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7/24/2019 Societe Generale, 2016 Outlook - Mind The Gaps
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| 2016 INVESTMENT STRATEGY
2016 OUTLOOK
MIND THE GAPSInvestmentStrategy
Alan MudieHead of Investment Strategy
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
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GLOBAL OUTLOOKTHE OUTLOOK FOR THE GLOBAL ECONOMY REMAINS MIXED
The global economy will continue to grow
at a steady pace in 2016.
The US has been clearly the strongest
developed world economy, also lifting
those countries most exposed to strong
American momentum. The euro zone and
Japan should also expand next year.
Low commodity prices should continue to
weigh on inflation, and central bank
monetary policy should remain
accommodative overall.
Commodity importer countries will still
benefit from lower bills, while commodity
exporters will continue to suffer.
Global economic momentum has bottomed
Manufacturing PMI
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Sources: Societe Generale Private Banking, Bloomberg
40
42
44
46
48
50
52
54
56
58
60
01.
2013
03.
2013
05.
2013
07.
2013
09.
2013
11.
2013
01.
2014
03.
2014
05.
2014
07.
2014
09.
2014
11.
2014
01.
2015
03.
2015
05.
2015
07.
2015
09.
2015
11.
2015
01.
2016
Global Eurozone US
UK Japan China
EXPANSION
CONTRACTION
P.2
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| 2016 INVESTMENT STRATEGY
SOCIETE GENERALE PRIVATE BANKINGFEBRUARY 2016
Sources: Societe Generale Private Banking, Datastream
GLOBAL OUTLOOKWORLD TRADE REMAINS SLUGGISH
World trade continues to slow. Global
trade growth has been anchored below its
historical average since the Great
Recession, offering further evidence of
tepid world economic recovery.
Decreasing global demand, especially due
to slowing emerging markets, weighs on
the outlook for world trade.
We believe however that other factors are
also at play: capital expenditure is below
par, manufacturers have begun to
reshoreproduction, new processes
such as 3D printing reduce the need for
shipping
World trade is no longer underpinning global growth
96
97
98
99
100
101
102
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
World trade growth (yoy, %)
Historical average
Industrial confidence indicator (OECD + 6 major EM, rhs)
P.3
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| 2016 INVESTMENT STRATEGY
Sources: Societe Generale Private Banking, Bloomberg
REGIONAL OUTLOOKUNITED STATES: SOLID GROWTH PROSPECTS
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
US wage growth should finally begin to catch up
US growth is broadening but not
accelerating, with the long-awaited capex
pickup still sluggish, particularly
hampered by the energy sector.
Although salary growth has remained
modest so far, continued labour market
improvement should fuel wage inflation
eventually. On the other hand, the strong
USD will continue to cap headline
inflation.
Private consumption remains robust and
should be the main driver of US growth in
coming quarters. Housing recovery
should also lift the US business cycle.
0
2
4
6
8
10
12
14
16
18
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
U-6 underemployment rate (%)
U-3 unemployment rate (%)
Average hourly earnings change (private nonfarm, % YoY)
U-6 underemp loym ent < 9%
9%
P.4
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| 2016 INVESTMENT STRATEGY
-4
-2
0
2
4
6
8
10
12
14
Sources: Societe Generale Private Banking, Datastream
REGIONAL OUTLOOKEUROZONE: RECOVERY UNFOLDING FURTHER
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Credit in the euro area is picking up
Credit to euro area residents (%, yoy)The euro zone has begun to recover from
the slowdown in late 2014, helped by the
weaker euro, lower energy prices and less
fiscal tighteningwe anticipate real GDP
growth around 1.6% in 2016.
Germany is showing steady signs of
improvement (unemployment at 6.3% in
December), helping lift the rest of the euro
zone.
With banks easing credit standards,
lending activity is finally showing signs of
recovery. Lending to the private sector is
edging further up (+1.2%YoY in
November).
P.5
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| 2016 INVESTMENT STRATEGY
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
The Eurogroup head recently explained
that Greece had so far met its
commitments and that the pension reform
proposed by the country in early January
was a serious offer. He added however
that the upcoming first bailout review was
more likely to last months than weeks.
