Moving Pro Growth DB Research 1 PDF

Europe
Company
Market Update
1 December 2009
European Equity Strategy
This note details our index targets and
2010 Outlook
Global Markets Research
sector recommendations for the year

ahead. It also focuses on any relevant
themes that can help investors pick
stocks.
Moving pro-growth
High capex / depreciation precedes
stronger sales growth
2009s stock performance could be described as pro-recovery. Cyclicals have 25
outperformed defensives and companies with rising margin expectations have 20
seen their betas rise. For 2010 we look to move pro-growth and our focus in this
15
note is on companies offering the potential for top-line growth. Typically
companies with high capex / depreciation deliver stronger sales growth in the 10
following year - see figure 13 (pg11). Amongst others we would highlight the DB 5
Buy rated easyJet, Unilever, Accor and Daimler.
0
We also highlight a set of companies we would term sustainable growth to -5
protect against the macro risks. These are 20 companies put forward by our
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009E
research analysts (figure 15, pg13): Acerinox, Atlas Copco, Autonomy, BG,
BSkyB, Credit Suisse, G4S, Kone, Linde, LOreal, Nestle, Nobel Biocare,
Prudential, Reckitt Benckiser, SABMiller, Smith & Nephew, SSL, Telenet, Subsequent year sales growth (%) for
companies with HIGH capex/depr
Tesco and Vedanta. In all of these cases growth is expected to last at least 5 Subsequent year sales growth (%) for
years. companies with LOW capex/depr
We are raising our end-2010 target for the DJ Stoxx 600 from 225 to 250 based on
the probability adjusted aggregation of different macro scenarios (pg16). These Source: Deutsche Bank, IBES, Datastream
scenarios take into account the large tail-risk in the system. The most likely
scenario by the end of 2010 (45% probability in Q4) is that economic growth is
sustained and the stimulus is withdrawn in an orderly way without disruption to Gareth Evans
the market. On this basis (i.e. if we avoid the tail risks) we could be looking at a Strategist
Stoxx 600 YE level closer to 280. The main risk case (35% probability by 2010 YE) (+44) 207 545 2762
is that bond yields sell off sharply either through fiscal or inflation concerns. A risk gareth.evans@db.com
premium of 5.25% coupled with a rise in bond yields to 5% could bring the
multiple down to below 11x (figure 23, pg17) and a Stoxx 600 level of 205.
Jim Reid
Overall, we believe there is more scope for a better performance from equities Strategist
during H1, a period where the probabilities of the positive scenarios are at their (+44) 207 547 2943
highest relative to the negative ones. A combination of higher sales growth and jim.reid@db.com
margins points to a strong outcome for earnings. For example a 1ppt increase in
DB analysts current estimates for sales growth in 2010E combined with a 1ppt Ingo Schmitz, CFA
increase in EBIT margins next year could produce earnings growth in the region of
Strategist
+50% (figure 7, pg8). In the mid-90s and in 2002/3 investors were prepared to pay
high multiples for this level of growth (figure 17,pg15). For the end of Q1 we have (+49) 69 910-31910
an index target of 260 for the DJ Stoxx 600 which equates to a multiple of 15.2x. ingo.schmitz@db.com
As the year progresses the risks increase which is why we think the market will
peak for the year in H1.
We recommend overweight positions in oil, telecom, insurance, food & beverages
and retailers and underweights in banks, basic resources, autos and utilities
(pg24). As we enter the mid-cycle there is likely to be more differentiation
between cyclicals and defensives (figure 29, pg21). Historically, sharp rises in
bond yields have been accompanied by underperformance from financials and
outperformance from oil (figure 31, pg23).
Deutsche Bank AG/London

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1. MICA(P) 106/05/2009
1 December 2009 European Equity Strategy
Table of Contents
Macro Overview...................................................................................................................... 3
Probabilities of our scenarios in 2010 ....................................................................................... 5
How our probabilities evolve over the course of 2010 ............................................................. 5
Moving pro-growth................................................................................................................. 7
A top-down sketch............................................................................................................ 7
Capex outlook ................................................................................................................... 8
Screening on capex/depreciation ...................................................................................... 9
Sustainable growth picks ........................................................................................................ 12
Market valuation ................................................................................................................... 15

Paying for growth............................................................................................................ 15
Scenario testing .............................................................................................................. 16
Dividends ........................................................................................................................ 18
Sector strategy...................................................................................................................... 20
Back to the cycle............................................................................................................. 20
Interest rate sensitivity.................................................................................................... 22
Sector recommendations........................................................................................................ 24
Investor positioning................................................................................................................. 25
1. Earning Trends .................................................................................................................. 26

2. M&A, Equity issuance and Fund flows ........................................................................... 27
3. DB European universe and sector aggregates ............................................................... 28
4. Value screens .................................................................................................................... 29
5. Earnings revisions............................................................................................................. 30
Important Disclosures..................................................................................................... 31
Analyst Certification ........................................................................................................ 31
Regulatory Disclosures ................................................................................................... 32
1. Important Additional Conflict Disclosures ................................................................... 32
2. Short-Term Trade Ideas............................................................................................... 32
3. Country-Specific Disclosures ...................................................................................... 32
Page 2 Deutsche Bank AG/London

Macro Overview
Jim Reid (+44 20 7547 2943)
As 2010 approaches we would have to say that the authorities deserve very high marks for
their achievements in 2009 after many years of benign neglect concerning the huge
imbalances that were building up around the world. The downside is that many of these
imbalances remain and there remains unfinished business in terms of the adjustments
necessary for us to feel more at ease with the financial world. The good news is that the
authorities may have managed to create a fresh economic cycle that will allow much of these
adjustments to be made over time or perhaps postponed until the next downturn. However
we remain in extraordinary times and we are highly dependent on the authorities repeating
their successes of 2009 over the next few years before we can say that the battle of the
Great Contraction was decisively won back in 2009. In reality if 2010 goes wrong its likely
due to mistakes by global authorities or from a Sovereign/Government bond market problem
somewhere in the world. The problems are unlikely to come from within the equity or credit
markets. This means the macro environment will decide 2010, and in reality investors in
Sovereign debt around the world will probably decide the fate of risk assets.
For 2010 we broadly see the year following one of four possible scenarios. These scenarios
are explained below and we then assess what each might mean for equities, credit and rates
over the course of the year.
Scenario 1 This scenario is the most optimistic and is one where the authorities have
as good a year as they did in 2009. They likely keep stimulus extremely high in the
system without there being any noticeable consequences of their actions (e.g. rates at
the short and long-end stay low). Under this scenario we would expect equities to be
significantly higher, credit spreads be much tighter but with bond yields only edging
slightly higher as the authorities are seen to have firm control of inflation expectations
and may even be continuing to buy bonds.
Scenario 2 This scenario is the most likely and suggests that we start to see gradual
easing off the gas from the authorities but only as its proved that there is some
momentum in the underlying economy. Under this scenario risk assets have a good year
but returns are checked to some degree by rising bond yields and less stimulus being
injected into markets. A satisfactory year for risk, especially equities, but a mildly
negative one for fixed income. Credit investors will likely have to rely on spreads (and
higher beta credit) to get positive total returns.
Scenario 3 This is the second most likely scenario overall in 2010 but one that
potentially becomes more likely as the year progresses. Here we are likely to see sharply
higher bond yields start to disrupt the positive momentum in markets. These higher
yields could be either due to Government supply starting to overwhelm demand
(especially as the impact of QE, and similar schemes, wane), or because of inflation
fears. It seems unlikely that actual inflation will be a concern in 2010 but its quite
possible for expectations to become unanchored. We would also have to include the
potential for a Sovereign crisis somewhere in the Developed world within this scenario.
We would note that the higher yields in this scenario are not based on positive growth
momentum but by inflation/Sovereign risk. Such a scenario is incorporated in Scenario 2.
Scenario 4 This is the nightmare scenario of Deflation or in less extreme terms
perhaps a double-dip. Given that much of the world is currently still in negative YoY
inflation territory it is difficult to completely rule out even if we do live in a fiat currency
system and even if inflation is expected to return to positive territory in early 2010. For
deflation to be sustained we would probably need an exogenous event to hamper the
authorities ability to continue to successfully fight this credit crisis. Such events could be
Deutsche Bank AG/London Page 3

a fresh banking crisis arising, a political backlash encouraging immediate increases in

economic regulation or withdrawal of stimulus, or possibly a Government bond/currency
sell-off that forces the authorities to aggressively reign in stimulus for fear of a sovereign
crisis. A Sovereign crisis outside the Developed world could also encourage this scenario
as there would be a flight to quality into Developed market bond market in spite of the
fact that these markets have their own large fiscal issues. Bond yields would eventually
rally strongly but risk assets would experience a very poor year. As time progresses this
scenario becomes less likely as the system gradually repairs itself and the authorities are
allowed more time to inflate the global economy. As we discuss in scenario 3, the more
likely risk scenario is inflation, especially as time progresses.
We have tried to simplify and narrow down the scenarios as much as possible to allow for
easy explanation but the reality is that there are many other permutations for the year ahead.
For example and as discussed above, within the worst case scenario we would have to
include a slightly less severe outcome where growth fails to show any momentum after the
stimulus starts to fade (a double dip perhaps?). If the authorities are unwilling or unable to
stimulate further then we could have a weak economy even if we don't see outright
deflation. This would likely be negative for equities/credit but the outcome would be unlikely
to be as negative as the -30% outcome.
The other big problem in differentiating between the two negative scenarios is with regards
to Sovereign risk. If we have Sovereign risk within the EM complex (e.g. Dubai) then Western
bond yields could rally strongly on a flight to quality basis. So an element of this risk is priced
into Scenario 4. However we are in a fairly unusual point in history where there is also an
increasing risk of a Sovereign crisis occurring in the Developed world at some point. The
fiscal deficits arising from this crisis have to be addressed at some point. If the market
eventually sees no credible medium-term way of certain Western countries balancing their
budgets and repaying their debts then we may see a large rise in Government yields. This in
itself could be enough to raise funding costs to levels that encourage a viscous circle.
Figure 1: US Debt to GDP back to 1929 Figure 2: UK Debt to GDP Ratios

400% Government GSE/Agency Financial 500% Govt Fins Non-Fins HouseHolds
350% ABS Household Corporate 400%
300%
250% 300%
200% 200%
150%
100%
100%
50% 0% Q1-2008
Q1-1987
Q1-1990
Q1-1993
Q1-1996
Q1-1999
Q1-2002
Q1-2005
0%
1929 1938 1947 1956 1965 1974 1983 1992 2001
Source: Deutsche Bank, Federal Reserve, The Statistical History of the US , from Colonial Times to the Source: Deutsche Bank, Office of National Statistics
Present, by Ben Wattenberg
Figures 1 and 2 helps understand why we are entering into unknown territory in terms of
Developed market debt. This chart simply shows the Debt to GDP ratio of the US and the UK.
The Government part of the deficit is starting to rise sharply in both regions and although it
looks within the range of historic observations we have to remember that Governments have
implicitly and explicitly backed the debt of other parts of the economy. This makes
Government liabilities potentially much larger. The hope is that growth rebounds strongly
enough for the Debt/GDP ratio to fall naturally over time. Such a scenario would also require
yields to stay low to facilitate such an adjustment. All we can say is that there are risks that
the deficits of such indebted countries at some point appear unsustainable to the market.
This is when far more difficult decisions than those made in 2009 would have to be made.

