investment strategy - société générale · 2015-06-12 · strategy december 2014 investment...

STRATEGY

December 2014

Investment Strategy Outlook 2015

Out of sync

Divergences in economic performance will persist in 2015: solid growth in the US and UK, a positive contribution from

Japan, sluggish growth in the eurozone and continued slowing of emerging market growth.

Inflation pressures will remain subdued globally, with sharp contrasts across regions.

Central bank monetary policies will remain out of sync, with substantial easing in the euro zone and Japan, while the

US has ended its asset purchase programme. However, the Federal Reserve and the Bank of England should take their

time before beginning to hike interest rates.

Fixed income returns should remain low in the eurozone, and Spain and Italy should outperform German Bunds. We

anticipate only modest upward pressure on USD yields and recommend longer maturities in USD and GBP. Within

credit, short-dated eurozone high yield remains attractive. We also add selectively to positions in USD-denominated

emerging debt.

Our recommended Neutral allocation to global equities remains unchanged. Our preferred markets are still in Asia-

Pacific. Within Europe, we Overweight the UK and Switzerland and reduce exposure to the eurozone.

The USD should remain the strongest currency globally, and we see further downside in European currencies and the

JPY.

Gold and crude oil prices remain vulnerable to further downside pressure. Within Hedge Funds, we note the attractive

risk/return profile of equity market-neutral strategies.

In summary, the out-of-sync economies and markets in 2015 will require investors to be very selective, but will offer

numerous opportunities in our preferred markets.

Investment Strategy - Outlook 2015

December 2014 2


December 2014 3

Contents

Editorial: An out-of-sync world ................................................................................................................................................. 4

Fixed income ......................................................................................................................................................................... 5

Rates: Flattish US yield curve ahead ........................................................................................................................................ 5

Credit: Spreads will determine performance ............................................................................................................................ 6

Theme for 2015: EM sovereign debt: attractive yields still to be had ....................................................................................... 8

Currencies ............................................................................................................................................................................... 9

EUR/USD: The ECB will push the euro down further ............................................................................................................... 9

GBP/USD: Dovish Bank of England curbs sterling ................................................................................................................. 10

USD/JPY: Foreign diversification weighs on the yen .............................................................................................................. 10

EUR/CHF: Struggling to maintain the floor ............................................................................................................................. 11

EM currencies: Diverging trends ............................................................................................................................................. 11

Equity markets ................................................................................................................................................................... 12

2015 returns set to be low in developed countries ................................................................................................................. 12

Stay selective among emerging markets ................................................................................................................................ 14

Themes for 2015: 1. Dollar appreciation: who stands to benefit most? ................................................................................. 15

2. Made in the USA ................................................................................................................................... 16

3. Eurozone dividends return to the spotlight ........................................................................................... 17

4. Water scarcity: Blue gold ...................................................................................................................... 18

Alternatives ........................................................................................................................................................................... 19

Hedge funds: The importance of managing risk ..................................................................................................................... 19

Gold and oil: Continued downside pressure .......................................................................................................................... 20

Theme for 2015: German residential real estate ..................................................................................................................... 21

Follow-up on convictions ........................................................................................................................................................... 22

Global economic forecasts ........................................................................................................................................................ 23

Market performance and forecasts .......................................................................................................................................... 24

Important disclaimer .................................................................................................................................................................. 26


December 2014 4

Editorial

An out-of-sync world Since the global financial crisis and ensuing recession, policy settings from governments and

central banks have diverged enormously.

With the benefit of hindsight, it can be argued that the reactions of both the US Treasury and

the Federal Reserve successfully mitigated the worst effects for the US economy and financial

markets. The policy response in the eurozone, however, has been a mixture of fiscal austerity

and monetary policy easing. While Mario Draghi’s dovish statements have helped stem break-

up risk, this policy mix has proved insufficient to revive the economy. More recently, Japan’s

government and central bank have embarked on an even more ambitious programme than the

US in an attempt to pull the country out of two long decades of stagnation.

