Text extracted via OCR from the original document. May contain errors from the scanning process.
II December 2013
GEM Equity Strategy Outlook 2014
6) IT and industrials have moved in favour of DM which reflects favourable
secular trends, most notably outsourcing from DM to EM companies and the
growing importance of DM Intellectual capital.
'Figure 26: EM vs DM net margins (?`s)- Industrials
1.15C1
Indul/mib
1•84 maw 1M
11
12
1
10
8
4
24
0 4-
3
2
115C1 DM IndusUs
6
6
6
6
13
f
t-
1
4
1 1 1
Sant Daces Bank Monty nn
LP
Figure 27: EM vs DM net margins (%) - Information
(Technology
Nei margin O41
18 -
18
14 -
12
10
2
0
a
alommeon Technakgy
-1192
DM • 11110110036 TOON1010gy
S.
S
:e-
San' Oars eBan. Ikombn
1P
7) EMs have fared especially badly in energy and materials primarily due to the
impact of policies based on state capitalism and resource nationalism, which
have reduced returns to capital.
[Figure 28: EM vs DM net margins (%) - Materials
[Figure 29: EM vs DM net margins (%) - Energy
2
I.415DIEM • MMersals
••••••-•M13O DM • Melenals
Net Myr DM
25
20
is
10
5
0 1 1 1 1 1 1 i i
San.. Onlacin an Skombeep Area LP
Ma Mow(%)
18
16 1
EM - EnM/Iff
0 1
4
6
6
4
S.
2
2
2
2
2
2
Saar Purse. Os* O'congtorp Mance LP
444-MSCI DM - EMMY
2
k
2
Conclusion; valuation now ambivalent, but the secular decline of EM
profitability relative to DM is likely to continue across most sectors.
Whilst the secular strengths of the US model are increasingly factored into
valuations (Figure 30 and Figure 31), there is no obvious end to the likely
degradation of margins of EM companies in the regulated and resource
sectors, relative to their DM peers. Continued DM outperformance in
Industrials and IT is also highly likely in our view, given the ongoing secular
trends, whilst EM staples stocks appear very expensive relative to their DM
counterparts based on their respective return profiles. Financials are a much
more difficult call, but given our negative structural view on China, we believe
that investors are right to price in a very substantial impairment of assets in
China, Brazil and Russia, while India is also problematic. The DM financials
sector is still under pressure from increasingly burdensome regulation and
litigation relating to the financial crisis, but would appear to be at a better
position in the economic cycle than most GEM economies.
Page 16
Deutsche Bank AG/London
CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e)
DB-SDNY-0107150
CONFIDENTIAL
SDNY_GM_00253334
EFTA01451032