Probabilities of our scenarios in 2010

In Figure 3 we assign a probability to the four potential scenarios we laid out for 2010 and try
to work out what Equities, Credit and Rates may do under each scenario. The Government
returns then help us arrive at total return outcomes for credit.
Figure 3: 2010 Equity and Credit Scenario Based Return Forecasts

Equity EUR Credit USD Credit GBP Credit
10yr US
Outcome (Probability) Yield Stoxx 600 Price Return Total Return IG ER IG TR HY TR IG ER IG TR HY TR IG ER IG TR
Scenario 1 (15%) 3.50% 315 30% 34% 6.6% 8.4% 16.2% 9.6% 11.1% 20.1% 12.0% 14.0%
Scenario 2 (50%) 4.00% 280 16% 20% 4.6% 5.0% 8.9% 6.1% 4.6% 10.3% 6.9% 8.2%
Scenario 3 (25%) 5.00% 205 -15% -11% 0.6% -4.1% -5.3% -1.8% -9.2% -7.0% -3.3% -12.3%
Scenario 4 (10%) 2.00% 170 -30% -26% -3.5% 0.8% -6.4% -9.1% 1.1% -9.1% -13.6% -2.0%
Wtd Average Outcome 3.98% 255.5 5.6% 9.6% 3.1% 2.8% 4.9% 3.1% 1.8% 5.5% 3.1% 2.9%
Note: TR=Total Return; ER=Excess Return. Source: Deutsche Bank
With the uniqueness of the current recovery relative to those seen through history, these
forecasts encompass a relatively wide range of outcomes that we feel is appropriate in these
unusual times. Overall on a weighted probability of outcomes we think that 2010 will be a
year where yields rise, which leads to negligible (or negative) total returns in Government
bond markets. Credit spreads should tighten and show positive excess returns but their total
returns will likely be weighed down by higher Government yields. For Equities its not a
runaway year but a small increase plus dividends allows for total returns that just about
exceed that of IG and HY on a weighted probability of outcomes. Credit is certainly a lower
beta play on the recovery than equities from this starting point.
We should note that the weighted average of outcomes guide our forecasts but do not
exactly match them. In the more illiquid credit markets these averages do correspond to
expectations for returns by year-end but for the more liquid equity markets our year-end
target relies more on how these probabilities change over the course of 2010.
How our probabilities evolve over the course of 2010

Figure 4 provides a guide to how we think the probabilities of these scenarios will evolve
over the course of 2010.
Figure 4: Evolution of Scenario Probabilities through 2010

Average Prob Q1 2010 Q2 2010 Q3 2010 Q4 2010
2010
Scenario 1 15% 17.5% 15.0% 15.0% 12.5%

Scenario 2 50% 55.0% 52.5% 47.5% 45.0%
Scenario 3 25% 15.0% 22.5% 27.5% 35.0%
Scenario 4 10% 12.5% 10.0% 10.0% 7.5%
Forecasts
EPS 17.1 18.0 18.8 19.7
PE Ratio 15.3 14.3 13.5 12.7
Wtd Average 261 257 254 250
Stoxx 600 Level
Source: Deutsche Bank
What is quite clear is that the risk-positive Scenario 2 is most likely to occur relative to the
others in the early part of the year. Intuitively this is when we are most likely to see a
continuation of the near Goldilocks 'not too hot, not too cold' outcome. The economy will
hopefully still be recovering but with enough ambiguity about its sustainability to reign in
speculation about an imminent rates market sell-off. The most positive Scenario 1 is the
second most likely scenario in Q1 but the inflation fears/bond market sell-off scenario edges
into second place from Q2 onwards.

Although Q1 is when the probabilities of the most positive scenarios are at their highest,
perversely this is also the time that the worst case scenario is at its highest as well. We think
this because as it stands we are still flirting with deflation around much of the Western world.
We should pull out of it early in 2010 but we also have to accept that the economy would still
likely have a major bias towards deflation if the authorities were unwilling or unable (for
whatever reason) to provide a similar level of support as they have been doing in 2009. As
the year progresses this deflation risk should minimise as the authorities continue down their
current path. As such the risk of an inflation scare or fears about the fiscal situation probably
grows. With the way we look at the world, the gap between the most likely scenario and the
inflation fear scenario narrows substantially by Q4. The outcomes are not quite binary in Q4
but start to move in that direction.
Our 2010 DJ Stoxx 600 YE target (currently 242) is 250 (13.8x top-down earnings) based on
the probability adjusted aggregation of different macro scenarios. These scenarios take into
account the large tail-risk in the system. The most likely scenario by the end of 2010 (45%
probability in Q4) is that economic growth is sustained and the stimulus is withdrawn in an
orderly way without disruption to the market. On this basis (i.e. if we avoid the tail risks) we
could be looking at a Stoxx 600 YE level closer to 280. The main risk case (35% probability by
2010 YE) is that bond yields sell off sharply either through fiscal or inflation concerns. A risk
premium of 5.25% coupled with a rise in bond yields to 5% could bring the multiple down to
below 11x (figure 23, pg16) and a Stoxx 600 level of 205. Overall, we believe there is more
scope for a better performance from equities during H1, a period where the probabilities of
the positive scenarios are at their highest relative to the negative ones. For the end of Q1 we
have an index target of 260 for the DJ Stoxx 600 which equates to a multiple of 15.2x. As the
year progresses the risks increase which is why we think the market will peak for the year in
H1.
The reality is that we perhaps need to keep flexible and navigate the year month by month
and quarter by quarter. It does seem the biggest risk in Q1 and perhaps H1 is from a huge
policy mistake, more likely due to a withdrawal of stimulus, or from an exogenous shock. This
shows how dependant we are on the authorities and leaves a lot of power in the hands of a
few important people around the world. We also dont know whether the problems in Dubai
will escalate in the near-term and this is an additional reason the probability of the worst case
scenario is slightly higher in Q1. However the positive factors should outweigh the risks for
now. We would stress though that its impossible to fully analyse equity and credit markets
without being aware of the immense largesse that the authorities have been providing
markets in 2009.
In the following article we outline a pro-growth strategy which we think will help us to protect
against the many macro risks of 2010.
For a fuller macro overview of 2010 please see the full Macro Credit and Equity Outlook
entitled 2010 Outlook - A strong Q1, risks increase thereafter

Moving pro-growth
Gareth Evans (+44 20 7545 2762)
We would characterise stock performance this year as pro-recovery. Since the end of January
to the peak in mid-October, cyclical sectors have in aggregate outperformed defensive
sectors by 37% (exc. financials and/or basic resources +24%). As cost cutting has continued,
margins have been a key focus and cyclicals have seen the most comprehensive revival in
margin expectations, and through this been rewarded with a higher beta. In our note The
right kind of cyclical, 20 October 2009 we looked at discriminating across the cyclical group
on the basis of which cyclical had the operational leverage to match these upgraded margin
forecasts.
We believe it is now time to extend this to a pro-growth strategy focused on top-line

potential and in this we note we screen for stocks best placed to see a sustainable growth in
sales spanning both cyclicals and defensives.
A top-down sketch
Our economists are currently forecasting nominal GDP to grow by 2.6% in Euroland next
year and by 2.8% in 2011. Historically the multiplier between nom GDP growth and sales
growth is 1.6x in Euroland implying sales growth of 4.2% in 2010 and 4.5% in 2011. After an
8% decline this year, DB analysts are forecasting 3% sales growth in 2010 in Euroland.
In the UK our economists are forecasting nominal GDP growth of 3% in 2010 and 4% in
2011. The average multiplier of sales growth to nom GDP growth (since 1989) is 1-to-1 in the
UK and DB analysts are forecasting a modest 2% sales growth next year.
Figure 5: Euroland nominal GDP vs. Sales growth Figure 6: UK nominal GDP vs. Sales growth
25% 20%
20% 15%
15%
10%
10%
5%
5%
0%
0%
-5% -5%
-10% -10%
2009E
2010E
2011E
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009E
2010E
2011E
Euroland nom GDP Euroland sales gth UK nom GDP UK Sales gth
Source: Wolrdscope, Deutsche Bank estimates Source: Worldscope, Deutsche Bank estimates
The combination of rising sales growth and rising margins points to a potentially strong
outcome for earnings in 2010. In the matrix below we have simulated the potential upside to
Pan-European earnings growth based on DB estimates. Currently DB analysts are forecasting
3.2% sales growth and 11.5% EBIT margin combining to produce 33% net income growth. If
we increase both by 1ppt then we could move to an earnings growth rate of closer to +50%.

Figure 7: Sensitivity of 2010E Pan-Eur earnings growth to different sales growth and margin assumptions
Sales growth (%)
1.20 1.70 2.20 2.70 3.20 3.70 4.20 4.70 5.20
EBIT Margin (%) 9.5 3.0 3.7 4.3 4.9 5.5 6.1 6.8 7.4 8.0
10.0 9.8 10.4 11.1 11.7 12.4 13.0 13.7 14.4 15.0
10.5 16.5 17.2 17.9 18.6 19.3 20.0 20.6 21.3 22.0
11.0 23.3 24.0 24.7 25.4 26.1 26.9 27.6 28.3 29.0
11.5 30.0 30.8 31.5 32.3 33.0 33.8 34.5 35.3 36.0
12.0 36.8 37.5 38.3 39.1 39.9 40.7 41.5 42.3 43.0
12.5 43.5 44.3 45.1 46.0 46.8 47.6 48.4 49.2 50.1
13.0 50.3 51.1 52.0 52.8 53.7 54.5 55.4 56.2 57.1
13.5 57.0 57.9 58.8 59.7 60.5 61.4 62.3 63.2 64.1
Source: Deutsche Bank estimats. Based on net income growth. Shaded areas represent DBs current bottom-up estimate
Capex outlook
How soon capex can recover is likely to be an important factor in determining the extent to
which sales can grow. From its peak, capex has been cut by 9% (based on the main
components of the DJ Stoxx 600). Construction and technology have seen the largest cuts.
Only oil & gas increased capex this year.
The outlook for capex next year is more differentiated between those that are still expected
to cut further, and those forecast to show growth. On DB estimates we are expecting capex
to grow in technology, retail, personal care, travel & leisure, chemicals and utilities.
Figure 8: Capex outlook by sector ranked by peak-to-trough change

DJ Stoxx sector Peak-to-2009 2010E Weight (2010E)
Constr & Matls -57.1% -24.8% 5%
Technology -31.8% 4.6% 1%
Healthcare -29.1% -6.2% 1%
Retail -23.5% 6.9% 5%
Pers & Hhold Gds -21.9% 0.8% 2%
Travel & Leisure -20.4% 0.6% 2%
Basic Res -18.6% -7.3% 8%
Industrial G&S -17.8% -4.8% 9%
Chemical -17.4% 5.0% 3%
Autos -16.8% -1.7% 6%
Food & Beverages -14.4% -0.2% 4%
Telecom -11.6% -2.5% 13%
DJ Stoxx -9.3% -4.7% 100%
Media -0.2% -5.6% 2%
Utilities 0.0% 3.8% 21%
Oil & Gas 0.0% -12.5% 19%
While the financing of capex remains in question, the need to increase capex is likely to hinge
on whether capacity has been destroyed during the recession. This could spur a more
immediate increase in capex going into economic recovery.
The data on capital stock is difficult to come by in Europe, but the ONS publish it for the UK
by sector. In 1992 total net capital stock (net of depreciation) fell by 1.3%. In figure 9 below
we show that the contributors to this by sector were wide-ranging, including financials, metal
production, machinery, construction, computer activities, leisure and food,drink & tobacco.
Only a handful of sectors bucked this trend.