Despite the unprecedented easing, many investors are surprised to note that inflation levels

remain extremely low: while the European Central Bank, The Federal Reserve, the Bank of

England and the Bank of Japan all target 2% consumer price inflation, none have reached this

level. We believe that this is because developed economies have experienced a massive

build-up in indebtedness over the past few decades, and the deleveraging process will have a

lasting deflationary impact.

As a consequence, in our view both central bank policy rates and long-dated government

bond yields will remain low, encouraging investors to continue to search for opportunities in

risky assets as they have done over the past few years. However, this reach for yield has

meant that asset prices have risen substantially, as have valuations. We believe that investors

will now have to be much more discriminating in their selections and also much more

disciplined about risk diversification. Long-dated government bonds, for instance, will provide

a useful offset to any sell-offs in equity markets.

Within asset classes and individual markets, careful stock and bond-picking will be vital. In

emerging markets for example, it is important to focus on, say, the quality of each country’s

structural reforms, its dependency on raw material exports or the health of its current account

balance and to be wary of arbitrary groupings such as BRIC: while Brazil and Russia face

deep-rooted problems, we see India and China as much better positioned.

Similarly, within Europe we think that UK or Swiss equities will benefit more from the strength

of the dollar than will the eurozone. However, some sectors in eurozone equity markets –

healthcare, for example – are much better positioned than others in this context.

In summary, the out-of-sync world we expect in 2015 will create numerous challenges, but we

believe it will ultimately prove rewarding for the careful investor.

Alan Mudie

Head of Investment Strategy

(41) 22 819 0255

[email protected]

Xavier Denis

Global strategist

(852) 2166 4683

[email protected]

Claudia Panseri

Global strategist

(33)1 42 14 58 88

[email protected]

Luis Cameirao

Strategist

(33)1 42 13 14 97

[email protected]

François Cardi

Strategist

(41) 22 819 0496

[email protected]

Caroline Davies

Editor

(33) 1 56 37 39 61

[email protected]

[email protected]


December 2014 5

Fixed income

Rates: Flattish US yield curve ahead 2014 has been characterised by a fall in benchmark yields across developed markets.

“Lowflation” and abundant liquidity have dragged down long-term yields despite the

economic improvement in the US. There, the recovery has gained pace but has not really

taken off. Looking ahead to 2015, we maintain our view that the US Federal Reserve (Fed)

may decide to hike its policy interest rate later than mid-2015, which is the consensus

forecast. The Fed is fearful of moving too early and surprising investors, which could harm

growth and trigger a bond sell-off. Happily, the end of the third round of quantitative easing

(QE3) in October was fully priced in by the market and so did not move the yield curve (the

curve representing the difference between the yield on shorter maturities and that on longer

ones). Since inflation is unlikely to accelerate significantly on the back of receding commodity

prices and muted wage increases, the balance of risks pleads for a first rate hike in late 2015.

Several factors will continue to limit the expected rise in US long-term yields.

The delay in Fed tightening will cap the long end of the curve.

Tepid inflation due to receding commodity prices and moderate wage inflation will

put a lid on the inflation premium.

The narrowing fiscal deficit in the US will limit net issuance (gross issuance less

redemptions) of Treasuries, preventing an oversupply of new debt.

The yield differential between the US and the eurozone will continue to attract inflows

to US Treasury markets, strengthening the USD and curbing long-term yields.

Foreign purchases of US Treasuries and 10-year yield

Sources: Societe Generale Private Banking, Datastream. Data as at 15/11/2014.

-60

-40

-20

0

20

40

60

80

100

120

1

1.5

2

2.5

3

3.5

4

2010 2011 2012 2013 2014

Foreign purchases of US Treasuries (rhs, bn$)

10 year yield (lhs, %)

With global disinflation and

a stronger USD, the Fed is

in no rush to hike rates.