A successful review would unlock the next
loan tranche, and could lead to possible
and necessarydebt relief.
However, the country will have to repay
large amounts of debt in March, making
the process more urgent.
Greek debt due in 2016, excluding T-bills (EUR millions)
Sources: Societe Generale Private Banking, Financial Times
FOCUS ON GREECEWHERE DO WE STAND?
459
880
459
306
459 455
306
53
2268
0
500
1000
1500
2000
2500
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
IMF
ECB
P.6
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FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
FOCUS ON GREECEDEBT BURDEN
Although the third Bailout programme will
help Greece meet its short-term liquidity
needs, it will also exacerbate the countrys
debt issue in the longer-run.
Upcoming discussions on debt relief will
prove key. At the moment, a haircut is offthe table, and a delay in principal
repayment and/or lower interest rates
seem more likely.
However, it is worth noting that Greece
already enjoys one of the lowest interest
bills as a % of GDP in the eurozone, as
well as one of the longest average
maturities.
Greecesdebt on the rise
Sources: Societe Generale Private Banking, Bloomberg
175%
188%195%
0%
50%
100%
150%
200%
0
50
100
150
200
250
300
350
400
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Nominal GDP (EUR bn)
Government debt (EUR bn)
Debt-to-GDP ratio (%, rhs)
Forecasts
P.7
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| 2016 INVESTMENT STRATEGY
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
FOCUS ON GREECEMACRO SNAPSHOT
Greek GDP growth is expected to come
out at -0.2% over the whole 2015.
The recovery should continue in 2016
thanks to an ambitious budget (pension
reform, privatizations, non-performing
loans, debt relief), although the GreekMinister of Economys1.5% growth target
seems overly optimistic.
Industrial confidence indicators bottomed
last summer and now seem well oriented.
Capital controls weighed on consumer
spending (retail sales -4.5% yoy in
November 2015, 6th month of decline),
with SMEs being the most affected.
Manufacturing activity bottomed last summer
GreecesManufacturing PMI
Sources: Societe Generale Private Banking, Bloomberg
25
30
35
40
45
50
55
60
2013 2014 2015 2016
Eurozone
Greece
EXPANSION
CONTRACTION
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REGIONAL OUTLOOKJAPAN: DOMESTIC DEMAND GAINS PACE
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Inflation has come down,
disposable income and employment have recoveredJapan GDP growth in Q3 was revised up
from -0.8% to +1.0% annualised. This
reading is particularly strong given that
the countrys population began to decline
in 2008, which has lowered potential
growth to 0.4-0.5%.
After the first consumption tax hike in
April 2014 dampened activity, the next one
has been postponed to April 2017.
Unemployment is also improving, at 3.3%
in November. Mr Abe recently announced
a 3% p.a. increase in minimum wages,
through to 2020.
Sources: Societe Generale Private Banking, Datastream
-6
-5
-4
-3
-2
-1
0
1
2
3
4
Headline CPI (%, yoy)
Households real disposable income (%, yoy, 6m moving average)
2.5
3.5
4.5
5.5
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Unemployment rate (%)
P.9
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| 2016 INVESTMENT STRATEGY
Sources: Societe Generale Private Banking, Bloomberg, FMI
REGIONAL OUTLOOKDIVERGENCE AMONG EMERGING MARKETS
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
An improved picture in 2016
Consensus growth forecasts (%)Chinas slowdown is unlikely to derail
global growth, thanks to fine-tuned
measures on fiscal and monetary policy.
The whole of emerging Asia should
benefit from Chinese measures to support
growth.
Commodity-exporter regions will continue
to suffer from low natural resource prices.
However, countries in recession (Russia,
Brazil) might be close to the low point in
the cycle.
More broadly, reforms remain essential to
prop up growth and lift investor
sentiment.
