INVESTMENT STRATEGY · investment and by a new round of qualitative [email protected]...

1

March 2014

SUCCESSFULLY NAVIGATING ROUGH WATERS

CONTENTS

Editorial 3

Fixed Income 6

Equity 8

Emerging Markets 13

Currency 16

Gold 18

Energy 19

Alternative Assets 20

Economic Outlook 23

Forecasts 26

At the beginning of the year, investors in advanced economies acted on

perceptions of a favourable growth outlook and accommodative monetary policy.

Unfortunately, the upbeat sentiment has been suddenly hit by weaker-than-

expected data in the US and China. Data revealing disappointing job growth in the

United States, coupled with a sell-off of emerging market (EM) assets and the

recent standoff between Russia and Ukraine, led to a drop in stock prices and a

rise in equity market volatility. At the same time, US Treasury and 10-year core

sovereign bond yields in the eurozone dropped, as did sovereign yields in the euro

area periphery, where investor sentiment has been improving. In this bumpy

beginning of the year, gold has been the best performer, recouping one-third of last

year’s losses. Although we remain convinced that the global economic outlook is

clearly on a growth path, and we see potential for risky assets to resume positive

performances in Q2, we want to hedge potential risks coming with the spring

season (i.e. weak earnings releases, further economic sanctions against Russia).

Therefore, we tend to diversify our asset allocation, reducing our Overweight

stance on US equities initiated back in 2012 and temporarily bringing our position

on euro Investment Grade corporate bonds to Neutral from Underweight.

INVESTMENT STRATEGY QUARTERLY VIEWS

2

March 2014

3

GLOBAL STRATEGY

SUCCESSFULLY NAVIGATING ROUGH WATERS

ST

RA

TE

GY

VIE

WS

The beginning of the year did not go as we expected. Although all the elements supporting

risky asset performance were in place in Q3 2013, a few factors changed the expected

trajectory. It would be very simple to say that unprecedented weather conditions have

influenced our rosy scenario. The reality is that after a strong economic acceleration in

developed markets in Q3, the US economy has taken a break, triggering investor fears of

another slowdown. Unfortunately, geopolitical risk in Russia and below-expectation figures in

China have only added more uncertainty to the already unclear global economic situation.

While the economy is navigating through rougher than previously expected waters, we

believe that a good balance between accommodative monetary policies in most developed

markets and ongoing improvements in the euro area may offset the risks coming from some

emerging markets, namely Russia. We therefore keep our preference for equities where

central banks may provide monetary support (i.e. Europe and Japan) and we increase

portfolio diversification, reshaping our fixed-income exposure (we move from Underweight to

Neutral on investment grade corporate bonds in the eurozone) and adding de-correlated

hedge fund strategies.

Spring economic acceleration in developed markets

The second quarter should provide some reassurance about positive momentum in

the developed world. In the US, weather-related weakness is expected to fade, and private

consumption as well as residential investment should advance further. We still expect capital

spending to firm up through the year, but so far figures have been rather sluggish, raising

some potential downside risks. In the eurozone, easing credit conditions and tightening

spreads in the periphery provide welcome support paving the way for stabilisation in both

domestic demand and unemployment in southern Europe. In the UK, the recovery is

gathering speed with risks tilted to the upside. Japan is the only notable exception, but we do

not expect a negative surprise. The scheduled VAT hike could dampen private consumption,

but the macro impact should be mitigated by the tax break aimed at boosting business

investment and by a new round of qualitative and quantitative easing (QQE) later in the year.

As monetary conditions should continue to be very loose against a low inflation backdrop,

most downside risks stem from exogenous factors such as the credit crisis in China or the

geopolitical conflict with Russia.

Emerging markets in choppy waters

Emerging markets will continue to face headwinds in the months ahead. Addressing

structural imbalances in the form of public or current account deficits takes time and means

tighter monetary or fiscal policies weighing on economic activity. Excess leverage, most of

the time in the private sector, will continue to require close monitoring from central banks and

cautious supervision as the period of cheap money is coming to an end. As such, some

property market bubbles could experience a downward price adjustment, notably in Asia. The

announcement of the Fed tapering last year spelled the end of yield-chasing in EM markets,

triggering significant outflows from fixed income and equity markets as well. This should

continue as US interest rates are likely to go up further in anticipation of the first rate hike by

the Fed. Political risks have returned to the fore with the Ukraine-Russia crisis and several

general elections to take place in significant countries such as Brazil, India, and Indonesia.

China is also facing major economic challenges since rebalancing growth and shoring up the

financial system are not easy tasks. Although currency depreciation in some places has

helped restore external competiveness, and valuations in some equity or fixed-income

markets have begun looking more attractive, we prefer to stay on the sideline and adopt a

wait and see attitude. We prefer for the dust to settle first before returning to those markets.

INVESTMENT STRATEGY - QUARTERLY VIEWS

Xavier Denis

Global strategist

+ 852 3699 3683

[email protected]

Claudia Panseri

Global strategist

(33)1 42 14 58 88

[email protected]

Dumitru Vicol

Global strategist

(33)1 42 13 14 97

[email protected]

March 2014

mailto:[email protected]



4

GLOBAL STRATEGY

ST

RA

TE

GY

VIE

WS

Limited downside risks at the current juncture

As detailed later in this document, downside risks look contained, although they may not be

easily quantified. For the most part, these risks are EM-related, stemming from purely

political factors and economic policy management. Geopolitical risk related to a negative

feedback loop as a consequence of sanctions applied to Russia could put pressure on

eastern European assets and spill over into other European markets. In China, defaults in the

financial system could create a shockwave and drive down local bonds and stocks and

spread over to the whole commodity and EM space. In the advanced economies, the US

unemployment situation might be better than many expect, thus triggering a wage-driven

price spiral, pushing up long-term yields and prompting the Fed into action. Equities and

long-dated bonds would be the most at risk.

Tactical allocation: diversification helps

Our overall allocation remains pro-risk as the macro and micro climates remain quite

supportive. It is worth highlighting again that despite rising valuations, equities look less richly

valued than bonds. After a rerating has already been achieved on many equity markets, we

come to a point where absolute valuation matters, and pricey assets could experience a

correction. This is to say that it is necessary to: 1) pursue value more than growth; and

2) diversify portfolios for navigating in rougher waters. We would stop adding exposure to US

markets and buy more in the eurozone and Japanese markets. As EM economies have

entered a structural slowdown, growth stocks which usually have significant exposure to

those markets may continue to suffer from currency depreciation impacting earnings and

slowing demand in those markets. Consequently, we tend to prefer domestic-exposed stocks

in the UK and Germany where the economy remains very strong. Increasing allocations of

European investment grade could certainly be a good way to hedge against market risk, as

any disappointment could trigger a pull-back as already observed in Q1. And we strongly

prefer to remain overweight on eurozone high-yield bonds as expected returns should remain

attractive in a low-yield environment. If surprise is on the upside, eurozone markets are likely

to benefit the most, as a rerating is still underway in some sectors such as Financials.

Although many have warned of the risk of inflation fuelled by ultra-loose monetary conditions,

deflation remains a more prominent risk across the board as reflected by low inflation rates

and subdued inflation expectations. To some extent, this is a good news as it gives most

central banks room to manoeuvre, allowing them to stay on the dovish side.


March 2014

5

TACTICAL GRADING

How to read the table:


Upgrade since previous investment strategy Downgrade since previous investment strategy

Gradings InvestmentsP o rtfo lio

(vs. B enchmark)

A bs. expectat io ns

(vs cash)

R el. expectat io ns

(vs histo ry)

++ Buy! Strong overweight Strong capital gain Strong capital gain

+ Buy on dips Overveight Capital appreciation Above average

= Hold Neutral Yield return* Average return

- Sell on rebond Underweight Capital loss Below average

- - Sell! Strong underweight Strong capital loss Strong capital loss

R eco mmandatio ns P erfo rmance expectat io ns

*Yield return: M oney market rate for FX, Coupon Yield for bonds, and earning yields for stocks

March 2014

Eurozone US UK Japan

Cash -

Fixed-income = = = = = =

Government - = - - - =

Corporate = = = = = =

Investment Grade - = - -

High Yield + + = +

Duration = 3-5y 1-3y 3-5y 1-3y

Equities + + = = + -

Alternative +

Commodities =

Hedge Funds +

Currencies (vs US$) = + - -

Q2 2014 GlobalAdvanced markets

EM

6

FIXED INCOME – GOVERNMENT BONDS

RISK OF RISING US YIELDS STILL LIES AHEAD

Several factors have disappointed the bullish view on a

steepening US yield curve over the past quarter. The 10-

year Treasury yield pulled back from 3.0% in early

December 2013 to less than 2.7% in late March 2014.

First, the EM currency sell-off reflecting market worries

about policy management in the EM world as well as softer

economic data in the US have prompted a return to safe

havens. Moreover, geopolitical risks related to the Ukraine

crisis will likely continue to cap yields in global fixed

income markets. So far inflation has remained subdued

despite US inflation expectations remain well anchored

with little risk of slippage in the short or even medium term.

Undoubtedly, the market has bought into the Fed’s

enhanced forward guidance, and the Fed still looks highly

credible at managing market expectations. Looking

ahead, the factors depicted below warranting a pause

in yield pick-up will gradually phase out and US long-

term yields should edge up again. Growth drivers

remain in place in the US, bringing down unemployment

and leading to wage increases. With the economic slack

narrowing, domestic price pressure should gradually build

up, although upside risks should remain moderate until late

2014. Yet, yield normalisation will likely be mainly driven

by the recovery rather than by inflation expectations.

As the Fed is not going to hike its Fed funds target before

Q2 15e, the short end of the yield curve should remain low,

while long-term yields will pick up further, leading to a

steepening yield curve in the months ahead. However, the

additional steepening is set to be capped as the 2Y-

10Y spread already stands well above the 15-year

average and not far from the historical high (235bp on

19 March vs 148bp for the 15-year average and 291bp on

Feb 2010 for the all-time high).

INTEREST RATE RISK LOOKS MORE LIMITED IN THE

EUROZONE

Obviously, the pick-up in US yields will spill over into

the European benchmark yield curve. There is

traditionally a high correlation between US and German

yields, but we expect this correlation to be on the low side

in 2014. In 2013, the 10-year Bund rose by 60bp when the

10-year US Treasury yield gained 100bp. In 2014, the yield

pick-up on German bunds may not exceed half of the yield

rise expected on the 10-year Treasuries as inflation is

running very low in the eurozone and then the ECB may

eventually step in with more accommodation.

Consequently, we maintain a negative stance on US

Treasuries and core eurozone sovereign bonds.

ST

RA

TE

GY

VIE

WS

US and German 10Y yield correlation (%)

Source: Bloomberg, Société Générale Private Banking

PERIPHERAL BONDS STILL OFFER ATTRACTIVE

RETURNS

As risk appetite for euro-denominated assets is spreading

and investors are chasing yields outside the EM-fixed

income space, peripheral bonds could continue to offer

attractive returns. After a meaningful spread compression,

we still anticipate more spread tightening on peripheral

sovereign bonds. Better economic data reflecting the first

positive effect of structural reforms should entice investors

looking for attractive risk-adjusted returns.

| The US Treasuries curve should resume steepening, and

we anticipate the yield reaching between 3.30% and

3.50% by year’s end. For the Bund we expect long-term

yields to converge towards 2%. Yield volatility will again

remain a key factor in 2014 as investor sentiment may be

affected by political factors such as geopolitical risk, the

Fed’s ability to moderate long-term yield increases, and

possible disappointing macro data. We reiterate our

negative stance on sovereign bonds with the exception of

the eurozone periphery.