2009 could be the same. The data on insolvencies from the Insolvency Agency (figure 10) is
indicating that we are on track to reach the heights of 1992 when the number of insolvencies
exceeded 24,000 companies. In 2Q09, manufacturing, construction and real estate were
showing the largest year-on-year increases in the number of insolvencies.
Figure 9: Change in UK net capital stock during 1992 Figure 10: Total number of UK liquidations
Financial intermediation 25
Insurance & pensions
Metals and metal products 20
Machinery & equip
Construction
15
Computer activities
Hotels& restaurants
Food, drink & tobacco 10
TOTAL net capital stock
Manufacturing 5
Chemicals
Transport equipment
Paper, publishing & printing 0
2009E
Motor vehicles
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Electricity, gas & water
-7.0% -3.0% 1.0% 5.0% Total company liquidations (000s)

Source: ONS Source: Insolvency Agency (2009E is derived from annualising 2009Q2)
Of course, these insolvencies are largely unlisted smaller companies, and so the listed
companies can gain market share without having to invest. But capacity can be quickly
rebuilt, particularly in sectors where there are low barriers to entry and the listed companies
will still need to invest in order to hold on to any market share gains they may have derived
from the recession.
Screening on capex/depreciation
Companies with high capex/depreciation ratios will normally see stronger sales the following
year. This is the main finding of our back-test. For each year since 1989 we have split the
constituents of the DJ Stoxx into two equal halves after ranking by capex / depreciation and
then measured the median sales growth for these two sections the following year.
The results are shown in the chart below and the evidence is compelling. Companies with
high capex/depreciation typically deliver stronger sales growth than companies with low
capex/depreciation. Out of 21 years, only in 2 did this fail to work.
In figure 13 we show the DB Buy rated companies that on DB estimates have higher than
market levels of capex/depr for 2009E and positive sales growth for 2010E. We have split the
table according to UK, Europe exc. UK, mid & small cap and basic materials. We have
excluded utilities. We would highlight the likes of easyJet, Tesco, Serco, Nestle, Accor and
Daimler.

Figure 11: High capex/depr engenders higher sales growth

25.0
20.0
15.0
10.0
5.0
0.0
-5.0
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009E
Subsequent year sales growth (%) for companies with HIGH capex/depr
Subsequent year sales growth (%) for companies with LOW capex/depr
In the chart below we rank the Pan-European sectors according to their estimated sales
growth for next year on DB estimates and show their capex/depr for 2009E. The standouts
are inevitably basic resources and oil & gas but also retail which has both a high sales growth
forecast and high capex/depr.
Figure 12: Sector capex/dep 2009E vs. 2010E sales growth

12% 2.5
10%
2.0
8%
6% 1.5
4% 1.0
2%
0.5
0%
-2% 0.0
Sales gth 2010E Capex / dep 2009E (rhs)


Figure 13: High capex/depreciation 2009E & positive sales growth 2010E
Capex / depreciation
Company Rec Close Price (local) 5-yr avg 2009E Sales gth 2010E
UK
easyJet Buy 370.7 12.27 9.40 10.1%
Misys Buy 208.3 3.02 5.82 16.9%
Tesco PLC Buy 429 3.27 3.96 8.7%
Whitbread Buy 1305 2.35 3.67 3.2%
Serco Buy 521.5 1.30 2.40 10.0%
Autonomy Corp Plc Buy 1440 1.43 2.20 20.8%
Unilever Plc Buy 1792 1.64 1.56 4.0%
Europe exc.UK
Acciona Buy 86.85 8.15 12.86 13.2%
Mediaset Buy 5.09 9.33 7.37 2.6%
Abengoa Buy 19.885 6.67 5.66 24.6%
M6 Buy 17.345 7.87 5.33 3.0%
Cintra Buy 7.32 8.68 4.78 7.1%
HHLA Buy 26.63 2.14 2.27 9.0%
United Internet Buy 9.01 1.21 2.18 14.4%
Nestle Buy 48.29 1.89 2.13 2.9%
Colruyt Buy 168.9 2.26 1.91 7.5%
Accor SA Buy 36.15 2.99 1.79 5.1%
MTU Buy 34.62 1.63 1.79 3.4%
Daimler Buy 34.625 0.75 1.71 9.2%
JM Buy 117.75 13.14 1.63 4.6%
Eutelsat Communications Buy 21.775 1.02 1.62 6.0%
Mid & Small cap
Orpea Buy 30.21 9.96 7.97 12.7%
Alapis Buy 0.46 28.57 5.37 12.0%
Delticom AG Buy 24 4.31 4.97 15.8%
YOC AG Buy 12.16 4.54 4.80 23.5%
Jumbo SA Buy 8.4 4.44 4.06 11.6%
Playtech Buy 406.75 4.99 3.96 9.1%
Korian SA Buy 18.5 5.58 2.05 8.6%
XING AG Buy 32.06 6.04 2.02 25.6%
Gruppo MutuiOnline Buy 5.46 1.68 1.79 14.9%
Basic materials
Cairn Energy Buy 3040 5.59 19.78 521.0%
Vedanta Resources Buy 2305 5.00 5.90 15.9%
BG Group Buy 1126 2.36 3.96 3.4%
Tullow Oil Buy 1243 2.32 3.66 4.9%
Tecnicas Reunidas S.A. Buy 36.7 3.34 3.66 15.7%
Saipem Buy 21.8 3.25 3.56 2.2%
Galp Energia Buy 12.3 2.37 3.07 4.4%
Motor Oil Buy 10.6 4.25 3.04 2.2%
Premier Oil Plc Buy 1112 1.97 2.57 12.0%
Royal Dutch Shell Plc Buy 1769 1.67 2.23 9.6%
Alliance Oil Company Buy 101.5 4.08 2.05 3.0%
Rio Tinto Buy 3089.5 2.15 1.73 8.1%
AMEC Plc Buy 793 2.43 1.58 9.7%
Acerinox SA Buy 13.925 1.85 1.51 56.5%
Source: Deutsche Bank. Close 27/11/09

Sustainable growth picks

There are cyclical and non-cyclical approaches to moving pro-growth. So far we have
concentrated on the cyclical with a focus on capex, but the more classical approach to buying
growth is to screen for companies where sales growth is not wholly dependent on the
progress of the economic recovery - companies that can offer sustainable or structural
growth. This allows us to get exposure to top-line growth but without the macro risk and
2010 is not devoid of macro risks.
It is worth noting that between March and October this year, according to MSCI European
growth stocks have underperformed value stocks by 19% (see figure 14).
Figure 14: EU growth stocks / value stocks during 2009

0.85
0.83
0.81
0.79
0.77
0.75
0.73
0.71
0.69
0.67
0.65
1/09 2/09 3/09 4/09 5/09 6/09 7/09 8/09 9/09 10/09 11/09
Growth / Value
Source: MSCI, Datastream
We have screened for growth stocks simply through consultation with DB analysts. We
asked them to recommend a sustainable growth pick and frame their contribution around the
following 4 questions:
1) What in your opinion is the sustainable growth rate in sales?
2) What are its main drivers? Specific details on product category or business division or
geographic exposure.
3) How long is this growth expected to last? More or less than 5 years?
4) Does the current valuation account for this growth potential?

We recommend 20 companies, and the answers to these 4 questions are summarised in the
table below. A valuation table for these companies is also given below.

Figure 15: DB sustainable growth picks

Qn1: What is the Qn2: What are its main drivers? Qn3: How long is this growth Qn4: Does the current
sustainable growth expected to last? valuation account for this
rate in sales? growth potential?
Acerinox 7 to 9% Global share gains and substitution for stainless more than 10 years No
steel
Atlas Copco 5% High exposure to emerging markets and More than 5 years No trading in line with sector
commodities (mining equip 22% sales) average
Autonomy 15% Provides solutions for using unstructured data 3 to 5 years at least Not fully
in enterprises. High quality data-mining and
search solutions.
BG Group 6 to 8% Brazil and Australia. Till at least 2020 No. We believe BG should
command a 40-50% premium
to UK oil majors.
BSkyB 6 to 7% Customer growth and HD driving average more than 5 years No, valuation in line with sector
revenue per user up.
Credit Suisse 8 to 9% Global wealth creation within the private bank. Cyclical recovery in operating 7x our 2011E adjusted EPS
Over the next 5 years CAGR in the region of margins should last for 5 years. forecast of CHF 8.2
20% pa at the EBIT level. Wealth growth longer.
G4S 6% Double digit growth in government business at least 5 years No, about 15-20% cheap if G4S
and new markets. returns to long-term growth
Kone Up to 5% Higher margin maintenance operations (60% of Maintenance business more Cheap compared to European
sales). Winning market share in Asia in the new than 5 years Capital Goods sector.
equipment business.
Linde 7% Emerging markets; Energy megatrends More than 5 years No. 25-30% discount to global
peers
L'Oreal 6% Personal care is fastest growing staple minimum 10 years Up to 10 years of such growth
category. L'Oreal most successful player and already factored in
already ca. 40% of business in emerging
markets.
Nestle 6% Perfect category exposure and is slowly More than 5 years Up to 10 years of such growth
internationalising. already factored in
Nobel Biocare 10-15% Increasing adoption of tech by dentists and at least 5 years No. Expected to benefit from
labs, patient awareness, reimbursements and material structural change in its
geographic expansion markets
Prudential 15% up to 20% Net inflows lifting AuM: between 15 and 24% 5 years, probably longer No
pa over the last 2 years depending on area +
emergence of profit in 5 Asian countries that
are still in start-up phase.
Reckitt Benckiser 8% Currently still seen as a household company. minimum 10 years Up to 10 years of such growth
But OTC now 1/3rd of company and could be already factored in
100% over next five years.
SABMiller 8% Increasing beer consumption per capita in key minimum 10 years Up to 10 years of such growth
emerging markets. already factored in
Smith & Nephew 8% Demographics (babyboomers approaching age at least 5 years 30% discount to this potential
for requiring these products), new technology
SSL 5% Expect condoms business to grow 8% pa in more than 5 years, up to 10 Yes, but this is because of bid
emerging markets leading to 30bp pa speculations not because the
improvement in EBITA margins. growth story is understood
widely.
Telenet 4 to 7% ARPU doubles for users switching from analog 5 to 6 years No, trading below direct peers
to digital TV + technology upgrades in mobile
and internet business.
Tesco 10 to 16% High international growth in Asia and Europe + more than 5 years No
services business.
Vedanta 12 to 15% Well positioned in India which has lacked 5 to 6 years Partially but still many risks
significant exploration expenditure despite priced in
being geologically prospective.