4.0 %
4.6 %
6.4 %
-4
-2
0
2
4
6
8
India China Brazil Russia
2015e
2016e
EM 2015e growth forecast
EM 2016e growth forecast
EM 2000-08 growth average
P.10
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CRUDE OIL OUTLOOKSUPPLY TO CONTINUE TO OUTSTRIP DEMAND
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Sources: Societe Generale Private Banking, Datastream,
Although US oil rig count has decreased,
production has been slow to dropOil oversupply hovers around 1.4M b/d
and may not disappear before 2017.
Saudi Arabia is still pumping at full speed
and last summers nuclear deal is paving
the way for Iran to return to the oil export
market. In the US, efficiency gains haveallowed non-conventional oil producers to
slash production costs by 20%.
The EM slowdown has led to a series of
downward revisions in global oil demand.
In our view, oil prices should remain stuck
at low levelsbetween $30 and $40 in H1,
and between $40 and $50 in H2and any
upside is likely to be short-lived.
0
200
400
600
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1000
1200
1400
1600
1800
4
5
6
7
8
9
10
11
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Saudi Arabia oil production (mb/d)
US oil production (mb/d)
US oil rig count (rhs)
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GLOBAL INFLATION IN A NUTSHELLINFLATIONARY PRESSURES ARE GLOBALLY MUTED
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Sources: Societe Generale Private Banking, Datastream
Euro zone core inflation has edged up
As wage pressures begin to emerge in the
US and the impact of the slump in energy
prices fades, we anticipate a modest pick-
up in US consumer price inflation.
However, the global outlook will remain
dominated by disinflationary pressures.
Deflation risk has not yet been entirely
dispelled in the euro zone, although core
inflation looks quite resilient.
Finally, certain commodity-dependent
emerging economies (Brazil, Russia) face
high inflation. However, the structural
economic slowdown will have a lasting
impact on the outlook for EM inflation. -3
-2
-1
0
1
2
3
4
5
6
2007 2008 2009 2010 2011 2012 2013 2014 2015
US core inflation (%, yoy)
US headline inflation (%, yoy)
Eurozone core inflation (%, yoy)
Eurozone headline inflation (%, yoy)
P.12
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DIVERGENCE ACROSS CENTRAL BANK POLICIESBASE RATES VERSUS ASSET PURCHASE PROGRAMMES
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Sources: Societe Generale Private Banking, Bloomberg
Libor rates (%)
After an unexpected no-change decision
in September 2015, the FOMC finally
announced its first 25bp rate hike in
December. We expect three more hikes in
2016.
On the other hand, the ECB recently cutits deposit rate by 10bp to -0.3% and
extended its EUR 60bn purchase
programme by at least six months to
March 2017.
The BoJsQuantitative and Qualitative
Easing is the most aggressive policy
compared to GDP. Further easing in 2016
remains possible if necessary.-1
0
1
2
3
4
5
6
2008 2009 2010 2011 2012 2013 2014 2015 2016
GBP Libor 1 month
USD Libor 1 month
JPY Libor 1 month
EUR Libor 1 month
P.13
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FOREIGN EXCHANGELIMITED DOWNSIDE RISK FOR THE EUR/USD
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Sources: Societe Generale Private Banking, Datastream
The EUR has become more resilient versus the USD
Following the announcement of the ECBs
QE in late 2014, the EUR weakened
sharply versus the USD.
Although we expect modest further
weakness for the EUR, a number of
factors should ensure the cross-rate doesnot dip below parity : the USD is already
overvalued, the weak EUR should attract
foreign investors, the euro zone enjoys a
3% current account surplus.
We expect the EUR/USD to weaken to 1.05
at 6 months with a possible overshoot in
the interim, before edging back up to 1.10
by late 2016. 1
1.1
1.2
1.3
1.4
1.5
1.6
2008 2009 2010 2011 2012 2013 2014 2015 2016
P.14
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FIXED INCOMEEUROZONE: PERIPHERY AT CORE
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Sources: Societe Generale Private Banking, Bloomberg
Peripheral spreads vs. German Bund (%)
ECB quantitative easing will last at least
until March 2017, maintaining all euro
zone yields under downward pressure. A
further extension of the programmes
timeframe and a broadening of its scope
remain possible.