March 2014

0.4

0.5

0.6

0.7

0.8

0.9

1

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

*monthly correlation

7

Spread versus eurozone PMI

Source: Datastream, Société Générale Private Banking

FIXED INCOME – CORPORATE BONDS

US CORPORATES RE-LEVERAGE FURTHER

Corporate bond spreads have narrowed further in the past

months, signalling that the search for yield is still on. Safe

fixed-income assets (Treasuries and investment grade)

have outperformed high-yield bonds as the yield curve has

flattened, but we consider this a temporary phenomenon.

Looking ahead, the yield curve should steepen again (bull

flattening) as policy rates remain anchored. Corporate

fundamentals are still very solid with strong cash positions,

high margins, and rising profits. Yet US companies have

continued to re-leverage to fund shareholder-friendly

policies in the form of massive share buy-backs. Debt has

continued to grow in the past few quarters, but net

leverage has levelled off as operating profits have

improved. This is a negative factor for bondholders, but the

main risk stems from the steepening yield curve in a tight

spread environment. Although investor appetite was rather

strong in the first few months of 2014, valuations look

stretched. The risk-adjusted return does not offset the

interest rate risk looming ahead in the investment grade

bucket. For the high-yield universe, we tend to maintain a

more positive stance as the economic outlook is bright,

funding conditions remain loose, and default rates have

returned to their pre-crisis level. Against this supportive

backdrop, we believe that the spread cushion offsets the

risk of a steepening in the benchmark yield curve.

MORE VALUE IN THE EUROZONE MARKET

In the eurozone, we have a more positive opinion on the

credit universe. First of all, the primary market is very

active as eurozone bank deleveraging is an important

driver. Banks have further reduced their balance sheets

ahead of the ECB’s Asset Quality Review. Credit metrics

look rather strong on average and certainly better than in

the US, with only modest re-leveraging taking place.

Capex and corporate activism have only inched up thus

far. Companies have been reluctant to use more debt in a

still fragile albeit improving macro environment. With an

upturn in earnings in 2014, profitability is on the rise. So,

we strongly upgrade our stance on the eurozone

investment grade (IG) bucket to Neutral. Although

expected returns through the end of the year are not

extremely attractive, this asset sub-class could be a buffer

for portfolios in the event of a spike in volatility and

corrections on risky assets. It is also true that inflows have

returned to European investment grade assets, most likely

fuelled by reallocation from EM fixed income and a quest

for safe haven assets.

ST

RA

TE

GY

VIE

WS

.

We maintain our overweight stance on the high-yield

universe with a preference for short duration. Further

spread compression combined with a positive carry is

expected to deliver a decent performance, although well

below the 2013 figure, perhaps around 7% over the year.

We have a clear preference for high beta sectors including

Cyclicals, Industrials and Financials.

I The interest rate environment should remain a key driver

of allocation in the fixed-income space. High issuance will

continue to be balanced by strong demand. Credit metrics

are worsening in the US but from a very strong position.

So we reiterate our preference for eurozone markets

where we see more value. We upgrade the investment

grade bucket as it could offer a good hedge against market

disappointment as already reflected in first quarter events.

As the US yield curve should continue to steepen, we

prefer to go down the credit ladder and not to take duration

risk on all markets.


March 2014

30

35

40

45

50

55

60

650

100

200

300

400

500

600

06 07 08 09 10 11 12 13

EURO BBB SPREAD VS 5Y GERMAN BOND (inverted lhs, bp)

Euro PMI (rhs)

8

EQUITY

ST

RA

TE

GY

VIE

WS

WE THINK IT IS TIME TO DOWNGRADE US STOCKS

TO NEUTRAL

While many investors are worried about the US stock

market being expensive, we believe US stocks are not yet

in a risky valuation zone. However, we are concerned

about the recent change in the correlation between US

stocks and the 10Y US bond yield. This correlation has

turned negative, which means that all the good economic

news may now have a negative impact on US equities due

to the rise in US interest rates. A negative correlation

between equities and bond yields clearly indicates that the

bullish equity market is nearing an end and that good news

could now be seen as an additional factor to accelerate

tapering or to hike Fed Fund rates ahead of the market’s

expectations.

I The change in US bond yield/US stock correlation may

indicate the end of the US bull market. We therefore

downgrade US stocks from Overweight to Neutral.

IMPROVING US JOB MARKET MAY HAVE A NEGATIVE

IMPACT ON US CORPORATE MARGINS

While the beginning of the year was characterised by weak

economic data in the US, our view of positive growth

remains unchanged. Q2 should highlight the gradual

normalisation of the job market and the ongoing positive

momentum in the US economy. In addition to improvement

in the job market, we note a rise in private sector wages

(which had bottomed out in October 2013). Unfortunately,

cyclical peaks in corporate margins have tended to occur

at a minimum of ten months after wage growth has started

to accelerate and have also tended to occur when hourly

wage inflation was between 3.5% and 4%. This means

that margins may be close to their cyclical peaks. As

valuations are going higher and margins may post some

disappointments in the coming earnings season, we tend

to be more cautious on the US market.

Sector-wise, we continue to favour cyclicals over

defensives; however, we downgrade sectors showing

negative sensitivity to flattening yield curve such as

Financials. Among cyclicals, we are buyers of capex

sectors such as Information Technology and Capital

Goods. Rising rates have set off “taper tantrums” in high-

dividend yielding and debt-burdened sectors, particularly

Telecom and Utilities.

I We keep our exposure to cyclicals unchanged but reduce

our exposure to sectors negatively impacted by the

flattening of the US yield curve (the end of the Tapering is

expected for September). We therefore downgrade

Financials to Neutral from Overweight.

Recent rise in US wages may have a negative impact on

corporate margins



March 2014

Correlation between the S&P500 and the 10Y US bond

yield weekly return (%)


-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

88 90 92 94 96 98 00 02 04 06 08 10 12 14

Increase in bond yield is

negative for US equities

Increase in bond yield is positive

for US equities

6%

7%

8%

9%

10%

11%

12%

13%52%

53%

54%

55%

56%

57%

58%

59%

68 73 78 83 88 93 98 03 08 13

Wages % GDP (lhs)

Profits % GDP (rhs, inverted) = proxy for margins

9

EQUITY

EURO PROFIT RECOVERY UNDER WAY

Since the beginning of the year, European economic

figures have improved overall. While concerns about the

low level of inflation and the euro’s recent appreciation

persist, Mr Draghi has been rather quiet so far. Investors

might wonder why. One possible explanation could be the

Asset Quality Review (AQR) due in October and the

associated need to improve bank solvability ahead of the

stress test. Indeed, in order to pass the AQR, European

banks have kept outstanding loans at very low levels,

breaking the normal credit transmission channel and

reducing the impact of a possible move by the European

Central Bank (ECB). Once the stress test is over, the ECB

could unveil a stimulus plan with negative interest rates or

any other blanket liquidity enhancement scheme as banks

will be ready to infuse credit into the economy. At that

point, the combination of accommodative monetary policy,

easing credit conditions, and positive profit growth should

drive eurozone equities up, supported by a strong re-rating

for European banks.

Our central view has not changed. Multiples expansion in

the euro area should rather be limited this year; however,

profit growth (EPS growth of 12% is expected in the

eurozone this year) and a good dividend yield should

ensure a low double-digit total return. Within the euro area

we continue to believe that German stocks still harbour

high potential, particularly the small and mid caps, which

are less affected by the euro’s appreciation. The French,

Italian, and Spanish indices may benefit from their

exposure to the banking sector.

Sector-wise, we increase exposure further on Value

sectors, upgrading Telecommunications from Underweight

to Neutral. Our strongest conviction remains the banking

sector, where we are still Overweight.

I With credit conditions set to improve by the end of the

year and profits expected to recover in the next quarter,

we keep our Overweight stance on European stocks.

WE STILL FAVOUR UK SMALL AND MID CAPS (FTSE

250) TO LARGE CAPS (FTSE 100)

The upward revision in growth and the downward revision

in inflation and unemployment leave the Bank of England

(BoE) with a degree of policy flexibility. Although the

market will continue to price in an earlier-than-optimal start

to interest rate normalisation, the BoE can afford to be

patient as inflation remains low. Most of the growth

contribution comes from private consumption while exports

and business investments have been a drag.

ST

RA

TE

GY

VIE

WS

As the GBP’s recent appreciation and the weak export

figures may have an impact on large UK-based global

companies, we continue to prefer small and mid caps

(FTSE 250) despite expensive valuations.

I We downgrade UK financials from Overweight to Neutral

as they are exposed to emerging markets. We also move

to Underweight on Utilities due to demanding valuations.

WE CONTINUE TO LIKE JAPANESE STOCKS

The beginning of the year has been rather difficult for

Japanese stocks (-9% year-to-date). Multiple factors have

weighed heavily on share price performance. First, the

weakness of the US data and the depreciation of the dollar

vs the yen. Second, fears about the consumer tax hike and

the likely negative impact on consumption have prompted

economists to downgrade 2014 GDP forecasts. Finally,

weak economic data in China is impacting Asia and Japan

in particular. Certainly, all these factors are negative;

however, investors seem to forget the positive side of the

equation. First, to offset the negative impact of the

consumer tax, the BoJ is expected to increase its

quantitative easing (QE). Second, thanks to higher wages

and a low unemployment rate, Japanese household

income is set to rise. Finally, strong corporate profit growth

should induce Japanese manufacturers to start increasing

their capital expenditure. The combination of these positive

factors along with attractive valuations should support

equities.

I Potential for further yen depreciation and recovery in

consumption are the ingredients for a potentially explosive

stock performance.

PMI points to profit recovery this year



March 2014

30

35

40

45

50

55

60

65

-60%

-45%

-30%

-15%

0%

15%

30%

45%

07 08 09 10 11 12 13 14

12m % EPS growth

PMI EURO ZONE (rhs)

Average PMI

10

EQUITY CONVICTIONS

TOPIX – MULTIPLES RERATING STILL UNDERWAY

HIGHLIGHTS

• With data improving in Q1 and further quantitative easing expected from the BoJ, we see more upside for Japanese

stocks.

• Cheap valuations, positive profit growth, and a multiples re-rating should drive the Topix up to 1,500 in the coming two

years.

We believe that Japan is moving towards a structural change.

The end of deflation should strongly support a stock market re-

rating. Recent share price weakness should be seen as a major

buy opportunity.