December 2014 6

In the eurozone, the European Central Bank (ECB) remains highly likely to embrace full-

fledged quantitative easing by purchasing first corporate bonds and then government bonds,

as deflation risks remain high. The ECB’s priority is not so much to push corporate or

peripheral government spreads much tighter, as they have already narrowed markedly, but

rather to lower real interest rates by propping up inflation expectations and to foster economic

risk-taking. Initially, a successful reflation of the eurozone economy would lead to a further

drop in yields, with a decrease in spreads for peripherals. In the longer term however, inflation

expectations might start to pick up on the back of improving economic prospects, which

would push benchmark yields higher. But we do not expect this to happen until the market is

reassured that the ECB’s policy is effective and political gridlock at European level has been

resolved- which is unlikely before the second half of 2015 at best.

The side effect of a more aggressive ECB stance is a weaker euro - in particular versus the

USD, as investors stick to the US fixed income market in order to reap higher returns. With

further ECB liquidity injections, the traditional influence of US yields on German bonds and by

extension on all eurozone bonds would operate in reverse, curbing upward pressure on US

long-term yields.

UK interest rate prospects look fairly similar to those in the US. Sustained economic growth

warrants a Bank of England (BoE) rate hike in 2015, though tepid inflation means this might

not happen before the second half of the year. But although the BoE may act before the Fed,

the pace of its hikes is set to be slower, as inflation risks currently look even more remote than

in the US.

Against this backdrop, we turn more constructive on US and UK government bonds and we

like longer maturities. In addition, longer-dated bonds would provide a useful hedge in

portfolios against any renewed sell-off in the equity market. For the eurozone, although we

stay on the sidelines for core government bonds given the ultra-low yields, we maintain a

selective approach to peripheral government bonds in order to benefit from the carry (the

difference in yields) and from possible spread compression due to ECB intervention. From a

duration angle, we remain long duration in the eurozone.

Credit: Spreads will determine performance In 2014, credit market performance has been mainly driven by falling government bond yields.

This will not happen again in 2015, as monetary policy is heading slowly towards

normalisation in the US and the UK and we do not expect further flattening of yield curves.

Also, if as we hope the ECB’s reflation policy is successful, the long end of the Bund yield

curve will be pushed higher. However, we expect 2015 to continue to provide a favourable

backdrop for corporate credit, with low inflation, accommodative monetary policies and

expected rock-bottom default rates offering a sweet spot for the asset class. Credit markets

are likely to continue to be supported by investor inflows chasing moderate but more stable

returns at a time when equity markets are heading towards higher volatility and lower

expected annual total returns than over the past few years.

In this context, spread levels are likely to be key performance drivers for credit markets. We

expect investment-grade bonds to post weaker performances than in 2014, while high yield

may deliver a performance of the same magnitude next year as this (i.e. 5-6% after a choppy

summer). From a fundamental angle, corporate borrowers have healthy balance sheets and

recent earnings seasons have posted better than expected results across developed markets.

However, this pleasant picture masks two very different trends. In the eurozone, corporate

With benchmark yields at

historical lows, spreads will

drive corporate bond

performance.

Peripheral eurozone countries in

this context include Spain, Greece,

Ireland, Portugal and Italy. Core

countries include Germany,

France, the Netherlands and

Belgium.


December 2014 7

leverage has moved lower as weak prospects have pushed companies to maintain a cautious

stance on borrowing. Meanwhile, the US corporate sector has steadily releveraged through

the bond market, taking advantage of low yields to finance merger and acquisition (M&A)

operations or to pay out hefty dividends to shareholders. It is true that cheap funding has

helped lower debt service payments to historical lows, but this understates the level of

leverage.