We see little value in core countries, as
short rates should remain negative and
long yields will stay low around current
levels.
Non-core bond spreads should narrow
and we suggest holding medium-long
term duration bonds.
0
0.5
1
1.5
2
2.5
3
3.5
4
01-2014 07-2014 01-2015 07-2015 01-2016
Spread Portugal
Spread Spain
Spread Italy
P.15
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FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
We believe US Treasury Inflation-
Protected Securities (TIPS) will outperform
fixed income Treasuries, as actual
inflation will exceed the breakeven rate.
First, as oil prices stabilise, the base
effect will start kicking in, reducingdownward pressure on inflation.
Also, we believe domestic forces will be
strong enough to support price increases.
If the Fed is too slow in the pace of hikes,
it may end up behind the curve later in
the cycle (i.e. too accommodative for too
long), thus raising the risk of higher
inflation.
Sources: Societe Generale Private Banking, Bloomberg
US 5-year real rate and breakeven
FIXED INCOME INVESTMENT THEMEUSEFUL TIPS
-2
-1
0
1
2
3
2010 2011 2012 2013 2014 2015 2016
US 5-year Real rate, % US 5-year Breakeven, %
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CREDIT MARKETEURO ZONE: ECB SUPPORTED
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Sources: Societe Generale Private Banking, Bloomberg
Issuance by US companies invs US-EU yield differential
Credit markets benefit from an ultra-
accommodative monetary policy, positive
economic momentum and a credit-friendly
cycle.
We expect these factors to offset upward
pressures on spreads from increased non-European issuance in EUR.
Default rates should stay low and
corporate bonds offer a pick-up in yields
compared to depressed core government
bonds.
We suggest holding Investment Grade and
High Yield bonds without piling up
duration risk.
0%
5%
10%
15%
20%
25%
30%
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
2010 2011 2012 2013 2014 2015
% of US risk-based corporates issuance in EUR (rhs)
USD-EUR IG Yield difference (%, lhs)
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CREDIT MARKETUNITED STATES: WORSENING CREDIT METRICS
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Sources: Societe Generale Private Banking, Moodys
Defaults to increase mainly in the Energy sector
US credit fundamentals have deteriorated
furthermainly because of corporate
activity (M&As, share buybacks). Defaults
should increase this year but to be
focused in the Energy sector.
After a period of spread widening, creditmarkets appear attractive in the short-
term. We prefer High Yield, non-energy,
short duration bonds, benefiting from a
good carry and low sensitivity to
underlying rates.
On a medium-term horizon however,
investors should take advantage of any
rally to begin to trim their positions.
0%
2%
4%
6%
8%
10%
12%
14%
16%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
US Moody's Trailing 12 month defaults
Moody's baseline US defaults forecast
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FIXED INCOME INVESTMENT THEMEUS CREDIT: PREFER BANKS TO CORPORATES, FLOATING TO FIXED
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Sources: Societe Generale Private Banking, Bloomberg
Banks improved their capital ratios
While non-financial companies will face
worsening fundamentals, the financial
sectorroughly 30% of the IG index today,
mainly in banksshould prove more
resilient.
Indeed, new rules (capital or liquidity ratios)
forced financial institutions to drastically
enhance their capital base after the 2008
financial crisis.
We expect banks to continue to outperform
non-financials in the near-term. Importantly,
it is advisable to cover duration exposureas higher underlying rates could weigh on
total return, for instance through floating-
rate bonds.
0
2
4
6
8
10
12
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Wtd Avg Tangible Equity/Tangible Assets Ratio, %
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FIXED INCOMEEMERGING DEBT: CAUTION WARRANTED
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Sources: Societe Generale Private Banking, BIS
Developing countries: outstanding amount of debt
securities (private sector)Most EM economies face major
headwinds:
Commodity price downturn
Falling currencies
Chinas structural growth slowdown
Macro imbalances (twin deficits)
Zero interest policies in the developed
world have bolstered debt issuance from
EM corporates.