Figure 16: DB sustainable growth picks

Company Name Recommendation Close Price Target Price
Acerinox SA Buy 14.235 20
Atlas Copco Buy 102.8 105
Autonomy Corp Plc Buy 1449 2000
BG Group Buy 1148.5 1275
BSkyB Buy 544.5 625
Credit Suisse Group Buy 54.4 77
G4S Buy 247.7 288
Kone Buy 27.77 31
Linde Buy 83.37 90
L'Oreal Hold 74 70
Nestle Buy 48.62 60
Nobel Biocare Buy 29.9 40
Prudential Buy 650.5 660
Reckitt Benckiser Buy 3216 3500
SABMiller Hold 1809 1700
Smith & Nephew Buy 586 700
SSL International Buy 733 800
Telenet Group Buy 18.505 22
Tesco PLC Buy 434.75 480
Vedanta Resources Buy 2357 2637

Market valuation
Paying for growth
There is little doubt that on occasion, investors are happy to pay up for growth and we could
be at one of those junctures now. The combination of rising sales growth and rising margins
can generate strong rates of earnings growth. Depending on whether you are looking at the
DAX, or CAC or FTSE, when earnings growth expectations hit very high levels during1993-95
and 2002/3 (prospective / trailing EPS) the prospective PE exceeded 15x, and the actual PE
settled 12-months later in the region of 16-20x. Current growth expectations are not as high
as those reached during these periods, but 12/13x looks modest particularly in the UK.
Figure 17: Historic guide to peak earnings growth expectations & multiples
12m fwd EPS Prosp PE (x) Trail PE (x) Trail PE 12m
growth exp later (x)
DAX-30 Q1 94 61.4% 21.7 34.5 19.1
Q1 02 75.9% 23.7 42.6 15.9
Latest 34.1% 12.2 16.8
CAC-40 Q4 95 95.9% 15.0 13.2 23.0
Q3 03 46.9% 15.3 14.3 16.6
Latest 21.1% 12.0 14.8
FTSE 100 Q1 93 24.2% 14.3 17.5 15.5
Q4 02 18.8% 17.8 21.3 21.4
Latest 19.9% 12.9 15.8
Source: Datastream
However, there are a couple of things that encourage us to be cautious of taking this at face
value. The first is that our top-down earnings growth forecast is underscoring the current
bottom-up expectations. Based on our economic forecasts, we are projecting earnings
growth of 20% in 2010 from the top-down. The second reason is the dependency on banks.
Looking at the change in aggregate earnings forecast by the consensus, banks make up 27%
of this growth in 2010 and 39% in 2011 (see figure 19).
It is also worth noting that, in terms of the level earnings, 2011E EPS for the DJ Stoxx is
expected to be greater than 2005 and 88% of 2007s peak earnings. Incidentally, for the S&P
the bottom-up consensus is forecasting a new peak in earnings for 2011.
Figure 18: Earnings growth expectations 2010E & 2011E Figure 19: Sector contribution to earnings growth
30% 40%
35%
25%
30% Contribution to chg 2010 earnings
20% 25% Contribution to chg 2011 earnings
20%
15%
15%
10% 10%
5% 5%
0%
0%
2/08 4/08 6/08 8/08 10/0812/082/09 4/09 6/09 8/0910/09
2010E 2011E
Source: IBES. Based on DJ Stoxx 600 Source: Deutsche Bank, IBES, Based on change in aggregate net income..

Scenario testing
We believe that there are a number of risks surrounding the outlook for the market next year
and the index targets need to account for these. We describe 4 separate scenarios. These
are summarised in figure 20. To each of these scenarios we have assigned probabilities,
bond yields, yield curve movements, index levels and multiples.
Figure 20: Probability adjusted index target

Yield curve Probability 10-year bond End 2010E PE (x) DJ Stoxx 600
(4Q10) yield (%)
Spot 3.17 12.3 242
Scenarios
1. "Sweet spot" persists Remain steep 12.5% 3.25 16.0 315
2. Base case: orderly Bear flattening 45% 4.00 14.2 280
removal of stimulus
3. Inflation sparks early and Bear steepening 35% 5.00 10.4 205
stimulus withdrawn quickly (at least initially)
4. Deflation / risk aversion Bull flattening 7.5% 2.00 8.6 170
Sum 100% 12.7 250

Source: Deutsche Bank, IBES. The bond yield is based on the German 10-year.
The first scenario is our most bullish where the sweet spot continues. QE is maintained
without threatening higher interest rates. Under this scenario the yield curve remains steep,
bond yields remain low and the multiple expands further settling at 16x by the end of 2010. In
figure 21 below where we show the change the probabilities during the course of the year
for each scenario, and in our view the probability of this scenarios falls from Q1 to Q4.
Therefore, the best period for the market is during H1.
The second scenario is in our opinion the most likely. It consists of an orderly withdrawl of
stimulus, bond yields rise, but not by too much, and the DJ Stoxx produces a 10% gain on
todays levels. We have assigned a probability of 45% to this scenario (having started the
year at 55%).
Scenarios 3 and 4 represent the downside risks with 3 being the most likely particularly later
in 2010. Scenario 3 is about inflation sparking earlier than expected and there is a more
abrupt withdrawl of stimulus which proves disruptive for financial markets which are currently
highly correlated. Specifically, we see a significant upside risk to bond yields. The speed of
this move is key. Equities might still be a better place to be than bonds, but a likely spike in
volatility would still drive the index level lower. Under this scenario we see the DJ Stoxx
falling to 205 and a sub-mid cycle multiple of 10.4x.
Figure 21: Quarterly profile

Scenarios 09 Q4 10 Q1 10 Q2 10 Q3 10 Q4
1. "Sweet spot" persists 17.5% 15.0% 15.0% 12.5%
2. Base case: orderly 55.0% 52.5% 47.5% 45.0%
removal of stimulus
3. Inflation sparks early and 15.0% 22.5% 27.5% 35.0%
stimulus withdrawn quickly
4. Deflation / risk aversion 12.5% 10.0% 10.0% 7.5%
EPS (index pts) 16.2 17.1 18.0 18.8 19.7

Index (DJ Stoxx) 265 260 257 254 250
PE 16.4 15.2 14.3 13.5 12.7
Source: Deutsche Bank, IBES. All and-quarter estimates.

Scenario 4 represents both deflation and a more general flight to quality brought about by
sovereign risk. Deflation is clearly the least likely risk, but still possible - we are after all only
seeing unprecedented levels of stimulus to head off this risk.
Figure 22 shows the still strong relationship between implied volatility and the prospective
PE. A multiple below 11x (consistent with scenario 3) implies a VSTOXX level of over 40
compared with the current 28.
Figure 22: DJ Stoxx forward PE vs implied volatility

90 5
80
7
70
60
9
50
40 11
30
13
20
10 15
0
11/06 2/07 5/07 8/07 11/07 2/08 5/08 8/08 11/08 2/09 5/09 8/09 11/09
VSTOXX implied volatility +12m PE (x), rhs inverted

Source: Datastream
Scenario 3 would likely involve both a rising risk premium combined and a rising bond yield.
The sensitivity of the PE multiple to changes in these two is shown in figure 23 below.
Assuming an RoE of 11% (current DB 2009E for Europe exc. financials) and a dividend
payout ratio of 45%, then a bond yield of 5% and an ERP of 5.25% would imply a multiple of
below 11x. Currently the gap between the prospective consensus earnings yield and real
bond yields is indicating a risk premium of 4.5%. The 10-year average is 5.25%.
Figure 23: Sensitivity of the multiple to changes in risk premium and bond yields
ERP (%)
4.75 5.00 5.25 5.50
10-year bond yield 3.5 20.5 18.4 16.7 15.3
(%)
4.0 16.7 15.3 14.1 13.0
4.5 14.1 13.0 12.2 11.4
5.0 12.2 11.4 10.7 10.1
5.5 10.7 10.1 9.6 9.1
Source: Deutsche Bank. Assuming RoE of 11% and payout ratio of 45%
Going back to figure 20, the aggregate weight of probabilities across the 4 scenarios gives an
index target of 250 for the DJ Stoxx. This is our new target for the end of 2010 (previously
225). On a top-down EPS forecast of 18.1 (+20%) this puts the DJ Stoxx on 13.8x 2010. The
related local index targets are shown in figure 24. Note we are not making any explicit
country preferences.

Figure 24: Index targets

Index target PE
EPS gth 2010E Spot Q1 End-2010 2009E 2010E
DJ Stoxx 600 23.2% 243 260 250 16.6 12.7
DAX-30 27.1% 5686 6090 5860 17.0 12.6
CAC-40 27.4% 3721 3990 3840 16.1 12.0
AEX 68.6% 310 332 319 22.7 12.7
S&PMIB 24.3% 22205 23800 22890 16.1 12.2
IBEX 10.8% 11777 12620 12130 14.7 12.5
SMI 27.2% 6337 6790 6530 17.3 12.8
FTSE 100 26.0% 5246 5620 5410 17.5 13.1
Source: Deutsche Bank. Earnings growth and PEs are based on the IBES consensus.
Dividends
Before leaving the subject of valuation, it is worth touching on the subject of dividends.
Going into 2009 there was a lot of concern about the sustainability of dividends given the
pressures on refinancing and the economic slowdown. In fact 2009 has turned out a lot
better than expected.
Taking the UK as an example, only 22% of dividend announcements this year have been cuts
(see figure 27). The FTSE dividend future since its launch in May has risen by 38.5% (based
on the Dec10 contract).
Figure 25: Large cap dividend still exceeds bond yields Figure 26: Market implied dividends for FTSE 100
7 190
180
6
170
5 160
4 150
140
3
130
2 120
98 98 99 99 00 01 01 02 02 03 04 04 05 05 06 06 07 08 08 09 5/09 6/09 6/09 7/09 8/09 9/09 9/09 10/09 11/09
Dividend yield of top 10 largest UK companies (%) Dec 10 dividend (index points)
10-year UK gilt yield (%) Dec 11 dividend (index points)
Source: Deutsche Bank, Datastream Source: Bloomberg
While dividend yields and bond yields re-crossed in August for the market overall, large caps
still have a dividend yield in excess of the gilt yield. Figure 25 shows that the top 10
companies in the FTSE 100 by market cap have a dividend yield of over 4%. Therefore, large
caps still represent a significant pocket of value assuming cash flows remain resilient is
sectors such as oil and telecom.

