting in overcapacity in many parts of the market. It is
also evident from the decline in capital productivity and
margins of the companies we cover. The median company
under our coverage is now destroying value.
The ROE of the financial part of the market has been steady
but we suspect that this too is because the companies are
not making sufficient provisions for bad debts.
Figure 19: ROE of Chinese Banks is consistently above
those in the Developed Markets
25%
20%
Return on Equity
Re-based to 2007 = 100
240
Figure 18: The majority of Chinese total debt is in
corporates
Debt as a % of GDP
Analysts typically assume a linear relationship over the long
term between broad economic growth and corporate profit
growth. However, our company-driven bottom-up analysis
suggests that this relationship has broken down in China.
One significant reason may be the absolute level of capital
investments, which have grown sharply.
15%
10%
5%
0%
07
09
China
11
13
15E
Developed Markets
17E
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and
CROCI. The chart shows aggregate Return on Equity (ROE) of the
Chinese and Developed Market Financial companies covered by the
CROCI team. Data as on 10 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 13
CROCI® Outlook 2016 | This time is different, or is it?
Stimulus to support economic growth may only make
existing problems worse
China’s economic problems do not stem from a lack of
investment, but rather from too much of it. Therefore, any
stimulus to support economic growth could further
encourage the misallocation of capital and thereby make
the existing problems worse.
Implications for the commodity end of the market
The most obvious implications of a slowdown in China are
for the commodity end of the market. Back in 2011 we wrote
a detailed report on the matter where we highlighted the
implications of the capital mismanagement in EM and
specifically China. We picked up on the same point in the
2015 Outlook. The conclusions were as follows:
China [is] the largest market in the world for the
consumption of cement (2,160mn tons in 2012)…
Valuations are not attractive
The non-financial Chinese companies we cover trade at an
Economic Price-to-Book (EV/NCI) of 1.0x in aggregate. This
implies that, over the long-term, these companies will
generate returns equal to the current cost of capital. Cash
returns for 2016, however, are forecast to be more than a
fifth below, having faded for the past decade.
At a price-to-book of 0.87, the financials look better (implied
ROE is less than half the level forecast for 2016). That said,
the ROE could be inflated substantially because of underprovisioning for bad loans. For example, if we were to
assume that a fifth of the loan assets added since 2009 are
worthless then the price-to-book of the Chinese banks
would increase to 1.45x3. US Banks by comparison trade on
a price-to-book of 1.32x.
Our analysis suggests that a fall in the consumption of
cement from 2012 levels to the current level in South Korea
would bring down [Chinese] consumption by 42%. If
Chinese consumption fell to the global average level, the
drop would be 68%. Given China’s large market share in
both the production and consumption market, global cement
demand would come down between 908m tons and 1,469m
tons. Using 2012 data, when consumption was 3,730m
tons, this would result in an [unprecedented] fall of between
24% and 39% in the global demand for cement.
The impact on the profitability of the industry … and
potentially on the suppliers of capital would be devastating.
Figure 20: Chinese Banks: Impact of a write-off of
incremental lending between 2009 and 2014 on valuations
Spot
Price-to-Book
10%
15%
20%
0.87
1.05
1.22
1.45
Provision for loan losses
0.76%
3.89%
5.84%
7.78%
Inflation- Adj. ROC
14.5%
-4.2%
-20.5%
-42.9%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and
CROCI. Data as on 10 December 2015.
Cement consump per capita (kg)
Figure 21: Cement consumption per capita
2000
1600
1200
800
400
0
1900
1920
France
1940
US
1960
1980
Spain
2000
China
Source: NBS, CEIC and Cembureau. The latest date for US, France and
Spain is as of 2009. Data is as available on 23 December 2014.
3
See CROCI Views Q3: The China Syndrome, 20th August 2015 for more
detail.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 14
CROCI® Outlook 2016 | This time is different, or is it?
This page has been intentionally left blank
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 15
CROCI® Outlook 2016 | This time is different, or is it?
Figure 22: China and Hong Kong ex Financials - P&L and Valuation
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Economic P / E (x)
29.1
24.6
21.2
17.6
16.9
18.9
19.1
21.5
29.7
25.2
21.3
Accounting P / E (x)
27.9
22.6
17.8
14.5
13.4
13.9
13.1
14.0
19.9
17.3
15.1
Yield (%)
2.6
2.4
2.8
2.9
3.0
2.9
3.1
2.9
2.7
2.7
3.1
P / BV (x)
4.9
3.1
2.4
2.3
2.0
1.7
1.5
1.4
1.5
1.4
1.3
342.3
202.4
173.4
136.3
110.2
98.6
91.4
94.1
119.3
112.2
103.2
14.4
10.7
8.7
7.5
6.9
6.7
6.3
6.5
7.6
7.0
6.3
52.8
36.2
65.3
123.7
100.8
51.4
30.5
21.2
1.9
1.7
1.4
1.3
1.2
1.3
1.2
1.2
EV / Sales (%)
EV / Adj. EBDIT (x)
EV / Free Cash Flow (x)
EV / Capital Employed (x)
154.7
4.1
2.5
2.0
Avg. Market Cap. (bn)
14,260
10,261
8,731
9,230
8,941
8,268
7,910
7,999
8,852
8,871
8,871
Enterprise Value (bn)
14,897
11,038
9,688
10,220
10,154
9,878
9,817
10,259
11,276
11,196
11,002
Key Ratios
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Revenue Growth
22.3
25.3
2.4
34.2
22.8
8.8
7.2
1.5
-13.4
5.6
6.8
Revenue Growth (Median)
21.0
19.7
7.9
30.9
20.2
6.1
10.6
4.9
0.2
5.5
5.3
Adj. Net Profit Pre-Min. Growth
14.1
-11.7
7.8
31.6
5.0
-10.2
1.6
-5.8
-20.4
14.2
14.4
Adj. EBDIT Mgn
23.8
19.0
19.9
18.1
16.0
14.7
14.4
14.5
15.6
16.1
16.3
Adj. EBIT Mgn
16.4
11.9
12.2
11.5
9.9
8.6
8.1
7.8
7.1
7.6
8.0
Adj. Net Prof. Pre-Min. Mgn
12.4
8.7
9.2
9.0
7.7
6.4
6.0
5.6
5.1
5.6
6.0
Depreciation / Sales
7.7
8.3
8.0
6.9
6.3
6.1
6.5
6.9
8.5
8.5
8.3
16.9
16.3
17.0
12.7
11.3
11.5
11.5
11.6
11.8
10.4
9.4
Free Cash-Flow / Sales (Post-Tax)
2.2
-0.9
3.3
3.8
1.7
-0.1
0.8
1.0
2.3
3.7
4.9
Dividends / Sales
4.8
3.6
3.4
2.7
2.6
2.4
2.3
3.1
2.5
1.8
1.9
Capex / Sales
Interest Cover (x)
24.3
18.3
21.1
23.2
20.3
14.6
12.8
11.2
7.9
9.1
10.7
-10.4
-15.2
-15.8
-15.4
-18.6
-24.0
-27.7
-31.2
-28.0
-24.7
-19.8
Return on Stated Equity
19.6
14.7
14.2
16.3
15.4
12.5
11.6
10.2
7.6
8.2
8.9
Return on Cap. Employed (Post-Tax)
16.1
12.7
11.5
13.1
12.4
10.1
9.0
8.0
6.0
6.5
7.1
Net Debt (-) Cash (+) / Equity
P&L (CNY bn)
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Turnover
4,352
5,455
5,587
7,500
9,211
10,017
10,742
10,907
9,449
9,980
10,659
Adjusted EBDIT
1,037
1,036
1,111
1,359
1,470
1,468
1,547
1,581
1,475
1,605
1,739
Depreciation
336
455
448
518
579
610
696
756
806
850
889
Adjusted EBIT
712
649
681
862
914
866
866
847
672
755
849
Pre-Tax Profit
682
537
631
802
850
791
772
729
583
672
771
Income Tax
172
139
147
183
195
193
189
191
139
160
183
Stated Net Profit Pre-Min.
546
464
513
661
696
639
664
588
478
549
629
Adj. Net Profit Pre-Min.
540
477
514
676
710
638
648
611
486
555
635
27
22
20
36
39
40
43
37
40
44
50
Minorities
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
EBIT before stock options
Cash Flow (CNY bn)
704
583
665
844
893
860
853
829
674
761
857
Depreciation
336
455
448
518
579
610
696
756
806
850
889
NWC and Provisions
-29
-55
178
66
-65
-121
-33
-9
14
-21
-17
Operating Cash Flow
1,012
983
1,291
1,428
1,407
1,349
1,517
1,576
1,494
1,590
1,729
Proceeds from Share Issues
307
214
26
47
53
42
26
13
109
0
0
Dividends Paid
-207
-194
-189
-205
-236
-244
-242
-335
-232
-181
-207
Capex
-734
-887
-952
-953
-1,044
-1,155
-1,230
-1,263
-1,112
-1,040
-1,006
Net Other Investments
-134
-218
-78
-185
-163
-148
-167
-44
48
-4
-2
82
-208
-80
-60
-234
-372
-317
-306
68
128
260
2017E
Change in Net Debt (-) Cash (+)
Balance Sheet (CNY bn)
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
Net Working Capital
-126
-115
-219
-289
-205
-142
-167
-170
-161
-142
-126
Net Financial Debt (-) Cash (+)
-317
-526
-606
-665
-899
-1,271
-1,587
-1,893
-1,824
-1,697
-1,437
Gross Tangible Fixed Assets
5,184
6,357
7,224
8,141
9,104
10,358
11,464
12,530
13,335
13,984
14,586
Net Tangible Fixed Assets
3,179
3,817
4,357
4,833
5,378
6,085
6,629
7,163
7,501
7,667
7,759
116
137
159
208
247
298
388
467
485
496
504
2,887
3,278
3,617
4,079
4,525
4,926
5,297
5,581
5,978
6,309
6,689
155
178
209
244
295
371
438
477
542
559
577
Other LT Assets
Stated Shareholder's Equity
Minorities
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of companies covered by the CROCI
team in China and Hong Kong. Data in CNY bn as on 09 December 2015.
.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 16
CROCI® Outlook 2016 | This time is different, or is it?
CROCI® Outlook 2016 | This time is different, or is it?
Figure 23: China and Hong Kong ex Financials: CROCI
x
CROCI cum and ex Goodwill & Implied CROCI
14000000
25%
14.0%
12000000
20%
900000
6.0%
4.0%
8000000
10%
6000000
5%
4000000
Economic Earnings
8.0%
15%
Growth
Net Capital Invested
10.0%
700000
10000000
600000
500000
400000
300000
200000
2.0%
2000000
0.0%
0
05
07
09
11
CROCI cum Goodwill
13
COC
15E
17E
05
Infl. Adj. NCI ex GW
07
GW
09
11
13
15E
Growth in Infl. Adj. NCI
0
17E
03
Organic Growth in NCI
0.80x
30.0%
0.70x
0.40x
15.0%
0.30x
10.0%
0.20x
11
13
15E
17E
Implied Long Term Earnings
600000
500000
400000
4.0x
3.0x
2.0x
300000
200000
100000
0
-100000
5.0%
0.10x
1.0x
0.0%
0.00x
0.0x
11
13
15E
17E
Sales / Gross Capital Invested (RHS)
09
5.0x
Sales / GCI
0.50x
20.0%
07
Economic Profit & Implied EP ex Goodwill
6.0x
0.60x
25.0%
05
Real Economic Earnings (in today's money)
Value & Returns ex Goodwill
35.0%
05
07
09
CROCI Cash Flow Margin
100000
-5%
03
Implied LT CROCI
CROCI Drivers
03
0%
Economic Profit
03
CROCI ex Goodwill
EV / NCI and CROCI / COC
CROCI %
Economic Earnings & Implied Economic Earnings*
800000
12.0%
Cash Flow Margins
=
Net Capital Invested*
16.0%
-200000
-300000
03
05
EV/NCI range
07
09
EV/NCI spot
11
13
EV/NCI average
03
15E
17E
CROCI / COC
05
Economic Profit (EP)
07
Implied EP
09
11
13
Implied EP (3 Months Ago)
15E
17E
Implied EP (spot)
Deutsche Bank AG 17
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Enterprise Value (CNY bn)
2698
3724
4600
6598
15439
11675
10455
11169
11120
10993
11048
11594
13871
12485
12361
Market Cap (CNY bn)
2089
2987
3762
5570
14260
10261
8731
9230
8941
8268
7910
7999
10268
8871
8871
EV/NCI Ex. GW
1.29x
1.56x
1.64x
1.98x
3.79x
2.24x
1.66x
1.60x
1.37x
1.15x
1.05x
0.99x
1.15x
1.01x
0.99x
Economic PE
12.3x
11.7x
11.5x
14.1x
29.1x
24.6x
21.2x
17.6x
16.9x
18.9x
19.1x
21.5x
33.1x
25.2x
21.3x
Accounting PE
9.7x
10.0x
9.8x
12.4x
27.9x
22.6x
17.8x
14.5x
13.4x
13.9x
13.1x
14.0x
23.0x
17.3x
15.1x
Cost of Capital
5.24%
5.10%
5.05%
5.00%
4.82%
5.18%
5.48%
5.45%
5.45%
5.35%
5.20%
5.07%
5.01%
5.01%
5.01%
CROCI Ex. GW
10.5%
13.3%
14.3%
14.1%
13.0%
9.1%
7.8%
9.1%
8.1%
6.0%
5.5%
4.6%
3.5%
4.0%
4.7%
Implied CROCI
6.7%
8.0%
8.3%
9.9%
18.3%
11.6%
9.1%
8.7%
7.5%
6.1%
5.4%
5.0%
5.8%
5.0%
5.0%
Implied Economic Earnings/ Economic Earnings
64%
60%
58%
70%
140%
127%
116%
96%
92%
101%
99%
109%
166%
126%
107%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of companies covered by the CROCI team in China and Hong Kong. Data in CNY bn as on 09 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are subject to risks and uncertainties that
may cause actual results to differ materially. See page 2 for important information.
CROCI® Outlook 2016 | This time is different, or is it?
This page has been intentionally left blank
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 18
CROCI® Outlook 2016 | This time is different, or is it?
Section 2:
The Valuation of Equities
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 19
CROCI® Outlook 2016 | This time is different, or is it?
2. The Valuation of Equities
In contrast to Section 1, whose focus was the economy and the messages emerging from the CROCI database, The focus
of Section 2 is the valuation of global equities. The main conclusions are that:
2.1
Valuation is full at an aggregate market level. Equities may be attractive compared to other asset classes, but the
expected rate of return on equities is already meaningfully below the long-term average.
2.2
Investors should expect a below-average long-term return on equities.
2.3
Stock pickers face significant challenges given the high valuation, by historical standards
The big problem with equities is the lack of revenue growth, which has
been close to zero since 2011.
Despite an 11% fall in 2015 revenues in USD terms,
analysts are not forecasting any rebound in 2016.
Figure 24: Global Equities P&L and Valuation (USD)
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Revenue Growth
10.7%
-11.6%
14.3%
14.6%
1.4%
0.4%
-0.8%
-10.6%
1.7%
4.5%
Net Profit Growth
-11.7%
-14.0%
41.8%
10.4%
-3.9%
1.6%
-0.6%
-8.5%
6.9%
10.6%
EBITDA Margin
16.2%
16.4%
17.4%
16.6%
16.1%
16.2%
16.3%
17.0%
17.6%
18.0%
Tax Rate
39.7%
32.8%
31.7%
33.2%
35.8%
33.8%
33.3%
31.4%
29.3%
29.3%
Net Profit Margin
6.7%
6.6%
8.1%
7.8%
7.4%
7.5%
7.5%
7.7%
8.1%
8.6%
Capex (USD bn)
1,510
1,301
1,418
1,677
1,789
1,790
1,781
1,606
1,516
1,493
Capex-to-Sales
7.9%
7.7%
7.4%
7.6%
8.0%
8.0%
8.0%
8.1%
7.5%
7.0%
FCF-to-Sales
4.0%
6.8%
6.3%
4.9%
4.1%
4.6%
5.0%
5.9%
6.9%
7.6%
Acc. P/E Ratio
15.4x
15.5x
13.1x
12.8x
13.6x
15.3x
17.0x
18.7x
17.4x
15.7x
FCF Yield
3.3%
5.6%
5.2%
4.2%
3.5%
3.5%
3.5%
3.6%
4.4%
5.1%
Dividend Yield
2.6%
3.1%
2.8%
3.0%
3.0%
2.8%
2.6%
2.6%
2.6%
2.7%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of the companies covered by the
CROCI team. Data as on 27 November 2015.
Revenue growth is critical, because...
...the following are at peak levels:
1. Margins
2. Profits
... and the following are at long-term lows:
3. Tax rates
4. Capex
...and:
5. Valuation is already rich
Without revenue growth, equities are
like a bond with volatility of 12% and
a yield of 4.4%
EY – BY = ERP
4.4% -2.3% = 210bps
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 20
CROCI® Outlook 2016 | This time is different, or is it?
2.1. Equities may be attractive versus other asset classes, but the expected return of equities is already
meaningfully below its long-term average
A slowdown in Emerging Markets and the fall in commodity
prices have weighed upon the performance of global
equities in 2015. However, most of the major Developed
Market benchmarks still finished the year in positive
territory. At the time of writing, the MSCI World index was
up 1.3%, taking the average annual returns over the past
five years to 8.6%—an exceptional result, given the macro
environment.
Figure 26: Market implied Cost of Capital (or, the expected
return on equities)
6,0%
LT Average: 5.4%
5,6%
5,2%
Spot
5.0%
4,8%
Looking back over the longer term, investors in the MSCI
World at the beginning of 2008 (just before the crisis but
after the boom years of 2003-2007) would still be sitting on
a positive annualised return of 3.0%.
4,4%
4,0%
89
94
99
Cost of Capital
Today, long-term investors may still be able to expect a
return on equities of 5.0%, albeit with expectations of wide
annual variance. This expectation is based on the marketimplied cost of capital for the CROCI universe 4.
Figure 25: Market implied profile of cash returns to
perpetuity
6%
5%
4%
3%
2%
04
09
14
Long-term average
Source: Deutsche Bank and CROCI. Data as on 29 November 2015.
The rate of return on equities as an asset class looks
attractive when compared with the bond yields of major
developed economies around the world (the 10 year yield 5
for the US, Japan, Germany, the UK and Italy is at 1.97%,
0.28%, 0.44%, 1.70% and 1.40% respectively). However,
today investors are accepting a lower rate of return in
equities than they have on average in the past. In a world
characterized by positive sentiment towards equities,
investors need to bear in mind that the strong equity returns
achieved over the past few years against a poor economic
backdrop may limit the average equity returns in the future.
There is a strong tendency for the expected rate of return
on equities to mean revert to 5.4% over the long term.
1%
0%
Mid-cycle CROCI
Cycle-Adjusted CROCI
Source: Deutsche Bank and CROCI. Data as on 29 November 2015.
The cost of capital is economically equivalent to the
expected rate of return on equities. This equivalence
enables us to estimate the implied rate of return that longterm equity investors can capture by investing in equities. It
is an exercise that we have performed since the mid-1990s
and the chart below shows our annual historical series.
4
The market-implied cost of capital is calculated by estimating the discount
rate that equates current prices (market cap) with the present value of
future cash flows (until perpetuity) of the companies in CROCI universe.
The cash flow is a function of both cash return and growth in invested
capital.
5
Data from Bloomberg Finance L.P. as on 30 November 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 21
CROCI® Outlook 2016 | This time is different, or is it?
2.2. Changes in risk aversion will continue to be the prime driver of equities in 2016
It is sensible to question why global equity returns have
been so strong against a generally dull economic backdrop.
There are two primary drivers of equity prices: earnings and
the discount rate. Many assume that the primary driver of
equity prices is earnings. If the earnings go up, equity prices
should go up, and vice versa; and that relationship usually
holds. Less frequently mentioned, however, is the more
important factor in equity prices, at least since 2011—
namely, the discount rate.
The following table shows how sensitive the level of equity
markets is to changes in the discount rate.