Only a fraction of EM countries are
immune to the current adverse conditions.
A cautious approach to these markets is
advised. 0
200
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1400
1600
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2000
2200
1995
1996
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2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
USD bn
x 3
P.20
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EQUITY MARKETSSOME EXPENSIVE VALUATIONS
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Sources: Societe Generale Private Banking, Bloomberg
CAPE* ratios per region (% of their long-term median)
Over the past few years, equity markets
have surged. In a context of rather low
earnings growth, this has pushed
valuations (P/E ratios) up. The correction
in global equity markets since summer
2015 has begun to improve valuation
metrics.
Corporate profit forecasts for 2016
continue to be cut. We believe that value
creation will come through careful
selection of securities and themes.
Volatility spiked last summer, then
subsided, before rising again in recent
weeks.
* CAPE: Cyclically Adjusted Price-to-Earnings ratio
20
40
60
80
100
120
140
160
180
US
Eurozone
UK
Japan
Median since 1983
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-100
-80
-60
-40
-20
0
20
40
60
1981 1986 1991 1996 2001 2006 2011 2016
Eurozone US
EQUITY MARKETSPROFITS: US AND EUROZONE
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Sources: Societe Generale Private Banking, Datastream
USD strength combined with low oil prices
will continue to weigh on US company
profits in the near-term. Nevertheless, US
profits should recover gradually
throughout 2016.
The drop in energy prices and EURweakness will boost early 2016 company
profits in the euro area. However, we
believe these catalysts will begin to
dissipate by mid-2016, thus profit growth
should gradually slow.
Further, sluggish global trade will penalise
euro zone manufacturers.
EPS growth - our forecasts (%)
+8.4%+8.5%
-8
-4
0
4
8
12
16
20
Q32015
Q42015
Q12016
Q22016
Q32016
Q42016
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EQUITY MARKETSUNITED STATES
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Sources: Societe Generale Private Banking, Datastream
Expensive valuations coupled with a rise
in interest rates calls for a switch in US
sector allocation, from high cyclical
growth stocks to low-beta value sectors.
Further, the worlds largest economy is
buoyant. In particular, the improving jobmarket should continue to support the
Consumer Discretionary sector.
Finally, rising US yields should help banks
improve margins, and thus support
Financials. US banks should take
advantage of US credit growth
acceleration and are currently cheap, at
around 10.0x expected 2016 earnings.
Value stocks should be sustained by rising US bond yields
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
0
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2
3
4
5
6
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
10-year US bond yield (%)
Value vs Growth (rhs)
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EQUITY MARKETSEUROZONE
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Sources: Societe Generale Private Banking, Datastream
The drop in energy prices and EUR
weakness will boost early 2016 euro area
company profits.
Although supports to the Consumer
Discretionary sector remain in place,
valuations of some sub-sectors such asHotels & Leisure, Media, or Luxury Goods,
are no longer attractive.
Also, we are becoming slightly more
optimistic about Energy. Mainly composed
of oil diversified majors, the sector seems
now attractively priced, and able to cope
with the new normal of crude oil prices
(USD 30-50).
Eurozone EPS growth
Consensus forecasts (%)
5.0
7.0
9.0
11.0
13.0
15.0
17.0
19.0
Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15
2015e
2016e
2017e
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EQUITY MARKETSJAPAN
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Sources: Societe Generale Private Banking, Datastream
Japan, one of the cheapest developed markets
Price-to-book ratios (x)Japan macro fundamentals are good, with
job creations and capital spending to
support the sputtering recovery.
The possible expansion of the QQE
should also support equity prices.
Further, corporate governance reforms
should underpin shareholder value
creation through higher dividends, share
buybacks and improved returns on equity.
On the valuation side, Japan is one of the
cheapest developed markets, trading at
13.9x the earnings expected for the next
fiscal year, a 15% discount to the 10-year
average.