There are many reasons why we believe that the Japanese

growth story is still alive. First, while exports continue to be below

our expectations, company earnings releases show that the yen’s

depreciation has prompted an increase in corporate profits. For

the second year in a row, Japanese profit growth should surprise

on the upside. Secondly, while investors are concerned about the

consumption tax hike (from 5% to 8%) effective from April, we

believe that the downside risks of the tax hike will be covered by

the ¥5.5tn fiscal stimulus package worth about 1% of GDP and by

the increase in aggregate wages. Therefore, we expect the strong

recovery in domestic demand to continue. Third, recent

announcement by companies (such as Nissan and Toyota)

regarding an increase in aggregate wages should stimulate

consumption and sustain inflation expectations. Finally, we still

expect the capex cycle to start an uptrend. As maintenance

capex had been suppressed over the past few years,

manufacturers have pent-up demand.

On the monetary side, the BoJ’s current commitment is to raise

the monetary base (¥204.8tn as at the end of February) by ¥60-

¥70tn per annum (to ¥270tn at the end of 2014) until its 2% price

stability target is achieved and consistently maintained. To reach

its target, the BoJ is also ready to implement additional

quantitative and qualitative easing (QQE) in Q2.

In our view, all of the above elements are not yet priced in. On the

contrary, we still see Japanese stocks as a value call among

developed markets. Assuming 10% profit growth in 2014e and

additional multiples expansion driven by the reflationary

environment, we see the Topix at 1,500 by the end of 2015e,

which means upside close to 30%.

Topix should re-correlate to the yen’s exchange rate

Sources: Datastream, IBES, Société Générale Private Banking

Among Japanese stocks, we think that Industrials and

Banking should benefit the most from the next round of

BOJ quantitative easing (QE). Meanwhile, the Consumer

Services and Technology sectors look to be at risk ahead

of QE.

March 2014 C

ON

VIC

TIO

NS

600

800

1000

1200

1400

1600

1800

2000

70

80

90

100

110

120

130

04 05 06 07 08 09 10 11 12 13 14

$/JPY (lhs) Topix

Bank book values increase with the rise in the CPI

Sources: Datastream, IBES, Société Générale Private Banking

50

100

150

200

250

300

350

70

75

80

85

90

95

100

105

110

Q1 1980

Q3 1984

Q1 1989

Q3 1993

Q1 1998

Q3 2002

Q1 2007

Q3 2011

Japanese CPI (lhs)

Japan Book Value

11

EQUITY CONVICTIONS

GLOBAL PHARMA – THE ONLY GARP* SECTOR

HIGHLIGHTS

• When market volatility picks up, Pharmaceuticals usually offer a nice hedge to the growing risk of an equities sell-off.

• Cheap valuations, high shareholder returns (dividend yields and share buybacks) and strong potential growth are the

key catalysts for a sector outperformance both in Europe and the US.

• In the medium term, we see European pharmaceutical names offering the best risk/reward profile overall.

There are many reasons why we like the Pharmaceuticals sector.

Cheap valuations, safe dividend yields, and defensive profiles in

highly volatile markets are all supportive factors. However, profit

growth remains the most important driver.

While a few years ago the Pharmaceuticals sector was

considered a value opportunity, its status has now clearly

changed with investors recognising its growth profile. Both in the

US and Europe, the 2014 pipeline is the core driver.

In 2013 the global pharmaceutical sector saw a 20% re-rating of

the trailing P/E multiple to 20x. Nevertheless, we still see potential

for further expansion given 2014e sector EPS growth at 11% in

Europe and c.8% in the US according to consensus forecasts.

Clearly European companies look more appealing as after facing

a drop in profits last year, they are enjoying a better environment

and still have attractive valuations (14x based on 2014e forward

forecasts). We see the sector achieving a 15x P/E multiple by the

end of 2014e as long as it delivers revenue growth. Most big

pharmaceutical companies have passed their patent cliff while

adapting their business organisation. With a return to top-line

growth, we also expect medium-term margin expansion for those

companies launching new products.

Another factor bolstering pharmaceuticals groups is the high

dividend distributed by European companies (2014e expected

dividend yield of 3.2%) and the large amount of share buybacks

announced in the US. While the dividend is already quite

attractive for the sector overall, the dividend payout ratio could

rise further. According to some companies, the 50% payout ratio

for the dividend paid on 2013 earnings should not be seen as a

maximum level, which suggests that further increases in the

payout ratio for the dividend due in 2015 are possible.

World pharmaceutical company valuations (trailing P/E**)

** Trailing P/E is calculated taking into account profits published over

the past 12 months. Sources: Datastream, IBES, Société Générale

Private Banking

Among global large caps, we see more upside for

eurozone companies than their US peers. US

companies have enjoyed a two-year re-rating, and while

pipeline progression is still very likely, European names

are less expensive. That said, the recent devaluation in

some important emerging currencies represents a risk for

European pharmaceuticals. 2013 has already seen some

disappointing figures due to slowing economic growth in

emerging markets. Some of this deceleration has been

driven by the negative impact of legal investigations in

China as well as company-specific one-offs. However, as

long as emerging market currencies remain volatile, the FX

risk persists. In the medium and long term, we are

confident that emerging markets still represent an

important source of growth.

March 2014 C

ON

VIC

TIO

NS

*Growth at a reasonable price

10

15

20

25

30

35

40

45

79 82 85 88 91 94 97 00 03 06 09 12

12

With bond yields set to rise in the US, emerging markets still

facing a bumpy ride, and profits expected to recover as soon

as Q1, we prefer to keep reasonable exposure to value

stocks in Europe.

Weak US economic data, fears about Chinese economic

growth, and more recently, geopolitical risk linked to Russia

have all driven the relative performance of European growth-

defensive stocks year-to-date. While the chaotic beginning of

the year may lead some investors to change their investment

style, we remain convinced that at this point in the cycle,

value should be favoured. Indeed we continue to believe that

traditional growth names in Europe may disappoint and may

temporarily lose their defensive status. We see EM currency

depreciation as a major risk for growth companies exposed

to EM (i.e. beverages, personal goods, food producers, and

luxury companies). In addition, the US economy’s expected

acceleration in Q2 should drive the US 10Y bond yield up

and support the relative performance of value vs growth (see

the right hand side chart). Last but not least, the gap in

valuation between value and growth sectors should boost the

former, as by definition value stocks tend to see their profits

expand when the global economy accelerates.

What is defined as value today? Traditionally, it stems

from the investment teachings of Ben Graham and David

Dodd at Columbia Business School in 1928. Value investing

is based on buying undervalued companies (i.e. low price to

book value, low price to earnings, high dividend yield).

Today, when we look into developed stock markets it is quite

difficult to identify deep value stocks. After the strong equity

market performance over the past year and a half, the

number of value stories has shrunk. By country, value names

can still be found in Japan and the eurozone (we are

overweight on both regions). Sector-wise, Financials and

Energy (we are overweight on both sectors) appear

extremely attractive.

EQUITY CONVICTIONS

EUROPE: PREFER VALUE TO GROWTH

Value vs growth style performance in the euro area


HIGHLIGHTS The concept of value investing stems from the teachings of Ben Graham and David Dodd at Columbia Business School

in 1928. Value investments generally involve buying undervalued companies.

Among developed stock markets, Japan and the eurozone still offer good value opportunities.

Sector-wise, we see Financials and Energy as the best value picks. Selectivity is very important for Utilities and

Telecommunication services.

March 2014 C

ON

VIC

TIO

NS

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1

1.5

2

2.5

3

3.5

4

09 10 11 12 13 14

10y US bond yield (lhs, %)

10y US bond yield forecasts (lhs, %)

Value vs Growth

The case for Utilities and Telecoms is difficult to judge. Can

these sectors be defined as real value investments?

Although both sectors trade at very low multiples, they also

face many challenges: low margins, low revenue growth,

and low return on equities. While Telecoms (which we rate

Neutral) is in the middle of a multi-year sector consolidation

which could support company re-ratings, the Utilities sector

(also rated Neutral) still needs to downsize balance sheets

and strengthen free cash flow generation. More disposals or

capital increases are necessary to bolster financial positions.

In addition, only regulated activities are likely to enjoy profit

growth.

13

EMERGING MARKETS

ST

RA

TE

GY

VIE

WS

EMERGING MARKETS STILL FACE IMPORTANT

CHALLENGES

While EM currencies are becoming less volatile, the EM

situation remains fragile. In addition to local elections in

several EMs (i.e. Brazil, India, Indonesia), 2014 should see

slowing economic growth, high inflation, and restrictive

monetary policies in the developing world. Furthermore, the

risk associated with Ukraine seems less significant when

compared with the outcome of a hard landing scenario in

China. The fact is that EMs represent the tail risk today.

I Risks related to EMs still persist and may intensify if a

diplomatic solution is not found for the Russian situation.

UKRAINE CRISIS – HOPES ARE FOR A DIPLOMATIC

RESOLUTION

On 16 March, Crimea voted in a referendum to join Russia.

At the time of writing, the EU and US had decided on limited

sanctions against Russia. Our central case assumes a

diplomatic solution that should limit the economic impact of

this crisis. Should diplomacy fail in the relationships

between Central and Eastern Europe (CEE) and Russia, the

consequences could be quite serious considering that

Russia may suspend exports to the rest of the European

Union. As a consequence, Russian financial assets would

slump and the economy would suffer a major recession,

starting with production loss in the industries directly

impacted by more frugal households. Furthermore, less

favourable financial conditions would restrict access to

foreign capital, for both direct and portfolio inflows, further

capping domestic investment in new capacity.

CHINA FACES PRIVATE SECTOR DEFAULTS

Chinese GDP growth is expected to fall short of the 7.5%

target presented at the National People’s Congress for the

first time in 16 years. As China enters its first year of private

sector defaults, we believe that several factors should

ensure that Chinese policymakers stay on the right side of

this balance. First, defaults are likely to be few and far

between. Second, the PBoC stands ready to inject liquidity.

Lastly, the central government could opt to support the

economy by launching new spending programs.

I Among the major emerging economies, we expect both

Brazil and Russia to grow below trend potential. In China,

the government is set to miss its growth target. India may

surprise positively but everything depends on the outcome

of the elections.

No respite for EM currencies and then equities


Emerging market valuations vs developed markets (P/E)



March 2014

80

85

90

95

100

105

110

115

400

500

600

700

800

900

1000

1100

1200

1300

08 09 10 11 12 13 14

EM Equities (lhs) EM Forex Index

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

EQUITIES: CHEAP BUT NOT SAFE ENOUGH TO BUY

Despite recent improvement in the risk/reward profile of

EM equities, valuations do not look appealing enough for

us to change our current Underweight stance on the

region. Indeed while economists have begun to

downgrade their growth expectations for EMs, it is difficult

to predict how the Chinese slowdown may affect

commodity producers and global growth, or how Ukraine’s

risk may impact CEE (i.e. Hungary).

14

ST

RA

TE

GY

VIE

WS

As investors are still assessing the risk of the EM

framework and are consequently re-pricing their exposure,

we believe that it is still too early to jump into what may

seem to be a value call. Emerging countries currently trade

at a 30-40% discount to developed markets, but profit

growth has been strongly revised down and there is still a

risk of further downgrades.

Within the emerging universe, we see Mexico, Korea, and

Taiwan as potential outperformers. In Mexico we expect

steady progress on enforcement of the reforms concerning

telecoms, competition, and energy. We expect a steady

recovery in economic growth in the three countries

mentioned above. Therefore, the outlook for equities in

these regions remains positive in our view.