Figure 27: Market sensitivity to changes in cost of capital
Cost of Capital
EV / NCI
Move in global
equity market
5.4%
1.06
-16.6%
5.3%
1.12
-13.0%
5.2%
1.18
-8.9%
5.1%
1.25
-4.4%
5.0%
1.32
0.0%
4.9%
1.42
+6.3%
4.8%
1.52
+12.6%
4.7%
1.64
+19.9%
For a more detailed study, the reader could read Stocks
could shed 35% of value if euro crisis spirals (CROCI
Focus, 14 July 2011), but one example will serve to
illustrate the point.
Think of the dark days of 2009. There was much uncertainty
during the financial crisis. Credit was scarce, and investors
required high rates of return to provide financial capital,
given their high risk aversion. Suppose the discount rate
was 20% for a hypothetical company delivering earnings of
$10 to perpetuity and no growth. Then the fair price would
have been $50 (earnings of $10 discounted with a COC of
20%).
Now, in 2016, investors are more confident about the world
and their risk aversion is lower. Suppose that investors
today require a 10% rate to provide financial capital to the
same company (which is delivering the same earnings into
perpetuity). The earnings of this company have not changed
and, using the same formula, the hypothetical price is now
$100. Profitability is unchanged, but a change in the risk
premium has doubled the fair price.
Cost of Capital
Source: Bloomberg Finance L.P., Deutsche Bank and CROCI. The table
shows sensitivity of equity prices from the changes in the cost of capital,
keeping other variables equal. Data as on 30 November 2015.
Investors may be surprised by the high sensitivity, but the
chart below spells out the non-linear relationship.
Figure 28: Changes to asset prices from the changes to the
cost of capital
6.0%
1800
5.6%
1500
5.2%
1200
4.8%
900
4.4%
600
4.0%
89
94
99
Cost of Capital
04
MSCI World
Figure 29: MSCI World and the market-implied cost of
capital
300
09
14
MSCI World (RHS)
600
Earnings = 10
Source: Bloomberg Finance L.P., Deutsche Bank and CROCI. Data as on
30 November 2015.
Asset Price
500
400
300
200
100
0
10%
8%
6%
4%
2%
Discount rate
Source: Deutsche Bank and CROCI. The chart shows how the asset price
varies with the cost of capital. This is a theoretical example and uses
constant earnings of 10.
Historically, the real cost of capital has been inversely
correlated to the level of equity markets. In particular, the
cost of capital tends to fall when there is economic growth
(post 1992, post 2003 and post 2011) and we estimate that
for a 10bp fall in the cost of capital equity markets could rise
by around 6.3%. At the same time, there is a strong
tendency for the market to revert to the mean and a 40 bps
rise in the cost of capital would push equity markets down
by almost 20%.
.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 22
CROCI® Outlook 2016 | This time is different, or is it?
2.3 The challenge for stock pickers
The charts below highlight the challenges for stock pickers:

Purists will be reluctant to call the value end of the
market true value as the buffer of comfort for bad news
is low by historical standards.
Valuations are generally unattractive with the median
Economic P/E for most of the regions close to its
highest level since 2000.
Valuation is particularly demanding in Europe with the
median Economic P/E close to its highest level in over
25 years.
Valuations in Japan have increased (the 2016 median
Economic P/E is 25.6x compared to 22.0x for 2015 at
the beginning of last year).
In Japan, the cheapest decile is at an Economic P/E of
13.3x (a 48% discount to the market) suggesting there
is still good scope for stock picking.

The gap between the value end of the market and the
median company has been widening in the past year,
which is positive for long-term value investors.

The value case for the Rest of the World (primarily
Emerging Markets) is not clear. Its performance has
been weak but, because of the deterioration in
profitability, median valuation for the market is at a
higher level than it was at the beginning of 2014. The
cheap value tail is on a median Economic P/E of 12.2x.
The valuation for the median US stock is more attractive
than in other regions, but (excluding 2014 and 2015)
the median Economic P/E for the market is at its highest
level since 2002.

The value end of the market is expensive by historical
standards. This is a particular problem in Europe.
Figure 30: US—dispersion of valuation
Figure 32: Europe—dispersion of valuation
40
Median Economic P/E
Median Economic P/E
40
30
20
10
0
20
10
0
99
01
03
05
07
US coverage
09
11
13
15
99
Cheapest Decile
01
03
05
07
09
Europe coverage
Figure 31: Japan—dispersion of valuation
11
13
15
Cheapest Decile
Figure 33: ROW—dispersion of valuation
40
Median Economic P/E
50
Median Economic P/E
30
40
30
20
10
0
30
20
10
0
99
01
03
05
Japan coverage
07
09
11
13
Cheapest Decile
15
99
01
03
05
RoW coverage
07
09
11
13
15
Cheapest Decile
Source: CROCI, Deutsche Bank. Data as on 20 Nov 2015. The charts show median Economic P/E of the companies in CROCI’s coverage in each
of the regions and those in the cheapest decile in these regions.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 23
CROCI® Outlook 2016 | This time is different, or is it?
This page has been intentionally left blank
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 24
CROCI® Outlook 2016 | This time is different, or is it?
Section 3:
Themes
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 25
CROCI® Outlook 2016 | This time is different, or is it?
3. Investment themes
We start with a preface on the factors that have led to such
an abnormal 2015. While Value and Quality have performed
over the long term, Value approaches had a tough time in
2015 (see page 29). On the other hand, factors such as
Forecast Growth, Earnings Revisions, Momentum and
Small Cap have done very well.
It is genuinely difficult to assess the reasons behind factor
performance. The poor performance in EMs may have
played a role. EMs were meant to be the new frontier for
‘growth investors’, the poor performance may have pushed
investors to give a greater premium to what was already
rich-valued DM growth stories. Another explanation could
be liquidity driven. The excessive amount of liquidity
provided by central banks may have also played a role.
Companies that would not survive under normal
circumstances have been given a new lease of life. It has
certainly been an environment where quality has not been
rewarded. Instead, growth companies, along with
companies struggling operationally and financially, have
been favoured. There tends to be little value in such
companies, so value investors have struggled, by definition.
This group of companies has failed to meet the cost of
capital since 2008. The operational characteristics can be
found on page 29. However, the staggering fact is that this
group of companies is trading on an Economic price-tobook of 1.6x. Based on current profitability, fair value is
0.62x, suggesting a potential 60% downside. Considering
the leverage, the downside to ‘fair value’ is 80%.
Figure 35 shows the CROCI chart of the cheapest global
tercile by economic valuation. Over 2015, it achieved
negative performance of 1.2%. Its CROCI is 10.7% and it
trades on an Economic price-to-book of 2.13x, suggesting it
is fair value on long-term assumptions, but it also has good
profitability and low debt.
Figure 35: CROCI of the cheapest DM tercile
12%
10%
CROCI %
Within this section we analyse the merits of different
investment approaches against the backdrop described in
the previous sections.
8%
6%
4%
2%
0%
The CROCI chart in Figure 34 shows the cash returns of the
most expensive tercile of CROCI’s global coverage by
economic valuation. This group of companies achieved a
performance of 10.5% in 2015 (data as of 27 November).
Figure 34: CROCI of the most expensive DM tercile
10%
CROCI %
8%
6%
89
93
97
CROCI ex Goodwill
01
05
COC
09
13
17E
Implied LT CROCI
Source: Bloomberg Finance L.P., Deutsche Bank and CROCI. The tercile
is constructed from CROCI’s coverage in the Developed Markets using
2016 Economic P/E. Data as on 27 November 2015.
The difference in fundamentals between the Value and the
Expensive parts of the markets is there for the reader to
see. There is little that helps understanding why expensive
stocks would be performing better than Value stocks, still,
this has been the case.
The risk for the Long term investor is that this type of market
dynamic has resulted in an increasing number of stocks
trading in bubble territory6.
4%
2%
0%
89
93
97
CROCI ex Goodwill
01
05
COC
09
13
17E
Implied LT CROCI
Source: Bloomberg Finance L.P., Deutsche Bank and CROCI. The tercile
is constructed from CROCI’s coverage in the Developed Markets using
2016 Economic P/E. Data as on 27 November 2015.
6
Bubbles are defined as stocks whose market-implied CROCI is 1.5x of
the average CROCI over the previous five years. Similarly, Black Holes are
defined as stocks whose market-implied CROCI is 0.7x of the previous five
years’ average CROCI. Stocks whose average CROCI is less than 3% are
excluded from this analysis.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 26
CROCI® Outlook 2016 | This time is different, or is it?
Figure 36: Proportion of CROCI covered stocks trading in
bubble territory since 1999
Proportion of companies
100%
80%
60%
40%
20%
0%
99
01
Bubbles
03
05
07
Fair
09
11
13
Black Holes
15
Source: Bloomberg Finance L.P., Deutsche Bank and CROCI. Data as on
30 November 2015.
At this stage, investors face the dilemma of whether to give
in and chase momentum or to stick to fundamentals. In our
mind, there is no doubt that fundamentals prevail in the long
term. The problem with bubbles, however, is that once they
start they can persist and grow for a long time. For investors
that cannot afford the risks of underperformance, a
diversified approach based on valuation may be one
solution.
The Themes
1. Concentrated value-focused approaches may be best
for long-term Investors (despite their poor 2015). For
value investors focusing on concentrated value, value
traps pose a substantial risk. Through our work we set
out to remove value-trap risk through a detailed
analysis of company accounts and true valuation, which
removes the ‘due diligence’ risk. We have also
introduced a second enhancement to our approach in
order to address the second type of ‘value trap’ risk,
namely lack of earnings sustainability7.
3. Dividends have historically accounted for the bulk of
equity return. In a world characterised by low growth
and high valuation, the dividend theme will continue to
be important, as it is likely that dividends will continue to
play a relevant part in the total equity return. CROCI
Global Dividends and CROCI US Dividends focus on
two elements: (1) high and sustainable dividend yield
stocks and (2) attractive valuation, as measured by
CROCI.
4. In a world characterised by a lack of growth, there is a
risk of already expensive stocks heading into bubble
territory. This is a tough environment for value
investors. Even if an investor has a long-term outlook,
relative performance can be a tyrant; in any case, some
investors require a much more diversified approach
than others. Back in 2014, we launched CROCI Real
Earnings Weighted, our value-weighted approach to
diversified investing. An REW index owns all of the
stocks within its relevant benchmark, but weights them
according to economic value, rather than market cap.
Performance in 2015 was strong, providing the perfect
complement to a concentrated strategy.
5. CROCI Flexible Allocation provides a defensive way to
gain equity exposure. Instead of owning equities simply
because alternative asset classes are less desirable, it
enables investors to own equities only when the riskreward is sufficiently attractive—relative to a given
hurdle rate—through a bottom-up flexible allocation
approach. The approach uses a measure of riskadjusted expected return to determine the allocation
between cash and equities.
We have included a section on currency because of the
turbulence in FX markets in recent years. Given the
importance of currency fluctuations to global equity returns,
we have summarised the DB FX Strategists views on
relevant currencies.
2. CROCI Sectors is the most concentrated strategy that
CROCI offers. Its intention is to give value investors
exposure to the cheapest three global sectors and the
cheapest companies within them. It has had a very
successful decade-long track record, over which time
both sector allocation and stock selection have
contributed positively. In 2015, the shift in the market
away from Quality and Value factors hurt performance,
but over the long term this would benefit from a return
to fundamentals in the market.
7
See CROCI Focus, Value Traps—Adjusting Valuation for Risk (October
2015)
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 27
CROCI® Outlook 2016 | This time is different, or is it?
Factor analysis: Value has had an unusually tough 2015, but has performed over the long term
The analysis presented in Figure 37 and Figure 38 was
provided by the DB Quantitative Strategy Research team. It
clearly indicates that value as an investment style works
over the long run.
Over the past 15 years, value has been the best performing
equity market factor in the US and Japan and the third-best
in Europe (Figure 38) among a selection of 17 fundamental
and technical factors. The picture is similar across regions:
value comes second in global developed markets and third
in EAFE. Conversely, most growth investors have struggled
to generate positive performance in the same period.
However, the past year has been very different (Figure 37).
The factors that have worked well in equity markets in 2015
were Earnings Revisions, Forecast Growth and Momentum.
Value has underperformed, especially in the US—in fact,
the factor has been in reversal in 2015 as expensive stocks
have outperformed.
Figure 37: 2015 factor analysis for equity markets – best and worst contributors (to 30 Oct. 2015)
World (developed)
US
Europe
Japan
International (EAFE)
Best performing factors
Reversal
9.5%
Revisions
11.4%
Growth
8.3%
Small Cap
8.1%
Momentum
8.8%
F’cast Growth
9.1%
F’cast Growth
10.1%
F’cast Growth
7.8%
Certainty
5.9%
Small Cap
8.2%
Revisions
6.5%
Low Risk
Momentum
7.3%
Yield
5.1%
Certainty
7.6%
9.8%
Worst performing factors
Int’l Exposure
-3.5%
Value
-6.7%
Yield
-4.8%
Growth
Margins
-3.2%
Small Cap
-4.9%
Int’l Exposure
-4.0%
Int’l Exposure
-3.8%
Value
-2.8%
Historic Growth -2.8%
-12.5%
Yield
-9.4%
Historic Growth -10.7%
Int’l Exposure
-5.6%
Quality
Quality
-4.2%
-9.6%
Source: Deutsche Bank Quantitative Strategy Research. Data to 30 October 2015, based on sector-neutral long-short spreads (please see
Appendix A for factor definitions). Past performance is not a reliable indicator of future results.
Figure 38: Long-term factor analysis for equity markets – best and worst contributors last 15 years
World (developed)
US
Europe
Japan
International (EAFE)
Best performing factors
Reversal
12.4%
Value
8.7%
Reversal
10.5%
Value
11.5%
Value
8.4%
Small Cap
6.1%
Small Cap
6.4%
Reversal
5.7%
Reversal
12.6%
Yield
7.3%
Yield
9.5%
Yield
8.5%
Value
6.6%
Reversal
7.8%
Value
7.9%
Worst performing factors
F’cast Growth -2.4%
F’cast Growth
-5.3%
Historic Growth
-1.0%
Momentum
-4.6%
F’cast Growth
-2.1%
Certainty
-1.4%
Growth
-4.6%
F’cast Growth
-0.9%
Historic Growth
-4.5%
Certainty
-1.4%
Growth
-1.1%
Historic Growth
-3.8%
Growth
-0.2%
Margins
-4.1%
Historic Growth
-0.8%
Source: Deutsche Bank Quantitative Strategy Research. Data to 30 October 2015, based on sector-neutral long-short spreads (please see
Appendix A for factor definitions). Past performance is not a reliable indicator of future results.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 28
CROCI® Outlook 2016 | This time is different, or is it?
3.1 CROCI’s analysis of value and performance; avoiding value traps by adjusting for risk
Our analysis of the performance of Economic P/E (Figure
41 on page 31) shows that baskets of stocks with lower
Economic P/E significantly outperformed those with higher
Economic P/E over the past 15 years. Both the value tail
and the cheaper half of the market managed strong
outperformance. Performance improved progressively from
the more expensive to the cheaper deciles (only deciles 7
and 8 break the trend).
Figure 39: Characteristics of the cheapest and most
expensive tercile of CROCI’s coverage in the Dev Markets
Importantly, the relative outperformance of value was not
associated with an increase in risk. The volatility of returns
of the cheaper Economic P/E deciles was similar to those of
higher Economic P/E.
In 2015, markets were driven by speculation rather than by
fundamentals
Figure 41 shows how 2015 has been a particularly tough
year for deciles number 1, 2, 3 (Value) and very strong for
deciles 8, 9, and 10 (Expensive).
The fundamentals and valuation of the cheapest and most
expensive terciles in the global market are shown in Figure
39. It raises more questions over why investors rewarded
the most expensive part of the market in 2015.
Value is not in evidence; profitability is low; and financial
leverage is high. It is particularly difficult to understand why
an investor would buy a set of companies on 1.6x Capital
Invested when the associated cash return is below the cost
of capital (remember that a cost of capital business should
trade on 1x capital invested).
Cheapest
Tercile
Most Expensive
Tercile
EBITDA Margin
18.1%
16.7%
Capex / Sales
4.5%
6.4%
Depreciation / Sales
3.6%
5.1%
FCF / Sales
7.6%
5.4%
Sales growth
0.7%
0.7%
CROCI
10.7%
3.6%
EV / NCI
2.13x
1.60x
Accounting P/E
15.5x
25.5x
Economic P/E
21.3x
43.2x
Dividend Yield
2.4%
1.8%
FCF yield
5.6%
3.7%
Net Fin Liabs / Market Cap
21.7%
31.6%
Median
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and
CROCI. The table shows the median characteristics of the cheapest and
most expensive tercile of companies selected using Economic P/E from
CROCI’s coverage of the Developed Markets. Data as on 25 November
2015.
One possible explanation is that the market may have been
driven more by speculation around the future actions of
central banks than by fundamentals—an environment which
is more conducive to momentum strategies than to value
investments.
Still, investors should not lose heart. The performance of
style factors is cyclical—quality could stage a come-back if
global economic concerns (e.g. on China) were to spread
again but, at the same time, quality could suffer if central
banks flooded markets with more liquidity yet again.
Equally, the value factor could bounce back strongly if
markets were to realise that there is little room for
disappointment at current valuations (especially for the
‘stars’ of 2015). The key is not to chase investment styles
(especially after they have performed) and to focus on what
works in the long term instead and to remember that
ultimately there is no harm in holding good quality,
reasonably priced companies.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 29
CROCI® Outlook 2016 | This time is different, or is it?
Adjusting for value traps
A value-based investment process inherently risks exposure
to value traps—stocks that appear cheap on valuation
measures but whose share prices never recover to their
potential. Within the CROCI team, we believe that there are
two types of value trap. The first type results from a lack of
proper due diligence on a company’s fundamentals.
CROCI’s economic appraisal of companies has been at the
heart of our philosophy for nearly two decades.
Our dedicated team of analysts rigorously analyse
companies’ fundamentals and converts their reported
accounting data to economic metrics, by providing
consistent due diligence on companies. The benefit of this
approach can be seen from the analysis presented in Figure
41. The table shows that cheaper companies on Economic
P/Es have delivered better returns with lower levels of risk.
There is also a second type, however, which arises from
unsustainability of earnings over the long term and is much
more difficult to deal with. A company may seem cheap
based on its current earnings. But if those earnings were to
fall in the future, then the company may turn out to have
been actually expensive. We published a report in October
2015 (CROCI Focus, Value Traps—Adjusting Valuation for
Risk) where we explained our approach for dealing with this
risk—by incorporating risk into our Economic P/E ratio.
be influenced by systemic factors but over time reflect the
long-term earnings of companies. Similarly, volatility can
also be influenced by systemic factors. But ultimately it
reflects the differences in investors’ assessments of risk to
long-term earnings.
An example may help clarify this. Imagine two stocks that
are similar in every respect but have different level of
volatilities. Stock A has a volatility of 10% and the Stock B
has a volatility of 30%. If the share prices of these stocks
are also the same then the market is implying there is three
times more risk to long-term sustainable earnings of Stock
B than there is for Stock A.
Adjusting for volatility improves risk-adjusted return
Just as we did for Economic P/E, we have looked at the
performance of deciles selected from our coverage based
on their risk-adjusted Economic P/E. The results are
presented in Figure 40 below.
Compared to the standard Economic P/E, the performance
is slightly more uneven but both the cheapest decile and the
cheaper half of our coverage have outperformed the
broader market. The Sharpe ratio is significantly higher for
the cheapest decile of the risk-adjusted Economic P/E
compared to the conventional version (seeFigure 41).
Volatility of share prices reflects investors’ assessment of
risk at a company
Volatility may seem like a controversial choice for
measuring risk but the concept is sound. Share prices can
Figure 40: The risk-adjusted return (Sharpe Ratio) of the cheaper deciles improves significantly when volatility is included
in Economic P/E
Performance of the CROCI coverage of the MSCI World by Economic P/E decile (inc. volatility) between 01 January 2000 - 30 November 2015
Lowest Economic P/E (inc. vol.)
Deciles
Highest Economic P/E (inc. vol.)
