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Implications of de-globalisation must be a focus in 2017, says Deutsche AM

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Investors globally need to consider the implications on their portfolios of the potential onset of a de-globalisation trend in 2017, according to the latest analysis from Deutsche Asset Management’s CROCI (Cash Return on Capital Invested) equity value analysis team.

In the CROCI Outlook 2017 report, CROCI analysts look at the impact of markets becoming less international as protectionist policies come into effect.
 
“The hot topic amongst policymakers at the moment is de-globalisation and how this may be able to create new jobs. We are keen to see the details when they are known, given that our analysis suggests that increasing globalisation and the US’s productivity gains went hand-in-hand,” says the report.
 
The report states that the reversal of the globalisation process could increase the cost of low-skilled jobs, lower productivity, increase inflation, and ultimately lower growth and company margins.
 
“Investors currently appear to be pricing that higher US growth will be positive for emerging markets,” says the report. “The latter have been the primary beneficiary of globalisation, though. Thus one needs to question the long-term benefits of reversing the process, especially when much of the emerging market growth of the past decade has been driven by investments that have diluted profitability, and financed by debt.”
 
The CROCI analysis suggests that equity is currently an expensive asset class, and that investors should expect no more than 5% annual returns, including dividends, over the long term. The report suggests that investors must choose between an aggressive and a defensive investment approach, the former looking at a world impacted by de-globalisation, and the latter with a focus on risk managing the transition towards a more de-globalised world.
 
“This analysis will aid fundamental investors as they look to assess the challenges of 2017,” says Francesco Curto (pictured), Deutsche AM’s head of CROCI.
 
CROCI is a proprietary equity valuation process that seeks to identify lower-valued companies while avoiding higher-valued stocks. The CROCI process involves the in-depth analysis of corporate data, with a series of adjustments applied which aim to gain a better picture of corporate assets and liabilities, and by extension to measure cash returns. CROCI analysts cover hundreds of companies globally. The aggregate analysis provides insights at a macro-economic level. 

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