Figure 27: FTSE 350 dividends in 2009

Number of dividend Raised Maintained Cut
announcements
Jan-09 4 1 1
Feb-09 23 4 13
Mar-09 39 4 10
Apr-09 12 12 3
May-09 34 22 20
Jun-09 18 10 6
Jul-09 29 19 16
Aug-09 29 19 16
Sep-09 12 20 3
Oct-09 10 5 3
Total 210 116 91

% of announcements YTD 50% 28% 22%
Source: Company REFs, Markit

Sector strategy
Back to the cycle
With the overwhelming preference for cyclicals relative to defensives this year it is important
to qualify some of these performances in the context of the cycle. Since 1960 we have
isolated 7 complete cycles on the basis of the global OECD lead indicator in figure 28 below.
We highlight 3 growth phases of early, mid and late. The early cycle is taken just prior to the
trough in the lead indicator and captures the initial recovery. The late cycle covers the period
before and after the lead indicator peaks, and mid cycle is the period in between.
Figure 28: Phases of the cycle
103
102
101
100
99
98
97
96
Early Cycle Mid Cycle Late Cycle OECD Global lead ind
We have measured the performance of European and UK sectors during these three phases
and in the tables below we show the top 10 and bottom 10 sectors by annualised absolute
performance for each phase across all 7 cycles.
During the early cycle, across both Europe and the UK we see outperformances from travel &
leisure, banks, autos and industrials. Utilities, telecom and non-life insurance typically
underperform. This is largely in line with what weve seen in 2009.
Moving into the mid cycle, which we are now on the verge of doing, we normally see better
performances from telecom, technology, media and aerospace and a weaker performance
from banks. During the late cycle, which we dont need to worry about yet, not surprisingly
oil, utilities, tobacco, pharma, food retail and food producers perform better, while retail,
media, travel & leisure, tech and autos underperform.

This time around, probably because of the rapid recovery in the lead indicator there has been
more a blend of early and mid-cycle sector performances, and in some cases such as retail
and leisure there was an aggressive move early on (end 08). Year to date, the largest returns
have been made in basic resources (+86%), banks (+52%), chemicals (+37%), industrials
(+32%) and retail (+32%). Utilities is the only sector to have fallen during the year (-4%). We
have also seen relatively weak performances from healthcare (+7%), travel & leisure (+8%),
telecom (+8%) and media (+10%).
Given that the mid-cycle is typically longer than the early and late cycles, there is scope for
more differentiation. For instance, technology, media and telecom may have room to perform
better.
Figure 29: Pan-European sectors and the cycle

Early cycle
Top 10 Avg ann Bottom 10 Avg ann return
return
S/W & Comp Svs 24% Oil/Eq Svs/Dst -15.1%
Ind. Met & Mines 19% Financial Svs -3.8%
Auto & Parts 17% Nonlife Insur -3.0%
Leisure Gds 16% Real Est Inv,Svs -2.5%
Forestry & Pap 14% Fd & Drug Rtl -1.7%
Inds Transpt 13% Life Insurance -1.6%
Inds Eng 11% Gen Retailers 0.0%
Chemicals 11% Support Svs 0.3%
Oil & Gas Prod 10% Fxd Line T/Cm 0.4%
Electricity 8% Eltro/Elec Eq 1.2%
Mid cycle
return
Support Svs 37% Leisure Gds 12.7%
Mining 30% REITs 13.6%
Aero/Defence 29% Oil/Eq Svs/Dst 13.8%
S/W & Comp Svs 28% Forestry & Pap 14.2%
Tch H/W & Eq 28% Inds Transpt 16.0%
Real Est Inv,Svs 27% Beverages 17.1%
Nonlife Insur 27% H/H Gds,Home Con 17.4%
Travel & Leis 27% Banks 18.2%
Media 26% Personal Goods 18.3%
Financial Svs 26% Ind. Met & Mines 18.4%
Late cycle
return
Tobacco 10% REITs -27.1%
Gs/Wt/Mul Util 4% Fxd Line T/Cm -26.3%
S/W & Comp Svs 2% Media -26.1%
Oil & Gas Prod 2% Auto & Parts -25.6%
Chemicals 1% Travel & Leis -24.8%
Fd Producers 0% Leisure Gds -21.5%
Mining -1% Gen Retailers -20.5%
Nonlife Insur -1% Tch H/W & Eq -18.1%
Personal Goods -2% H/H Gds,Home Con -17.7%
Pharm & Bio -3% Oil/Eq Svs/Dst -17.1%
Source: Deutsche Bank, based on Datastream sectors

Figure 30: UK sectors and the cycle

Early cycle
Top 10 Avg ann return Bottom 10 Avg ann. return
Tch H/W & Eq 47% Oil/Eq Svs/Dst -3.6%
Mining 31% Gs/Wt/Mul Util 0.0%
Fd & Drug Rtl 27% Fxd Line T/Cm 0.3%
Travel & Leis 22% Nonlife Insur 1.1%
Financial Svs 21% Eltro/Elec Eq 4.7%
Pharm & Bio 18% Mobile T/Cm 5.0%
Support Svs 17% Electricity 5.6%
Banks 17% Life Insurance 5.7%
Aero/Defence 17% H/C Eq & Svs 5.8%
Oil & Gas Prod 16% Beverages 6.4%
Mid cycle
Top 10 Avg ann return Bottom 10 Avg ann. return
Tch H/W & Eq 46% Nonlife Insur 4.6%
Leisure Gds 41% Banks 6.6%
Mobile T/Cm 29% Fd Producers 7.1%
Mining 25% Tobacco 7.9%
Fxd Line T/Cm 22% General Inds 8.3%
Aero/Defence 22% Gen Retailers 8.7%
Financial Svs 21% Inds Transpt 8.8%
Oil & Gas Prod 20% Beverages 8.8%
Support Svs 19% Oil/Eq Svs/Dst 8.9%
Real Est Inv,Svs 17% Media 9.4%
Late cycle
Top 10 Avg ann return Bottom 10 Avg ann return
Electricity 11% Tch H/W & Eq -33.7%
Gs/Wt/Mul Util 7% Fxd Line T/Cm -32.1%
Tobacco 6% Mobile T/Cm -31.0%
S/W & Comp Svs -1% Auto & Parts -24.2%
Fd & Drug Rtl -1% Oil/Eq Svs/Dst -22.5%
Pharm & Bio -2% Media -22.4%
Mining -3% Travel & Leis -19.4%
Personal Goods -3% Eltro/Elec Eq -18.2%
Nonlife Insur -4% Gen Retailers -17.9%
REITs -6% Inds Eng -17.8%
Source: Deutsche Bank, based on Datastream sectors
Interest rate sensitivity

As discussed in the market valuation section one of the big risks in 2010 could be a sharp rise
in bond yields. In figure 31 we have examined the sector correlations in both Euroland and
the UK during the last main period when bond yields rose sharply. Between Jan-99 and Feb-
00 the German 10-year bond yield rose from 3.70% to 5.59%. Between Feb-99 and Oct-99
the 10-year gilt yield rose from 4.18% to 5.83%.
During these periods weekly equity returns we negatively correlated with bond yields.
Financials seem to struggle the most. Oil & gas was the standout outperformer in Europe
and the UK during these periods.

Figure 31: Sensitivity to rising bond yields

Euroland: Jan-99 to Feb 00 UK: Feb-99 to Oct 99
Top 10 Euro sector Correlation of Top 10 UK sector Correlation of
weekly abs returns weekly abs returns
Forestry & Pap 30.6% Oil & Gas Prod 15.4%
H/H Gds,Home Con 15.5% Fd & Drug Rtl 7.2%
Oil & Gas Prod 15.0% Mining 6.9%
Ind. Met & Mines 13.7% REITs 5.1%
Leisure Gds 11.4% Travel & Leis 4.8%
Con & Mat 11.1% Inds Eng 4.2%
Oil/Eq Svs/Dst 9.9% Real Est Inv,Svs 3.6%
Chemicals 6.3% Tobacco 1.0%
Inds Eng 5.3% Oil/Eq Svs/Dst 0.2%
H/C Eq & Svs 3.1% Leisure Gds -0.9%
Bottom 10 Euro sector Correlation of Bottom 10 UK sector Correlation of

weekly abs returns weekly abs returns
Nonlife Insur -42.4% Fd Producers -27.2%
Electricity -37.4% S/W & Comp Svs -28.7%
Banks -35.6% Investment Trust -30.3%
Life Insurance -35.2% Fxd Line T/Cm -30.6%
S/W & Comp Svs -32.3% Banks -34.4%
Gen Retailers -31.6% H/C Eq & Svs -35.8%
Fxd Line T/Cm -30.8% Pharm & Bio -36.6%
Pharm & Bio -29.9% Mobile T/Cm -43.9%
Eqt Ivst Ins -26.3% Life Insurance -51.4%
Support Svs -25.2% Nonlife Insur -57.2%
Euroland market -28.8% UK market -37.3%


Sector recommendations
Overweight Justification Top pick Bottom pick

Oil & Gas Market expectations on cash flow are too negative. Failed to BP OMV
participate in the rally.
Telecoms Highest dividend yield in the market at 6.7% (2010E). Do not Vodafone TeliaSonera
expect a big pick up in capex in 2010.
Retailers Housing data has improved and interest rate expectations have Kingfisher Inditex
fallen. High street buoyant. Positive also on food.
Food & beverages A maintenance of high margins should sponsor a structural re- Unilever Pernod
rating. Supported by emerging market exposure.
Insurance Renewed interest in the sector as insurance assets are put up Allianz Munich Re
for sale. Attractive dividend yield.
Neutral Justification Top pick Bottom pick
Technology Better outlook for semis than hardware, but limited valuation ASML Ericsson
headroom left.
Travel & leisure Underperformed during 2H09 but earnings momentum trends Accor Intercontinental
remain weak.
Chemicals Third strongest performer year to date. Destocking ended and Linde Clariant
potential for some restocking in Q1.
Industrial goods & Margins have been successfully protected and supported by GEA Volvo
services exposure to China. Now expensive relative to market.
Healthcare Potential to perform 2H10 because of the sectors strong Novartis AstraZeneca
defensive characteristics. Valuation attractive.
Media Scope to perform better during mid-cycle but structural WPP Wolters Kluwer
pressures continue to weigh on the sector.
Construction & Emerging market exposure and expected to benefit from govt CRH Saint Gobain
building materials spending in 2H10 in Europe and the US.
Underweight Justification Top pick Bottom pick
Basic Resources Vulnerable to a stronger Dollar in 2010. Restocking slowing in Rio Tinto Lonmin
China. Looking expensive.
Utilities No strong valuation case and risk of rising bond yields. Power RWE Verbund
prices remain weak. Only catalyst is regulatory.
Banks May have a good Q1, but seen the best of the steepening of Barclays Commerzbank
the yield curve. Further capital raising in US and Europe.
Negative correlation with oil.
Autos Strong Q4/1 because of scrapage incentives and end of Daimler BMW
destocking, but fall in volumes thereafter.