1
2
3
4
5
6
7
8
9
10
Annualised net total return
13.5%
9.3%
9.4%
9.0%
7.7%
6.0%
6.5%
3.3%
3.9%
1.2%
Volatility
12.6%
13.4%
14.3%
14.5%
15.6%
16.1%
16.6%
17.7%
19.2%
21.6%
0.84
0.47
0.45
0.42
0.30
0.19
0.21
0.02
0.05
-0.08
Sharpe ratio
Source: Deustche Bank, CROCI, Datastream and Factset Research Systems. Data as on 11 December 2015.
Deciles are constucted from the CROCI coverage of the MSCI World Index. Annualised total return shows the compounded annual growth rate (CAGR) of
each Economic P/E decile between 01 Jan 2000 and 30 November 2015. Volatility shows the annualised standard deviations of daily log returns over this
period. Performance is historical and does not guarantee future results.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 30
CROCI® Outlook 2016 | This time is different, or is it?
Figure 41: The lowest Economic P/E decile has generated the best return
Performance of the CROCI coverage of the MSCI World by Economic P/E deciles: 01 January 2000 – 30 November 2015
Lowest Economic P/E
Deciles
Highest Economic P/E
1
2
3
4
5
6
7
8
9
10
2000
12.5%
14.7%
10.7%
11.0%
9.5%
-13.2%
-3.3%
-4.6%
-21.3%
-26.4%
2001
8.2%
1.3%
0.2%
-1.4%
-12.7%
-9.9%
-13.8%
-17.8%
-14.1%
-28.6%
2002
2.7%
-2.1%
-4.0%
-8.2%
-9.5%
-15.2%
-12.7%
-14.7%
-22.7%
-27.5%
2003
52.9%
52.0%
43.8%
31.4%
33.6%
27.5%
28.4%
39.8%
29.0%
49.1%
2004
32.1%
22.6%
25.3%
17.9%
20.0%
15.6%
16.1%
14.3%
9.7%
14.0%
2005
19.0%
10.6%
9.4%
7.4%
9.1%
6.9%
7.6%
10.6%
4.6%
8.2%
2006
28.8%
29.0%
30.0%
26.4%
22.5%
22.1%
25.4%
19.6%
18.2%
10.1%
2007
13.5%
9.7%
8.8%
10.2%
6.5%
8.6%
8.8%
7.9%
7.1%
11.7%
2008
-34.9%
-39.2%
-38.1%
-43.1%
-38.1%
-34.1%
-36.1%
-32.7%
-34.9%
-35.0%
2009
55.9%
45.9%
43.4%
45.2%
37.3%
41.1%
28.8%
32.8%
29.3%
33.6%
2010
13.0%
14.1%
14.7%
14.8%
16.7%
16.8%
18.0%
20.6%
16.9%
19.8%
2011
-2.4%
-7.9%
-4.7%
-8.2%
2.6%
-2.5%
-8.2%
-1.7%
-4.3%
-16.2%
2012
10.3%
11.9%
18.7%
13.5%
13.5%
10.8%
22.1%
19.7%
15.9%
18.4%
2013
33.3%
30.6%
31.8%
36.0%
27.7%
28.6%
26.2%
25.6%
28.2%
32.7%
2014
5.1%
4.3%
0.9%
4.2%
0.4%
10.6%
6.2%
7.9%
9.7%
-2.2%
2015 YTD
-1.2%
-2.6%
-3.5%
4.0%
-1.8%
0.7%
3.3%
8.7%
5.2%
4.5%
Annualised net total return
13.6%
10.1%
9.6%
7.9%
7.1%
5.5%
5.5%
6.9%
2.8%
1.3%
Volatility
16.8%
17.0%
16.3%
16.2%
15.4%
16.1%
14.7%
14.9%
16.1%
20.9%
Sharpe ratio
0.70
0.48
0.47
0.37
0.33
0.22
0.24
0.33
0.05
-0.03
Median EcPE (30 Nov 2015)
16.7
20.7
23.1
25.8
27.5
28.8
32.2
34.3
39.8
61.7
Source: Deutsche Bank, CROCI, Datastream and Factset Research Systems. Data as on 09 December 2015.
Deciles are constucted from the CROCI coverage of the MSCI World Index. Annualised total return shows the compounded annual growth rate (CAGR) of
each Economic P/E decile between 01 Jan 2000 and 30 November 2015. Volatility shows the annualised standard deviations of daily log returns over this
period. Performance is historical and does not guarantee future results.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 31
CROCI® Outlook 2016 | This time is different, or is it?
3.2 CROCI Sectors: capturing value both at the sector and the stock level
The CROCI Sectors strategy is a unique sector-rotation
strategy, seeking to capture value both at the sector and
stock levels. It does so by looking for the three cheapest
GICS sectors 8 and then choosing the ten most attractive
stocks in each, based on CROCI’s assessment of Real
Value.
Over the long term, CROCI Sectors has performed strongly,
thanks both to the sector and the stock selection
Since CROCI Sectors USD strategy was launched in March
2005, it has outperformed the MSCI World by an annualised
4.5%. This is the highest outperformance of any of the
concentrated strategies, and is the result of applying CROCI
valuations twice over to generate this ultra-concentrated
portfolio—30 stocks from more than 500. Of this
outperformance, 330bps came from sector allocation and
137bps from stock selection.
Since 2005, exposure to value has unsurprisingly been the
biggest contributor to the performance of the strategy.
Figure 42: Top and Bottom Five contributors to the
performance (31 March 2005 to 31 December 2014)
Top Five
Annualised
Contribution Bottom Five
Annualised
Contribution
Value
1.6%
Energy
-1.0%
Health Care
1.2%
Momentum
-1.0%
Financial Leverage
(negative exposure)
0.7%
Information Tech.
-0.3%
The worst stock selection came from IT (which negatively
contributed 7.2%). The top performing stocks in the sector
this year were expensive on CROCI’s metrics, and
benefited from the market’s desire to seek out growth
regardless of valuation9. (Indeed, the top performing stocks
in IT almost singlehandedly drove the whole of the US
market this
year.)
Specific value stocks also
underperformed substantially, thanks to widely discussed
market fears over business model sustainability. Within
Utilities, political reversals over nuclear generation in
Germany caused certain stock specific weaknesses.
Value as a style factor suffered in any case. As we have
discussed at the start of the section, this behaviour was
widespread in the current market environment. Investors
should be reassured, however, in the knowledge that the
Value is the strongest driver of performance over the longterm, as shown by Figure 42.
Figure 43: Brinson attribution of the performance of CROCI
Sectors strategy in 2015
Contribution to active return
Allocation
1.9%
Selection
-13.6%
Currency
0.8%
Source: CROCI, Deutsche Bank and MSCI Barra. Data as on 30
November 2015.
Figure 44: Performance of the CROCI Sectors strategy and
MSCI World Index
350
Rebased (March 2005 = 100)
Sector investing was once again an important theme in
2015. Significant differences in sector performances
emerged within the MSCI World: IT and Consumer
Discretionary outperformed the index by an average of
7.5%, whilst the commodity sectors lagged sharply.
Source: CROCI, Deutsche Bank and MSCI Barra. The table shows the
three best and worst contributors to the performance. The analysis is
derived from a multi-factor attribution of the CROCI Sectors Strategy using
MSCI Barra model. Data as on 30 September 2015.
2015 was a tough year for CROCI Sectors
Year to date 2015, the CROCI Sectors USD strategy was
11% behind the MSCI World index at the time of writing.
Sector allocation in fact, generated positive performance,
with a net contribution of 1.9%. The negative performance
was entirely generated by unfavourable stock selection.
This cost the strategy 13.6% in active returns.
300
250
200
150
100
50
05
06 07 08 09 10
CROCI Sectors Strategy
11
12
13 14 15
MSCI World
Source: CROCI, Deutsche Bank, MSCI through Bloomberg Finance L.P.
Data as on 14 December 2015. The chart shows performance of the
CROCI Sectors Strategy and the MSCI World Index priced in US
Dollars. Returns include reinvestment of dividends.
8
CROCI Sectors Strategy invests in three cheapest sectors based on their
median trailing twelve months Economic P/E. It then selects ten stocks with
lowest trailing twelve months Economic P/E in each sector.
9
See factor analysis on page 28
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 32
CROCI® Outlook 2016 | This time is different, or is it?
3.3 Dividends: the importance of a dividend yield approach in a low growth environment
The dearth of economic growth combined with richly valued
equity markets means that dividends should make up a
large proportion of total shareholder returns. Investors are
right to question the use of cash by management, but in
practice we may see a continuation of the trend of the past
few decades, where almost half of total returns have come
from dividends.
attractive real-earnings based valuations. Only a healthy
and sustained level of earnings can support a reliable
dividend stream, after all. But the reality is somewhat
different. The overlap between picking the 50 cheapest
Economic P/E companies and the 50 highest dividend
yielders from our coverage of MSCI World dividend paying
stocks is only 12%
Developed markets remain in the low single digits when it
comes to GDP growth, despite the unprecedented
economic stimulus let loose by central banks. It is also clear
from Figure 45 that US real earnings growth has historically
been below GDP.
Investor demand for dividends has reduced the overlap
between Real Value and yield. Fewer than 40 stocks (6% of
CROCI’s DM universe) appear in both the cheapest quartile
and the highest yielding quartile.
Figure 45: GDP vs real earnings growth since the 1930s
GDP
Growth
Real Earnings
growth
Earnings
less GDP
growth
1930s
2.7
-0.3
-3.0
1940s
5.6
3.8
-1.7
1950s
3.5
0.5
-3.0
1960s
4.2
2.3
-1.9
1970s
3.2
2.6
-0.6
1980s
3.2
-0.9
-4.1
1990s
3.4
6.1
2.7
2000s (up to 2010)
1.6
0.3
-1.3
Compounded 1930 – 2010
3.4
2.0
-1.4
Compounded 1980 – 2010
2.7
2.4
-0.3
CROCI’s approach to a dividend yield strategy
A value strategy based on dividends needs to connect the
operating side of a company and its financing side. A
dividend yield strategy taking only dividends into
consideration is potentially misleading. It hides the potential
risk to the sustainability of the dividends. Investors should
be aware of the risks to dividends posed by low levels of
profitability, high financial gearing or external shocks.
CROCI’s approach aims to select higher dividend-yielding
stocks that trade on low Economic PE ratios, while also
removing the risks associated with high financial gearing,
low profitability and volatility. To achieve this, four elements
are brought into play:


Source: Deutsche Bank, Shiller. Data as of September 2011
We have already highlighted our concerns about low
corporate revenue growth in Section 1. Against a backdrop
of low real GDP growth and low inflation, it is difficult to see
how earnings growth can pick up materially in the short
term.

Combining dividend yield with valuation

The difficulty with the highest dividend-yielding stocks is that
they can often have meaningful associated operational
problems10. A high yield portfolio today typically has lower
profitability and higher financial gearing. However, the risks
can be controlled by focusing on companies with a
reasonable pay-out, which we analyse using CROCI
metrics.
Based on corporate finance theory, investors might expect
to see an overlap between attractive dividend yields and
10
See CROCI Focus The Case For Dividends, 18th May 2012
Dividend Yield: must be greater than the market
median
CROCI cash returns: we remove companies with
low cash returns. This seeks to reduce operational
risk; if a company cannot generate a return on its
capital, it is unlikely to be able to sustain a dividend.
Financial Leverage: we remove companies that
have high financial leverage, looking at both onand off-balance sheet liabilities. This seeks to
reduce financial risk. Leverage may not normally be
a problem, but in a crisis situation it could endanger
dividends.
Volatility: we remove companies with high share
price volatility. Volatility higher than the market’s
suggests fears around the sustainable level of longterm profitability. With this, we seek to reduce
market risk. While a rise in volatility may be
associated with positive dynamics, we take a more
cautious approach.
The good news is that adjusting to capture cheap economic
valuation and dividend sustainability historically has not
compromised the dividend yield in aggregate. When we
compare the CROCI Global Dividends strategy yield to
MSCI World High Dividend Yield (HDY) index, the dividend
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 33
CROCI® Outlook 2016 | This time is different, or is it?
yields have been very closely correlated since 2002, as
shown below.
Figure 46: CROCI Global Dividends 12m Trailing Dividend
Yield is in line with the MSCI World High Dividend Yield
index
Sectors that are traditionally perceived as dividend sectors,
such as Utilities and Telecoms, are currently underweighted
compared to our dividend benchmark, the MSCI World HDY
index. At the same time, Industrials and IT are overweight
thanks to their interesting relative valuation, low financial
leverage and appealing cash returns.
Performance of CROCI Global Dividends
7%
Section 3.1 has already touched on the difficulties faced by
Value as a factor over the course of 2015; Yield fared just
as badly. Although both suffered at the hands of the
momentum market last year, over the long run both these
factors have been amongst the top performers both globally
and regionally.
Live Date
6%
5%
4%
3%
2%
1%
0%
02
03
04
05
06
07
08
09
10
11
12
13
14
CROCI Global Dividends
MSCI World High Dividend Yield Net
MSCI World Net USD
Source: Deutsche Bank, as of 30th September 2015.
All pro-forma performance data is simulated and was calculated by means
of retroactive application of the model. Past performance is not a reliable
indicator of future results.
Sector & regional characteristics of CROCI Global
Dividends
Because of its twin focus on the sustainability of dividends
and on valuation, CROCI Global Dividends has tended to
have markedly different sector exposures compared to
conventional High Dividend approaches.
Figure 47: Sector weights of CROCI Global Dividends vs
MSCI World HDY index
CROCI Global
Dividends
MSCI World HDY
index
Consumer Discretionary
20%
7%
Consumer Staples
4%
19%
Energy
2%
13%
Financials
0%
10%
Health Care
10%
19%
Industrials
34%
7%
Information Technology
22%
5%
Materials
6%
6%
Telecommunication Services
0%
6%
Utilities
2%
7%
At the time of writing, the CROCI Global Dividends USD
strategy had outperformed its benchmark—MSCI World
HDY index—by 10bps over the past 12 months. The
headwinds are more apparent when the strategy is
compared to broader MSCI World, which it underperformed
by 350bps. Over the past decade, however, this approach
would have outperformed both benchmarks comfortably
based on historical simulations, which backs up the
conclusions from our factor analysis.
Figure 48: Performance of CROCI Global Div USD strategy
Annualised
1yr
3yr
5yr
10yr
CROCI Global Dividends USD
-4.3%
16.2%
14.9%
11.5%
MSCI World HDY index
-4.4%
15.3%
13.4%
6.0%
MSCI World
-0.7%
19.0%
14.2%
6.6%
Excess return vs MSCI World HDY
0.1%
0.9%
1.5%
5.5%
Source: Deutsche Bank, Bloomberg Finance LP. Datastream. Data as of
30th November 2015. CROCI Global Dividends USD Strategy has a live
track record since 15 March 2012. Performance before this date is
simulated and is derived from retroactive application of the strategy model.
Source: Deutsche Bank, MSCI Inc. Data as of 30 November 2015
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 34
CROCI® Outlook 2016 | This time is different, or is it?
3.4 The merits of a value-weighted approach
This approach is based on using all companies covered by
CROCI and instead of market cap which is conventionally
used to calculate stock weights, the approach uses growth
adjusted Real Equity Economic Earnings.
Market-cap weighting invariably skews investors towards
more expensive stocks. The Real Earnings Weighted
(REW) Index, by comparison uses CROCI’s Real Economic
Earnings to calculate stock weights. Compared to a marketcap weighted benchmark index, the REW index tends to
underweight expensive stocks and overweight cheaper
stocks.
Figure 49: Performance of CROCI REW Indices relative to
their benchmarks
Annualised Returns
1 Year
3 Years
5 Years
REW International
1.7%
0.6%
0.9%
World
0.8%
1.3%
1.1%
US
-1.5%
0.4%
0.1%
Europe
1.5%
0.7%
1.1%
Japan
2.1%
0.6%
1.5%
Source: CROCI, Deutsche Bank. Data as on 30 November 2015. The table
shows performance of the Real Earnings Weighted Indices relative to the
following benchmarks: International - MSCI EAFE; World - MSCI World;
US - S&P 500; Europe - MSCI Europe; and Japan - TOPIX 100. The
indices have a live track record since 30 September 2014. Performance
before this date is simulated. The returns include reinvestment of dividends
and are before any fees.
Figure 50: Trailing 12m Economic P/E of REW World index
27
Trailing 12m Economic P/E
In a context characterised by expensive markets—where
value is expensive compared to its historical levels—it is
worth considering the merits of a value-weighted approach
as described in ‘The CROCI Approach to Fundamental
Weighting’ (November 2014).
23
19
15
11
05
06
07
08
09
10
11
12
13
14
15
Source: CROCI, Deutsche Bank. Data as on 30 Nov 2015. The chart
shows trailing twelve months Economic P/E of the CROCI REW World
Index.
Consumer Discretionary and Energy appear expensive;
value in IT
The weight of individual sectors in the CROCI REW World
Index has been quite stable over time. However, since 2009
there has been a steady increase in the weight of the IT
sector. This shows Economic Earnings of IT has increased
compared to other sectors. The REW Index is overweight IT
by 4.1% which suggests value in the sector.
Consumer Discretionary is another sector whose relative
earnings have increased since 2009. However, despite the
growth in earnings the overall sector is still quite expensive.
Energy is expensive as the fall in price has been less than
the fall in earnings.
Figure 51: Active exposure of CROCI REW World Index
relative to the MSCI World ex Financials Index
Active Weight
Valuations are close to the highest in over a decade
The merits of using a value-weighted approach reside in the
fact that investors get exposure to the broader market, but
pay a lower price. Global equities are currently trading on a
Economic P/E of 29.9x, whereas the CROCI REW World
index is on 23.8x. However, the investor is still paying a
hefty price compared to historical averages. Excluding
2015, this is the highest level at which the index has traded
in over a decade.
Consumer Discretionary
-2.2%
Consumer Staples
0.7%
Energy
-1.8%
Health Care
0.6%
Industrials
-0.4%
Information Technology
4.1%
Materials
0.1%
Telecommunication Services
-0.7%
Utilities
-0.4%
Source: Bloomberg Finance L.P., Deutsche Bank and CROCI. The table
shows active exposure of the CROCI REW World Index relative to the
MSCI World ex Financials Index. Data as on 30 November 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 35
CROCI® Outlook 2016 | This time is different, or is it?
3.5 CROCI Flexible Allocation – introducing the concept of risk Adjusted return to define allocation between
cash and equities
Long-term value investors should be patient by nature, and
do not necessarily need to be fully invested in equities all
the time. They will monitor the market on a regular basis in
search of attractive opportunities. In the meantime, they
may want to be invested in liquid assets to ensure that they
can capture the opportunity when it arises.
Figure 52: CROCI Flexible Allocation has outperformed the
MSCI World Index with less than half of its volatility
3000
Return: 8.7% p.a.
Volatility: 6.6%
2500
2000
Level
Our investment themes have historically been geared
towards fully-invested equity investors. We have, in the
previous pages, taken the reader through a lengthy
discussion of the various risks we see in the economy along
with its rich valuation. Such a context has made us
challenge our historical premise of full equity allocation.
1500
1000
Return: 7.6% p.a.
Volatility: 12.6%
500
04
06
08
10
12
CROCI Flexible Allocation
CROCI Flexible Allocation offers a solution
14
MSCI World
We recently published a report 11 in which we described a
bottom-up approach that allocates capital between cash
and equities. The approach—CROCI Flexible Allocation—
uses a measure of risk-adjusted expected return to
determine the allocation between cash and equities.
Source: Deutsche Bank, Bloomberg, as of 10th November 2015.
The allocation model is simple: it starts with 100 units of
cash. Then, for each company that passes a predefined
threshold (defined by the risk adjusted expected rate of
return), the strategy allocates one unit of cash to buy
equities. If the risk-reward relationship is favourable, the
strategy can be fully invested in equities. However, if risks
are high or value is scarce, then the strategy systematically
divests from equities and in extreme situations, can be fully
invested in cash.