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
MSCI World
MSCI Japan
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EQUITY MARKETSEMERGING MARKETS
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Sources: Societe Generale Private Banking, Datastream
Emerging markets on a roller coaster
Volatility has eased as the structural
slowdown of China has begun to be
factored in by investorsin line with our
conviction that a hard landing is off the
table. The whole region has been hit by
Chinas slowdown, though with marked
differences between countries.
Commodity-exporters should still be
avoided, even though countries like
Russia may be hitting rock bottom.
India, currently our top pick within EMs,
should be driven by ambitious economic
plans, strong profit outlook and
accommodative monetary policies.
70
80
90
100
110
120
MSCI India
MSCI Emerging Markets
0.8
1
1.2
Jan-15 Apr-15 Jul-15 Oct-15 Jan-16
Relat ive performance: India v s EM
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7.0%
2.1%
3.2%1.8%
-25%
-15%
-5%
5%
15%
25%
35%
Trailing 12m performance
Average performance
Average real performance (vs Citi 3M USD)
HEDGE FUNDS INVESTMENT THEMEEDGE FUNDS
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Sources: Societe Generale Private Banking, Bloomberg
Hedge funds global performance
HRFXGL Global index In the past few years, the performance of
alternative investment managers has
proved disappointing when compared
with the period running up to the financial
crisis and Great Recession (2007-2009).
We identify a number of reasons for that:declining dispersion and correlation
between assets, low volatility, financial
repression and zero-interest rate policies.
As US interest rates begin to normalise,
we expect all these factors to gradually
reverse and translate into better returns
from hedge funds.
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EQUITY INVESTMENT THEMESURVIVING DISRUPTION
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Sources: Societe Generale Private Banking
Disruptive newcomers on all fronts
Disruptive newcomers with innovative
business practices or technologies are
substantially impacting existing firms.
Disruptive newcomers are attacking more
and more business segments:
accommodation, household services,transportation, business services
Focusing on companies which are set to
continue to grow their top-line sales,
which generate a high cash-flow return on
investment and amply cover their cost of
capital is likely to help identify businesses
which seem well placed to survive the
disruption of their industry.
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0
100
200
300
400
500
600
700
800
900
1000
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Exane Convertible Europe Index MSCI Europe (total return)
+18.2% p.a.
-6.8% p.a.
+20.5% p.a.
-14.2% p.a.
+7.9% p.a.
-21.4% p.a.
+25.0% p.a.
+15.2% p.a.
+10.2% p.a.
-38.4% p.a.
EQUITY INVESTMENT THEMECONVERTIBLE BONDS, THE BEST OF BOTH WORLDS
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
Sources: Societe Generale Private Banking, Datastream
MSCI Europe vs European convertible bonds (base 100)
Converts generate higher total return than
classic fixed income securities, and are
less risky than equities.
In periods of bull market, convertible
bonds tend to capture the positive
performance of equities. Conversely,when markets decline, converts offer far
better capital protection as they gradually
resume their bond-like behaviour.
The timing seems right, as equities are
expensive, and bonds are even more over-
valued. As converts enjoy better risk-
adjusted performance than equities, they
should prove valuable in 2016.
ConvertibleEurope MSCIEurope (TR)
Ann. Performance 8.3% 8.6%
Ann. Volatility 8.0% 17.9%
Max. Draw-Down -31.4% -56.7%
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MIND THE GAPSKEY TAKEAWAYS
FEBRUARY 2016 SOCIETE GENERALE PRIVATE BANKING
The global economy will continue to grow at a steady pace in 2016. The US is clearly the strongest developed world
economy, but the euro zone and Japan should also expand next year.
As wage pressures begin to emerge in the US and the impact of the slump in energy prices fades, we anticipate a modest pick-
up in US CPI. The global outlook however will remain dominated by disinflationary pressures.
The Feds FOMC finally announced a first rate hike (25bp) in December 2015. The ECB and BoJ on the other hand stand
ready to ease policy further if necessary. Globally, monetary policies will remain very accommodative.
With the Fed hiking US rates, bond yields should rise across all maturities. In this context, inflation-linked bonds and
floating-rate notes in dollars offer diversification benefits. The gradual deterioration of US balance sheet quality warrants a
gradual reduction in exposure to corporate bonds. In the euro zone, yields should remain low and investors will be better
rewarded in non-core sovereign bonds and corporate securities.