EM FIXED INCOME (HARD CURRENCY): PRESSURE

MAY CONTINUE DESPITE ATTRACTIVE VALUATIONS

EM debt is one of the remaining areas of the global

government bond market that offers some value. However,

EMs continue to suffer from retail outflows given concerns

about a potential increase in UST yields and rising risk in

the emerging countries.

Risk appetite for Asia bonds started to recover with local

institutional investors buying bonds. Even the price

guidance of some High Yield new issues was revised

downward when launched, indicating the robust demand

from investors on Asian corporate bonds. Asian credit

metrics saw deterioration in the first two months of 2014 as

there were 17 downgrades vs 4 upgrades from January to

February. Most downgrades were triggered by the profit-

warning notices in the earnings season and mainly

affected Chinese corporates. Despite some negative

actions, the broader picture is that most Asian corporate

credit metrics have stabilised. The overall stable rating

outlook improved to 75% from 72% before Moody’s and

S&P’s rating criteria revisions in December 2013.

Risk appetite for EMEA bonds has surely been impacted

by the risk linked to Russia. Fundamentals of Russian

corporates are good in general, although the Russian

economy has been slowing down for several months.

However, we believe there is still room to absorb further

challenges on the financial front. In particular, the

investment grade (IG) portion of the universe has relatively

low leverage and good balance sheet liquidity. The two

sectors that would be impacted by international sanctions

are the two major exporting sectors: oil & gas and metals &

mining.

Yield to maturity (%)


EMERGING MARKETS


We believe that the latter sector has the most to lose, as

there is global overcapacity currently, and Russian exports

could easily be replaced. As for oil & gas, we believe the

economic pain supported by Europe, in particular, would

be too harsh for the continent to accept. Russia on the

other hand would also be reluctant to freeze exports to

Europe, even though some of it could be replaced by

China. In this regard, we believe the safest sectors are the

largest state-owned banks, oil & gas, and domestically-

oriented businesses such as telecoms and retail. We

recommend a status quo attitude on IG-bonds with

durations of less than five years. We believe that the risk-

premium recently reflected in prices will not go away in the

immediate future, which is why we do not believe that a

more positive stance is justified at the moment.

Latam hard currency bond funds recorded outflows of

$13.3bn YTD, mainly driven by retail investors going to

developed market bonds and equities after being

disappointed by the poor performance, volatility, and

negative sentiments surrounding EM asset classes. With

elections coming in Brazil and the weak economic

environment, fund outflows should continue in the near

term. Moreover, yields do not seem attractive enough from

a risk/reward perspective.

I We recommend a neutral allocation on local currency EM

debt while staying very selective.

March 2014

3

3.5

4

4.5

5

5.5

6

6.5

7

7.5

8

11 12 13 14

ASIA EMEA

LATAM

15

Qatar is to join the MSCI emerging market index in June

2014, following the upgrade announcement in mid-2013. We

expect that the market will experience a liquidity boost as we

approach May 2014, when the MSCI reclassification of Qatar

as an EM will become effective.

Qatar has one of the highest per capita GDPs (c.$107,000 in

FY13), a well-developed banking system, fixed exchange

rates (pegged to USD) and a strong sovereign balance sheet

(forex reserves at c.100% of GDP) which makes it less

vulnerable to sudden changes in global liquidity flows. The

International Monetary fund (IMF) expects Qatar’s GDP to

grow 6% in 2014e and 7.1% in 2015e with a positive short

and medium-term economic outlook. The country’s GDP

growth slowed from 13% in 2011 to about 6.5% in Q3 13.

This was primarily due to a long-standing self-imposed

moratorium on additional hydrocarbon production from the

North Field as the country intends to focus on non-

hydrocarbon sector growth. Furthermore, inflation is

expected to remain benign at 3.3% in 2014 and 3.5% in

2015. With a breakeven oil price at around $50/bbl (lowest in

the region), Qatar continues to post a rising budget surplus.

The IMF expects Qatar’s current account (in 2013) to record

another year of high surplus (consensus expects about 25%

of GDP) after it recorded a surplus of 32% of its GDP in

2012. The external and fiscal balances in Qatar should also

benefit from new gas output from the Barzan field. Over the

medium term, the IMF expects 6-7% growth in public

investments while the non-hydrocarbon sector is expected to

grow about 10%.

An important catalyst for Qatar is the improvement in

infrastructure spending. Transportation and urban

regeneration projects are expected to get a boost, along with

downstream investments and the beginning of infrastructure

awards/projects related to the 2022 soccer world cup. In

addition, we expect some acceleration in real non-oil GDP

growth in 2014, with the increase in new projects including

implementation of the Doha metro, the start of broader

transportation projects.

EMERGING CONVICTIONS

QATAR: HAVEN FROM THE TURMOIL

HIGHLIGHTS The IMF expects Qatar’s GDP to grow 6% in 2014e and 7.1% in 2015e with a positive short and medium-term economic

outlook.

An important catalyst for Qatar is the improvement in infrastructure spending. A surge is expected in transportation and

urban regeneration projects.

Despite the strong market performance in 2013 (Qatar all share index up 28.4%), Qatar’s equity market valuations still

look attractive.

March 2014 C

ON

VIC

TIO

NS

Despite the strong market performance in 2013 (Qatar all

share index up 28.4%), Qatar’s equity market valuations still

look attractive. The Qatar index is trading at P/E 2014e of

10.3x vs 12.9x for Saudi Arabia, 12.1x for UAE, 10.3x for the

MSCI FM and 9.2x for the MSCI EM index. Moreover, Qatar

offers an attractive dividend yield of 4.8% in 2014e,

compared with 3.7% for Saudi Arabia, 4.5% for UAE, 4.5%

for the MSCI FM and 3.4% for the MSCI EM. We prefer

names that are expected to benefit from strong domestic

demand. Credit growth is expected to be in mid-to-high

double digits, driven by the boost in investment spending

and diversification of the economy towards the non-

hydrocarbon sector.

Qatar’s outperformance started in July last year


100

120

140

160

180

200

220

240

09 10 11 12 13 14

QATAR EQUITY INDEX

MSCI EM INDEX

16

Eurozone cumulative fund flows ($m)

Source: EPFR, Société Générale Private Banking

CURRENCY

EUR/USD: LIMITED DOWNSIDE AHEAD FOR THE

EURO

Once again the euro has surprised on the strong side

versus the USD and it might even reach 1.40 in the short

run. Until a few months ago, most forecasters predicted a

stronger USD on the back of Fed normalisation, a subdued

recovery in the eurozone, and the derating of EM assets.

Although the USD has gained ground against most EM

currencies, it lost pace against the GBP and the EUR. The

stronger US momentum has not been reflected in interest

rate differentials vs the EUR or the GBP. Although Fed

tapering started last December, it only signals that the Fed

is buying fewer assets each month while the ECB balance

sheet is shrinking steadily. Overall, the new Fed

chairwoman has reiterated a dovish view, keeping a lid on

interest rates and putting off expectations of a rate hike.

Sluggish inflation provides the Fed with some room to

maintain an accommodative stance, but the steady

acceleration in wages should gradually lift headline

inflation over the year. In the UK, bullish macro readings

and weak forward guidance credibility have propped up the

forward interest rates, lifting in turn the British pound. In

the eurozone, the ECB has remained on hold despite

expectations of falling inflation that have pushed up real

yields. In fact, the interest rate differential has been less a

driver for the EUR exchange rate as returning risk appetite

and receding financial stress have attracted new capital

inflows in the eurozone, underpinning the euro’s strength.

A passive ECB and foreign investor appetite for euro-

denominated assets have bolstered the single

currency.

Looking ahead, we do not expect a significant

softening of the EUR vs the USD. Yet, as the recovery

continues, markets will anticipate a Fed funds hike which

the consensus expects in Q2 15, while the ECB could

decide to ease its stance to cap the euro rally. But this

downward move could easily be dampened by investors

chasing value assets in the eurozone. At the current

juncture, eurozone assets offer more appealing valuations

than their US counterparts, both in the fixed income space

and the equity space. Also, from a long-term perspective,

the eurozone’s current account surplus provides additional

support to the single currency when the US is still running

a significant deficit.

I We forecast the EUR/USD to trade above the 1.35 mark

in the coming months with possible overshooting before

receding slightly to remain in a 1.30 – 1.35 range later this

year .

ST

RA

TE

GY

VIE

WS

Higher real yields in the eurozone underpin the euro’s

strength



March 2014

-10000

-5000

0

5000

10000

15000

20000

25000

2012 2013 2014

Equity Bond

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

3Y 5Y

Spread German-US

17

Lingering upward pressure on the CHF pushes nominal

rates in negative territory


CURRENCY

USD/JPY: RENEWED WEAKNESS IN H2 14

On the back of the EM turmoil, the yen has regained some

ground since early January, levelling off around 102. The

yen is a safe haven currency that tends to appreciate when

risk aversion spikes. The market focus is on the VAT hike

scheduled in April. We still expect a new round of QQE but

probably not before next summer or even fall as the BoJ

intends to calibrate its new liquidity injection according to

the dampening impact of the tax hike. Also, a yield pick-up

in the US, reflecting expected monetary policy

normalisation, should mean a weaker yen. We maintain

our expectation of a lower yen although this may not

happen in the near term. In the months ahead, the yen

should trade in a range-bound market but looks more likely

to edge down in the second half alongside new QQE.

I We forecast 103 at a three-month horizon and 108 for

late 2014.

EUR/CHF: GRADUAL SOFTENING AHEAD

Renewed tensions in the EM space have favoured

returning capital inflows for the CHF similar to the yen.

Despite low or even slightly negative nominal interest rates,

the CHF is still trading at high levels. The huge current

account surplus (12% of GDP) is a major driver. With the

SNB being firmly committed to defend the 1.20 floor

against the EUR, risks are asymmetric. As long as interest

differentials with the EUR and the USD remain almost nil,

we are unlikely to see a meaningful softening of the CHF.

We anticipate a modest weakening of the CHF as risk

appetite improves further at the global level and US

monetary policy is set to normalise. But any bout of

volatility as recently observed in relation to the Ukraine

crisis could prop up the currency.

I We forecast 1.23 in three months and 1.25 in six.

EUR/GBP: MODEST SLIDE IN THE CARDS

As economic momentum has surprised on the strong side

and the BoE’s forward guidance has been largely

ineffective, markets have priced in an early rate hike,

possibly in Q1 15, the first to occur among G4 economies.

As a consequence, the GBP has outperformed, but we

appear close to a tipping point. Any macro disappointment

or delay in the expected tightening may drag down the

short-term yields and the currency as well.

I We expect EUR/GBP at 0.82 in three months and 0.81 in

six.