In the eurozone, the ECB is set to step up asset purchases beyond those already agreed for

covered bonds and asset-backed securities. As these markets are not deep enough for the

ECB to increase its balance sheet by the targeted EUR 1trln, we believe that the central bank

is very likely to buy corporate bonds. This could drive spreads down further across the whole

corporate bond spectrum, boosting their performance - including that of senior and

subordinated financials. Financials should also benefit from modest debt issuance, but we do

not anticipate a return to pre-crisis spread levels. After the sell-off in high-yield bonds over the

summer, we would take exposure to this segment with a buy-and-hold strategy, as we find

current spreads attractive. In terms of ratings, we prefer BB and higher-rated B ratings to

lower-rated issuers, which are likely to suffer from the grim economic environment and where

spreads do not compensate for the risk.

US and eurozone high-yield spreads

Sources: Societe Generale Private Banking, Bloomberg. Data as at 28/11/2014.

As for the US and UK markets, we upgrade the investment-grade segment. Disinflationary

forces are at work and central banks are set to remain on hold for longer than was expected a

few months ago: the risk of yield curve steepening has decreased significantly, in our view.

This warrants a more constructive view on investment-grade bonds in both countries, hence

we lengthen durations in order to capture decent yields. However, we maintain our neutral

view on the US high-yield universe, as it may be penalised by the impact of falling oil prices.

Energy companies account for about 20% of high-yield issuance in the US market, and any

financial stress would lead to spread widening with a possible spillover impact on the rest of

the US high-yield market.

300

400

500

600

700

800

900

1000

1100

2012 2013 2014

US High Yield spreads (basis points)

Euro zone High Yield spreads (basis points)

More ECB intervention is

set to drive peripheral

yields down further.


December 2014 8

Fixed income theme for 2015

EM sovereign debt: attractive yields still to be had In a context of depressed yields in developed markets and subdued inflation, investors

continue to seek new investments and higher returns. Emerging markets in general and

emerging market (EM) debt in particular have been popular among investors since the 2000s

thanks to high yields and improving economic fundamentals in many emerging countries.

However, emerging markets have been facing new challenges and a revival of some old

problems in recent months: lower EM growth estimates, a strong dollar, sliding commodity

prices and heightened geopolitical risks. We can divide emerging markets into two groups

here: commodity exporters such as South Africa and Russia, and manufactured goods

exporters including China, India and Turkey. The latter should benefit more from the current

context due to lower dependence on commodities prices and an improving environment for

world trade. The recent drop in oil prices will trouble EM producers such as Venezuela and

Russia, but it is a windfall for energy importers.

Although the stronger dollar has made the EM carry trade less attractive, it should boost the

competitiveness of EM countries and favour the narrowing of current account deficits. Central

bank liquidity (from the European Central Bank and the Bank of Japan) will also encourage

investors to hunt for yield: India, Mexico and emerging southeast Asia, for example, should

attract inflows from Japan. Also, low or falling inflation should allow an easing of local interest

rates in most EM countries (but not in Russia, for example).

However, we must be very selective and favour highly liquid markets in countries with ongoing

structural reforms, political stability and good macro fundamentals (current account deficits

that can be reduced, low inflation, growth potential etc.). We prefer USD-denominated EM

debt, with medium-long maturities: this offers greater liquidity than local-currency debt and

still attractive yields. Our preferred countries are Brazil, Indonesia, Mexico and Turkey.

Selectivity remains key when investing in this asset class, as volatility will rise across the

board and liquidity will gradually shrink as the US Fed’s policy shifts.

J.P. Morgan EM USD-denominated bond index and US 10-year Treasuries


1

1.5

2

2.5

3

3.5

4

4.5

350

400

450

500

550

600

650

700

750

800

2009 2010 2011 2012 2013 2014

JPM EM Bond Index USD denominated debt (total return, lhs)

10Y US bond yield ( %,rhs)

The carry trade consists of

borrowing money where interest

rates are low, and investing it

somewhere where they are higher.

Changes in inflation,

interest rates and the rate

of exchange may have an

adverse effect on the value,

price and income of

investments. Your capital

may be at risk and you may

not get back the amount

you invest.

Investors will continue to

seek yield in safe

emerging-market issuers –

both corporate and

sovereign.