Investor positioning
Figure 32: Europe Sector positioning
Active weight relative to benchmark (%)
October-09 2.43
Industrials 2.50
September-09
August-09 1.54
Information Technology 1.60
1.48
Consumer Staples 0.96
1.13
Health Care 1.00
0.67
Consumer Discretionary 0.13
0.07
Materials -0.19
-0.40
Financials 0.19
-0.48
Telecommunication Services -0.70
-0.49
Energy -1.25
-1.66
Utilities -1.29
-2.0 -1.0 0.0 1.0 2.0 3.0
Source: EPFR / Deutsche Bank calculations

1. Earning Trends
DJ Stoxx 600 earnings revision ratio DJ Stoxx 600 consensus earnings growth forecasts
0.4 Expected earnings growth for
40
respective years
0.2
35
0.0 30
-0.2 25
21.3%
-0.4 20 23.4%
-0.6 15 -16.9%
-0.8 10
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
-1.0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Earnings revisions: Companies with 12-month-forward earnings (ups-downs) / total 2009 2010
2011 12 month fwd EPS: Stoxx
Average
Source: Thomson Financial, IBES and Deutsche Bank calculations Source: Thomson Financial, IBES and Deutsche Bank calculations
DJ Stoxx 600 forward PE ratio Forward dividend yield vs. 10-year German bond yield
17 Latest PE ratios for 7
respective years
15.7
15 6
13 12.9
5
12.7
11 4
10.5
9 3
7
2
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
5
Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09
Stoxx dividend yield German 10 year bond yield
2009 2010 2011 12 month fwd PE: Europe (Stoxx)
Source: Thomson Financial, IBES and Deutsche Bank calculations Source: Thomson Financial and Deutsche Bank calculations
1M and 3M revision of 2010E sector earnings (%) 3M change in earnings uncertainty* (%)
Autos & Parts Health Care 2.2
Basic Resources Media -3.9
Banks Retail -5.8

Personal & Household Goods Insurance -8.1
Construction & Materials Food & Beverages -10.1
Stoxx600 Chemicals -10.2
Chemicals Utility -12.4
Retail Industrial G. & S. -13.2
Industrial Goods & Services Oil & Gas -13.8
Telecoms
Travel & Leisure -15.3
Technology
Technology -15.6
Health Care
Telecoms -16.0
Food & Beverage
Stoxx600 -18.9
Oil & Gas
revision of 2010E earnings Construction & Materials -19.0
Insurance
revision last month Personal & Household Goods -23.4
Utilities
Financial Services -29.5
Media revision previous three
months Basic Resources -33.6
Financial Services
Banks -34.4
Travel & Leisure
nm
Automobiles & Parts
-10 -5 0 5 10 15 20 25 30
-40 -35 -30 -25 -20 -15 -10 -5 0 5
Source: Thomson Financial, IBES and Deutsche Bank calculations Source: Thomson Financial, IBES and Deutsche Bank calculations
*Measured as standard deviation of 12month fwd earnings estimates as percentage of earnings

2. M&A, Equity issuance and Fund flows

M&A activity in Europe (incl. Private equity) Equity Issuance in Europe
5% 12% 1.6% 4.5%
Equity issuance at historic high following
several high value issues (especially 4.0%
1.4%
European M&A activity in 10% from Banks): HSBC (E13.6bn), HBOS
4% 2009 is slightly stronger than (E9.4bn), Llyods (E9.0bn) and Rio Tinto 3.5%
in 2008, but is till slightly 1.2%
(E8.2bn)
below historic average 8% 3.0%
1.0%
3%
2.5%
6% 0.8%
2.0%
2% 0.6%
4% 1.5%
0.4%
1.0%
1%
2% 0.2% 0.5%
0.0% 0.0%
0% 0%
Q1 1995
Q1 1996
Q1 1997
Q1 1998
Q1 1999
Q1 2000
Q1 2001
Q1 2002
Q1 2003
Q1 2004
Q1 2005
Q1 2006
Q1 2007
Q1 2008
Q1 2009
Q1 1995
Q1 1996
Q1 1997
Q1 1998
Q1 1999
Q1 2000
Q1 2001
Q1 2002
Q1 2003
Q1 2004
Q1 2005
Q1 2006
Q1 2007
Q1 2008
Q1 2009
Quarterly Equity issued as % of Mkt Cap (l.h.s)

Quarterly M&A as % of Mkt Cap (l.h.s) Annual M&A as % of Mkt Cap (r.h.s.) Annual equity issued as % of Mkt Cap (r.h.s)
Source: Thomson, Datastream and Deutsche Bank calculations Source: Thomson, Datastream and Deutsche Bank calculations
Datastream Total European Market index is used for Market Cap
Share Buybacks in Europe Cumulative 12M flow by assets ex ETFs (%of assets)
0.7% 1.2% 50%
Bond markets have seen clear inflows
European share buyback 40% over the last 6 months on the expense
0.6%
volume in 2009 at 15 1.0% of Money markets, but equity markets
year lows have only remained stable
30%
0.5%
0.8%
20%
0.4%
0.6% 10%
0.3%
0.4% 0%
0.2%
-10%
0.2%
0.1%
-20%
May-09
Nov-08
Mar-09
Nov-09
Dec-08
Jan-09
Feb-09
Apr-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
0.0% 0.0%
Q1 1995
Q1 1996
Q1 1997
Q1 1998
Q1 1999
Q1 2000
Q1 2001
Q1 2002
Q1 2003
Q1 2004
Q1 2005
Q1 2006
Q1 2007
Q1 2008
Q1 2009
Total Equity International bonds Corp. High Yield Bonds

Quarterly Share buybacks as % of Mkt Cap (l.h.s) Money Market bonds US bonds Emerging Bonds
Annual Share buybacks as % of Mkt Cap (r.h.s)
Source: Thomson, Datastream and Deutsche Bank calculations Source: EPFR / Deutsche Bank calculations
Cum. 12M flow by equity regions ex ETFs (% of assets) Flow into W. Europe Equity Funds ex ETFs (% of assets
20% 0.90%
Emerging markets is the only
regions with clear inflows over
10% the last 6 months European fund flows have been
0.60% trendless since April 2009
0%
0.30%
-10%
0.00%
-20%
-30% -0.30%
-40% -0.60%
May-09
Nov-08
Mar-09
Nov-09
Dec-08
Jan-09
Feb-09
Apr-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-08
Jan-09
Feb-09
May-09
Jun-09
Aug-09
Sep-09
Nov-09
Dec-08
Mar-09
Apr-09
Jul-09
Oct-09
US Western Europe Japan Pacific EM Weekly flows as a % of NAV 4-week average flows as a % of NAV
Source: EPFR / Deutsche Bank calculations Source: EPFR / Deutsche Bank calculations

Page 28
1 December 2009
3. DB European universe and sector aggregates
DB European universe aggregates (ex financials)
Data as at: 26 November 2009 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E
Number of companies 50 59 71 89 111 144 177 257 309 330 362 420 479 536 579 587 582 578 504
P/E ratio Headline (x) 20.5 14.6 15.4 19.2 18.3 21.7 33.9 17.9 23.1 18.1 11.4 11.2 13.3 13.8 15.1 12.6 15.1 12.9 11.0
Headline EPS growth (%) -5.8 37.4 -0.5 3.3 39.6 9.9 3.9 38.6 -36.2 9.7 34.2 22.3 0.4 14.7 7.5 -6.0 -25.9 19.2 17.5
European Equity Strategy

P/E ratio FD (x) 27.1 16.6 14.7 19.5 17.0 22.5 47.2 22.6 60.1 129.5 14.3 13.4 14.3 13.7 14.4 16.6 17.3 13.6 11.4
P/CFPS (x) 7.9 7.6 8.0 8.1 8.9 10.6 23.1 13.8 10.2 7.5 6.4 7.6 8.4 8.9 9.7 7.7 7.6 7.2 6.6
Dividend yield (%) 1.8 2.1 2.5 1.9 2.3 3.9 1.3 1.9 2.2 2.5 3.2 3.1 3.1 3.2 3.0 3.5 3.6 3.7 4.0
Dividend cover (x) 2.0 2.8 2.8 2.7 2.5 1.1 1.7 2.3 0.8 0.3 2.1 2.4 2.2 2.3 2.4 1.7 1.6 2.0 2.21
Price/BV (x) 2.5 2.8 2.1 2.6 3.0 3.5 5.7 2.5 2.3 1.3 2.1 2.4 2.5 2.7 2.7 1.7 1.9 1.8 1.7
EV/Sales 0.87 0.79 0.79 1.07 1.14 1.33 2.49 1.47 1.26 1.14 1.01 1.10 1.19 1.27 1.43 1.15 1.20 1.17 1.17
EV/EBITDA 7.83 6.54 6.67 7.43 7.48 9.34 17.57 9.64 9.10 7.51 6.29 6.88 6.99 7.31 8.17 6.97 7.56 6.84 6.31
EV/EBIT 14.07 10.79 10.75 12.91 11.99 15.42 28.73 15.50 16.71 15.43 10.37 10.42 10.17 10.55 11.67 10.44 12.16 10.32 9.15
EV/Operating Capital 1.73 1.71 1.71 1.71 1.95 2.26 3.01 1.91 1.69 1.28 1.50 1.80 1.85 1.91 2.04 1.69 1.52 1.49 1.45
Sales growth (%) 1.6 8.5 2.2 8.8 30.0 7.2 1.0 19.4 6.5 -0.2 -2.6 1.5 8.3 9.7 6.5 6.8 -11.1 2.9 5.4
Op. EBITDA/sales (%) 11.1 12.0 11.9 14.4 15.2 14.2 14.2 15.2 13.9 15.2 16.0 16.0 17.1 17.4 17.5 16.5 15.9 17.1 18.6
EBIT/sales (%) 6.2 7.3 7.4 8.3 9.5 8.6 8.7 9.5 7.5 7.4 9.7 10.6 11.7 12.0 12.3 11.0 9.9 11.3 12.8
Payout ratio (%) 49.7 35.4 35.9 37.3 39.9 87.0 60.6 43.2 131.4 321.1 46.6 41.5 45.2 44.3 42.5 57.6 62.2 50.9 45.3
ROE (%) 8.1 12.5 14.1 11.8 16.2 14.7 11.8 12.7 3.8 1.3 10.4 16.7 16.9 18.5 19.1 12.9 11.2 13.8 13.9
Return on Capital (%) 7.1 10.2 11.3 8.5 10.8 9.5 6.7 8.4 3.4 1.6 9.3 12.1 11.7 12.6 12.9 9.1 8.1 9.7 11.1
Operating Return on Capital (%) 7.8 10.5 10.7 9.0 11.2 9.8 7.9 9.2 5.6 4.0 10.4 11.9 12.2 12.8 12.5 10.6 8.7 10.1 16.5
Capex/sales (%) 7.3 6.7 6.6 8.3 7.6 8.2 9.0 9.9 8.3 7.4 6.7 6.4 7.0 8.4 7.8 8.0 8.2 7.6 6.7
Capex/depreciation (x) 1.5 1.4 1.5 1.4 1.4 1.6 1.8 1.9 1.5 1.3 1.2 1.3 1.4 1.7 1.6 1.7 1.5 1.4 1.3
Net debt/equity (%) 40.8 34.2 33.1 56.4 55.4 67.8 57.6 56.0 64.6 46.0 52.7 46.5 44.6 48.0 50.9 61.2 59.6 52.7 46.5
Net interest cover (x) 4.4 6.9 7.4 5.4 6.7 7.2 8.2 7.6 4.5 4.6 6.9 9.0 9.9 10.1 10.0 7.4 5.4 6.9 7.3
Source: Deutsche Bank estimates
DB European sector aggregates