CROCI Flexible Allocation currently suggest a low allocation
to equities
There are several risk-return profiles that can be used to
define a Flexible Allocation approach. The profile illustrated
here is defined using an investor seeking a return of 5.4%
with volatility no higher than 19% 12 , or a proportional
equivalent (return of 2.7% with volatility lower than 9.5%).
We ran a simulation using our Flexible Allocation approach
and the results show that between March 2004 and October
2015, the Flexible Allocation approach would have delivered
a long-term return broadly in line with the MSCI World with
half the level of volatility.
The approach lagged in periods when market returns were
strong but it avoided large drawdowns as well, thereby
providing a more defensive equity exposure.
11
CROCI Focus, CROCI Flexible Allocation: Allocating Between Cash and
Equities, October 2016
12
Long-term historical equity market volatility
At the time of writing this report, the equity allocation of
CROCI Flexible Allocation is close to 5%, well below its
historical average of 69%.
Figure 53: Equity allocation of CROCI Flexible Allocation
100%
80%
Equity Allocation
CROCI Flexible Allocation provides a defensive way to gain
equity exposure
All pro-forma performance data is simulated and was calculated by
means of retroactive application of the model. CROCI Flexible
Allocation methodology can be implemented in a number of ways. The
analysis presented in this chart uses one possible approach. Past
performance is not a reliable indicator of future results.
60%
40%
20%
Only very few attractive riskreturn-profiles available
0%
04
06
08
10
12
14
Source: Deutsche Bank, Bloomberg, as of 10th November 2015.
All pro-forma performance data is simulated and was calculated by
means of retroactive application of the model. CROCI Flexible
Allocation methodology can be implemented in a number of ways. The
analysis presented in this chart uses one possible approach Past
performance is not a reliable indicator of future results.
Figure 53 shows how the equity allocation has changed
over the past decade. The strategy was fully invested in
equities in 2006 and then again in 2011. However, since
then, equity exposure has fallen and is now at its lowest
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 36
CROCI® Outlook 2016 | This time is different, or is it?
level since 2010. The difference between now and 2008 is
that the current low level of equity allocation is due to
unattractive valuation, rather than risk that was too high in
2008.
Figure 54: Simulated risk / return characteristics of CROCI
Flexible Allocation with different hurdle rates (Mar 2004 –
Oct 2015)
Sharpe
Ratio
(1.54%)
Maximal
drawdown
Average
equity
allocatio
n
Current
equity
allocatio
n
Investors looking for yield need to take additional risk
Hurdle
rates
CAGR
Ann.
Monthly
Volatility
Over the past few years, there has been an increasing trend
of investors considering investments in equities because of
the scarcity of yield offered by other asset classes.
However, one needs to look no further than the current
stress in the high yield market and the repercussions of the
closure of a high-profile ‘junk fund’ to understand the
dangers of looking for yield without considering the
associated risks.
0.18
10.1%
10.1%
0.85
-35.7%
96%
100%
0.20
9.6%
9.8%
0.82
-33.0%
93%
98%
0.22
9.1%
9.5%
0.81
-32.1%
91%
61%
0.24
9.3%
8.6%
0.92
-27.8%
86%
34%
0.26
9.8%
7.8%
1.07
-21.3%
79%
20%
0.28
8.7%
6.6%
1.1
-15.0%
66%
12%
0.30
8.1%
5.5%
1.21
-11.3%
51%
7%
0.32
6.9%
4.4%
1.23
-9.0%
39%
3%
0.34
5.7%
3.5%
1.19
-7.7%
29%
3%
0.36
5.1%
2.9%
1.24
-5.7%
22%
2%
Investors considering equities frequently used to shun the
asset class because of its risks. Current risks may be
temporarily lower, but valuation is rich, which leaves
investors potentially exposed to a future rise in risk.
The following table looks at different risk profiles and we
note that someone whose portfolio has historically allocated
61% to equities would today need to take 290bps of
additional risk to be invested at the same levels. Historically
this level of risk would have meant an allocation of 91% and
would have captured 32.1% of the fall in 2008.
Source: CROCI, Deutsche Bank. Data as on 4th November 2015. Period:
22 March 2004 till 30 October 2015. The data in this table is simulated and
is derived from a retroactive application of CROCI Flexible Allocation
model
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 37
CROCI® Outlook 2016 | This time is different, or is it?
3.6 DB Official Currency Views
Over the past few years there has been significant turmoil in
the foreign exchange markets. This has been exacerbated
by the heavy pressure on the commodity space, as oil and
other commodity prices have plunged over the past couple
of years. Temporary victors in these currency wars have
seen short-term assistance to their corporate sectors. In
2013, for instance, Japan’s sales growth was substantially
buoyed by the weakening yen, whilst European and US
growth faltered.
Many of CROCI’s investment approaches are global in
nature. Because of the importance of currency to global
equity returns, we have provided a review of Deutsche
Bank’s official currency outlook. We have used Deutsche
Bank’s Foreign Exchange Research 13 to provide some
expert guidance on potential dynamics. The comments
below exclusively reflect their views.
The comments below reflect the views of Deutsche Bank
Markets Research Foreign Exchange team, and are quoted
directly from FX Forecasts and Valuations: Plenty of run left
in the USD upswing, 17 December 2015. The Deutsche
Bank Markets Research Foreign Exchange team is a team
within the Research function of Deutsche Bank Corporate
Banking and & Securities Division, with which the CROCI
Team of Deutsche Bank AWM Division has no affiliation.
Yen:
The USD/JPY is likely to rise to around 128 in 2016 in line
with US rate hikes, but such a level could possibly be seen
as a ceiling. The USD/JPY has already risen more than
60% in the current cycle. Softening of USD buying
momentum by pension funds and other Japanese investors,
political pressure to restrain yen depreciation in
US/Japanese election years, risk market fragility due to US
rate hikes, fading impact of BoJ policy surprise, and
Japanese current account surplus growth are likely to be
recognized as factors capping the upside.
Sterling:
The sterling uptrend has reached maturity. Valuations are
stretched, with the cross the most expensive against the
dollar among all the majors. UK growth continues above
potential but has slowed noticeably from its peak in Q4 last
year. Fiscal tightening, set to pick-up again sharply next
year, should prove another headwind... We forecast a steep
medium term fall in GBP/USD partly as a result of our
bearish EUR/USD view, but also due to a fall in the TWI.
Swiss franc:
Euro:
EUR/USD experienced an aggressive short-covering rally
following a less dovish than expected ECB meeting, but the
medium-term drivers behind our forecasts remain
unchanged: a broad dollar up-move that is only 2/3rds
complete, an impending Fed hiking cycle that is very
dovishly priced, and an ECB reaction function where the
risks are still skewed towards more, rather than less easing
on the back of persistently weak inflation pressures and a
large negative output gap... From a valuation perspective
EUR/USD remains only moderately under-valued versus
our standard PPP/BEER and FEER metrics, suggesting
plenty of scope to fall towards typical 20% valuation
undershoot below 90 cents into 2017.
CHF remains highly overvalued on all three valuation
metrics (PPP, BEER and FEER), but external risks and a
reluctance from the SNB to cut rates further mean that
current account recycling could pause. We remain medium
term franc bears, but would prefer to wait for Fed and China
risks to blow over before re-entering shorts.
Brazilian real:
Little has changed on Brazil’s much battered fundamentals.
The unraveling of inflation, collapse in activity, fiscal
deterioration and continuing political gridlock continue to
challenge the economic backdrop and the possibility of a
sovereign downgrade and a full-blown institutional crisis
suggest that the worst might be yet to come... Given the
rout in commodities and fundamental we expect the
currency to settle in the 4.00-4.20 range in the next couple
of months, possibly visiting weaker levels as risk-premium
builds up.
13
Source: DB Research Global Markets, FX Forecasts and Valuations:
Plenty of run left in the USD upswing, 17 December 2015
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 38
CROCI® Outlook 2016 | This time is different, or is it?
Markets and Sectors
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 39
CROCI® Outlook 2016 | This time is different, or is it?
Figure 55: Global Sector Valuation 2016
EV/NCI
Consumer Discretionary
(13.3% weight in MSCI World)
Consumer Staples
(10.4%)
Energy
(6.2%)
Financials*
(20.7%)
Health Care
(13.5%)
Industrials
(10.6%)
Information Technology
(14.5%)
Materials
(4.3%)
Telecoms
(3.4%)
Utilities
(3.1%)
COC
Banks COE
CROCI
Ec PE
Current
5Y
10Y
20Y
1.84x
1.71x
1.57x
1.54x
7.2%
6.7%
6.1%
5.9%
25.4x
27.3x
30.0x
31.3x
Current
5Y
10Y
20Y
3.20x
2.91x
2.69x
2.65x
11.9%
11.9%
11.7%
11.2%
26.9x
26.9x
27.2x
28.5x
Current
5Y
10Y
20Y
0.71x
0.84x
1.12x
1.23x
1.8%
4.3%
6.1%
5.8%
39.4x
16.5x
11.7x
12.3x
Current
5Y
10Y
19Y
1.12x
1.25x
1.62x
2.14x
11.2%
10.3%
10.5%
13.3%
10.0x
10.9x
10.7x
8.4x
Current
5Y
10Y
20Y
3.34x
2.78x
2.56x
2.95x
15.8%
14.7%
14.6%
14.0%
21.1x
22.8x
22.8x
23.9x
Current
5Y
10Y
20Y
1.74x
1.71x
1.71x
1.66x
7.4%
7.7%
7.7%
6.7%
23.6x
22.6x
22.5x
25.9x
Current
5Y
10Y
20Y
3.29x
3.01x
2.87x
3.18x
15.5%
15.3%
14.1%
11.8%
21.3x
21.5x
23.3x
27.8x
Current
5Y
10Y
20Y
1.10x
1.28x
1.38x
1.25x
4.2%
5.5%
6.6%
5.7%
26.2x
20.0x
16.7x
19.2x
Current
5Y
10Y
20Y
1.18x
1.16x
1.21x
1.47x
4.1%
4.3%
5.0%
5.5%
28.9x
27.3x
23.8x
21.5x
Current
5Y
10Y
20Y
0.86x
0.87x
0.92x
0.86x
3.3%
3.5%
3.8%
3.8%
26.1x
24.5x
22.8x
22.5x
5.01%
7.15%
Glossary:
EV/NCI:
An economically adjusted measure of the price-to-book. Similar to Tobin’s Q, this is a ratio of market value of assets to replacement
value of assets. An EV/NCI greater than 1 implies that the market expects value creation (in equilibrium, EV/NCI = CROCI/COC).
* Financials:
The Financial sector excludes Insurance, but includes Banks and Diversified Financials. Note that the PE of Financials is not
comparable to Industrials as we estimate that they have a different Cost of Equity due to the higher leverage.
Numbers in brackets are risk adjusted Economic PE.
Source: Deutsche Bank. Data as on 21 December 2015
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 40
CROCI® Outlook 2016 | This time is different, or is it?
Figure 56: Regional Sector Valuation
2016
US
Europe
Japan
A-Pac
GEMs
Value
Consumer Discretionary
EV/NCI
CROCI
Ec PE
2.73
10.3%
26.6
1.68
6.8%
24.8
0.85
4.4%
19.2
0.90
5.4%
16.7
0.92
5.3%
17.4
A-Pac
Cons. Staples
EV/NCI
CROCI
Ec PE
3.38
12.3%
27.5
3.53
12.3%
28.7
1.86
7.6%
24.5
2.13
7.0%
30.2
3.44
12.7%
27.1
Japan
Energy
EV/NCI
CROCI
Ec PE‡
0.95
2.3%
42.0
0.66
1.7%
38.7
0.59
1.6%
37.5
0.74
2.5%
29.8
0.57
1.3%
45.6
A-Pac
Financials*
P/B
Inf. Adj. ROC
PE
PE (risk adj)†
1.35
11.4%
11.8
16.8
1.04
8.8%
11.9
17.0
0.80
8.2%
9.7
13.8
1.05
14.6%
7.2
10.3
0.89
14.5%
6.1
8.7
GEMs
Health Care
EV/NCI
CROCI
Ec PE
3.88
19.4%
19.9
2.96
13.8%
21.5
1.51
6.1%
24.6
4.36
17.3%
25.2
1.61
7.6%
21.2
US
Industrials
EV/NCI
CROCI
Ec PE
2.49
10.1%
24.5
1.80
7.3%
24.6
1.02
4.5%
22.8
1.17
4.3%
27.2
1.18
4.3%
27.5
Japan
Information Technology
EV/NCI
CROCI
Ec PE
5.04
24.5%
20.6
3.43
14.2%
24.2
0.95
3.9%
24.4
1.52
8.1%
18.8
1.52
8.1%
18.8
A-Pac
Materials
EV/NCI
CROCI
Ec PE
1.63
7.1%
23.0
1.09
4.2%
25.8
0.64
2.1%
29.9
0.95
3.6%
26.6
0.82
2.3%
35.7
US
Telecoms
EV/NCI
CROCI
Ec PE
1.27
4.5%
28.5
1.32
4.1%
32.4
0.96
2.8%
33.8
1.09
2.8%
39.4
1.05
3.1%
33.7
US
Utilities
EV/NCI
CROCI
Ec PE
0.94
3.4%
27.2
0.92
3.7%
24.9
0.75
1.5%
51.3
0.75
4.5%
16.7
0.59
3.5%
16.7
A-Pac
Source: Deutsche Bank. Data as on 21 December 2015
* Financials: Asia Pacific Financials primarily represents Chinese and Australian Banks; GEMs Financials primarily represents Chinese and South African
banks.
† Reflects accounting PE adjusted for relative differential in cost of capital.
‡ Japan Energy Sector consists of one company – JX Holdings
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 41
CROCI® Outlook 2016 | This time is different, or is it?
Figure 57: Regional Valuations
USA
Europe
Japan
GEMs
2015E
2016E
2017E
-4.5%
3.6%
5.0%
CROCI
8.7%
9.0%
9.6%
EV/FCF
24.9
21.2
18.2
Economic PE
29.1
26.7
23.7
Accounting PE
19.7
18.1
16.4
Sales Growth
Sales Growth
-0.7%
2.0%
4.5%
CROCI
5.3%
5.7%
6.2%
EV/FCF
28.2
22.9
19.6
Economic PE
30.3
27.6
24.6
Accounting PE
18.4
16.8
14.8
Sales Growth
0.2%
2.0%
2.6%
CROCI
3.1%
3.2%
3.2%
EV/FCF
35.6
28.1
24.9
Economic PE
32.8
29.3
28.5
Accounting PE
15.0
13.9
13.0
Sales Growth
-14.3%
-0.8%
5.0%
CROCI
3.6%
3.2%
3.8%
EV/FCF
32.2
23.4
17.9
Economic PE
25.8
28.0
23.1
Accounting PE
14.2
14.0
12.5
Source: Deutsche Bank. Data as on 23 December 2015
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 42
CROCI® Outlook 2016 | This time is different, or is it?
Figure 58: Benchmark Indices Valuation
Acct.
PE
Ec.
PE
Div.
Yield
FCF
Yield
EV/NCI
CROCI
CROCI
2016E
2016E
2016E
2016E
2016E
2016E
5YA
MSCI The World Index
16.8
27.5
2.7%
4.5%
1.6
6.0%
6.8%
DJ Global Titans
15.0
25.5
3.5%
5.5%
1.7
6.5%
S&P 500
17.8
26.4
2.3%
4.8%
2.4
9.1%
NASDAQ-100 Index
19.3
21.2
1.4%
5.8%
4.8
SOX Semiconductor
15.5
18.0
2.8%
7.1%
2.3
DJ Industrial Average
16.4
24.4
3.0%
5.9%
TOPIX 100
13.7
28.7
2.2%
STOXX 600
17.3
27.9
Euro STOXX
16.7
Germany DAX
14.3
France CAC 40
2016
Earnings
Growth
Market
Cap/EV
Implied 2007-16E 2007-16E
2016E
CROCI
NCI
Growth
Benchmarks
8.3%
17.7%
-9.9%
80.6%
7.5%
8.3%
14.8%
-23.2%
91.2%
9.5%
12.0%
32.3%
20.5%
86.3%
22.6%
22.2%
24.0%
85.1%
110.3%
102.8%
13.1%
15.4%
11.8%
77.6%
62.8%
110.1%
2.4
10.0%
11.1%
12.2%
29.1%
9.9%
96.2%
3.5%
1.0
3.3%
3.1%
4.8%
48.4%
-20.3%
78.9%
3.4%
4.3%
1.6
5.7%
6.2%
7.9%
30.1%
-15.5%
72.3%
29.7
3.1%
4.1%
1.5
4.9%
5.1%
7.4%
19.1%
-17.8%
67.4%
25.2
2.7%
4.0%
1.4
5.6%
5.4%
7.1%
23.7%
11.9%
61.7%
15.4
30.6
3.3%
4.0%
1.3
4.1%
4.7%
6.3%
15.3%
-34.4%
72.0%
FTSE 100
17.5
28.0
4.2%
4.4%
1.6
5.6%
6.8%
7.9%
49.9%
-25.8%
70.1%
Switzerland SMI
18.3
22.0
3.3%
5.1%
2.6
11.9%
12.0%
13.1%
16.0%
-0.6%
93.9%
South Africa JSE Top 40
19.0
22.9
3.0%
5.3%
1.2
5.2%
7.7%
6.0%
86.2%
-36.8%
97.1%
Korea KOSPI 100
8.4
15.1
2.0%
7.2%
0.6
3.8%
4.5%
2.9%
55.3%
5.4%
82.5%
18.0
25.2
1.9%
4.8%
1.8
7.0%
8.3%
8.8%
98.6%
-7.9%
70.8%
3.5
-201.0
8.1%
0.9%
0.2
-0.1%
1.2%
1.1%
80.3%
-103.9%
62.4%
China
18.5
26.9
2.5%
3.2%
1.0
3.8%
5.5%
5.1%
129.2%
-33.7%
71.2%
MSCI Emerging Markets
14.0
28.1
2.7%
4.2%
0.9
3.2%
4.9%
4.5%
36.3%
-49.9%
78.2%
Mexico IPC
Russia MICEX
Source: Deutsche Bank: represents a bottom up aggregation of the CROCI coverage of the stated benchmark. Data as on 21 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are
subject to risks and uncertainties that may cause actual results to differ materially. See page 2 for important
information.