December 2014 9

Currencies

EUR/USD: The ECB will push the euro down further On the back of the European Central Bank (ECB)’s rhetoric and actions, the euro has lost

significant ground versus the USD (-10% Year To Date at time of writing, 24 November 2014),

but much less from a REER perspective (-4% YTD). The ECB has now shifted its stance by

pledging to buy assets (covered bonds and asset-backed securities) to boost the size of its

balance sheet and to fight deflation, and large-scale quantitative easing (involving corporate

and government bond purchases) is still on the table. At the same time, the USD has picked

up against all major currencies, as America’s economic momentum has improved steadily and

appetite for US assets has returned. According to US Treasury data, the tide has turned

dramatically since August, with a massive jump in foreign inflows for both equities and bonds.

Unsurprisingly, this has led to impressive performances by both equities and bonds in the US,

where purchases have pushed long-dated yields lower despite the sustained economic

momentum. So we continue to expect the USD to outperform the euro, given the higher yields

available - although we do not expect any early rate hikes from the Federal Reserve. Turning

to the euro, expansion of the central bank’s balance sheet will increase the money supply,

dragging the currency down. A question mark hangs over the magnitude of the additional

slide. Relative money supply and yield differentials are set to return as the main drivers of the

currency pair, but the large eurozone current account surplus will offer some support. Only a

major financial meltdown could trigger a downward spiral that might pave the way for

convergence towards parity between the two currencies as private global investors shed euro-

denominated assets.

We expect the EUR/USD to hover around 1.20 on a 3-month horizon and 1.17 at 6 months.

EUR/USD and net long positions on futures markets

Sources: Societe Generale Private Banking, Bloomberg. Data as at 21/11/2014.

-300000

-200000

-100000

0

100000

200000

1.1

1.2

1.3

1.4

1.5

1.6

2008 2009 2010 2011 2012 2013 2014

EURUSD (lhs) Net long positions on futures markets (number of contracts, rhs)

Real effective exchange rate

(REER): the weighted average

exchange rate of a currency

relative to an index or basket of

other currencies, adjusted for the

effects of inflation. The weights are

determined by comparing the

relative trade balances of the

countries in the index.

Monetary policy divergence

will drive the euro lower.


December 2014 10

GBP/USD: Dovish Bank of England curbs sterling After an impressive rally over the first seven months of 2014 driven by the market’s bullish

view on the imminence of Bank of England (BoE) rate hikes, the referendum on Scottish

independence triggered a sell-off from which sterling has not really recovered. The market

now seems less convinced of the BoE’s willingness to hike interest rates soon. Lack of wage

inflation and imported disinflation fuelled by lower oil prices have capped inflation prospects.

Even the buoyant property market has recently started to ease, and economic momentum has

softened marginally on the back of the protracted eurozone slump. Also, the upcoming

election in 2015 carries significant political risk related to the UK’s ongoing membership of the

European Union, and may spark volatility on UK financial markets – starting with the currency.

All in all, the BoE looks less in a hurry to hike interest rates, as there is no catalyst to do so in

the months ahead. This should lead to range-bound trading for sterling versus the USD.

We expect to see the GBP/USD at 1.58 on a 3-month horizon and 1.56 at 6 months.

USD/JPY: Foreign diversification weighs on the yen The Bank of Japan (BoJ) has been the most aggressive central bank in the aftermath of the

financial crisis, and its latest move in late October has only reinforced its ultra-dovish efforts to

move towards its 2% inflation target. At the moment, the BoJ is purchasing about 70-80% of

new government bond issuance in an effort to boost inflation expectations. As core inflation

adjusted for the impact of the consumption tax hike is still running low at around 1%, the

market continues to anticipate further easing. Nominal wages have accelerated slightly, but

not enough to drive inflation. More importantly, domestic investors and particularly

government pension funds have started to buy more foreign assets – both equities and fixed

income – to boost portfolio returns, as they anticipate further yen weakness. As the Japanese

currency has already fallen significantly over the past two years and is now below its fair

value, we see only limited room for further depreciation.