ST

RA

TE

GY

VIE

WS


March 2014

1.1

1.15

1.2

1.25

1.3

1.35

1.4

1.45

1.5

-1

-0.5

0

0.5

1

1.5

2010 2011 2012 2013 2014

Switzerland Govt Bonds 2 Year (lhs) EUR/CHF (rhs)

JPY benefits from safe haven investments


60

70

80

90

100

110

12070

80

90

100

110

120

2009 2010 2011 2012 2013 2014

JPMorgan Emerging Markets Curr (lhs)

Japanese Yen Spot (inverted rhs)

18

Real yields drive gold prices

Source: Macrobond, Société Générale Private Banking

COMMODITIES – GOLD

GOLD: NEGATIVE (SPOT: USD1,386, 3M: USD1,250,

6M: USD1,200)

The bearish consensus on gold has been challenged

during the past couple of months. At the beginning of

2014, markets expected stronger US growth and further

normalisation of interest rates. In contrast to the

consensus, economic data was on the soft side, with US

non-farm payrolls dropping sharply. PMI, retail sales, and

housing starts underperformed as adverse weather took a

toll. Given a softer macro backdrop, investors started to re-

price the Fed’s response function considering a slower

pace of tapering and a possible delay in the first rate hike.

A weaker USD bolstered the gold price. In the EM space,

current account deficit countries, which are in urgent need

of capital inflow, suffered from significant currency sell-off.

As a response, policymakers tightened monetary policies,

highlighting the downside growth risks for EM economies.

Therefore, the rally in gold was accompanied by an

increasing drop in many industrial metals, emphasising the

fragility of the world’s economic recovery. Also, geopolitical

tensions between Ukraine and Russia have boosted risk

aversion and favour safe haven investments like gold.

Money investors had a significant influence in the recent

rebound. Assets under management at physically backed

ETF stopped falling and a similar picture was seen in the

futures space where money managers added long

positions. Physical gold demand in China remained well

above the long-term average while India’s was somewhat

subdued due the 10% import duty imposed to reduce

internal demand.

Despite the recent bullish developments, we think that the

gold price will fall again as concerns on global economy

growth subside. As 2014 advances, US short-term interest

rates should reflect expectations of a policy rate hike, a

negative driver for gold. In the short term, market

fundamentals might be supportive for gold as strong

Chinese physical demand and easing Indian import

restrictions should prevail. In the medium term, the macro

scenario of trend growth, tame inflation, and fewer tail risks

suggests downside risks to gold. Our outlook forecasts a

re-acceleration in the US and a steady recovery in the

eurozone.

I Technical indicators, geopolitical risks and uncertainty on

the Fed tapering pace support the gold uptrend. However,

investors should not be too bullish as underlying bearish

fundamentals should cap the upside potential. We would

take advantage of the recent rally to take profits on gold

holdings .

ST

RA

TE

GY

VIE

WS


March 2014

New buyers emerged as the consensus was challenged


19

WTI was more sensitive due to cold weather in the US


COMMODITIES – ENERGY

ENERGY (OIL): NEUTRAL (BRENT SPOT: USD109, 3M:

USD104, 6M: USD107).

Weaker business confidence and mixed signals on the

global economy diminished investor risk appetite.

However, the markets observed a recent rebound for oil

which can be explained by a couple of temporary factors.

Bitterly cold weather in the US was a major supportive

factor as it caused a sharp spike in distillate oil prices. The

impact was exacerbated by lower oil production growth in

the US and low inventories in OECD markets. China’s all-

time high demand in January played a key role in the oil

price trend. The underlying supportive factors triggered

investors to play in the oil futures space. Speculators

drove CFTC’s gauge of positions in WTI to an impressive

383m barrels (all-time high).

Geopolitical risks contributed to the rally along with the

aforementioned market fundamentals. The crisis in

Ukraine spurred fears of an energy supply shock. Russia

is the single largest energy supplier for OECD countries in

Europe. In 2013 crude imports from Russia represented

34% of net imports from outside of Europe. The crude

arrives in Europe through a combination of seaborne trade

and pipeline shipments on the Druzhba line that crosses

Ukraine. Russia relies on Europe as the buyer for 75% of

its oil and gas exports. Consequently, the relationship is

bilaterally important. US-EU sanctions could lead to a cut-

off of energy supplies through the Ukraine pipeline

network. However, this is not Pareto efficient given the EU-

Russia interconnectedness. Such a measure is unlikely to

be durable as economic losses would press both sides to

come up with a diplomatic solution.

The recent developments point to a highly volatile

environment for oil with both significant downside and

upside risks. The weather-related effect will inevitably fade

out. The recent spike in China’s demand was due to stock-

building as new refineries start up; therefore, this demand

will slow. The speculative position overhang could lead to

a sharp price drop. The supply side remains fragile as

there is no guarantee that Iranian oil will return to the

market, while Nigeria and Libya are still afflicted by theft

and security issues. Geopolitics could maintain a risk

premium.

I The aforementioned factors would create potential

volatility in Q2. Nonetheless, they are likely to fade in Q2.

A robust recovery is expected in H2 with a stronger picture

in DM growth underpinning oil demand; however, the

China slowdown may mitigate this upside risk. We suggest

remaining neutral and hedging against volatility.

ST

RA

TE

GY

VIE

WS


March 2014

Tight inventories contributed to the rally


20

M&A volume expands when markets perform well


ALTERNATIVE ASSETS

HEDGE FUND STRATEGIES: A CONVENIENT WAY TO

INTRODUCE ASSET DE-CORRELATION

The global economy appears to be mid-cycle while

slowdown/acceleration risks could appear on the horizon.

The macro consensus was recently challenged, and

markets reassessed the recovery path. As hedge fund

strategies are less market driven, they could generate

more alpha. Considering the recent economic data fog, we

would hedge portfolios by increasing exposure to market-

neutral funds which provide some form of downside

protection while maintaining good returns.

Among the different strategies that hedge funds may

adopt, the long/short equity* bucket is expected to

perform well given the favourable but balanced macro

backdrop. Robust but modest growth and ample but

shrinking liquidity in combination with low asset class

correlation should create more trading opportunities for

talented managers.

Event-driven space** should benefit from still low interest

rates, better visibility on growth, and still affordable

valuations. Perhaps one of the biggest market drivers right

now is necessity. After wringing every ounce of profit by

cutting costs to the bone, CEOs and corporate boards are

realising that real growth can only come via acquisitions

I Hedge funds are sound tools for portfolio diversification in

times marked by increasing geopolitical risk and change in

US monetary policy.

* A long/short strategy involves buying long equities that

are expected to increase in value and selling short equities

that are expected to decrease in value.

**Event-driven is an investment strategy that seeks to

exploit pricing inefficiencies that may occur before or after

a corporate event, such as a merger, acquisition, or

spinoff.

ST

RA

TE

GY

VIE

WS


March 2014

600

800

1000

1200

1400

1600

1800

2000

0

100

200

300

400

500

600

700

2002

Q1

2004

Q1

2006

Q1

2008

Q1

2010

Q1

2012

Q1

2014

Q1

M&A volume (bn$) S&P500 (rhs)

21

MAJOR RISKS

ST

RA

TE

GY

VIE

WS


March 2014

We see four main downside risks and two upside risks. Some risks could hurt our positions,

but most of our current tactical bias tends to mitigate downside risks.

Downside risks

Credit crisis in China. Chinese defaults cannot be controlled by the authorities. Investor

risk appetite wanes, driving risky assets down strongly. Commodities demand slips.

► Underweight equities and assets vulnerable to Chinese growth such as commodities,

commodity FX, and broad EM.

Harsh sanctions applied to Russia lead to a “cold war”-like situation. Russia cuts off

energy shipments to Europe, while the US starts to export gas and oil. Ukraine defaults on

sovereign bonds.

► Avoid EM equities and increase exposure to defensive assets.

No recovery in US Capex. Disappointments in capex fuels bets on a US slowdown and

labour market deterioration. S&P drops and Fed ceases tapering cycle.

► Long Gold, CHF and Treasuries. Sell equities.

Interest rate shock. US 10-year rates overshoot towards 4%. US housing stalls,

corporates stop re-leveraging. Stock markets drop and EM assets bleed further.

► Underweight EM assets (FX) and interest-sensitive US stocks.

Upside risks

Strong rebound in profit growth. If companies exposed to EM release above-expectation

profit growth, equities will soar.

► Increase exposure to consumer staples.

Emerging economies resume growth after active policy-mix. China rebounds and lifts

Asian and Latam suppliers. EM stocks, carry currencies, metal commodities rebound.

► Portfolios with risky assets will benefit indirectly.

22

FOLLOW-UP ON CONVICTIONS


Inception Date Conviction Currency Performance

Since Inception

Performance

Q.o.Q.

Performance

Y.T.D. Status Comments

November 22, 2012

Conviction N°1: Buy

European stocks now or

never

EUR 26.00% 3.00% 0.00% Open Low valuations are still the major drivers for European Stocks

February 20,

2013

Conviction N°2: Capital

expenditure recovers in

the US

USD 19.00% 2.00% -1.00% Open

With the US economy gaining momentum, we reiterate our

conviction that US sectors linked to capital expenditure (capex)

should outperform by the end of the year.

September 1, 2013 Conviction N°3: US De-

Equitisation USD 11.00% 2.00% 0.00% Open

The “de-equitisation” process is still underway, sustained by large

cash piles on company balance sheets. The most represented

sectors in the share buyback universe are Consumer

Discretionary, Health Care, and Financials. Companies buying

back shares tend to be strong performers.

September 1, 2013

Conviction N°4:

Commercial Real Estate:

Resilient Yield

EUR 22.10% 6.80% 4.40% Open

As fixed income returns have meaningfully come down, investors

venture beyond traditional bond markets to meet their fixed return

objectives. Commercial real estate markets look appealing as they

offer a potential defensive profile, long-term visibility, and a hedge

against inflation.

December 1, 2013 Conviction N°5: US bond

yields back up! USD --0.90% -1.90% -2.80% Open

US monetary policy is entering a multi-year tightening phase and

US long-term yields should keep rising in line with accelerating

activity.

This is a major trend that impacts portfolio structure and

investments in bonds, currency, and diversification techniques.

December 1, 2013

Conviction N°6a:

European banks beauty

contest (Equity)

EUR 3.00% 5.00% 2.00% Open

Economic turnaround and accommodative monetary policy will

further ease funding conditions. The ECB’s Asset Quality Review

performed should ease market concerns about the soundness of

the eurozone banking sector and whet investor appetite. Bond

redemptions will continue to overtake bond issuance providing

support for the financial bond market.

December 1, 2013

Conviction N°6b:

European banks beauty

contest (Bonds)

EUR 3.14% 3.14% 3.14% Open

December 1, 2013

Conviction N°7: Value in

European short duration

high yield

EUR 3.40% 2.90% 2.70% Open

Default rates in European High Yield are set to stay low while

short-maturity bonds provide protection against the risk of rising

long-term yields

Structural factors are supporting increased market liquidity

December 1, 2013

Conviction N°8:

Investment cycle

gathering speed

USD 3.00% 0.00% -3.00% Open

Business fixed investment has been relatively weak in developed

markets for several years but we now expect a rebound in capex in

Japan, the US, and Europe (especially in Germany and the UK).

As financing conditions remain accommodative, company cash

flows are at very high levels and now that global growth is

accelerating, we expect an increase in investments.

December 1, 2013

Conviction N°9: Upside

for depressed energy

sector

USD -7.00% 4.00% 2.00% Open

Free cash flow generation is key for avoiding the ongoing Big Oil

de-rating. Improved visibility on Big Oil’s future cash flow, the near

10-year low valuation relative to the market, and higher cash

returns to shareholders should whet investor appetite for energy

stocks. In addition, the oil sector’s defensive profile and high

dividend yield look attractive for those investors wanting to avoid

the likely increase in equity market volatility.