Deutsche Bank AG 43
=
Net Capital Invested*
30000000
14%
9.0%
25000000
Net Capital Invested
8.0%
CROCI %
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
2%
0%
10000000
CROCI ex Goodwill
99
01
03
05
CROCI cum Goodwill
07
09
COC
11
13
15E 17E
89
Implied LT CROCI
97
99
GW
01
03
05
07
09
11
Growth in Infl. Adj. NCI
200000
-8%
0
13 15E 17E
89
18.0%
0.80x
16.0%
0.70x
14.0%
0.50x
10.0%
0.40x
8.0%
0.30x
6.0%
4.0%
0.20x
2.0%
0.10x
0.0%
03
95
97
99
01
03
05
07
09
11
13
15E 17E
Implied Long Term Earnings
800000
700000
600000
2.5x
2.0x
1.5x
500000
400000
300000
200000
100000
1.0x
0
0.5x
-100000
0.00x
01
93
Economic Profit & Implied EP ex Goodwill
3.0x
0.60x
12.0%
91
Real Economic Earnings (in today's money)
Organic Growth in NCI
3.5x
EV / NCI and CROCI / COC
0.90x
Sales / GCI
Cash Flow Margins
95
600000
-6%
Value & Returns ex Goodwill
20.0%
91 93 95 97 99
CROCI Cash Flow Margin
93
Infl. Adj. NCI ex GW
CROCI Drivers
89
91
800000
400000
-4%
Economic Profit
97
1000000
-2%
0
95
1200000
4%
15000000
0.0%
93
1400000
6%
5000000
91
1600000
10%
8%
20000000
1.0%
89
12%
Growth
10.0%
Economic Earnings & Implied Economic Earnings*
1800000
Economic Earnings
x
CROCI cum and ex Goodwill & Implied CROCI
0.0x
05 07 09 11 13 15E 17E
Sales / Gross Capital Invested (RHS)
-200000
89
91
93
95
EV/NCI range
97
99
01
EV/NCI spot
03
05
07
09
EV/NCI average
11
13 15E 17E
CROCI / COC
89 91 93
Economic Profit (EP)
95 97 99
Implied EP
01 03 05 07 09
11
13 15E 17E
Implied EP (3 Months Ago)
Implied EP (spot)
Deutsche Bank AG 44
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Enterprise Value (USD bn)
9117
11122
14625
17664
15817
14723
14963
17572
19468
22318
27370
25253
22121
25111
27274
28181
31200
34097
34291
32803
32163
Market Cap (USD bn)
7377
9212
12483
14893
12701
11017
11247
13809
15669
18249
22620
19325
16109
19184
20909
21472
24552
27306
27614
26330
26311
EV/NCI Ex. GW
1.59x
1.75x
2.08x
2.31x
1.95x
1.62x
1.48x
1.61x
1.70x
1.74x
1.86x
1.66x
1.34x
1.43x
1.46x
1.43x
1.52x
1.72x
1.75x
1.63x
1.56x
Economic PE
27.4x
35.2x
36.8x
33.2x
31.9x
29.6x
24.2x
21.7x
19.6x
21.4x
23.8x
20.9x
23.5x
20.1x
19.2x
21.4x
23.7x
24.7x
30.3x
27.3x
24.2x
Accounting PE
22.4x
27.1x
31.0x
27.2x
28.2x
21.5x
16.7x
15.3x
15.2x
15.5x
16.6x
15.4x
15.5x
13.1x
12.8x
13.6x
15.3x
17.0x
18.8x
16.7x
15.1x
Cost of Capital
4.89%
4.82%
4.63%
4.65%
5.06%
5.21%
5.24%
5.10%
5.05%
5.00%
4.82%
5.18%
5.48%
5.45%
5.45%
5.35%
5.20%
5.07%
5.01%
5.01%
5.01%
CROCI Ex. GW
5.8%
5.0%
5.7%
7.0%
6.1%
5.5%
6.1%
7.4%
8.7%
8.1%
7.8%
7.9%
5.7%
7.1%
7.6%
6.7%
6.4%
7.0%
5.8%
6.0%
6.4%
Implied CROCI
7.8%
8.4%
9.6%
10.7%
9.9%
8.4%
7.8%
8.2%
8.6%
8.7%
9.0%
8.6%
7.4%
7.8%
8.0%
7.6%
7.9%
8.7%
8.8%
8.2%
7.8%
Implied Economic Earnings/ Economic Earnings
134%
170%
170%
154%
161%
154%
127%
111%
99%
107%
115%
108%
129%
110%
105%
115%
123%
125%
152%
137%
121%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of companies in CROCI’s global coverage. Data in USD billion and is as on 16 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are subject to risks and uncertainties that
may cause actual results to differ materially. See page 2 for important information.
CROCI® Outlook 2016 | This time is different, or is it?
Figure 59: Global Equities CROCI
x
CROCI cum and ex Goodwill & Implied CROCI
=
Net Capital Invested*
14.0%
12000000
Economic Earnings & Implied Economic Earnings*
1000000
14%
900000
12%
12.0%
10000000
800000
6.0%
4.0%
6%
4%
4000000
2.0%
0.0%
0
93
95
97
CROCI ex Goodwill
99
01
03
05
CROCI cum Goodwill
07
09
COC
11
13
15E 17E
89
Implied LT CROCI
93
95
97
99
GW
01
03
05
07
09
11
Growth in Infl. Adj. NCI
4.5x
0.90x
4.0x
0.80x
0.60x
0.50x
10.0%
0.40x
Sales / GCI
0.70x
15.0%
0.30x
5.0%
0.20x
0.0%
01
03
EV / NCI and CROCI / COC
20.0%
1.00x
700000
600000
500000
400000
300000
0%
200000
-2%
100000
-4%
0
13 15E 17E
89
91
93
95
97
99
01
03
Real Economic Earnings (in today's money)
Organic Growth in NCI
Value & Returns ex Goodwill
25.0%
91 93 95 97 99
CROCI Cash Flow Margin
91
Infl. Adj. NCI ex GW
CROCI Drivers
89
2%
05
07
09
11
13
15E 17E
Implied Long Term Earnings
Economic Profit & Implied EP ex Goodwill
600000
500000
3.5x
400000
3.0x
Economic Profit
91
8%
6000000
2000000
89
Cash Flow Margins
8000000
Growth
Net Capital Invested
CROCI %
8.0%
Economic Earnings
10%
10.0%
2.5x
2.0x
1.5x
300000
200000
100000
1.0x
0.10x
0.5x
0.00x
0.0x
05 07 09 11 13 15E 17E
Sales / Gross Capital Invested (RHS)
0
-100000
89
91
93
95
EV/NCI range
97
99
01
EV/NCI spot
03
05
07
09
EV/NCI average
11
13 15E 17E
CROCI / COC
89 91 93
Economic Profit (EP)
95 97 99
Implied EP
01 03 05 07 09
11
13 15E 17E
Implied EP (3 Months Ago)
Implied EP (spot)
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Enterprise Value (USD bn)
4587
5766
7599
9078
8471
7554
7455
8447
9129
9768
11050
10385
8927
10298
11566
12540
14255
16481
17530
17221
16808
Market Cap (USD bn)
3926
5126
6994
8188
7291
6117
6092
7175
7788
8452
9624
8465
7052
8509
9523
10409
12210
14175
14903
14803
14798
EV/NCI Ex. GW
2.05x
2.47x
2.96x
3.10x
2.63x
2.20x
2.06x
2.23x
2.23x
2.24x
2.35x
2.08x
1.73x
1.88x
1.98x
2.02x
2.18x
2.43x
2.52x
2.41x
2.28x
Economic PE
27.6x
33.1x
37.0x
37.2x
36.1x
32.7x
27.1x
24.2x
24.1x
21.8x
23.6x
21.9x
22.8x
20.1x
19.6x
20.9x
23.4x
25.6x
29.0x
26.6x
23.7x
Deutsche Bank AG 45
Accounting PE
21.6x
26.7x
30.9x
29.8x
29.9x
24.3x
20.0x
18.1x
17.9x
17.0x
17.4x
15.6x
16.0x
13.9x
13.3x
14.2x
16.4x
18.0x
19.7x
18.1x
16.4x
Cost of Capital
4.89%
4.82%
4.63%
4.65%
5.06%
5.21%
5.24%
5.10%
5.05%
5.00%
4.82%
5.18%
5.48%
5.45%
5.45%
5.35%
5.20%
5.07%
5.01%
5.01%
5.01%
CROCI Ex. GW
7.4%
7.5%
8.0%
8.3%
7.3%
6.7%
7.6%
9.2%
9.3%
10.3%
10.0%
9.5%
7.6%
9.4%
10.1%
9.7%
9.3%
9.5%
8.7%
9.0%
9.6%
Implied CROCI
10.0%
11.9%
13.7%
14.4%
13.3%
11.4%
10.8%
11.4%
11.2%
11.2%
11.3%
10.8%
9.5%
10.3%
10.8%
10.8%
11.3%
12.3%
12.6%
12.1%
11.4%
Implied Economic Earnings/ Economic Earnings
135%
159%
171%
173%
182%
171%
142%
123%
122%
109%
114%
114%
125%
109%
107%
112%
122%
130%
145%
133%
119%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of companies covered by the CROCI team in the US. Data in USD and is as on 16 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are subject to risks and uncertainties that
may cause actual results to differ materially. See page 2 for important information.
CROCI® Outlook 2016 | This time is different, or is it?
Figure 60: US Equities CROCI
=
Net Capital Invested*
8000000
9.0%
400000
7000000
15%
Net Capital Invested
8.0%
6.0%
5.0%
4.0%
3.0%
10%
5000000
4000000
5%
3000000
0%
300000
250000
200000
150000
2000000
2.0%
1.0%
1000000
0.0%
0
89
91
93
95
97
CROCI ex Goodwill
99
01
03
05
CROCI cum Goodwill
07
09
COC
11
13
15E 17E
Implied LT CROCI
91
93
95
Infl. Adj. NCI ex GW
97
99
GW
01
03
05
07
09
11
Growth in Infl. Adj. NCI
18.0%
16.0%
0.60x
0.50x
10.0%
0.40x
8.0%
0.30x
Sales / GCI
14.0%
6.0%
0.20x
4.0%
0.10x
2.0%
0.0%
0.00x
01
03
EV / NCI and CROCI / COC
0.70x
12.0%
0
13 15E 17E
89
93
95
97
99
01
03
05
07
09
11
13
15E 17E
Implied Long Term Earnings
Economic Profit & Implied EP ex Goodwill
200000
2.5x
150000
2.0x
1.5x
1.0x
100000
50000
0
0.5x
0.0x
05 07 09 11 13 15E 17E
Sales / Gross Capital Invested (RHS)
91
Real Economic Earnings (in today's money)
Organic Growth in NCI
3.0x
0.80x
91 93 95 97 99
CROCI Cash Flow Margin
50000
-10%
Value & Returns ex Goodwill
20.0%
89
100000
-5%
89
CROCI Drivers
Cash Flow Margins
350000
6000000
Economic Profit
CROCI %
7.0%
450000
20%
Growth
10.0%
Economic Earnings & Implied Economic Earnings*
Economic Earnings
x
CROCI cum and ex Goodwill & Implied CROCI
-50000
89
91
93
95
EV/NCI range
97
99
01
EV/NCI spot
03
05
07
09
EV/NCI average
11
13 15E 17E
CROCI / COC
89 91 93
Economic Profit (EP)
95 97 99
Implied EP
01 03 05 07 09
11
13 15E 17E
Implied EP (3 Months Ago)
Implied EP (spot)
Deutsche Bank AG 46
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Enterprise Value (EUR bn)
2119
2869
3742
5477
5061
4526
3886
4361
5069
5827
6602
5943
5305
6079
6406
6719
7207
7902
8583
8400
8294
Market Cap (EUR bn)
1734
2378
3063
4463
3829
3179
2680
3175
3745
4385
5038
4031
3350
4111
4318
4536
5104
5674
6399
6074
6060
EV/NCI Ex. GW
1.39x
1.70x
1.78x
2.14x
1.81x
1.63x
1.43x
1.53x
1.54x
1.68x
1.85x
1.57x
1.33x
1.43x
1.40x
1.43x
1.54x
1.60x
1.66x
1.59x
1.53x
Economic PE
23.5x
30.5x
33.5x
29.2x
28.5x
24.1x
19.3x
19.8x
19.1x
19.9x
21.1x
19.8x
21.7x
19.0x
19.6x
20.6x
25.1x
30.4x
30.9x
27.7x
24.7x
Accounting PE
19.6x
24.3x
26.5x
24.5x
25.6x
20.2x
14.3x
13.7x
13.4x
14.4x
15.0x
13.3x
14.3x
12.4x
12.0x
13.2x
16.2x
18.5x
20.0x
17.3x
15.3x
Cost of Capital
4.89%
4.82%
4.63%
4.65%
5.06%
5.21%
5.24%
5.10%
5.05%
5.00%
4.82%
5.18%
5.48%
5.45%
5.45%
5.35%
5.20%
5.07%
5.01%
5.01%
5.01%
CROCI Ex. GW
5.9%
5.6%
5.3%
7.3%
6.3%
6.7%
7.4%
7.7%
8.0%
8.4%
8.8%
7.9%
6.1%
7.5%
7.1%
7.0%
6.1%
5.3%
5.4%
5.7%
6.2%
Implied CROCI
6.8%
8.2%
8.2%
9.9%
9.1%
8.5%
7.5%
7.8%
7.8%
8.4%
8.9%
8.1%
7.3%
7.8%
7.6%
7.7%
8.0%
8.1%
8.3%
7.9%
7.7%
Implied Economic Earnings/ Economic Earnings
115%
147%
155%
136%
144%
126%
101%
101%
96%
100%
102%
102%
119%
104%
107%
110%
131%
154%
155%
139%
124%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of companies covered by the CROCI team in Europe. Data in EUR and is as on 16 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are subject to risks and uncertainties that
may cause actual results to differ materially. See page 2 for important information.
CROCI® Outlook 2016 | This time is different, or is it?
Figure 61: Europe Equities CROCI
7.0%
400000
6.0%
350000
4.0%
3.0%
2.0%
Economic Earnings & Implied Economic Earnings*
18000
10%
16000
8%
14000
300000
6%
250000
200000
Growth
Net Capital Invested
4%
150000
2%
12000
10000
8000
6000
100000
1.0%
50000
0.0%
0
89
91
93
95
CROCI ex Goodwill
97
99
01
03
05
CROCI cum Goodwill
07
09
COC
11
13
15E 17E
Implied LT CROCI
91
93
95
Infl. Adj. NCI ex GW
97
99
GW
01
03
05
07
09
11
Growth in Infl. Adj. NCI
0
13 15E 17E
89
14.0%
1.20x
12.0%
0.60x
6.0%
Sales / GCI
0.80x
8.0%
0.40x
4.0%
2.0%
0.20x
0.0%
0.00x
01
03
95
97
99
01
03
05
07
09
11
13
15E 17E
Implied Long Term Earnings
6000
1.8x
1.00x
10.0%
93
Economic Profit & Implied EP ex Goodwill
2.0x
EV / NCI and CROCI / COC
1.40x
91
Real Economic Earnings (in today's money)
Organic Growth in NCI
Value & Returns ex Goodwill
16.0%
91 93 95 97 99
CROCI Cash Flow Margin
2000
-2%
89
CROCI Drivers
89
4000
0%
4000
1.6x
2000
1.4x
Economic Profit
CROCI %
5.0%
Cash Flow Margins
=
Net Capital Invested*
Economic Earnings
x
CROCI cum and ex Goodwill & Implied CROCI
1.2x
1.0x
0.8x
0
-2000
-4000
0.6x
-6000
0.4x
0.2x
-8000
0.0x
-10000
05 07 09 11 13 15E 17E
Sales / Gross Capital Invested (RHS)
89
91
93
95
EV/NCI range
97
99
01
EV/NCI spot
03
05
07
09
EV/NCI average
11
13 15E 17E
CROCI / COC
89 91 93
Economic Profit (EP)
95 97 99
Implied EP
01 03 05 07 09
11
13 15E 17E
Implied EP (3 Months Ago)
Implied EP (spot)
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Enterprise Value (JPY tn)
208
216
278
287
244
224
214
221
234
282
296
238
212
210
195
201
265
286
314
310
305
Market Cap (JPY tn)
136
138
198
203
161
138
140
154
181
226
234
162
138
143
128
129
188
212
239
238
238
EV/NCI Ex. GW
1.05x
1.06x
1.37x
1.36x
1.12x
1.02x
0.99x
0.99x
1.03x
1.16x
1.17x
0.93x
0.83x
0.82x
0.76x
0.75x
0.91x
0.93x
0.98x
0.93x
0.89x
Economic PE
33.9x
41.4x
39.9x
34.2x
36.7x
24.1x
21.6x
19.9x
20.1x
22.0x
21.7x
27.6x
30.3x
22.0x
33.6x
35.8x
26.8x
32.0x
32.1x
28.6x
27.8x
Accounting PE
38.3x
48.4x
57.7x
33.6x
49.0x
23.6x
17.2x
15.8x
15.6x
17.4x
16.7x
26.7x
20.3x
13.2x
15.2x
13.7x
13.8x
14.1x
14.8x
13.7x
12.8x
Cost of Capital
4.89%
4.82%
4.63%
4.65%
5.06%
5.21%
5.24%
5.10%
5.05%
5.00%
4.82%
5.18%
5.48%
5.45%
5.45%
5.35%
5.20%
5.07%
5.01%
5.01%
5.01%
CROCI Ex. GW
3.1%
2.6%
3.4%
4.0%
3.0%
4.2%
4.6%
5.0%
5.1%
5.3%
5.4%
3.4%
2.8%
3.8%
2.3%
2.1%
3.4%
2.9%
3.1%
3.3%
3.2%
Deutsche Bank AG 47
Implied CROCI
5.1%
5.1%
6.4%
6.3%
5.7%
5.3%
5.2%
5.1%
5.2%
5.8%
5.6%
4.8%
4.6%
4.5%
4.1%
4.0%
4.7%
4.7%
4.9%
4.7%
4.4%
Implied Economic Earnings/ Economic Earnings
166%
200%
185%
159%
186%
126%
113%
102%
102%
110%
105%
143%
166%
120%
183%
191%
139%
162%
161%
143%
139%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of companies covered by the CROCI team in Japan. Data in JPY and is as on 16 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are subject to risks and uncertainties that
may cause actual results to differ materially. See page 2 for important information
CROCI® Outlook 2016 | This time is different, or is it?
Figure 62: Japan Equities CROCI
CROCI® Outlook 2016 | This time is different, or is it?
Figure 63: Developed Markets Equities CROCI
Global DM
25000000
10%
Net Capital Invested
20000000
6%
4%
15000000
93
95
97
CROCI ex Goodwill
99
01
03
05
CROCI cum Goodwill
07
09
COC
11
13
0.0%
Implied LT CROCI
97
99
01
03
05
07
09
GW
11
18%
200000
0
89
13 15E 17E
Growth in Infl. Adj. NCI
EV / NCI and CROCI / COC
0.40x
Sales / GCI
0.60x
12%
0.30x
10%
0.20x
8%
97
99
CROCI Cash Flow Margin
01
03
05
07
09
11
97
99
01
03
05
07
09
11
13
15E 17E
Implied Long Term Earnings
Economic Profit & Implied EP ex Goodwill
800000
700000
2.5x
500000
2.0x
1.5x
400000
300000
200000
100000
1.0x
0
-100000
0.00x
95
95
0.5x
0.10x
6%
93
600000
16%
0.50x
91
Real Economic Earnings (in today's money)
3.0x
0.70x
14%
600000
-6.0%
3.5x
0.80x
93
95
Infl. Adj. NCI ex GW
0.90x
91
93
800000
-4.0%
Value & Returns ex Goodwill
20%
89
91
1000000
400000
-2.0%
89
15E 17E
CROCI Drivers
1200000
2.0%
0
91
1400000
8.0%
4.0%
10000000
0%
89
10.0%
6.0%
5000000
2%
1600000
Economic Profit
CROCI %
8%
Economic Earnings & Implied Economic Earnings*
12.0%
Growth
12%
Cash Flow Margin
=
Net Capital Invested*
Economic Earnings
x
CROCI cum and ex Goodwill & Implied CROCI
0.0x
13 15E 17E
-200000
89
91
EV/NCI range
Sales / Gross Capital Invested (RHS)
93
95
97
99
EV/NCI spot
01
03
05
07
EV/NCI average
09
11
13
15E 17E
89
91
93
Economic Profit (EP)
CROCI / COC
95
97
99
Implied EP
01
03
05
07
09
11
Implied EP (3 Months Ago)
13
15E 17E
IEP (spot)
Deutsche Bank AG 48
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15E
16E
17E
Enterprise Value (USD m)
8820
10840
14245
16896
15125
13920
14036
16285
17773
19868
23280
21715
18996
21372
23217
24116
27044
29850
29889
29451
27874
Market Cap (USD m)
7147
9009
12181
14289
12146
10401
10528
12767
14262
16172
18962
16259
13512
16018
17523
18229
21299
23974
24000
23905
22966
EV/NCI
1.60x
1.78x
2.12x
2.37x
2.02x
1.67x
1.52x
1.66x
1.75x
1.78x
1.83x
1.66x
1.37x
1.46x
1.52x
1.54x
1.67x
1.91x
1.92x
1.85x
1.76x
Economic PE
27.8x
35.5x
37.3x
34.0x
35.0x
31.0x
25.3x
22.9x
21.4x
22.2x
23.8x
21.3x
23.7x
20.6x
19.7x
21.5x
24.4x
27.3x
29.9x
27.7x
25.8x
Accounting PE
22.5x
27.2x
31.4x
28.2x
29.4x
22.6x
17.5x
16.2x
15.9x
16.1x
16.4x
15.3x
15.8x
13.4x
13.0x
13.9x
16.2x
17.8x
18.9x
17.5x
15.9x
Cost of Capital
4.89%
4.82%
4.63%
4.65%
5.06%
5.21%
5.24%
5.10%
5.05%
5.00%
4.82%
5.18%
5.48%
5.45%
5.45%
5.35%
5.20%
5.07%
5.01%
5.01%
5.01%
CROCI
5.8%
5.0%
5.7%
7.0%
5.7%
5.4%
6.0%
7.2%
8.2%
8.0%
7.7%
7.8%
5.8%
7.1%
7.7%
7.2%
6.9%
7.0%
6.4%
6.7%
6.8%
Implied CROCI
7.8%
8.6%
9.8%
11.0%
10.2%
8.7%
8.0%
8.4%
8.9%
8.9%
8.8%
8.6%
7.5%
8.0%
8.3%
8.3%
8.7%
9.7%
9.6%
9.3%
8.8%
Implied Economic Earnings/ Ec. Earnings
136%
171%
173%
158%
177%
162%
133%
117%
108%
111%
115%
110%
130%
112%
107%
115%
127%
138%
150%
139%
129%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of companies covered by the CROCI team in the MSCI World Index. Data in USD and is as on 17 November 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are subject to risks and uncertainties that
may cause actual results to differ materially. See page 2 for important information
5000000
CROCI %
6.0%
4.0%
25%
300000
20%
250000
15%
4000000
10%
3000000
5%
0%
2000000
Economic Earnings & Implied Economic Earnings*
Economic Earnings
10.0%
Net Capital Invested
6000000
8.0%
=
Net Capital Invested*
12.0%
Growth
x
CROCI cum and ex Goodwill & Implied CROCI
CROCI® Outlook 2016 | This time is different, or is it?