We expect the USD/JPY to trade around 118 at 3-months and to fall to 120 at 6 months.

Massive monetary easing is putting pressure on the yen.


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900000

1400000

1900000

2400000

2900000

3400000

2012 2013 2014

BoJ balance sheet USD/JPY (rhs)billion JPY

A vanishing current

account surplus and

portfolio diversification will

push the yen lower.


December 2014 11

EUR/CHF: Struggling to maintain the floor Renewed euro weakness has pushed the Swiss franc up further. It is trading close to the 1.20

floor set in 2011 to prevent excessive appreciation of the currency.

With deflation looming in the eurozone, the Swiss National Bank (SNB) has been forced to

intervene on foreign exchange markets again, increasing its euro-denominated reserves. The

SNB remains firmly committed to defending the 1.20 floor, as domestic inflation is already at

zero and further strength would significantly damage economic competitiveness. Negative

interest rates could be implemented as a way to deter capital inflows, like in the mid-1970s.

Given this backdrop, we expect limited change in the currency pair over our investment

horizon.

We expect the EUR/CHF to remain close to its 1.20 floor over the coming months.

EM currencies: Diverging trends Desynchronisation in emerging markets (EM) is one of our key convictions. Some countries

will continue to struggle to cope with slowing growth, rising inflation and a surge in capital

outflows, while others will benefit from the first steps towards more orthodox policy-making

and the first gains from structural reforms. While the former may suffer from further outflows

and renewed currency sell-offs, the latter may record an upturn in foreign interest.

Countries which fall into the first category include Russia, Brazil and Venezuela, which are

plagued with falling commodity prices combined with major policy mismanagement. Their

currencies should continue to trade at low levels or even decline further, as central banks are

keen to preserve their cushion of forex reserves.

Countries in the second category include Mexico, Poland, and most Asian countries. These

countries may experience a currency upturn or steady appreciation as inflation is being kept

under control, external imbalances have started to recede and appropriate economic reforms

are being implemented.

As already mentioned, we believe that Asian currencies benefit from stronger economic

fundamentals, and although we see no upside versus the USD, they should continue to do

well against most other G10 currencies. Also, currencies of commodity exporters in both

emerging and developed markets will remain under pressure as terms of trade – a long-term

driver of currency valuations – are set to worsen.

As for the Chinese currency, we see limited risk of depreciation: CNY stability is instrumental

for the rebalancing of the domestic economy in favour of private consumption, and a

prerequisite for its internationalisation.

The Swiss national bank

will fight CHF appreciation.

Commodity exporters will

feel the pain, while

commodity importers will

outperform as long as their

policy mix remains

appropriate.


December 2014 12

Equity markets

2015 returns set to be low in developed countries It looks like 2015 will be a difficult year for equity investors. Low profit growth in the euro area,

fears of higher interest rates in the US, elections in the UK and - last but not least - the

persistence of geopolitical risk (Russia and Islamic State, for example), are all factors which

could keep investors awake at night over the coming 12 months.

Over the past two years, markets have performed extremely well: in local currency terms, the

S&P500 has risen 51% and the DJ Stoxx 600 31%. Central banks’ accommodative monetary

policies have been the main catalyst of price-to-earnings (P/E) expansion, as profit growth

expectations have been revised down steadily in most developed countries. Economic growth

has improved since the financial crisis but remains well below the levels reached before 2008,

limiting the potential for a recovery in earnings. Although the global growth environment

remains fragile, US and Japanese companies have managed to keep profits growing in 2013

and 2014. Eurozone and UK corporates lag far behind, with zero profit growth at best

expected in 2014. The chart below highlights the fact that the problem eurozone corporates

face is structural rather than cyclical, as their contribution to global profit growth has declined

steadily. The strength of the euro over the years and still high labour costs in France and Italy

have weighed heavily on earnings.

Declining contribution of eurozone corporates to global EPS growth

Sources: Societe Generale Private Banking, Datastream. Data as of 20/11/2014.