December 1, 2013

Conviction N°10:

German stocks: Rocket-

borne

EUR -1.00% -1.00% -3.00% Open

The low interest rate environment, attractive effective exchange

rate, and accelerating economic growth are all the factors needed

to drive German stocks up further. In the eurozone the DAX

remains our preferred index as valuations are cheap.

Small & Mid caps in Germany are still attractive despite the 20%

premium they show relative to large caps in the region.

March 19,

2014

Conviction N°11: TOPIX -

Multiples rerating still

underway

(currency hedged)

EUR - - - Open

We believe that Japan is moving towards a structural change. The

exit of deflation should strongly support the stock market re-rating.

Recent stocks weakness should be seen as a major buy

opportunity.

March 19,

2014

Conviction N°12: Global

Pharma - The only GARP

Sector

USD - - - Open

There are many reasons why we like the Pharmaceuticals sector.

Cheap valuations, safe dividend yields, and defensive profiles in

highly volatile markets are all supportive factors. However, profit

growth remains the most important driver.

March 19,

2014

Conviction N°13: Europe:

Prefer Value to growth

style

EUR - - - Open

With bond yields set to rise in the US, emerging markets still facing

a bumpy ride, and profits expected to recover as soon as Q1, we

suggest keeping a reasonable exposure to value stocks in Europe.

March 19,

2014

Conviction N°14: Qatar:

Haven from the turmoil USD - - - Open

Qatar should be joining the MSCI Emerging market index in June

2014, following the upgrade announcement in mid-2013. We

expect that the market will experience a liquidity boost as we

approach May 2014, when the MSCI reclassification of Qatar as an

EM will become effective.

Average Performance 7.43% 2.36% 0.40%

Convictions have either a Tactical horizon (3-12 months) or a Strategic horizon (1-3 years), the current position refers to our stance at the current time, thus they are Open then Closed and

removed from the list. For the Strategic Convictions, we also have an additional ‘Hold’ position, when we think the theme is still valid over its stated horizon but current conditions are not

ideal to enter/sell.

March 2014

23

EC

ON

OM

IC V

IEW

S

The force of global liquidity, difficult to observe and measure, is nonetheless clear. Even very

modest changes in fundamentals or the mere hint of them can trigger sharp reversals in

liquidity tides with major consequences for the real economy. Last summer, the mere

suggestion of Fed tapering triggered sudden market re-pricing. More recently, the reappraisal

of emerging economies’ fundamentals, most notably China, led to new outflows.

The fundamentals of the global leverage cycle remain at the heart of our scenario of a

recovery in advanced economies (credit revival) and softer growth for emerging economies

(credit slowdown). In advanced economies, the recoveries in the United States and the

United Kingdom are the most advanced, while in the euro area it is still nascent and in Japan

still highly reliant on policy stimulus. Amongst the major emerging economies, we expect

both Brazil and Russia to grow well below trend potential. In China, the government is set to

miss its growth target for the first time in 16 years. Albeit only by a small margin, this will be

symbolic politically.

We assume that there will be no storm surge in global liquidity. The ability of the US Fed to

keep key rates well below a Taylor Rule level in 2014 is one protective barrier. Credible

policy responses in emerging economies is another. For the euro area, progress on

bolstering banks and fiscal union will be the main pillars of support.

1. Localised EM turbulence: Most recently, events in Ukraine sparked global market jitters.

The combination of challenging political issues (Ukraine, Russia, India, Indonesia, Brazil,

etc.) and slower growth momentum overall in emerging economies is likely to trigger more of

these tremors. It is only in our risk scenario, however, that we see globally disruptive

dislocations in emerging markets. We identify three risks that merit particular attention: (1)

policy responses; (2) portfolio concentration risks; and (3) economic linkages.

2. China’s credit tide ebbing while the US is flowing: The rotation of the global leverage

cycle from emerging to advanced economies remains at the heart of our global economic

outlook. China’s bumpy landing is playing out to script as policymakers have sought to slow

credit and sacrifice short-term growth to protect long-term stability. This year, we expect GDP

growth to fall short of the 7.5% target presented at the National People’s Congress for the

first time in 16 years. As China enters its first year of private sector defaults, the moment

when a hard landing could occur has arrived. We place a 20% probability on a China hard

landing (China’s GDP growth falling below 5%). This kind of risk scenario would cost the

global economy 1.5pp of GDP in the first year after the shock. The world economy is now

looking for a leverage relay; the US, UK and Germany are the best placed today to pick up

this role.

3. G4 price stability: Each major economy, it seems, has its own price concern. In the euro

area, the fear is deflation and just how quickly the ECB could respond in the event of this

kind of risk scenario. In the US, concerns centre on the level of slack in the economy and

whether this is currently overestimated at the risk of pushing the Fed faster towards the exit,

mirroring the BoE’s recent experience. Finally in Japan, as the consumption tax hike nears,

there are clearly worries that this will stop consumers dead in their recovery tracks, marking a

rapid return to deflation. In the absence of a major new shock, we consider these fears

overstated, and our central scenario remains one of price stability for the major advanced

economies.

GLOBAL ECONOMIC OUTLOOK

BARRIERS AGAINST LIQUIDITY STORM SURGES


March 2014

24

GLOBAL ECONOMIC OUTLOOK

BARRIERS AGAINST LIQUIDITY STORM SURGES

4. US growth fundamentals trump liquidity ... for now: Weather-driven weakness appears

to be fading from US data, and we look for a strong bounce back in Q2. Also on a positive

note, since our last publication, US policy uncertainty has declined, albeit as market

uncertainty has increased with recent emerging market tremors. The focus now is on just

how much spare capacity the US holds. Our view is that wage inflation is likely to materialise

sooner than the Fed’s forecasts assume. The result is that we expect a steep tightening cycle

from late 2016 through 2018.

5. Bumpy eurozone take-off: As we head to press, the German Constitutional Court is

preparing to rule on the ESM. The last time the Court made an announcement, markets were

quick to brush it aside, and they have also shown little concern for the challenges faced by

ongoing negotiations on a Single Resolution Mechanism, the second pillar of banking union.

The market focus, it seems, is more on the first green shoots of recovery in the euro area. As

long as the institutional set-up continues to lag, we believe the recovery will remain bumpy

and fragile.

6. Japanese wage acceleration comes next: Japan is exiting deflation driven by three

factors: (1) corporate deleveraging, the main cause of weak domestic demand and prolonged

deflation, has eased to a large extent; (2) net domestic financial demand is recovering while

corporate deleveraging is easing, and the government is expanding its budget; and (3)

unemployment has fallen below 4% aided by monetary easing. The next step now is the

expansion of aggregate wages to accelerate the recovery in domestic demand and exit

deflation. Our expectation is that these forces will be strong enough to offset the April

consumption tax hike.

Fundamentals in the advanced economies continue to improve and we have made upward

revisions in particular to our eurozone outlook, in part reflecting fiscal drift but also stronger

export performance and much improved financial conditions. In terms of upside risks, faster-

than-expected credit expansion - be it in the US, UK, eurozone, or Japan - holds the greatest

upside potential for the global economy. Emerging economies could also deliver upside

surprises with better-than-expected progress on structural reform attracting the return of

investors. Upside surprises could also come from an easing of monetary conditions in China,

but we fear this would be at the cost of far greater risks to the economy in the medium term.

On the downside, risks centre on emerging economies and what we call liquidity storm

surges. These could result both from political events and misjudged policy choices. More

aggressive-than-expected policy tightening from the Federal Reserve and/or portfolio

concentration risks could further aggravate the situation. Moreover, as we head to press, the

German Constitutional Court is due to rule on the ESM. The divide on the euro area’s future

institutional framework remains significant, and while no longer a source of immediate market

concern, the shortcomings of the current institutional framework would become all too clear

in the event of a new shock.