We see only modest further downside for the EUR against the USD. Similarly, the sharp devaluations in a number of
emerging economies have improved their competitive position and reduced the potential for further slides.
Potential upside in equity markets will be constrained by the current high valuations and the outlook for earnings
growth.Japanese and euro zone equities wil l remain supported by abundant liquidity.
Oil prices should remain stuck at low levels. The bulk of the correction in gold prices since 2011 seems now complete.
We continue to see potential in non-directional investment strategies.
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IMPORTANT DISCLAIMER
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Socit Gnrale is under no obligation to disclose or take into account this document when advising or dealing with or on behalf of customers.In addition, Socit Gnrale 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 anyrecipient of this report.Socit Gnrale maintains and operates effective organisational and administrative arrangements taking all reasonable steps to identify, monitor and manage conflicts of interest. To help the Socit Gnrale Private Banking Entities to do this, theyhave put in place a management of conflicts of interest policy designed to prevent conflicts of interest giving rise to a material risk of damage to the interests of SGPB clients. For further information, SGPB clients can refer to the management ofconflicts of interests policy, which was provided to them by the SGPB entity of which there are clients.
General WarningThis document, which is subject to modifications, is provided for information purposes only and has no legal value.The contents of this document are not intended to provide investment advice nor any other investment service. The document does not constitute and under no circumstances should it be considered in whole or in part as an offer, a personalrecommendation or advice from any of the Societe Generale Private Banking entities, regarding investment in the asset classes mentioned therein. The information in this document does not constitute legal, tax or accounting advice.Certain asset classes mentioned may present various risks, including potential loss of the total invested amount or even potential unlimited loss. These asset classes may accordingly be reserved for a certain category of investors, and/or only adaptedfor investors who are sophisticated and familiar with these types of asset classes. Accordingly, before making an investment decision, as the case may be and according to the applicable laws, a potential investor will be questioned by his or her advisoror Customer relationship Manager within the Societe Generale Private Banking entity, of which the investor is a client, regarding his eligibility for the envisaged investment, and the compatibility of this investment with his investment profile andobjectives. Before any investment, the potential investor should also consult his own independent financial, legal and tax advisers in order to obtain all the financial, legal and tax information which will allow him to appraise the characteristics and therisks of the envisaged investment and the pertinence of the strategies discussed in this document, as well as the tax treatment of the investment, in the light of his own circumstances.Prior to any investment, a potential investor must be aware of, understand and sign the related contractual and informative information, including documentation relating to risks. The potential investor has to remember that he should not base anyinvestment decision and/or instructions solely on the basis of this document. Any investment may have tax consequences and it is important to bear in mind that the Societe Generale Private Banking entities, do not provide tax advice. A potentialinvestor should seek independent tax advice (where necessary).Investment in some of the asset classes described in this document may not be authorised in certain countries, or may be restricted to certain categories of investors. It is the responsibility of any person in possession of this document to be aware ofand to observe all applicable laws and regulations of relevant jurisdictions. This document is not intended to be distributed to people or in jurisdictions where such distribution is restricted or illegal. It is not to be published or distributed in the UnitedStates and cannot be made available directly or indirectly in the United States or to any US person.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 exchange rates may have adverse effects on the value, price and income of investments issued in a differentcurrency from that of the client. The simulations and examples included in this document are provided for informational and illustration purposes alone. The present information may change with market fluctuations, and the information and viewsreflected in this document may change. The Societe Generale Private Banking entities disclaim any responsibility for the updating or revising of this document. The documentsonly aim is to offer information to investors, who will take their investmentdecisions without relying excessively on this document. The Societe Generale Private Banking entities disclaim all responsibility for direct or indirect losses related to any use of this document or its content. The Societe Generale Private Banking entitiesdo not offer no implicit or explicit guarantees as to the accuracy or exhaustivity of the information or as to the profitability or performance of the asset classes, countries and markets concerned.
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