Developed market valuations are less attractive than two years ago, as P/Es have generally

expanded. The combination of more expensive valuations and low earnings growth results in

little upside potential for developed market stocks in 2015.

The only countries in which we expect double-digit total returns in 2015 are Japan, the UK

and Switzerland (total return includes both price increase and dividends). These countries

enjoy low interest rates coupled with positive 2015 profit growth forecasts, which should

sustain the upward trend in valuation ratios (price-to-earnings, price-to-book-value etc.) and

ensure positive equity returns for next year.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Q1 1992

Q1 1994

Q1 1996

Q1 1998

Q1 2000

Q1 2002

Q1 2004

Q1 2006

Q1 2008

Q1 2010

Q1 2012

Q1 2014

UK

AUSTRALIA

SINGAPORE

CANADA

SWITZERLAND

EMERGING MARKETS

JAPAN

US

EURO ZONE

Unimpressive profit growth

expectations for 2015 leave

us with low upside

potential for developed

market index returns.

Price to earnings ratio (P/E):

share price divided by earnings

per share.


December 2014 13

Societe Generale Private Banking (SGPB) earnings per share (EPS) and index forecasts

2015e EPS GROWTH (%) -

IBES consensus forecasts 2015e EPS GROWTH (%) - SGPB forecasts SGPB index forecasts Close (26/11/14)

2015 % upside potential

according to SGPB

S&P 500 9.9% 8% 2150 2070 4%

DJ Euro Stoxx 16.4% 2% 3300 3226 2%

FTSE 100 3.9% 6% 7300 6730 8%

Topix 12.8% 6% 1550 1406 10%

SMI 11.6% 7% 10000 9058 10%

Sources: Datastream, Societe Generale Private Banking. Data as at 26/11/2014.

Over the past two years, eurozone stocks have experienced the strongest P/E expansion

among developed markets. P/Es are at 15x versus 9x back in August 2012 (see chart), while

profits have not yet recovered. More expensive valuations combined with the market’s

overoptimistic profit expectations for 2015 drive our caution on eurozone equities. 2014

earnings per share (EPS) for the S&P 500 are on track to hit our longstanding forecast of $118,

representing growth of close to 8% vs 2013. Our 2015 forecast is again for 8% EPS growth.

With margins close to record levels, we see the US stock market as fairly valued.

Country allocation

Q4 2014 CHANGES Q1 2015

United States Neutral

Neutral

Euro zone Neutral Underweight

UK Neutral Overweight

Switzerland Neutral Overweight

Asia Pacific incl. Japan Overweight

Overweight

Emerging Market Neutral Overweight

Sources: Societe Generale Private Banking. Data as at 21/11/2014.

In this context of low growth and low inflation, we maintain a rather defensive sector allocation

in the euro zone. We continue to prefer resilient growth companies which are exposed to the

dollar and which generate high cash flow and steadily growing dividends. As the long-awaited

Asset Quality Review did not bring the hoped-for positive effect on banks’ performance, and

considering that deflation risk is weighing on bank book values, we reduce our exposure to

the banking sector to Neutral. In the US, we remain exposed to cyclical sectors and we move

consumer-related stocks and financials to Overweight, as the former benefit from lower

energy prices and the latter profit from lower non-performing loan levels and an improving

housing market.

In Japan, while the upcoming elections may

cause some near-term disruption, the policy

environment should be favourable for

Japanese equities, and in particular for

sectors which benefit from yen weakness

(Autos, Luxury goods, Industrials) and capex

recovery (Industrials and Tech). We also

believe that share buyback programmes will

sustain some Japanese financials. In the

UK, we maintain exposure to relatively

attractive Industrials, which are correlated to

US capex spending and benefit from the

appreciation of the dollar (Aerospace and

Defence, in particular). We move defensive

Pharmaceuticals and Consumer Discretionary (Media and Hotels/Restaurants/Leisure) to

US banks set to perform well

Sources: Societe Generale Private Banking, Datastream. Data as of

20/11/2014. Numbers above 50 in the Home Builders survey indicate

that more builders view sales conditions as good than poor. The survey

leads bank performance by about a year.