EC

ON

OM

IC V

IEW

S


Michala Marcussen

Global Head of Economics

SG Cross Asset Research

March 2014

25

GLOBAL ECONOMIC FORECASTS

FO

RE

CA

ST

S

Source: SG Cross Asset Research/Economics, IMF

March 2014

% change YoY

World (Mkt FX weights) 2.5 NA 3.2 NA 3.4 NA 3.2 NA 3.1 NA 3.2 NA

Developed countries 1.3 NA 2.2 NA 2.4 NA 1.4 NA 1.7 NA 2.1 NA

Emerging countries 4.6 NA 4.9 NA 5.1 NA 6.3 NA 5.7 NA 5.2 NA

G5

Euro area -0.4 NA 1.1 ▲ 1.2 NA 1.4 NA 0.9 NA 1.2 NA

Germany 0.5 NA 1.9 ▲ 1.5 NA 1.6 NA 1.5 NA 1.6 ▼

France 0.3 NA 0.8 NA 1.3 NA 1.0 NA 1.2 NA 1.3 NA

Italy -1.8 NA 0.7 ▲ 1.0 NA 1.3 NA 0.8 NA 1.0 NA

Spain -1.2 NA 0.6 ▲ 0.9 NA 1.5 NA -0.2 NA 0.5 NA

United States 1.9 NA 3.0 ▼ 3.2 NA 1.5 NA 1.7 NA 2.4 ▲

China 7.7 NA 7.1 NA 6.8 NA 2.6 NA 2.6 ▼ 2.9 NA

Japan 1.5 ▼ 1.2 ▼ 1.7 NA 0.4 NA 2.9 NA 2.0 NA

United Kingdom 1.8 NA 2.7 NA 2.5 NA 2.6 NA 2.3 ▼ 3.0 NA

Other advanced

Switzerland 2.0 NA 1.7 NA 1.8 NA -0.2 NA 0.3 NA 0.8 ▼

Australia 2.4 NA 2.9 ▲ 3.0 NA 2.4 NA 2.9 NA 2.5 NA

South Korea 2.8 NA 3.6 NA 3.6 NA 1.3 NA 1.8 NA 2.3 NA

Taiwan 1.9 NA 3.0 NA 3.4 NA 1.0 NA 1.3 NA 1.6 NA

Emerging economies

Brazil 2.3 NA 1.7 ▼ 2.3 NA 6.2 NA 5.9 NA 5.0 ▼

Russia 1.4 NA 1.4 ▼ 2.4 ▼ 6.6 NA 6.0 ▲ 4.1 NA

Poland 1.5 NA 3.3 ▲ 3.8 NA 0.9 NA 1.4 ▼ 2.5 ▼

Czech Republic -1.4 NA 1.5 NA 2.5 NA 1.4 NA 0.9 NA 2.0 ▲

Slovakia 0.9 NA 2.3 NA 2.5 NA 1.5 NA 0.9 ▼ 1.7 NA

Mexico 1.3 ▼ 3.5 ▼ 3.7 NA 3.8 NA 3.8 ▲ 3.5 NA

Chile 4.1 ▼ 2.4 ▼ 3.5 ▼ 2.1 ▲ 2.8 NA 2.7 NA

India* 4.6 ▲ 5.3 NA 6.1 ▲ 9.6 8.2 7.2

Indonesia 5.8 5.4 5.6 7.0 6.1 5.6

* 2011 refers FY 2012, GDP income side

Real GDP CPI

2013f 2014f 2015f 2013f 2014f 2015f

Significant changes from previous forecasts

▲ Up ▼ Down

26

FO

RE

CA

ST

S

MARKET PERFORMANCES & FORECASTS

*As of 21 March 2014

Source: Société Générale Private Banking

Δ1m Δ3m ΔYTD Δ12m

(in local currency) Current Level

S&P500 1872 1.39% 2.95% 1.28% 20.1%

DJ Euro Stoxx 50 3089 2.3% 1.3% -0.6% 14.0%

FTSE100 6542 -0.17% -0.97% -3.06% 1.7%

Nikkei 225 14224 -3.99% -10.37% -12.69% 14.1%

MSCI World ($) 404 0.12% 1.00% -1.02% 12.4%

(in local currency) Yield to Mat

European IG 1.79% 4.70% 1.8% 1.9% 3.6%

European HY 3.69% 12.02% 2.9% 2.7% 11.1%

US IG 3.21% 1.52% 1.9% 2.3% 0.9%

US HY 5.57% 8.49% 2.8% 2.6% 7.2%

UK 3.79% 5.84% 2.2% 2.5% 3.0%

Japan 0.42% 1.63% 0.4% 0.5% 1.2%

Δ1m Δ3m ΔYTD Δ12m

(in USD) Current Level

MSCI EM 956 -0.31% -3.49% -3.97% -9.62%

MSCI EM Asia 437 0.88% -1.13% -1.23% -2.66%

MSCI EMEA 378 -9.75% -13.50% -14.28% -20.68%

MSCI Latam 2882 -1.14% -9.00% -9.57% -26.13%

(in USD) Yield to Mat

BAML EM SVGN 5.41% -1.48% 1.85% 1.91% -0.88%

Asia Svgn 4.46% -1.41% 4.19% 4.05% -1.25%

EMEA Svgn 4.91% 0.35% 1.19% 1.41% 0.59%

Latam Svgn 6.50% -3.91% 1.91% 1.81% -2.73%

BAML EM CORP 5.07% 24.90% 1.23% 1.23% -0.12%

Asia Corp 4.29% 1.22% 1.35% 1.47% 0.49%

EMEA Corp 5.31% 0.32% -0.29% -0.35% -0.08%

Latam Corp 5.64% -0.82% 2.54% 2.45% -0.39%

Performance YTD Current 3-Month forecast 6-month forecast

EUR/USD 0.03% 1.37835 1.36 1.33

USD/JPY -2.70% 102.4 103 108

EUR/CHF -0.83% 1.2168 1.23 1.25

GBP/USD -0.37% 1.65055 1.66 1.64

EUR/GBP 0.35% 0.8349 0.82 0.81


USA -7.7% 2.8% 3.0% 3.4%

GER -15.0% 1.7% 1.8% 1.9%

UK -8.8% 2.8% 3.1% 3.3%


Gold in USD 10.15% 1330.45 1250 1200

Oil (Brent) in USD -3.84% 105.73 104 107

Emerging Markets Performance

Developed Markets Performance

Currencies forecasts

10-year yield forecasts

Commodity forecasts

March 2014

27

March 2014

28

This document has been prepared by the Strategy team of Société Générale

Private Banking . The information provided is an objective and independent

explanation of the content of this document. The name and function of the

person having prepared the document is indicated in the first page of this

document. This document is provided to you for private use only and may not be

passed on or disclosed to any other person (with the exception of external

advisors on the condition that they themselves respect this confidentiality

undertaking), nor copied in whole or in part, without the prior written consent of

the Société Générale group of companies ("SG").

The information herein is not intended to be in whole or in part an offer,

recommendation or advice to buy or sell, or a solicitation of an offer to buy or

sell, any securities. The material is not intended to provide, and should not be

relied on for, accounting or legal purposes. The information herein, including any

expression of opinion, has been obtained from, or is based upon, sources

believed to be reliable but is not guaranteed as to accuracy or completeness.

Any price levels, rates, simulations, illustrations, terms or conditions contained

herein are indicative only, provided for illustration or discussion purposes only

and may vary in accordance with changes in market conditions or market

fluctuations.

The investment product(s)/asset class(es) described in this document may not

be eligible for sale or subscription in all jurisdictions or to certain categories of

investors. This document is not intended for distribution to a person or within a

jurisdiction where such distribution would be restricted or illegal. It is the

responsibility of any person in possession of this document to investigate and

observe all applicable laws and regulation of the relevant jurisdiction.

SG is under no obligation to disclose or take account of this document when

providing services to or dealing with or on behalf of customers. The views of SG

reflected in this document may change without notice. In addition, SG may issue

other reports that are inconsistent with, and reach different conclusions from,

the information presented in this report and is under no obligation to ensure that

such other reports are brought to the attention of any recipient of this report.

To the maximum extent possible at law, SG does not accept any liability

whatsoever (financial or otherwise) arising from the use of the material or

information contained herein nor in respect of actions taken by recipients on the

basis of the research. Moreover, no member of SG makes any warranty,

expressed or implied, as to the accuracy or the completeness of the information

or on the profitability or performance of any investment product(s)/asset

class(es), countries, markets or companies. SG is not responsible, in any

circumstances, for the financial, legal or tax consequences of investing into the

investment product(s)/asset class(es) described in this document, nor the

performance of this investment(s).

The investment product(s)/asset class(es) described in this document are

destined to prospective investors who possess sufficient knowledge, based on

their own experience, to evaluate the advantages and the risks inherent to such

investment product(s)/asset class(es). In addition, the financial instrument

discussed in this report may not be suitable for all investors. Investors must

make their own informed decisions, not to be taken solely on the basis of this

document. Investors must seek their own advice regarding the appropriateness

of investing in financial instruments or implementing strategies discussed herein

and/or enabling them to understand any applicable tax, legal or accounting

consequences and other risks arising in respect of such investment and/or

related to their own particular circumstances and financial conditions. For this

purpose, investors must, to the extent they deem necessary, obtain independent

advice from competent legal, financial, tax, accounting and other professionals.

No information, explanations or communication (written or oral) of SG shall be

considered as investment advice or recommendation to enter into any

transaction(s) described in this document or deemed to be an assurance or

guarantee as to the expected results of transaction(s) involving such investment

product(s)/asset class(es).

This document does not purport to list or summarise all of the terms and

conditions, nor to identify or define all or any of the risks that would be

associated with the purchase or sale of the investment product(s)/asset

class(es) described herein.

The price and value of investments and the income derived from them can go

down as well as up. Changes in inflation, interest rates and the rate of exchange

may have an adverse effect on the value, price and income of investments.

The value of securities and financial instruments may be subject to currency

exchange rate fluctuation that may have a positive or negative effect on the

price, value of such securities or financial instruments and the income derived

from such investments.

Any services and investments referred to may have tax consequences and it is

important to bear in mind that SG does not provide any tax advice. The level of

taxation depends on individual circumstances and such levels and bases of

taxation can change.

Past performance is not necessarily a guide to future performance. Estimates of

future performance are based on assumptions that may not be realized.

Investments in general, and derivatives in particular, involve numerous risks,

including, among others, market, counterparty default and liquidity risk.

The investment product(s)/asset class(es) described herein may be issued by

issuer(s) which credit rating given by any rating agency in the market may be

inferior to that of the companies in SG and SG is not responsible nor liable for

any risk in respect of such issuer(s) including but not limited to risk of default on

the part of such issuer(s). Further, SG assumes that investors are aware of the

risks, including any risk which may be in relation to or arise from the issuer(s),

and practices described herein.

CONFLICTS OF INTEREST

This research contains the views, opinions and recommendations of SGPB

Strategists. Trading desks may trade, or have traded, as principal on the basis

of the analyst(s) views and reports. In addition, strategists receive compensation

based, in part, on the quality and accuracy of their analysis, client feedback,

trading desk and firm revenues and competitive factors. As a general matter,

SG normally makes a market and trade as principal in fixed income securities

discussed in research reports.

Companies within SG may from time to time deal in, profit from trading on, hold

on a principal basis or act as market-makers, advisers or brokers in relation to

the investment product(s)/asset class(es) mentioned in this document or provide

banking services to the companies and their affiliates mentioned herein.

Employees of SG or persons/entities connected to them may from time to time

have position in or are holding any of the investment product(s)/asset class(es)

mentioned in this document.

SG may have (or may liquidate) from time to time positions in the investment

product(s)/asset class(es), security or securities and/or underlying assets

(including derivatives thereof) referred to

IMPORTANT DISCLAIMER

March 2014

29

herein, if any, or in any other asset, and therefore any return to prospective

investor(s) such as yourself under the investment product(s)/asset class(es)

described herein may directly or indirectly be affected. Specific disclosures are

made in the first part of this document.

DISTRIBUTION

Unless otherwise expressly indicated, this document is issued and distributed by

Société Générale, a French bank authorised and supervised by the Autorité de

Contrôle Prudentiel, located 61, rue Taitbout, 75436 Paris Cedex 09. Société

Générale is a French Société Anonyme with its registered address at 29

boulevard Haussman, 75009 Paris, with a capital of EUR 998 320 373,75 at 8

January 2013 and unique identification number 552 120 222 R.C.S. Paris.

Further details are available on request or can be found at www.

privatebanking.societegenerale.com.

Bahamas: This document has been distributed in Bahamas to its private clients

by Société Générale Private Banking (Bahamas) Ltd duly licensed and regulated

by the Securities Commission of the Bahamas and is not intended for

distribution to persons designated as a Bahamina citizen or resident under the

Bahamas Exchange Control Regulations.

Belgium: This document has been distributed in Belgium by Société Générale

Private Banking NV, a Belgian credit institution according to Belgian law and

controlled and supervised by the National Bank of Belgium (NBB) and the

Financial Services and Markets Authority (FSMA). Société Générale Private

Banking NV is registered as insurance broker at the FSMA under the number

61033A. Société Générale Private Banking NV has its registered address at

9000 Gand, Kortrijksesteenweg 302, registered at the RPM Ghent, under the

number VAT BE 0415.835.337. Further details are available on request or can

be found at www.privatebanking.societegenerale.be.

China: This document is not distributed or provided by Societe Generale

(China) Limited and Societe Generale (China) Limited is not involved in

preparing for this document in China.

Dubaï: This document has been distributed in Dubaï by Societe Generale Bank

and Trust, DIFC branch. Related financial products or services are only

available to professional clients with liquid assets of over $1 million, and who

have sufficient financial experience and understanding, to participate in the

relevant financial markets according to the DFSA rules. Societe Generale Bank

and Trust is duly licensed and regulated by the Dubai Financial Services

Authority (DFSA). Further details are available on request or can be found at

www. privatebanking.societegenerale.ae.

Gibraltar: This document has been distributed in Gibraltar by SG Hambros

Bank (Gibraltar) Limited (“SGPB Hambros GIB”), which is regulated and

authorised by the Gibraltar Financial Services Commission. SGPB Hambros GIB

is registered in Gibraltar under number 1294. The Company’s registered office is

at 32 Line Wall Road, Gibraltar. The Company’s principal place of business is at

Hambro House, 32 Line Wall Road, Gibraltar. The paid-up capital and reserves

of SGPB Hambros GIB exceeded £47 million as at 31 December 2010. Copies

of the most recent audited financial statements are available on request. SGPB

Hambros GIB is a participant in the Gibraltar Deposit Guarantee Scheme ("the

Scheme") established under the Deposit Guarantee Scheme Act ("the Act").