Figure 64: Emerging Markets Equities CROCI
200000
150000
100000
-5%
2.0%
1000000
0.0%
0
07
CROCI ex Goodwill
09
11
CROCI cum Goodwill
13
COC
15E
17E
Implied LT CROCI
05
Infl. Adj. NCI ex GW
CROCI Drivers
07
09
GW
11
13
15E
Growth in Infl. Adj. NCI
0
17E
03
Organic Growth in NCI
0.70x
25.0%
0.60x
0.30x
10.0%
0.20x
09
11
13
15E
17E
Implied Long Term Earnings
120000
100000
2.5x
0.50x
15.0%
07
Economic Profit & Implied EP ex Goodwill
3.0x
20.0%
0.40x
05
Real Economic Earnings (in today's money)
Value & Returns ex Goodwill
30.0%
Sales / GCI
Cash Flow Margins
-15%
03
80000
60000
2.0x
Economic Profit
05
EV / NCI and CROCI / COC
03
50000
-10%
1.5x
1.0x
5.0%
0.10x
0.5x
0.0%
0.00x
0.0x
40000
20000
0
-20000
-40000
-60000
03
05
07
09
CROCI Cash Flow Margin
11
13
15E
17E
Sales / Gross Capital Invested (RHS)
-80000
03
05
EV/NCI range
07
09
EV/NCI spot
11
13
EV/NCI average
03
15E
17E
CROCI / COC
05
Economic Profit (EP)
07
09
Implied EP
11
13
Implied EP (3 Months Ago)
15E
17E
Implied EP (spot)
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Enterprise Value (USD bn)
903
1257
1658
2400
4038
3478
3063
3660
3927
3940
4026
4091
4063
3533
3472
Market Cap (USD bn)
692
1010
1367
2028
3603
3010
2536
3089
3295
3157
3162
3217
3246
2752
2752
EV/NCI Ex. GW
1.02x
1.15x
1.27x
1.49x
2.03x
1.64x
1.17x
1.23x
1.16x
0.97x
0.93x
1.01x
1.05x
0.89x
0.86x
Economic PE
12.9x
13.0x
13.3x
15.7x
22.4x
17.5x
21.4x
17.5x
16.8x
21.7x
19.7x
22.0x
28.6x
26.9x
22.7x
Deutsche Bank AG 49
Accounting PE
9.9x
9.3x
10.4x
11.9x
17.9x
15.7x
14.1x
12.0x
11.6x
12.0x
11.3x
12.9x
16.3x
13.6x
12.2x
Cost of Capital
5.24%
5.10%
5.05%
5.00%
4.82%
5.18%
5.48%
5.45%
5.45%
5.35%
5.20%
5.07%
5.01%
5.01%
5.01%
CROCI Ex. GW
7.9%
8.8%
9.6%
9.5%
9.1%
9.3%
5.5%
7.0%
6.9%
4.4%
4.7%
4.6%
3.7%
3.3%
3.8%
Implied CROCI
5.4%
5.8%
6.4%
7.4%
9.8%
8.5%
6.4%
6.7%
6.3%
5.2%
4.8%
5.1%
5.3%
4.4%
4.3%
Implied Economic Earnings/ Economic Earnings
68%
66%
67%
78%
108%
91%
117%
96%
91%
116%
102%
112%
143%
135%
114%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of companies covered by the CROCI team in Emerging Markets. Data in USD and is as on 16 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are subject to risks and uncertainties that
may cause actual results to differ materially. See page 2 for important information
x
CROCI cum and ex Goodwill & Implied CROCI
=
Net Capital Invested*
10.0%
9.0%
4000000
14%
3500000
12%
8.0%
250000
5.0%
4.0%
3.0%
8%
2500000
6%
2000000
4%
1500000
2%
0%
Economic Earnings
6.0%
3000000
Growth
Net Capital Invested
CROCI %
300000
10%
7.0%
200000
150000
100000
1000000
2.0%
-2%
500000
1.0%
0.0%
93
95
97
CROCI ex Goodwill
99
01
03
05
CROCI cum Goodwill
07
09
COC
11
13
15E 17E
Implied LT CROCI
93
95
97
99
GW
01
03
05
07
09
11
Growth in Infl. Adj. NCI
0
13 15E 17E
89
16.0%
0.90x
14.0%
0.80x
0.50x
8.0%
0.40x
6.0%
Sales / GCI
0.60x
10.0%
0.30x
4.0%
0.20x
2.0%
0.10x
0.0%
0.00x
01
03
95
97
99
01
03
05
07
09
11
13
15E 17E
Implied Long Term Earnings
140000
120000
0.70x
12.0%
93
Economic Profit & Implied EP ex Goodwill
2.5x
EV / NCI and CROCI / COC
1.00x
91
Real Economic Earnings (in today's money)
Organic Growth in NCI
Value & Returns ex Goodwill
18.0%
91 93 95 97 99
CROCI Cash Flow Margin
91
Infl. Adj. NCI ex GW
CROCI Drivers
89
-6%
89
2.0x
100000
80000
Economic Profit
91
50000
-4%
0
89
Cash Flow Margins
Economic Earnings & Implied Economic Earnings*
1.5x
1.0x
60000
40000
20000
0
0.5x
-20000
-40000
0.0x
05 07 09 11 13 15E 17E
Sales / Gross Capital Invested (RHS)
-60000
89
91
93
95
EV/NCI range
97
99
01
EV/NCI spot
03
05
07
09
EV/NCI average
11
13 15E 17E
CROCI / COC
89 91 93
Economic Profit (EP)
95 97 99
Implied EP
01 03 05 07 09
11
13 15E 17E
Implied EP (3 Months Ago)
Implied EP (spot)
Deutsche Bank AG 50
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Enterprise Value (USD bn)
1542
1878
2450
2650
2628
2572
2628
3108
3281
3433
3868
3310
3016
3498
3873
4080
4820
5243
5480
5455
5385
Market Cap (USD bn)
1075
1368
1897
1932
1777
1583
1618
1993
2187
2495
2801
1999
1792
2418
2763
2942
3690
4113
4332
4307
4307
EV/NCI Ex. GW
1.39x
1.52x
1.75x
1.83x
1.69x
1.48x
1.32x
1.41x
1.49x
1.55x
1.57x
1.36x
1.25x
1.40x
1.48x
1.51x
1.71x
1.89x
1.91x
1.82x
1.72x
Economic PE
23.6x
28.2x
32.9x
29.0x
33.7x
27.5x
25.2x
23.8x
23.1x
23.4x
24.7x
28.3x
31.9x
24.1x
22.2x
24.1x
26.2x
26.0x
28.0x
25.1x
23.2x
Accounting PE
19.7x
22.9x
31.6x
26.9x
34.6x
20.3x
16.7x
15.6x
17.0x
19.1x
17.5x
32.0x
28.0x
14.4x
14.7x
15.1x
16.7x
17.9x
18.1x
16.2x
14.8x
Cost of Capital
4.89%
4.82%
4.63%
4.65%
5.06%
5.21%
5.24%
5.10%
5.05%
5.00%
4.82%
5.18%
5.48%
5.45%
5.45%
5.35%
5.20%
5.07%
5.01%
5.01%
5.01%
CROCI Ex. GW
5.9%
5.4%
5.3%
6.3%
5.0%
5.4%
5.2%
5.9%
6.4%
6.6%
6.4%
4.8%
3.9%
5.8%
6.7%
6.3%
6.5%
7.3%
6.8%
7.2%
7.4%
Implied CROCI
6.8%
7.3%
8.1%
8.5%
8.6%
7.7%
6.9%
7.2%
7.5%
7.7%
7.6%
7.0%
6.9%
7.6%
8.1%
8.1%
8.9%
9.6%
9.6%
9.1%
8.6%
Implied Economic Earnings/ Economic Earnings
116%
136%
152%
135%
171%
143%
132%
121%
117%
117%
119%
147%
175%
131%
121%
129%
136%
132%
140%
126%
116%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of companies covered by the CROCI team in the sector. Data in USD as on 16 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are subject to risks and uncertainties that
may cause actual results to differ materially. See page 2 for important information
CROCI® Outlook 2016 | This time is different, or is it?
Figure 65: Consumer Discretionary CROCI
x
CROCI cum and ex Goodwill & Implied CROCI
=
Net Capital Invested*
25.0%
600000
50%
500000
40%
Economic Earnings & Implied Economic Earnings*
45000
40000
10.0%
20%
300000
10%
200000
0%
30000
25000
20000
15000
10000
5.0%
100000
-10%
0
-20%
0.0%
91
93
95
97
CROCI ex Goodwill
99
01
03
05
CROCI cum Goodwill
07
09
COC
11
13
15E 17E
89
Implied LT CROCI
95
97
99
GW
01
03
05
07
09
11
Growth in Infl. Adj. NCI
0
13 15E 17E
89
12.0x
35000
1.00x
10.0x
30000
0.60x
10.0%
Sales / GCI
0.80x
15.0%
0.40x
5.0%
0.20x
0.0%
0.00x
01
03
93
95
97
99
01
03
05
07
09
11
13
15E 17E
Implied Long Term Earnings
Economic Profit & Implied EP ex Goodwill
1.20x
EV / NCI and CROCI / COC
20.0%
91
Real Economic Earnings (in today's money)
Organic Growth in NCI
Value & Returns ex Goodwill
25.0%
91 93 95 97 99
CROCI Cash Flow Margin
93
Infl. Adj. NCI ex GW
CROCI Drivers
89
91
5000
25000
8.0x
Economic Profit
89
Cash Flow Margins
Economic Earnings
15.0%
35000
30%
400000
Growth
Net Capital Invested
CROCI %
20.0%
6.0x
4.0x
20000
15000
10000
2.0x
5000
0.0x
05 07 09 11 13 15E 17E
Sales / Gross Capital Invested (RHS)
0
89
91
93
95
EV/NCI range
97
99
01
EV/NCI spot
03
05
07
09
EV/NCI average
11
13 15E 17E
CROCI / COC
89 91 93
Economic Profit (EP)
95 97 99
Implied EP
01 03 05 07 09
11
13 15E 17E
Implied EP (3 Months Ago)
Implied EP (spot)
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Enterprise Value (USD bn)
184
256
402
527
586
486
466
491
437
498
586
492
374
445
530
588
738
838
876
830
803
Market Cap (USD bn)
143
227
393
463
496
370
372
397
366
396
451
321
235
317
365
413
552
645
662
631
631
EV/NCI Ex. GW
3.77x
5.06x
7.31x
8.05x
6.00x
4.47x
4.20x
4.17x
3.67x
3.76x
3.68x
2.98x
2.50x
2.84x
3.07x
3.39x
3.98x
4.27x
4.14x
3.85x
3.63x
Economic PE
27.0x
39.3x
61.3x
63.0x
49.9x
40.2x
32.4x
28.4x
28.4x
25.2x
24.0x
19.6x
17.8x
19.4x
19.2x
20.7x
25.0x
26.8x
26.4x
23.9x
22.1x
Deutsche Bank AG 51
Accounting PE
24.6x
36.7x
57.9x
52.5x
52.0x
39.2x
30.3x
24.2x
23.1x
20.9x
20.0x
16.8x
12.7x
14.7x
13.4x
14.1x
17.5x
19.2x
18.5x
16.3x
15.1x
Cost of Capital
4.89%
4.82%
4.63%
4.65%
5.06%
5.21%
5.24%
5.10%
5.05%
5.00%
4.82%
5.18%
5.48%
5.45%
5.45%
5.35%
5.20%
5.07%
5.01%
5.01%
5.01%
CROCI Ex. GW
14.0%
12.9%
11.9%
12.8%
12.0%
11.1%
13.0%
14.7%
12.9%
15.0%
15.3%
15.2%
14.0%
14.6%
16.0%
16.4%
15.9%
15.9%
15.7%
16.1%
16.4%
Implied CROCI
18.4%
24.4%
33.8%
37.4%
30.4%
23.3%
22.0%
21.3%
18.5%
18.8%
17.7%
15.5%
13.7%
15.5%
16.7%
18.2%
20.7%
21.7%
20.7%
19.3%
18.2%
Implied Economic Earnings/ Economic Earnings
132%
189%
283%
293%
253%
210%
170%
145%
143%
126%
116%
101%
98%
106%
104%
110%
130%
136%
132%
120%
111%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of companies covered by the CROCI team in the sector. Data in USD as on 16 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are subject to risks and uncertainties that
may cause actual results to differ materially. See page 2 for important information
CROCI® Outlook 2016 | This time is different, or is it?
Figure 66: Consumer Staples CROCI
6000000
20%
10.0%
5000000
15%
CROCI %
6.0%
4.0%
2.0%
10%
5%
3000000
0%
2000000
-5%
0.0%
0
91
93
95
97
CROCI ex Goodwill
99
01
03
05
CROCI cum Goodwill
07
09
COC
11
13
15E 17E
89
Implied LT CROCI
95
97
99
GW
01
03
05
07
09
11
Growth in Infl. Adj. NCI
16.0%
0.90x
14.0%
0.80x
12.0%
0.60x
10.0%
0.50x
8.0%
0.40x
6.0%
Sales / GCI
0.70x
0.30x
4.0%
0.20x
2.0%
0.10x
0.0%
0.00x
01
03
100000
-15%
0
89
91
93
95
97
99
01
03
Real Economic Earnings (in today's money)
Organic Growth in NCI
05
07
09
11
13
15E 17E
Implied Long Term Earnings
Economic Profit & Implied EP ex Goodwill
150000
100000
2.0x
1.5x
1.0x
0.5x
50000
0
-50000
-100000
0.0x
05 07 09 11 13 15E 17E
Sales / Gross Capital Invested (RHS)
150000
13 15E 17E
2.5x
EV / NCI and CROCI / COC
1.00x
200000
50000
Value & Returns ex Goodwill
18.0%
91 93 95 97 99
CROCI Cash Flow Margin
93
Infl. Adj. NCI ex GW
CROCI Drivers
89
91
250000
-10%
Economic Profit
89
300000
4000000
1000000
Economic Earnings & Implied Economic Earnings*
350000
Growth
Net Capital Invested
12.0%
8.0%
Cash Flow Margins
=
Net Capital Invested*
Economic Earnings
x
CROCI cum and ex Goodwill & Implied CROCI
-150000
89
91
93
95
EV/NCI range
97
99
01
EV/NCI spot
03
05
07
09
EV/NCI average
11
13 15E 17E
CROCI / COC
89 91 93
Economic Profit (EP)
95 97 99
Implied EP
01 03 05 07 09
11
13 15E 17E
Implied EP (3 Months Ago)
Implied EP (spot)
Deutsche Bank AG 52
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Enterprise Value (USD bn)
720
849
1092
1288
1397
1380
1373
1732
2245
2812
4002
3559
2883
3124
3506
3389
3486
3667
3277
2928
2941
Market Cap (USD bn)
668
787
954
1159
1230
1163
1188
1603
2130
2648
3843
3305
2535
2722
3066
2896
2952
3083
2596
2191
2191
EV/NCI Ex. GW
1.39x
1.47x
1.57x
1.47x
1.39x
1.21x
1.09x
1.26x
1.48x
1.56x
1.83x
1.54x
1.04x
1.01x
0.99x
0.83x
0.80x
0.89x
0.83x
0.72x
0.72x
Economic PE
31.6x
91.5x
49.7x
22.2x
21.9x
28.4x
17.4x
15.5x
13.5x
15.1x
21.2x
15.8x
22.3x
17.0x
15.0x
17.5x
19.4x
21.2x
43.5x
38.5x
26.5x
Accounting PE
18.0x
32.6x
26.1x
13.0x
14.1x
15.7x
10.9x
9.7x
9.4x
9.9x
13.6x
10.8x
13.6x
10.5x
8.9x
9.5x
10.7x
12.8x
22.1x
18.6x
14.0x
Cost of Capital
4.89%
4.82%
4.63%
4.65%
5.06%
5.21%
5.24%
5.10%
5.05%
5.00%
4.82%
5.18%
5.48%
5.45%
5.45%
5.35%
5.20%
5.07%
5.01%
5.01%
5.01%
CROCI Ex. GW
4.4%
1.6%
3.2%
6.6%
6.4%
4.3%
6.2%
8.1%
10.9%
10.3%
8.6%
9.7%
4.7%
5.9%
6.6%
4.7%
4.1%
4.2%
1.9%
1.9%
2.7%
Implied CROCI
6.8%
7.1%
7.3%
6.8%
7.1%
6.3%
5.7%
6.4%
7.5%
7.8%
8.8%
8.0%
5.7%
5.5%
5.4%
4.4%
4.1%
4.5%
4.1%
3.6%
3.6%
Implied Economic Earnings/ Economic Earnings
155%
441%
230%
103%
111%
148%
91%
79%
68%
76%
102%
82%
122%
93%
82%
94%
101%
107%
218%
193%
133%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of companies covered by the CROCI team in the sector. Data in USD as on 16 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are subject to risks and uncertainties that
may cause actual results to differ materially. See page 2 for important information
CROCI® Outlook 2016 | This time is different, or is it?