EV/OC EV/Sales EV/EBITDA Div. Yield (%) P/E 2 P/BK ROE (%)
2009E 2010E 2009E 2010E 2009E 2010E 2009E 2010E 2009E 2010E 2009E 2010E 2009E 2010E
Automobiles & Parts 0.9 0.9 0.4 0.4 7.1 4.2 0.9 2.3 NA 19.6 0.9 0.9 -4.4 4.5
Basic Resources 1.6 1.6 1.9 1.8 9.7 7.5 1.7 1.6 22.0 14.0 2.0 1.8 7.8 13.8
Chemicals 1.8 1.8 1.3 1.2 9.2 7.4 2.6 2.9 17.8 13.7 2.2 2.1 8.7 12.9
Construction & Materials 1.1 1.1 1.0 1.0 8.0 7.6 3.0 3.0 14.6 14.2 1.4 1.3 9.4 9.2
Food & Beverage 2.1 2.1 1.9 1.9 9.8 9.6 3.1 3.1 15.5 14.8 3.1 2.9 18.5 19.3
Health Care 1.9 1.8 2.0 1.9 8.8 8.2 1.6 1.8 16.6 15.4 2.4 2.2 12.1 13.0
Industrial Gds & Services 1.6 1.6 0.9 0.9 8.7 7.4 2.5 2.7 23.0 15.5 2.0 1.8 7.3 11.6
Media 1.4 1.4 1.6 1.6 8.0 7.5 4.1 4.4 13.0 12.4 1.6 1.5 10.2 10.8
Oil & Gas 1.5 1.4 0.9 0.9 4.8 4.5 4.5 4.6 13.5 11.7 1.9 1.7 14.3 15.4
Personal & H'hold Gds 2.2 2.2 1.9 1.8 10.5 9.5 2.7 2.9 17.0 15.3 2.7 2.5 14.4 16.1
Retail 1.7 1.7 0.5 0.5 7.3 7.1 3.4 3.4 14.8 14.3 2.3 2.1 13.9 15.4
Technology 2.5 2.4 1.3 1.3 11.6 8.5 2.2 2.4 18.1 14.3 2.6 2.3 8.7 16.0
Telecommunications 1.2 1.2 1.8 1.7 5.1 5.0 6.1 6.5 10.2 9.9 1.6 1.5 13.3 15.4
Travel & Leisure 1.5 1.5 0.9 0.8 8.1 7.4 2.7 3.1 15.3 13.4 1.5 1.5 11.0 11.1
Utilities 1.4 1.3 1.7 1.7 8.0 7.7 4.8 5.0 12.2 11.5 1.7 1.6 14.3 13.8
Banks 1 2.0 2.6 21.2 13.8 1.6 1.5 8.4 11.2
Insurance 1 3.8 4.2 8.6 7.8 17.4 15.0
Figures as at 25 Nov 2009, 1: Certain positions are calculated in a different way than for the other sectors. 2. Banks and Insurance P/E data are referred to Adjusted P/E.
4. Value screens
Screen 1: Dividend Yield Screen Screen 2: Price to Book Screen
Screen Criteria: All Stoxx 600 Industrials under our coverage with FF Market Screen Criteria: All Stoxx 600 Industrials under our coverage with FF Market
Capitalisation > 2 bn, Dividend yield 2010E > 5% and Buy recommendation Capitalisation > 2 bn Price to Book 2010E < 1 and Buy recommendation
Div. FCF Div. FCF

Model Price P/BV Yield Yld.* Model Price P/BV Yield Yld.*
Company Last (local) Local PE (x) (x) (%) (%) Company Last (local) Local PE (x) (x) (%) (%)
updated 25/11/09 curr. 2010E 2010E 2010E 2010E updated 25/11/09 curr. 2010E 2010E 2010E 2010E
BAT 28/10/09 1915.0 GBP 11.7 4.4 5.6 6.9 ArcelorMittal 29/10/09 26.4 EUR 13.4 1.0 1.8 -0.4
BP 27/10/09 589.7 GBP 11.1 1.9 5.9 4.9 Deutsche Lufthansa A 29/10/09 10.8 EUR 21.1 0.7 3.6 -2.1
British Land Co Plc 28/10/09 467.5 GBP 17.1 1.0 5.6 17.5 Hammerson 28/10/09 412.4 GBP 23.6 0.9 3.6 1.7
Cable & Wireless 06/11/09 143.7 GBP 10.8 1.9 6.6 2.4 Home Retail Group 06/11/09 308.0 GBP 14.9 0.9 4.8 7.8
Enel 05/11/09 4.1 EUR 9.5 1.3 6.3 4.4 International Power 11/11/09 282.5 GBP 8.6 0.9 4.7 7.1
Fortum 22/10/09 17.1 EUR 11.9 1.8 5.9 3.7 Investor 13/10/09 131.0 SEK 83.5 0.7 3.1 -0.1
GDF Suez 16/10/09 29.3 EUR 12.4 1.1 5.8 3.8 Logica 04/11/09 121.1 GBP 9.5 0.8 2.6 6.0
KPN 28/10/09 12.0 EUR 10.3 8.3 6.7 7.1 Renault SA 03/11/09 33.2 EUR NM 0.5 0.0 8.2
Mediaset 11/11/09 5.2 EUR 15.6 1.3 6.4 6.5 Telecom Italia 06/11/09 1.1 EUR 8.8 0.8 4.5 7.2
National Grid PLC 10/11/09 671.0 GBP 11.8 3.3 5.7 1.0 Vodafone Group Plc 11/11/09 139.0 GBP 8.7 0.8 5.8 11.2
OPAP 11/11/09 16.5 EUR 7.0 7.6 13.7 16.8 Wolseley 18/11/09 1251.0 GBP 21.7 0.9 0.0 8.0
Royal Dutch Shell plc 12/11/09 1861.0 GBP 11.7 1.4 5.4 3.0
RWE 02/11/09 63.1 EUR 9.2 2.6 5.7 -2.6 * FCF Yield is calculated as the reciprocal of EV/FCF
Severn Trent 18/11/09 1006.0 GBP 10.1 2.5 7.0 0.3
Swisscom 11/11/09 392.3 CHF 10.3 3.6 6.6 6.6
Telefonica 13/11/09 19.5 EUR 9.5 4.7 7.2 7.2
Telekom Austria 16/11/09 11.9 EUR 12.1 2.8 6.3 10.4
Terna S.p.A. 11/11/09 2.8 EUR 15.3 2.7 6.9 -2.8
Total SA 04/11/09 42.6 EUR 10.1 1.8 5.6 5.7
United Utilities 18/11/09 484.1 GBP 8.4 2.3 7.1 1.6
Vodafone Group Plc 11/11/09 139.0 GBP 8.7 0.7 5.8 11.2
* FCF Yield is calculated as the reciprocal of EV/FCF
Source: Deutsche Bank estimates Source: Deutsche Bank estimates
Screen 3: Free Cash Flow Screen Screen 4: CROCI Value Screen
Screen Criteria: All Stoxx 600 Industrials under our coverage with FF Market Screen Criteria: All Stoxx 600 Industrials under our coverage with FF Market
Capitalisation > 2 bn FCF yield 2010E > 10% and Buy recommendation Capitalisation > 2 bn CROCI Value = 1
Div. FCF EV/

Model Price P/BV Yield Yld.* Market Price CROCI NCI x Eco. P/E CROCI
Company Last (local) Local PE (x) (x) (%) (%) Company Cap. (local) Local x GW GW x GW Value
updated 25/11/09 curr. 2010E 2010E 2010E 2010E (Euro mn) 25/11/09 curr. 2010E 2010E 2010E 2010E
AMEC Plc 25/11/09 796.0 GBP 14.1 2.4 2.5 10.7 EADS 5,050 12.3 EUR 5.0% 0.8 15.8 1.0
British Land Co Plc 28/10/09 467.5 GBP 17.1 1.0 5.6 17.5 Nokia 32,956 9.0 EUR 16.7% 1.8 10.5 1.0
Land Securities 28/10/09 687.0 GBP 22.0 0.7 4.1 10.2 Vivendi SA 24,012 19.7 EUR 16.5% 2.3 13.8 1.0
Novartis 13/11/09 55.9 CHF 11.1 2.3 4.3 10.6
OPAP 11/11/09 16.5 EUR 7.0 7.6 13.7 16.8
Sanofi-Aventis 13/11/09 52.2 EUR 7.6 1.5 4.6 13.3
Telekom Austria 16/11/09 11.9 EUR 12.1 2.8 6.3 10.4
Vodafone Group P 11/11/09 139.0 GBP 8.7 0.7 5.8 11.2
* FCF Yield is calculated as the reciprocal of EV/FCF
Source: Deutsche Bank estimates Source: Deutsche Bank estimates