Payments under the Scheme cover 100% of the bank’s total liability to a

depositor in respect of deposits which qualify for compensation under the Act

subject to a maximum payment to any one depositor of €100,000 (or the

Sterling equivalent). Further details of the Scheme are available on request or

can be found at www.gdgb.gi The Scheme does not apply to fiduciary deposits.

SGPB Hambros GIB is a participant in the Gibraltar Investor Compensation

Scheme. Further details are available on request or can be found at

www.gics.gi.

SGPB Hambros GIB is part of SGPB Hambros Group. Further details are

available on request or can be found at

www.privatebanking.societegenerale.com/hambros.

SGPB Hambros GIB is part of SGPB Hambros Group. Further details are



Guernsey: This document has been distributed in Guernsey by SG Hambros

Bank (Channel Islands) Limited, Guernsey branch. SG Hambros Bank (Channel

Islands) Limited (“SGPB Hambros CI”) is regulated for banking and investment

business by the Jersey Financial Services Commission. The Guernsey branch

of SGPB Hambros CI is regulated for banking and investment business by the

Guernsey Financial Services Commission and the Jersey Financial Services

Commission. SGPB Hambros CI is registered in Jersey under number 2693.

The company’s registered office and principal place of business is at PO Box 78,

SG Hambros House, 18 Esplanade, St Helier, Jersey, Channel Islands, JE4

8PR. The Guernsey branch of SGPB Hambros CI has its principal place of

business at PO Box 6, Hambros House, St Julian’s Avenue, St Peter Port,

Guernsey, GY1 3AE. The paid-up capital and reserves of SGPB Hambros CI

exceeded £218 million as at 31 December 2011. Copies of the most recent

audited summary financial statements are available on request. There are no

investor compensation schemes in Jersey or Guernsey. SGPB Hambros CI is a

participant in the Jersey Banking Deposit Compensation Scheme: such scheme

offers protection for eligible deposits of up to £50,000. The maximum total

amount of compensation is capped at £100,000,000 in any 5 year period. Full

details of such scheme and banking groups covered are available on the States

of Jersey website or on request. The Guernsey branch of SGPB Hambros CI is

a participant in the Guernsey Banking Deposit Compensation Scheme. The

scheme offers protection for 'qualifying deposits' up to £50,000, subject to

certain limitations. The maximum total amount of compensation is capped at

£100,000,000 in any 5 year period. Full details are available on such scheme's

website www.dcs.gg or on request.

SGPB Hambros CI is part of SGPB Hambros Group. Further details are



Hong Kong: This document has been distributed in Hong Kong by Societe

Generale Bank and Trust, Hong Kong Branch, which is authorised and regulated

by the Hong KongMonetary Authority. The contents of this document have not

been reviewed by any regulatory authority in Hong Kong. If you are in any doubt

about the contents of this document, you may clarify them with Societe

Generale Bank and Trust or you should obtain independent professional advice.

Further details are available on request or can be found at

www.privatebanking.societegenerale.asia.

Japan: This document has been distributed in Japan by Societe Generale

Private Banking (Japan) Ltd, which is regulated by the Japanese Financial

Services Agency. Further details are available on request or can be found at

www.privatebanking.societegenerale.co.jp.

Jersey: This document has been distributed in Jersey by SG Hambros Bank

(Channel Islands) Limited (“SGPB Hambros CI”), which is regulated for banking

and investment business by the Jersey Financial Services Commission. SGPB

Hambros CI is registered in Jersey under number 2693. The company’s

registered office and principal place of business is at PO Box 78, SG Hambros

House, 18 Esplanade, St Helier, Jersey, Channel Islands, JE4 8PR. The paid-up

capital and reserves of SGPB Hambros CI exceeded £218 million as at 31

December 2011. Copies of the most recent audited summary financial

statements are available on request. There are no investor compensation

schemes in Jersey or Guernsey. SGPB Hambros CI is a participant in the

Jersey Banking Deposit Compensation Scheme: such scheme offers protection

for eligible deposits of up to £50,000. The maximum total amount of

compensation is capped at £100,000,000 in any 5 year period. Full details of

such scheme and banking groups covered are available on the States of Jersey

website or on request.

SGPB Hambros CI has a branch in Guernsey branch having its principal place

of business at PO Box 6, Hambros House, St Julian’s Avenue, St Peter Port,

Guernsey, GY1 3AE. The Guernsey branch of SGPB Hambros CI is a

participant in the Guernsey Banking Deposit Compensation Scheme. Such

scheme offers protection for 'qualifying deposits' up to £50,000, subject to

certain

March 2014

30

limitations. The maximum total amount of compensation is capped at

£100,000,000 in any 5 year period. Full details are available on such scheme's

website www.dcs.gg or on request.

SGPB Hambros CI is part of SGPB Hambros Group. Further details are



Luxembourg: This document has been distributed in Luxembourg by Societe

Generale Bank and Trust (“SGBT”), a credit institution which is authorised and

regulated by the Commission de Surveillance du Secteur Financier and whose

head office is located at 11 avenue Emile Reuter – L 2420 Luxembourg. Further

details are available on request or can be found at www.sgbt.lu.

SGBT accepts no responsibility for the accuracy or otherwise of information

contained within the research environment. SGBT accepts no liability or

otherwise in respect of actions taken by recipients on the basis of the research

only and SGBT does not hold itself out as providing any advice, particularly in

relation to investment services.

SGBT has neither verified nor independently analysed the information contained

in this document.

The opinions, views and forecasts expressed in this document (including any

attachments thereto) reflect the personal views of the author(s) and do not

reflect the views of any other person or SGBT unless otherwise mentioned.

The Commission de Surveillance du Secteur Financier has neither verified nor

analysed the information contained in this document.

Monaco: This document has been distributed in Monaco by Société Générale

Private Banking (Monaco) S.A.M. , located at 13, 15 Bd des Moulins, 98000

Monaco Ville, Monaco, which is regulated by the Autorité de Contrôle Prudentiel

and the Commission de Contrôle des Activités Financières. Further details are


www.privatebanking.societegenerale.mc.

Singapore: This document is for distribution to only “accredited investors”,

expert investors and institutional investors, in Singapore within the meaning of

the Securities and Futures Act (Cap. 289) of Singapore by Societe Generale

Bank and Trust, Singapore Branch (“SGBT SIN”), which is regulated by the

Monetary Authority of Singapore. If you are an accredited investor or expert

investor, please be informed that SGBT SIN is relying on the following

exemptions to the Financial Advisers Act, Cap. 110 (“FAA”) that have been

granted to it by the Monetary Authority of Singapore: (1) the exemption in

Regulation 33 of the Financial Advisers Regulations (“FAR”), which exempts

SGBT SIN from complying with Section 25 of the FAA on disclosure of product

information to clients; (2) the exemption set out in Regulation 34 of the FAR,

which exempts SGBT SIN from complying with Section 27 of the FAA on

recommendations; and (3) the exemption set out in Regulation 35 of the FAR,

which exempts SGBT SIN from complying with Section 36 of the FAA on

disclosure of certain interests in securities.

Further details are available on request or can be found at

www.privatebanking.societegenerale.asia.

Société Générale

SA Capital 976 447 673,75 EUR

Registered under Paris RCS N°552 120 222

Société Générale Private Banking

Tour Granite

189, rue d’Aubervilliers

75886 Paris Cedex 18

France

privatebanking.societegenerale.com

Switzerland: This document has been distributed in Switzerland by Société

Générale Private Banking (Suisse) S.A. , which is regulated by the Swiss

Financial Market Supervisory Authority, FINMA, and in Lugano by Société

Générale Private Banking (Lugano-Svizzera) S.A. , which is regulated by the

Swiss Financial Market Supervisory Authority FINMA. Further details are

available on request or can be found at www.privatebanking.societegenerale.ch.

UK: This document has been distributed in UK by SG Hambros Bank Limited

(“SG Hambros”), which is authorised and regulated by the Financial Services

Authority. SG Hambros is registered in England and Wales under number

964058. The company’s registered office is at Norfolk House, 31 St James’s

Square, London SW1Y 4JR. SG Hambros is covered by the Financial Services

Compensation Scheme (FSCS). The FSCS can pay compensation to depositors

if a bank is unable to meet its financial obligations. Most depositors - including

most individuals and small businesses - are covered by the scheme. The

scheme, however, is not available in respect of non-deposit investment

products. For further information about the scheme (including the amounts

covered and eligibility to claim) please ask your private banker, refer to the

FSCS website www.FSCS.org.uk or call the FSCS on 0800 678 1100.

SG Hambros is part of the wealth management arm of the Société Générale

Group, Societe Generale Private Banking. Société Générale is authorised by the

Banque de France and by the UK Financial Services Authority and is regulated

by the Financial Services Authority for the conduct of UK business. Further

details on SG Hambros including additional legal and regulatory details are



SG Hambros accepts no responsibility for the accuracy or otherwise of

information contained within the research environment. SG Hambros accepts no

liability or otherwise in respect of actions taken by recipients on the basis of the

research only.

Rules and regulations made for the protection of investors and/or depositors

under the UK Financial Services and Markets Act 2000 will not apply to business

conducted at or from offices located outside the UK and investors and/or

depositors will not be able to benefit from the provisions of the Financial

Services Compensation Scheme.

Notice to U.K. Investors: The information and any advice contained herein is

directed only at, and made available only to, professional clients and eligible

counterparties (as defined in the FSA rules) and should not be relied upon by

any other person or party.

Notice to U.S. Investors: This document is not intended to U.S. Persons under

the U.S. Securities Act of 1933, as amended and under the various laws of the

States of the United States of America.

Notice to Canadian Investors: This document is for information purposes only

and is intended for use by Permitted Clients, as defined under National

Instrument 31-103, Accredited Investors, as defined under National Instrument

45-106, Accredited Counterparties as defined under the Derivatives Act

(Québec) and "Qualified Parties" as defined under the ASC, BCSC, SFSC and

NBSC Orders

Notice to Japanese Investors: This document is solely for educational purposes

and does not constitute advertisement of financial services targeted at investors

in Japan. This document is intended for information purposes only and does not

constitute investment advice or an offer to sell or solicitation of an offer to buy

the funds described herein. This document is intended only for those people to

whom it is sent directly by Societe Generale Private Banking (Japan) Ltd, and

under no circumstances should it be forwarded to any third party. The products

mentioned in this report may not be eligible for sale in Japan and they may not

be suitable for all types of investors.

http://www.privatebanking.societegenerale.com.

© Copyright the Société Générale Group 2012. All rights reserved. Any

unauthorized use, duplication, redistribution or disclosure in whole or in part is

prohibited without the prior consent of SG.

The key symbols, Société Générale, Société Générale Private Banking are

registered trademarks of SG. All rights reserved.

March 2014

INVESTMENT STRATEGY · investment and by a new round of qualitative [email protected]...

Documents

Transcript of INVESTMENT STRATEGY · investment and by a new round of qualitative [email protected]...