Figure 67: Energy CROCI
x
CROCI cum and ex Goodwill & Implied CROCI
=
Net Capital Invested*
18.0%
3000000
14%
2500000
8.0%
6.0%
2000000
8%
1500000
6%
4%
1000000
2%
4.0%
Economic Earnings
10.0%
10%
Growth
Net Capital Invested
12.0%
200000
12%
14.0%
CROCI %
250000
16%
16.0%
150000
100000
50000
0%
500000
2.0%
-2%
0.0%
0
91
93
95
97
CROCI ex Goodwill
99
01
03
05
CROCI cum Goodwill
07
09
COC
11
13
15E 17E
Implied LT CROCI
93
95
97
99
GW
01
03
05
07
09
11
Growth in Infl. Adj. NCI
0
13 15E 17E
89
30.0%
0.70x
20.0%
0.40x
15.0%
0.30x
10.0%
Sales / GCI
0.50x
0.20x
5.0%
0.10x
0.0%
0.00x
01
03
95
97
99
01
03
05
07
09
11
13
15E 17E
Implied Long Term Earnings
180000
160000
0.60x
25.0%
93
Economic Profit & Implied EP ex Goodwill
6.0x
EV / NCI and CROCI / COC
0.80x
91
Real Economic Earnings (in today's money)
Organic Growth in NCI
Value & Returns ex Goodwill
35.0%
91 93 95 97 99
CROCI Cash Flow Margin
91
Infl. Adj. NCI ex GW
CROCI Drivers
89
-4%
89
5.0x
140000
4.0x
Economic Profit
89
Cash Flow Margins
Economic Earnings & Implied Economic Earnings*
3.0x
2.0x
120000
100000
80000
60000
40000
1.0x
20000
0.0x
05 07 09 11 13 15E 17E
Sales / Gross Capital Invested (RHS)
0
89
91
93
95
EV/NCI range
97
99
01
EV/NCI spot
03
05
07
09
EV/NCI average
11
13 15E 17E
CROCI / COC
89 91 93
Economic Profit (EP)
95 97 99
Implied EP
01 03 05 07 09
11
13 15E 17E
Implied EP (3 Months Ago)
Implied EP (spot)
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Enterprise Value (USD bn)
986
1329
1514
1770
1807
1597
1616
1836
1909
2163
2320
2073
1932
2125
2298
2540
3125
3829
4275
4018
3880
Market Cap (USD bn)
979
1315
1515
1780
1797
1561
1554
1783
1863
2038
2185
1903
1714
1884
2016
2226
2832
3446
3805
3662
3662
EV/NCI Ex. GW
3.05x
3.76x
4.13x
4.28x
4.12x
3.24x
2.84x
2.80x
2.86x
2.84x
2.67x
2.27x
1.90x
2.01x
2.08x
2.26x
2.69x
3.32x
3.60x
3.29x
3.08x
Economic PE
26.7x
32.3x
31.2x
31.1x
29.0x
23.8x
20.4x
19.1x
18.7x
18.7x
19.1x
15.2x
13.3x
13.7x
13.6x
15.6x
19.5x
22.5x
24.0x
20.8x
18.5x
Deutsche Bank AG 53
Accounting PE
25.9x
31.2x
31.4x
30.5x
29.0x
24.3x
20.1x
18.8x
18.6x
17.8x
17.7x
14.0x
12.6x
12.2x
12.1x
13.4x
16.7x
19.1x
19.8x
17.0x
15.4x
Cost of Capital
4.89%
4.82%
4.63%
4.65%
5.06%
5.21%
5.24%
5.10%
5.05%
5.00%
4.82%
5.18%
5.48%
5.45%
5.45%
5.35%
5.20%
5.07%
5.01%
5.01%
5.01%
CROCI Ex. GW
11.5%
11.6%
13.2%
13.8%
14.2%
13.6%
13.9%
14.7%
15.3%
15.2%
13.9%
14.9%
14.3%
14.6%
15.2%
14.5%
13.8%
14.8%
15.0%
15.9%
16.6%
Implied CROCI
14.9%
18.1%
19.1%
19.9%
20.9%
16.9%
14.9%
14.3%
14.4%
14.2%
12.8%
11.8%
10.4%
10.9%
11.3%
12.1%
14.0%
16.9%
18.0%
16.5%
15.4%
Implied Economic Earnings/ Economic Earnings
130%
156%
144%
145%
147%
124%
107%
97%
94%
94%
92%
79%
73%
75%
74%
83%
102%
114%
120%
104%
93%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of companies covered by the CROCI team in the sector. Data in USD as on 16 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are subject to risks and uncertainties that
may cause actual results to differ materially. See page 2 for important information
CROCI® Outlook 2016 | This time is different, or is it?
Figure 68: Health Care CROCI
x
CROCI cum and ex Goodwill & Implied CROCI
=
Net Capital Invested*
10.0%
3500000
9.0%
3000000
200000
5.0%
4.0%
3.0%
5%
2000000
1500000
0%
1000000
2.0%
Economic Earnings
6.0%
2500000
Growth
Net Capital Invested
10%
7.0%
CROCI %
250000
15%
8.0%
150000
100000
50000
-5%
500000
1.0%
0.0%
0
89
91
93
95
97
CROCI ex Goodwill
99
01
03
05
CROCI cum Goodwill
07
09
COC
11
13
15E 17E
-10%
89
Implied LT CROCI
91
93
95
Infl. Adj. NCI ex GW
CROCI Drivers
97
99
GW
01
03
05
07
09
11
Growth in Infl. Adj. NCI
0
13 15E 17E
89
0.60x
4.0%
0.40x
2.0%
91 93 95 97 99
CROCI Cash Flow Margin
01
03
03
05
07
09
11
13
15E 17E
Implied Long Term Earnings
1.0x
60000
40000
20000
0
0.5x
-20000
0.00x
89
01
80000
1.5x
0.20x
0.0%
99
2.0x
Economic Profit
0.80x
EV / NCI and CROCI / COC
6.0%
Sales / GCI
1.20x
1.00x
97
100000
1.40x
10.0%
8.0%
95
120000
1.60x
12.0%
93
Economic Profit & Implied EP ex Goodwill
2.5x
1.80x
91
Real Economic Earnings (in today's money)
Organic Growth in NCI
Value & Returns ex Goodwill
14.0%
Cash Flow Margins
Economic Earnings & Implied Economic Earnings*
0.0x
05 07 09 11 13 15E 17E
Sales / Gross Capital Invested (RHS)
-40000
89
91
93
95
EV/NCI range
97
99
01
EV/NCI spot
03
05
07
09
EV/NCI average
11
13 15E 17E
CROCI / COC
89 91 93
Economic Profit (EP)
95 97 99
Implied EP
01 03 05 07 09
11
13 15E 17E
Implied EP (3 Months Ago)
Implied EP (spot)
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
1239
1384
1684
1910
1867
1782
1779
2169
2471
2825
3535
3285
2727
3227
3545
3556
3962
4350
4424
4204
4112
949
1084
1378
1594
1466
1299
1293
1670
1955
2304
2856
2345
1789
2297
2523
2461
2948
3310
3354
3177
3162
EV/NCI Ex. GW
1.48x
1.46x
1.66x
1.89x
1.78x
1.59x
1.45x
1.65x
1.82x
1.88x
1.99x
1.76x
1.41x
1.56x
1.60x
1.55x
1.68x
1.88x
1.88x
1.74x
1.66x
Economic PE
31.3x
34.0x
35.6x
28.6x
34.0x
28.8x
26.5x
23.0x
21.5x
22.5x
23.9x
20.8x
23.5x
19.8x
19.1x
20.1x
23.0x
23.8x
26.4x
23.5x
21.7x
Accounting PE
23.4x
24.4x
25.9x
22.4x
26.6x
21.2x
17.3x
16.2x
16.0x
16.2x
16.9x
15.4x
17.8x
13.8x
13.1x
13.2x
15.7x
16.7x
17.5x
15.3x
14.0x
Cost of Capital
4.89%
4.82%
4.63%
4.65%
5.06%
5.21%
5.24%
5.10%
5.05%
5.00%
4.82%
5.18%
5.48%
5.45%
5.45%
5.35%
5.20%
5.07%
5.01%
5.01%
5.01%
CROCI Ex. GW
4.7%
4.3%
4.7%
6.6%
5.2%
5.5%
5.5%
7.2%
8.4%
8.3%
8.3%
8.5%
6.0%
7.9%
8.4%
7.7%
7.3%
7.9%
7.1%
7.4%
7.7%
Implied CROCI
7.2%
7.0%
7.7%
8.8%
9.0%
8.3%
7.6%
8.4%
9.2%
9.4%
9.6%
9.1%
7.7%
8.5%
8.7%
8.3%
8.7%
9.5%
9.4%
8.7%
8.3%
Implied Economic Earnings/ Economic Earnings
153%
164%
164%
133%
172%
150%
139%
117%
109%
113%
115%
108%
129%
108%
104%
107%
119%
121%
132%
118%
108%
Enterprise Value (USD bn)
Market Cap (USD bn)
Deutsche Bank AG 54
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of companies covered by the CROCI team in the sector. Data in USD as on 16 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are subject to risks and uncertainties that
may cause actual results to differ materially. See page 2 for important information
CROCI® Outlook 2016 | This time is different, or is it?
Figure 69: Industrials CROCI
x
CROCI cum and ex Goodwill & Implied CROCI
=
Net Capital Invested*
18.0%
2500000
16%
10.0%
8.0%
6.0%
4.0%
12%
1500000
10%
Growth
Net Capital Invested
12.0%
200000
14%
8%
1000000
6%
4%
500000
Economic Earnings
2000000
14.0%
CROCI %
250000
18%
16.0%
150000
100000
50000
2%
2.0%
0%
0.0%
0
91
93
95
97
CROCI ex Goodwill
99
01
03
05
CROCI cum Goodwill
07
09
COC
11
13
15E 17E
Implied LT CROCI
93
95
97
99
GW
01
03
05
07
09
11
Growth in Infl. Adj. NCI
0
13 15E 17E
89
25.0%
1.00x
10.0x
20.0%
0.80x
15.0%
0.60x
10.0%
0.40x
5.0%
0.20x
0.0%
0.00x
01
03
EV / NCI and CROCI / COC
12.0x
Sales / GCI
1.20x
93
95
97
99
01
03
05
07
09
11
13
15E 17E
Implied Long Term Earnings
Economic Profit & Implied EP ex Goodwill
200000
150000
8.0x
6.0x
4.0x
100000
50000
0
2.0x
0.0x
05 07 09 11 13 15E 17E
Sales / Gross Capital Invested (RHS)
91
Real Economic Earnings (in today's money)
Organic Growth in NCI
Value & Returns ex Goodwill
30.0%
91 93 95 97 99
CROCI Cash Flow Margin
91
Infl. Adj. NCI ex GW
CROCI Drivers
89
-2%
89
Economic Profit
89
Cash Flow Margins
Economic Earnings & Implied Economic Earnings*
-50000
89
91
93
95
EV/NCI range
97
99
01
EV/NCI spot
03
05
07
09
EV/NCI average
11
13 15E 17E
CROCI / COC
89 91 93
Economic Profit (EP)
95 97 99
Implied EP
01 03 05 07 09
11
13 15E 17E
Implied EP (3 Months Ago)
Implied EP (spot)
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Enterprise Value (USD bn)
1194
1548
2699
4113
2523
1825
1834
2249
2329
2652
3088
2719
2356
2866
3094
3378
3788
4532
4831
4692
4465
Market Cap (USD bn)
1145
1509
2721
4079
2519
1788
1874
2327
2430
2716
3110
2666
2370
2931
3148
3459
3986
4725
5064
5080
5076
EV/NCI Ex. GW
2.59x
3.01x
4.89x
6.74x
4.05x
2.75x
2.69x
3.10x
3.14x
3.10x
3.16x
2.67x
2.28x
2.49x
2.54x
2.62x
2.84x
3.37x
3.56x
3.28x
2.96x
Economic PE
25.0x
39.5x
43.4x
47.3x
nm
56.8x
30.8x
23.6x
24.7x
23.7x
24.2x
20.8x
20.0x
17.3x
16.5x
18.3x
18.9x
21.0x
22.8x
21.3x
18.7x
Deutsche Bank AG 55
Accounting PE
26.2x
37.6x
43.4x
50.2x
nm
47.1x
27.9x
21.7x
23.4x
21.5x
20.8x
20.0x
17.1x
14.1x
14.3x
14.7x
15.7x
17.3x
18.5x
17.5x
15.9x
Cost of Capital
4.89%
4.82%
4.63%
4.65%
5.06%
5.21%
5.24%
5.10%
5.05%
5.00%
4.82%
5.18%
5.48%
5.45%
5.45%
5.35%
5.20%
5.07%
5.01%
5.01%
5.01%
CROCI Ex. GW
10.4%
7.6%
11.3%
14.2%
3.6%
4.8%
8.7%
13.1%
12.7%
13.1%
13.0%
12.9%
11.4%
14.3%
15.4%
14.4%
15.0%
16.0%
15.6%
15.4%
15.9%
Implied CROCI
12.7%
14.5%
22.6%
31.3%
20.5%
14.3%
14.1%
15.8%
15.9%
15.5%
15.2%
13.8%
12.5%
13.6%
13.8%
14.0%
14.8%
17.1%
17.8%
16.4%
14.8%
Implied Economic Earnings/ Economic Earnings
122%
190%
201%
220%
574%
296%
162%
120%
125%
118%
117%
107%
109%
95%
90%
98%
98%
107%
114%
107%
94%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of companies covered by the CROCI team in the sector. Data in USD as on 16 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are subject to risks and uncertainties that
may cause actual results to differ materially. See page 2 for important information
CROCI® Outlook 2016 | This time is different, or is it?
Figure 70: Information Technology CROCI
x
CROCI cum and ex Goodwill & Implied CROCI
=
Net Capital Invested*
10.0%
2500000
Economic Earnings & Implied Economic Earnings*
160000
20%
9.0%
140000
6.0%
5.0%
4.0%
3.0%
2.0%
120000
10%
1500000
5%
1000000
0%
Economic Earnings
Net Capital Invested
7.0%
CROCI %
15%
2000000
Growth
8.0%
100000
80000
60000
40000
500000
-5%
20000
1.0%
0.0%
0
89
91
93
95
97
CROCI ex Goodwill
99
01
03
05
CROCI cum Goodwill
07
09
COC
11
13
15E 17E
89
Implied LT CROCI
91
93
95
Infl. Adj. NCI ex GW
CROCI Drivers
97
99
GW
01
03
05
07
09
11
Growth in Infl. Adj. NCI
89
8.0%
0.30x
Sales / GCI
14.0%
0.40x
6.0%
0.20x
4.0%
2.0x
0.0%
91 93 95 97 99
CROCI Cash Flow Margin
01
03
01
03
05
07
09
11
13
15E 17E
Implied Long Term Earnings
1.5x
40000
1.0x
30000
20000
10000
0
0.5x
-10000
-20000
0.00x
89
99
50000
0.10x
2.0%
97
70000
Economic Profit
EV / NCI and CROCI / COC
0.60x
10.0%
95
60000
16.0%
0.50x
93
Economic Profit & Implied EP ex Goodwill
0.70x
12.0%
91
Real Economic Earnings (in today's money)
Organic Growth in NCI
2.5x
0.80x
18.0%
0
13 15E 17E
Value & Returns ex Goodwill
20.0%
Cash Flow Margins
-10%
0.0x
05 07 09 11 13 15E 17E
Sales / Gross Capital Invested (RHS)
-30000
89
91
93
95
EV/NCI range
97
99
01
EV/NCI spot
03
05
07
09
EV/NCI average
11
13 15E 17E
CROCI / COC
89 91 93
Economic Profit (EP)
95 97 99
Implied EP
01 03 05 07 09
11
13 15E 17E
Implied EP (3 Months Ago)
Implied EP (spot)
Deutsche Bank AG 56
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Enterprise Value (USD bn)
517
525
628
664
696
768
853
1028
1208
1560
2327
2135
1810
2209
2381
2242
2345
2404
2097
1886
1846
Market Cap (USD bn)
393
396
478
462
485
520
568
744
925
1203
1753
1567
1204
1595
1727
1531
1612
1677
1492
1260
1260
EV/NCI Ex. GW
1.09x
1.02x
1.13x
1.12x
1.14x
1.10x
1.06x
1.20x
1.31x
1.44x
1.79x
1.60x
1.23x
1.37x
1.37x
1.25x
1.26x
1.35x
1.24x
1.09x
1.05x
Economic PE
23.2x
28.5x
27.8x
20.1x
28.1x
29.2x
25.5x
18.4x
16.1x
16.0x
19.4x
18.3x
30.4x
18.2x
17.4x
24.4x
23.9x
25.8x
31.0x
26.0x
21.9x
Accounting PE
16.6x
16.4x
19.0x
13.4x
18.3x
18.2x
15.2x
12.0x
11.2x
11.2x
12.8x
13.2x
20.2x
12.8x
12.2x
15.7x
15.8x
16.7x
19.3x
14.7x
12.6x
Cost of Capital
4.89%
4.82%
4.63%
4.65%
5.06%
5.21%
5.24%
5.10%
5.05%
5.00%
4.82%
5.18%
5.48%
5.45%
5.45%
5.35%
5.20%
5.07%
5.01%
5.01%
5.01%
CROCI Ex. GW
4.7%
3.6%
4.1%
5.6%
4.1%
3.8%
4.2%
6.5%
8.1%
9.0%
9.2%
8.8%
4.1%
7.6%
7.9%
5.1%
5.3%
5.2%
4.0%
4.2%
4.8%
Implied CROCI
5.3%
4.9%
5.2%
5.2%
5.8%
5.7%
5.6%
6.1%
6.6%
7.2%
8.6%
8.3%
6.8%
7.5%
7.5%
6.7%
6.6%
6.8%
6.2%
5.5%
5.3%
Implied Economic Earnings/ Economic Earnings
113%
137%
128%
93%
142%
152%
134%
94%
81%
80%
94%
95%
167%
99%
95%
131%
124%
131%
155%
130%
110%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of companies covered by the CROCI team in the sector. Data in USD as on 16 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are subject to risks and uncertainties that
may cause actual results to differ materially. See page 2 for important information
CROCI® Outlook 2016 | This time is different, or is it?
Figure 71: Materials CROCI
x
CROCI cum and ex Goodwill & Implied CROCI
160000
3500000
20%
7.0%
3000000
15%
2500000
10%
2000000
5%
1500000
0%
1000000
-5%
1.0%
500000
-10%
20000
0.0%
0
-15%
0
140000
4.0%
3.0%
2.0%
91
93
95
97
CROCI ex Goodwill
99
01
03
05
CROCI cum Goodwill
07
09
COC
11
13
15E 17E
89
Implied LT CROCI
95
97
99
GW
01
03
05
07
09
11
Growth in Infl. Adj. NCI
35.0%
0.35x
3.5x
30.0%
0.30x
25.0%
0.25x
20.0%
0.20x
15.0%
0.15x
10.0%
0.10x
5.0%
0.05x
0.5x
0.00x
0.0x
0.0%
01
03
EV / NCI and CROCI / COC
4.0x
Sales / GCI
0.40x
80000
60000
40000
13 15E 17E
89
91
93
95
97
99
01
03
Real Economic Earnings (in today's money)
Organic Growth in NCI
Value & Returns ex Goodwill
40.0%
91 93 95 97 99
CROCI Cash Flow Margin
93
Infl. Adj. NCI ex GW
CROCI Drivers
89
91
100000
05
07
09
11
13
15E 17E
Implied Long Term Earnings
Economic Profit & Implied EP ex Goodwill
80000
60000
3.0x
40000
Economic Profit
89
Economic Earnings
5.0%
Growth
120000
Net Capital Invested
CROCI %
Economic Earnings & Implied Economic Earnings*
8.0%
6.0%
Cash Flow Margins
=
Net Capital Invested*
2.5x
2.0x
1.5x
20000
0
1.0x
05 07 09 11 13 15E 17E
Sales / Gross Capital Invested (RHS)
-20000
-40000
89
91
93
95
EV/NCI range
97
99
01
EV/NCI spot
03
05
07
09
EV/NCI average
11
13 15E 17E
CROCI / COC
89 91 93
Economic Profit (EP)
95 97 99
Implied EP
01 03 05 07 09
11
13 15E 17E
Implied EP (3 Months Ago)
Implied EP (spot)
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Enterprise Value (USD bn)
849
1198
1910
2467
1785
1585
1659
1821
1871
2203
2693
2578
2280
2445
2592
2588
2789
2908
2919
2747
2697
Market Cap (USD bn)
649
943
1628
1972
1287
977
1062
1233
1284
1432
1961
1715
1422
1573
1688
1676
1738
1880
1893
1757
1757
EV/NCI Ex. GW
1.50x
1.78x
2.50x
2.78x
1.88x
1.42x
1.34x
1.37x
1.38x
1.34x
1.46x
1.34x
1.08x
1.08x
1.12x
1.11x
1.14x
1.22x
1.26x
1.18x
1.15x
Economic PE
23.0x
32.0x
40.9x
47.7x
38.1x
25.8x
22.4x
21.4x
19.4x
21.6x
25.5x
20.5x
21.8x
23.1x
22.2x
24.4x
29.3x
29.9x
30.9x
28.5x
26.3x
Accounting PE
25.1x
27.4x
42.4x
40.5x
31.4x
17.5x
14.0x
13.6x
13.4x
14.2x
16.3x
13.5x
11.5x
12.1x
12.7x
12.3x
14.0x
16.2x
16.0x
14.4x
13.4x
Cost of Capital
4.89%
4.82%
4.63%
4.65%
5.06%
5.21%
5.24%
5.10%
5.05%
5.00%
4.82%
5.18%
5.48%
5.45%
5.45%
5.35%
5.20%
5.07%
5.01%
5.01%
5.01%
CROCI Ex. GW
6.5%
5.5%
6.1%
5.8%
4.9%
5.5%
6.0%
6.4%
7.1%
6.2%
5.7%
6.6%
5.0%
4.7%
5.1%
4.5%
3.9%
4.1%
4.1%
4.2%
4.4%
Deutsche Bank AG 57
Implied CROCI
7.4%
8.6%
11.5%
12.9%
9.5%
7.4%
7.0%
7.0%
7.0%
6.7%
7.0%
6.9%
5.9%
5.9%
6.1%
5.9%
5.9%
6.2%
6.3%
5.9%
5.7%
Implied Economic Earnings/ Economic Earnings
112%
154%
189%
222%
193%
134%
117%
109%
98%
108%
123%
106%
119%
126%
121%
131%
153%
151%
155%
143%
132%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of companies covered by the CROCI team in the sector. Data in USD as on 16 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are subject to risks and uncertainties that
may cause actual results to differ materially. See page 2 for important information
CROCI® Outlook 2016 | This time is different, or is it?