5. Earnings revisions
Companies with strongest 1 month EPS upgrades Companies with strongest 3 month EPS upgrades
2010E 2010E
S. 1M % 1M S. 3M % 3M
No. Company Curr. Price EPS change perf. No. Company Curr. Price EPS change perf.
1 UPM Kymmene EUR 9 0.37 75.0 6.9 1 Aixtron EUR 22 0.67 76.8 60.1
2 Kinnevik Investment AB SEK 108 1.90 52.0 12.2 2 Jyske Bank DKK NA 9.98 74.8 NA
3 Stora Enso EUR 5 0.23 52.0 3.3 3 ASML Holding NV EUR 20 1.05 69.6 8.7
4 Jyske Bank DKK NA 9.98 35.3 na 4 UPM Kymmene EUR 9 0.37 57.8 4.8
5 ITV Plc GBP 52 2.13 26.8 2.8 5 Persimmon GBP 437 9.16 56.0 -12.6
6 Nordea SEK 76 0.42 26.1 1.1 6 ITV Plc GBP 52 2.13 51.9 8.4
7 Aixtron EUR 22 0.67 24.8 1.9 7 Inchcape Plc GBP 31 2.30 51.0 3.9
8 Metso EUR 22 1.20 21.3 9.4 8 Michael Page GBP 338 4.67 49.7 3.6
9 Natexis Banques Populaires EUR 4 0.28 19.6 -3.7 9 Nordea SEK 76 0.42 48.7 7.6
10 Umicore EUR 24 1.11 19.4 5.4 10 Svenska Handelsbanken SEK 197 13.43 43.3 12.3
11 Skandinaviska Enskilda SEK 46 0.91 17.4 -3.2 11 Stmicroelectronics Nv EUR 6 0.17 42.5 4.8
12 Clariant AG CHF 11 0.77 16.1 0.1 12 Metso EUR 22 1.20 41.9 32.2
13 Schroders Plc GBP 1222 72.21 16.0 2.0 13 Electrolux SEK 176 14.04 34.4 19.3
14 HSBC GBP 732 0.67 15.3 5.5 14 Volvo SEK 70 1.36 33.8 16.8
15 KBC Group EUR 32 3.94 15.2 -8.8 15 Danske Bank DKK 114 4.96 33.5 -13.2
16 Svenska Handelsbanken SEK 197 13.43 14.8 -1.0 16 YIT EUR 14 0.82 33.5 43.6
17 Software AG EUR 70 5.43 14.2 9.6 17 Antofagasta GBP 901 1.09 33.1 19.2
18 Pargesa Holding AG CHF 87 6.84 13.2 -4.4 18 Grupo Ferrovial EUR 31 1.09 31.4 26.5
19 Croda GBP 774 60.32 12.7 3.1 19 Clariant AG CHF 11 0.77 30.2 32.0
20 Wendel EUR 39 5.14 12.3 -13.7 20 Anglo American Plc GBP 2530 2.82 29.8 32.1
Source: Thomson Financial, IBES and Deutsche Bank calculation Source: Thomson Financial, IBES and Deutsche Bank calculation
Companies with strongest 1 month EPS downgrades Companies with strongest 3 month EPS downgrades
2010E 2010E
S. 1M % 1M S. 3M % 3M
No. Company Curr. Price EPS change perf. No. Company Curr. Price EPS change perf.
1 Deutsche Lufthansa EUR 11 0.07 -51.7 -7.4 1 Deutsche Lufthansa EUR 11 0.07 -54.4 0.7
2 Investor SEK 127 1.24 -37.5 -1.9 2 Iberia Lineas Aer De Espana EUR 2 0.02 -51.0 21.1
3 Eramet Sln EUR 222 6.05 -32.6 -16.3 3 CIE Generale De GeophysiqueEUR 14 0.5 -33.3 -0.5
4 Iberia Lineas Aer De Espana EUR 2 0.02 -25.1 -6.9 4 Investor SEK 127 1.24 -32.8 -1.9
5 Lonza AG CHF 81 5.69 -23.8 -25.7 5 Lonza AG CHF 81 5.69 -25.4 -25.8
6 CIE Generale De GeophysiqueEUR 14 0.46 -22.4 -13.8 6 K+S AG EUR 40 2.32 -25.2 8.1
7 Wienerberger AG EUR 12 0.2 -22.3 -23.8 7 Wienerberger AG EUR 12 0.18 -23.2 -7.2
8 K+S AG EUR 40 2.32 -17.5 -1.2 8 A.P. Moller - Maersk DKK 36200 1538.2 -21.8 9.7
9 Ryanair EUR 3 0.21 -17.1 -15.3 9 Ryanair EUR 3 0.21 -21.5 -8.4
10 Salzgitter EUR 63 3.86 -16.8 -8.7 10 Swiss Prime Site CHF NA 2.61 -19.7 NA
11 Veolia Environnement EUR 23 1.41 -13.2 -1.0 11 Marfin Investment Group EUR 2 0.09 -18.8 -15.9
12 Cable & Wireless GBP 138 12.93 -10.1 -1.2 12 Salzgitter EUR 63 3.86 -17.8 -5.5
13 European Aeronautic DefenseEUR 13 0.95 -8.9 -7.8 13 Tullow Oil Plc GBP 1260 12.85 -16.9 16.9
14 Capgemini EUR 31 2.35 -7.1 -11.3 14 Aegon NV EUR 5 0.44 -16.7 -6.9
15 Eurazeo EUR 49 3.04 -7.0 -0.4 15 Banco Comercial Portugues EUR 1 0.08 -16.6 -3.3
16 Marfin Investment Group EUR 2 0.09 -6.7 -22.5 16 Swiss Life Holding CHF 128 13.16 -16.5 11.4
17 Aegon NV EUR 5 0.44 -6.6 -17.9 17 Neste Oil EUR 12 0.74 -16.4 8.0
18 Catlin Group Ltd GBP 314 1.00 -6.5 -8.5 18 Veolia Environnement EUR 23 1.41 -14.1 -0.3
19 Old Mutual Plc GBP 118 14.56 -6.4 4.4 19 Cable & Wireless GBP 138 12.93 -13.4 -1.6
20 Nexans EUR 51 3.56 -5.7 -12.7 20 Standard Life GBP 215 18.15 -12.4 13.6
Source: Thomson Financial, IBES and Deutsche Bank calculation Source: Thomson Financial, IBES and Deutsche Bank calculation

Appendix 1
Important Disclosures
Additional information available upon request
For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see
the most recently published company report or visit our global disclosure look-up page on our website at
http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the
undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in
this report. Jim Reid
Equity rating key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share-holder

return (TSR = percentage change in share price from current 400 48%
price to projected target price plus pro-jected dividend yield ) 43%
, we recommend that investors buy the stock. 300
Sell: Based on a current 12-month view of total share-holder 200 38%

return, we recommend that investors sell the stock 29%
9%
100 37%
Hold: We take a neutral view on the stock 12-months out
and, based on this time horizon, do not recommend either a 0
Buy or Sell.
Buy Hold Sell
Notes:
1. Newly issued research recommendations and target prices
always supersede previously published research. Companies Covered Cos. w/ Banking Relationship
2. Ratings definitions prior to 27 January, 2007 were: European Universe

Buy: Expected total return (including dividends) of 10%
or more over a 12-month period
Hold: Expected total return (including dividends) between
-10% and 10% over a 12-month period
Sell: Expected total return (including dividends) of -10% or
worse over a 12-month period

Regulatory Disclosures
1. Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the
"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent
or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at
http://gm.db.com.
3. Country-Specific Disclosures
Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian
Corporations Act.
EU countries: Disclosures relating to our obligations under MiFiD can be found at
http://globalmarkets.db.com/riskdisclosures.
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Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No.
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fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange
fluctuations.
New Zealand: This research is not intended for, and should not be given to, "members of the public" within the meaning of
the New Zealand Securities Market Act 1988.
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appraisal or evaluation activity requiring a license in the Russian Federation.

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The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). The information herein is believed to be reliable and has been obtained from public sources
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Europe

sector recommendations for the year

Deutsche Bank AG/London

Market valuation ................................................................................................................... 15

1. Earning Trends .................................................................................................................. 26

Page 2 Deutsche Bank AG/London

Deutsche Bank AG/London Page 3

a fresh banking crisis arising, a political backlash encouraging immediate increases in

Figure 1: US Debt to GDP back to 1929 Figure 2: UK Debt to GDP Ratios

Page 4 Deutsche Bank AG/London

Probabilities of our scenarios in 2010

Figure 3: 2010 Equity and Credit Scenario Based Return Forecasts

How our probabilities evolve over the course of 2010

Figure 4: Evolution of Scenario Probabilities through 2010

Scenario 1 15% 17.5% 15.0% 15.0% 12.5%

Deutsche Bank AG/London Page 5

Page 6 Deutsche Bank AG/London

We believe it is now time to extend this to a pro-growth strategy focused on top-line

Deutsche Bank AG/London Page 7

Figure 8: Capex outlook by sector ranked by peak-to-trough change

Page 8 Deutsche Bank AG/London

-7.0% -3.0% 1.0% 5.0% Total company liquidations (000s)

Deutsche Bank AG/London Page 9

Figure 11: High capex/depr engenders higher sales growth

Figure 12: Sector capex/dep 2009E vs. 2010E sales growth

Sales gth 2010E Capex / dep 2009E (rhs)

Page 10 Deutsche Bank AG/London

Deutsche Bank AG/London Page 11

Sustainable growth picks

Figure 14: EU growth stocks / value stocks during 2009

1) What in your opinion is the sustainable growth rate in sales?

4) Does the current valuation account for this growth potential?

Page 12 Deutsche Bank AG/London

Figure 15: DB sustainable growth picks

Deutsche Bank AG/London Page 13

Figure 16: DB sustainable growth picks

Page 14 Deutsche Bank AG/London

Deutsche Bank AG/London Page 15

Figure 20: Probability adjusted index target

Sum 100% 12.7 250

Figure 21: Quarterly profile

EPS (index pts) 16.2 17.1 18.0 18.8 19.7

Page 16 Deutsche Bank AG/London

Figure 22: DJ Stoxx forward PE vs implied volatility

VSTOXX implied volatility +12m PE (x), rhs inverted

Deutsche Bank AG/London Page 17

Figure 24: Index targets

Page 18 Deutsche Bank AG/London

Figure 27: FTSE 350 dividends in 2009

Total 210 116 91

Deutsche Bank AG/London Page 19

Figure 28: Phases of the cycle

Source: Deutsche Bank

Page 20 Deutsche Bank AG/London

Figure 29: Pan-European sectors and the cycle

Deutsche Bank AG/London Page 21

Figure 30: UK sectors and the cycle

Interest rate sensitivity

Page 22 Deutsche Bank AG/London

Figure 31: Sensitivity to rising bond yields

Bottom 10 Euro sector Correlation of Bottom 10 UK sector Correlation of

Euroland market -28.8% UK market -37.3%

Deutsche Bank AG/London Page 23