Figure 72: Telecommunications Services CROCI
3500000
15%
6.0%
3000000
10%
5.0%
2500000
4.0%
3.0%
1.0%
5%
0%
1500000
-5%
1000000
0.0%
0
91
93
95
97
CROCI ex Goodwill
99
01
03
05
CROCI cum Goodwill
07
09
COC
11
13
15E 17E
89
Implied LT CROCI
95
97
99
GW
01
03
05
07
09
11
Growth in Infl. Adj. NCI
20000
-15%
0
13 15E 17E
89
0.30x
1.2x
10000
EV / NCI and CROCI / COC
Sales / GCI
0.15x
0.10x
5.0%
0.0%
01
03
0.8x
0.6x
0.4x
0.2x
0.00x
0.0x
05 07 09 11 13 15E 17E
Sales / Gross Capital Invested (RHS)
95
97
99
01
03
05
07
09
11
13
15E 17E
Implied Long Term Earnings
0
1.0x
0.05x
93
Economic Profit & Implied EP ex Goodwill
20000
0.20x
91
Real Economic Earnings (in today's money)
Organic Growth in NCI
1.4x
0.25x
10.0%
40000
0.35x
20.0%
15.0%
60000
-10%
Value & Returns ex Goodwill
25.0%
91 93 95 97 99
CROCI Cash Flow Margin
93
Infl. Adj. NCI ex GW
CROCI Drivers
89
91
80000
Economic Profit
89
100000
2000000
500000
Economic Earnings & Implied Economic Earnings*
120000
Growth
Net Capital Invested
CROCI %
7.0%
2.0%
Cash Flow Margins
=
Net Capital Invested*
Economic Earnings
x
CROCI cum and ex Goodwill & Implied CROCI
-10000
-20000
-30000
-40000
-50000
-60000
89
91
93
95
EV/NCI range
97
99
01
EV/NCI spot
03
05
07
09
EV/NCI average
11
13 15E 17E
CROCI / COC
89 91 93
Economic Profit (EP)
95 97 99
Implied EP
01 03 05 07 09
11
13 15E 17E
Implied EP (3 Months Ago)
Implied EP (spot)
Deutsche Bank AG 58
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Enterprise Value (USD bn)
672
716
800
950
1018
1069
1100
1232
1502
1693
2061
2179
1998
2034
2063
2101
2107
2194
2101
2035
2061
Market Cap (USD bn)
349
377
385
450
493
459
468
590
817
1032
1334
1290
969
1008
975
924
987
1085
1022
937
937
EV/NCI Ex. GW
0.78x
0.76x
0.77x
0.84x
0.87x
0.81x
0.76x
0.82x
0.91x
0.95x
1.05x
1.06x
0.87x
0.87x
0.86x
0.84x
0.84x
0.93x
0.91x
0.86x
0.85x
Economic PE
19.1x
22.6x
21.4x
19.1x
20.6x
22.6x
21.0x
20.8x
21.2x
23.4x
26.9x
25.1x
21.8x
21.4x
25.1x
25.9x
25.1x
23.9x
25.5x
26.0x
25.9x
Accounting PE
21.5x
23.7x
18.7x
15.8x
15.6x
15.1x
12.5x
13.4x
14.8x
16.5x
18.7x
18.3x
13.4x
13.5x
18.1x
15.7x
14.4x
14.9x
14.4x
13.8x
13.4x
Cost of Capital
4.89%
4.82%
4.63%
4.65%
5.06%
5.21%
5.24%
5.10%
5.05%
5.00%
4.82%
5.18%
5.48%
5.45%
5.45%
5.35%
5.20%
5.07%
5.01%
5.01%
5.01%
CROCI Ex. GW
4.1%
3.4%
3.6%
4.4%
4.2%
3.6%
3.6%
4.0%
4.3%
4.1%
3.9%
4.2%
4.0%
4.0%
3.4%
3.2%
3.4%
3.9%
3.6%
3.3%
3.3%
Implied CROCI
3.8%
3.7%
3.6%
3.9%
4.4%
4.2%
4.0%
4.2%
4.6%
4.8%
5.1%
5.5%
4.8%
4.7%
4.7%
4.5%
4.4%
4.7%
4.6%
4.3%
4.2%
Implied Economic Earnings/ Economic Earnings
93%
109%
99%
89%
104%
118%
110%
106%
107%
117%
130%
130%
119%
117%
137%
139%
130%
121%
128%
130%
130%
Source: Company reports, Bloomberg Finance L.P., Deutsche Bank and CROCI. The table shows aggregate data of companies covered by the CROCI team in the sector. Data in USD as on 16 December 2015.
Past performance may not be a reliable indicator of future performance. Forward looking statements or projections are subject to risks and uncertainties that
may cause actual results to differ materially. See page 2 for important information
CROCI® Outlook 2016 | This time is different, or is it?
Figure 73: Utilities CROCI
CROCI® Outlook 2016 | This time is different, or is it?
Appendix A: Introduction to CROCI
Brief introduction to CROCI
Cash Return on Capital Invested (CROCI) is a cash-flow-based analysis which, by making a series of economic
adjustments to traditional accounting data, aims to make non-financial companies comparable - regardless of industry or
domicile. The main areas where the “economic data” differ from the accounting data are as follows:
Accounting for “hidden” liabilities – CROCI Enterprise Value (EV) includes not only financial liabilities (such as
debt) but also operational liabilities (such as operating lease commitments, warranties, pension funding, specific
provisions etc).

Depreciating similar assets in a similar manner - Adjusting depreciation to reflect “economic depreciation” and
effective useful economic life.

Replacement value of assets – Inflating the value of net assets using the relevant inflator (based on the age of
assets).

Unreported assets – Systematically capitalizing cash-generative assets that are left off the balance sheet.
Research and development costs and advertising are examples of such assets.
Definitions:
Enterprise Value (EV): Market value of equity (market cap), debt, and other liabilities, such as pension underfunding,
warranties, leases.
Net Capital Invested (NCI): Estimated replacement value of the economic asset base, comprising the inflation-adjusted
tangible assets, capitalised intangible assets (e.g brands, R&D), leases and net working capital.
Cash Return on Capital Invested (CROCI): the economic equivalent of return on equity, is a real (inflation-adjusted)
economic cash return. It is the internal rate of return of gross cash flows (taxed, adjusted EBDIT) over the average asset
life of the company’s assets against the gross capital invested.
CROCI 5YA: Average CROCI over the past five years
Economic PE (Ec PE): is the CROCI version of the PE ratio and is calculated as EV/(CROCI * NCI) or (EV/NCI)/CROCI
EV/NCI: is the CROCI version of the price-to-book ratio and can be thought of as a proxy for replacement value or Tobin’s
Q at a company level. It is calculated by dividing EV by Net Capital Invested.
Free Cash Flow (FCF) Yield: represents firm level free cash flow yield on EV. It is calculated before payment of interest on
borrowed capital.
Implied CROCI: Level of return implied by the market as sustainable. It is calculated as EV / NCI * Cost of Capital.
Deutsche Bank AG 59
CROCI® Outlook 2016 | This time is different, or is it?
Appendix B: CROCI & Real Value
Real Value:
Economic value as calculated by the CROCI process via the adjustments to and normalisations of reported financial
statements, conducted by CROCI’s team of company analysts.
Notes: The CROCI process seeks to make company financial data more consistent, comparable and economically
meaningful through a series of reviews and adjustments. This contrasts with more conventional definitions of “Value“ that
tend to be based on accounting measures such as equity or profits.
The principal indicator of Real Value is CROCI’s Economic P/E. An attractive Economic P/E ratio suggests that the market
is undervaluing the cash flow being produced by the operating assets, all other things being equal.
The term Real Value can therefore be used attributively to refer to companies with the lowest CROCI Economic P/E.
Real Investor:
Definition: An investor whose investments are driven principally by the careful analysis of company fundamentals, including
their economic cash returns and their economic valuation. Specifically, a Real Investor has two characteristics:
1. Fundamental: any investment is informed or driven by the interplay between the cash flow generation, the capital
intensity and the valuation of that company.
2. Skeptical of reported financial statements as a guide to investing: Real Investors believe that the income statement and
balance sheet in a company's accounts are not necessarily designed to be helpful to equity investors, and that a synthesis
of all the notes to the accounts and diligent restatement of the accounts must happen in order to render valuations
comparable and meaningful; and
Real Investors look to economic value to inform investment, and believe that the reported financial statement data may not
be representative of the economic reality of a company.
Since CROCI makes adjustments to financial statements in order to include all relevant information in the notes to the
accounts, and to restate the accounts in order to render economic valuations, which are meaningful and comparable,
CROCI may be one valuable approach.
Deutsche Bank AG 60
CROCI® Outlook 2016 | This time is different, or is it?
Appendix C: Important Information on Backtest Data
Backtested performance is not an indicator of future actual results. The results reflect performance of a strategy not
historically offered to investors and do not represent returns that any investor actually attained. Backtested results are
calculated by the retroactive application of a model constructed on the basis of historical data and based on assumptions
integral to the model which may or may not be testable and are subject to losses.
General assumptions include: The index would have been able to purchase the securities recommended by the model and
the markets were sufficiently liquid to permit all trading. Changes in these assumptions may have a material impact on the
backtested returns presented. This information is provided for illustrative purposes only.
Backtested performance is developed with the benefit of hindsight and has inherent limitations. Specifically, backtested
results do not reflect actual trading or the effect of material economic and market factors on the decision-making process.
Since trades have not actually been executed, results may have under or over-compensated for the impact, if any, of
certain market factors, such as lack of liquidity, and may not reflect the impact that certain economic or market factors may
have had on the decision-making process. Actual performance may differ significantly from backtested performance.
Backtested results are adjusted to reflect the reinvestment of dividends and other income and, except where otherwise
indicated, are presented gross-of-fees and do not include the effect of backtested transaction costs, management fees,
performance fees or expenses, if applicable.
All CROCI indices have a history that combines backtested data with live data. Inception dates refer to the first instance of
a CROCI index which would have been backtested and live dates refer to the moment in time when a particular CROCI
index was no longer backtested (i.e. “live”).
All CROCI performance shown reflects the returns of an index and not any investment product, portfolio management or
mandated strategy.
Deutsche Bank AG 61
CROCI® Outlook 2016 | This time is different, or is it?
Appendix D: Factor Definitions
Factor returns are calculated as the long-short sector neutral spread over the stated period. The construction of each factor
is as follows. Each sector is, in effect, treated as a separate portfolio—and the factor portfolio goes long top quintile by
factor exposure, and short the bottom quintile, combining each sector’s long-short return.
Quality
ROE LTM, ROIC LTM, Cash ROIC LTM, Accruals**
Margins
Net Income Margin LTM, Gross Income Margin LTM, EBIT Margin LTM, Free Cash Flow Margin LTM
Yield
Dividend Yield LTM, Dividend Yield NTM
Sales to Price LTM/NTM, Book to Price LTM/NTM, Earnings Yield LTM/NTM, EBIT to EV LTM/NTM, EBITDA to
Value
EV LTM/NTM, Free Cash Flow Yield LTM/NTM, Cash Flow Yield LTM/NTM
Small Cap
Market Cap (US$ FF)**
Low Risk
Beta – Market**, Realised Volatility**, Idiosyncratic Volatility**
Low Leverage
Net Debt to Equity LTM**, Total Debt to Total Equity LTM**, LT Debt to Equity**
Debt Coverage
Net Debt to EBITDA LTM**, EBITDA to Interest Expense, FCF to Interest Expense
Cash Liquidity
Current Ratio, Quick Ratio, Cash Ratio
Growth
1 year EPS growth LTM, 1 year DPS growth LTM, 1 year sales growth LTM
Forecast Growth
1 year EPS growth NTM, 1 year DPS growth NTM, 1 year sales growth NTM
Historic Growth
5 year EPS growth LTM, 5 year DPS growth LTM, 5 year sales growth LTM
Int’l Exposure
Foreign Sales as % Total Sales
Revisions
Sales Revisions NTM, Earnings Revisions NTM, Cash Flow Revisions NTM, Dividend Revisions NTM
Momentum
First 11 Months, First 5 Months
Reversal
Williams R, Stochastic Oscillator, Bollanger Band, On Balance Volume, Commodity Channel Index, Force Index,
Relative Strength Index, MACD
Certainty
Sales Certainty NTM, Earnings Certainty NTM, Cash Flow Certainty NTM, Dividend Certainty NTM
** Denotes Signal Direction Reversed
Source: Deutsche Bank Quantitative Strategy Research
Deutsche Bank AG 62
CROCI® Outlook 2016 | This time is different, or is it?
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CROCI® Outlook 2016 | This time is different, or is it?
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Bank AG) EU Passports within the European Economic Area (“EEA”). Reference is made to European Union Regulatory Background and Corporate and
Regulatory Disclosures at https://www.db.com/en/content/eu_disclosures_uk.htm. Details about the extent of our authorisation and regulation by BaFIN
are available from us on request." DBS is acting in an agency/agency similar capacity (“the agent”) for and behalf of Deutsche Bank AG London Branch
and if you decide to enter into a transaction with Deutsche Bank AG or one of its affiliates (“the principal”) will any and all contractual and commercial
agreements be as entered into with that principal. This presentation is for information purposes only and is not intended to be an offer or an advice or
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arrange any type of transaction as a consequence of any information contained herein. It has been prepared without consideration of the investment
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regulation FFFS 2007:16, as amended.
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Investments in financial markets are subject to substantial degree of investment risk, including market fluctuations, regulatory change, possible delays in
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Deutsche Bank AG 64
CROCI® Outlook 2016 | This time is different, or is it?
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Deutsche Bank AG 65
CROCI® Outlook 2016 | This time is different, or is it?
Deutsche Bank AG 66
CROCI® Outlook 2016 | This time is different, or is it?
Head of CROCI Investment Strategy & Valuation Group
Francesco Curto
+44 20 754 53201
[email protected]
CROCI Intelligence
Francesco Curto
Colin McKenzie*
Sarvesh Agrawal
+44 20 754 53201
+44 20 754 52117
+44 20 754 59945
[email protected]
[email protected]
[email protected]
+44 20 754 75683
+44 20 754 73541
+44 20 754 50788
+44 20 754 16110
+1 212 454 0037
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
+33 1 4495 6605
+61 3 9270 4178
[email protected]
[email protected]
+44 20 754 51971
+44 20 754 74735
[email protected]
[email protected]
Americas
Joe Hall (Sales)
+1 212 454 5947
[email protected]
EMEA
Stefan Meinhold (Sales)
Christian Roessling (Sales)
Colin McKenzie
+44 20 754 55552
+44 20 754 17782
+44 20 754 52117
[email protected]
[email protected]
[email protected]
Japan
Colin McKenzie
+44 20 754 52117
[email protected]
Asia-Pac & Australia
Markus Barth
+44 20 754 75683
[email protected]
CROCI Investment Strategies
Markus Barth*
Jean-Baptiste Mayer
Fabio Pinna
Dirk Schlueter
Karan Mehta
CROCI Company Analysis
Virginie Galas*
Chris Town
CROCI Portfolio Management
Chris Wane*
Shinil Balakrishnan
* denotes Head of Function
Primary Regional Contacts
Deutsche Bank AG 67
Further Information
CROCI® Team
[email protected]
Important risk information
This document is intended for discussion purposes only and does not create any legally binding obligations on the part of Deutsche Bank
AG and/or its affiliates (“DB”). Without limitation, this document does not constitute an offer, an invitation to offer or a recommendation to
enter into any transaction. When making an investment decision, you should rely solely on the final documentation relating to the
transaction and not the summary contained herein. DB is not acting as your financial adviser or in any other fiduciary capacity with
respect to this proposed transaction. The transaction(s) or products(s) mentioned herein may not be appropriate for all investors and
before entering into any transaction you should take steps to ensure that you fully understand the transaction and have made an
independent assessment of the appropriateness of the transaction in the light of your own objectives and circumstances, including the
possible risks and benefits of entering into such transaction. For general information regarding the nature and risks of the proposed
transaction and types of financial instruments please go to https://www.db.com/en/content/Risk-Disclosures.htm. You should also
consider seeking advice from your own advisers in making this assessment. If you decide to enter into a transaction with DB, you do so
in reliance on your own judgment. The information contained in this document is based on material we believe to be reliable; however,
we do not represent that it is accurate, current, complete, or error free. Assumptions, estimates and opinions contained in this document
constitute our judgment as of the date of the document and are subject to change without notice. Any projections are based on a number
of assumptions as to market conditions and there can be no guarantee that any projected results will be achieved. Past performance is
not a guarantee of future results. This material was prepared by a Sales or Trading function within DB, and was not produced, reviewed
or edited by the Research Department. Any opinions expressed herein may differ from the opinions expressed by other DB departments
including the Research Department. Sales and Trading functions are subject to additional potential conflicts of interest which the
Research Department does not face. DB may engage in transactions in a manner inconsistent with the views discussed herein. DB
trades or may trade as principal in the instruments (or related derivatives), and may have proprietary positions in the instruments (or
related derivatives) discussed herein. DB may make a market in the instruments (or related derivatives) discussed herein. Sales and
Trading personnel are compensated in part based on the volume of transactions effected by them. The distribution of this document and
availability of these products and services in certain jurisdictions may be restricted by law. You may not distribute this document, in
whole or in part, without our express written permission.
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DAMAGES INCLUDING LOSS OF PROFITS INCURRED BY YOU OR ANY THIRD PARTY THAT MAY ARISE FROM ANY
RELIANCE ON THIS DOCUMENT OR FOR THE RELIABILITY, ACCURACY, COMPLETENESS OR TIMELINESS THEREOF.
Issued and approved by Deutsche Bank AG London Branch, Winchester House, 1 Great Winchester Street, London EC2N 2DB.
Authorised and regulated by the Financial Conduct Authority ("FCA“). This document is a “non-retail communication” within the meaning
of the FCA's Rules and is directed only at persons satisfying the FCA’s client categorisation criteria for an eligible counterparty or a
professional client. This document is not intended for and should not be relied upon by a retail client. This document may not be
reproduced or circulated without written consent of DB.
Deutsche Bank AG is authorised under German Banking Law (competent authority: European Central Bank) and, in the United Kingdom,
by the Prudential Regulation Authority. It is subject to supervision by the European Central Bank and by BaFin, Germany’s Federal
Financial Supervisory Authority, and is subject to limited regulation in the United Kingdom by the Prudential Regulation Authority and
Financial Conduct Authority. Deutsche Bank AG is a joint stock corporation with limited liability incorporated in the Federal Republic of
Germany, Local Court of Frankfurt am Main, HRB No. 30 000; Branch Registration in England and Wales BR000005 and Registered
Address: Winchester House, 1 Great Winchester Street, London EC2N 2DB.
Deutsche Asset Management is the brand name for the asset management arm of Deutsche Bank AG. © Deutsche Bank AG 2015

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