0.2

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0.6

0.8

1

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1.8

86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

0

10

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30

40

50

60

70

80

US Home Builders survey - pushed forward 1y

Relative performance of US banks

We stick with a cyclical

sector allocation in the US

and remain fairly defensive

in the euro area.

Eurozone trailing P/E

Sources: Datastream, Societe Generale

Private Banking. Data as at 21/11/2014)

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19

03 04 05 06 07 08 09 10 11 12 13 14

Trailing P/E is the current stock

price divided by the past 12

months of earnings.


December 2014 14

Overweight. While valuations are expensive, we continue to like Consumer Staples in all

developed markets (they are well represented in the Swiss market), as they offer stable

growth and increasing dividends.

In terms of style, we continue to prefer non-cyclical growth to value stocks. We also

continue to like companies offering increasing dividends over time. Both these sectors tend to

outperform in periods of low returns and high dispersion, which is the context we expect for

next year.

Stay selective among emerging markets Emerging markets cannot be considered as a single universe, especially now that lower

commodity prices are supporting growth in some countries and putting more downside

pressure on others. For commodity importers (most Asian emerging countries, which

represent 64% of the MSCI Emerging Market Equity Index), the drop in energy prices

represents a stimulus to growth and an improvement in the trade balance (particularly in

India). However, for commodity exporters (Latin America and the majority of Europe, Middle

East and Africa - EMEA) this unfortunately means a worsening current account deficit and

negative profit growth (Brazil and Russia). In this context, we continue to prefer Asia to Latin

America and EMEA. Asia has the best policy mix, along with low valuations and high potential

for profit growth. Indian equities will benefit from falling interest rates in a context of lower

inflation. On the other hand, we believe the twin geopolitical and oil price shocks are only

partially priced into Russian stocks. Upside will be constrained by exporters’ ability to

transform their devaluation-boosted competitivity into dividends, as a consequence of

sanctions imposed by the US and Europe. We also remain Negative on Brazil. Although

exporters will benefit from the weaker real, there are few other bright spots and we are

expecting further weakness in the equities market. Dilma Rousseff’s second term as President

is unlikely to be significantly different from her first: low growth and high inflation will hurt

consumption and investment.

Correlation between the Russian stock market and Brent Asia is the main contributor to emerging market profit growth

Sources: Societe Generale Private Banking, Datastream. Data as at 21/11/2014. Sources: Societe Generale Private Banking, Datastream. Data as at 21/11/2014.

Past performance should not be seen as an indication of future performance. Investments may be subject to market

fluctuations, and the price and value of investments and the income derived from them can go down as well as up.

Your capital may be at risk and you may not get back the amount you invest.

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

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0.8

1

98 00 02 04 06 08 10 12 14

0%

20%

40%

60%

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100%

Q1

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00

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01

Q1

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11

Q1

20

12

Q1

20

13

Q1

20

14

EMEA

Latam

Asia


December 2014 15

Equity themes for 2015

1. Dollar appreciation: who stands to benefit most? Investors believe that the recent depreciation of the euro relative to the dollar will favour

eurozone profit growth in 2015. However, we find that it is the British and Swiss markets that

will be best supported by the dollar’s strength.

While the dollar has risen relative to all other

major currencies, the euro has only

depreciated relative to the dollar. Investors

tend to think that the recent appreciation of

the dollar and the strengthening of the US

economy will drive a recovery of eurozone

profit growth in 2015. We believe that this

widely-held idea is only partially true and

that the risk of disappointment is high. Our

calculations give us good reason to expect

that some other parts of Europe will benefit

more than the euro area from this year’s

dollar appreciation. Indeed, when we look at the geographical sales breakdown of companies

throughout Europe, we see that the Swiss and British markets are by far the most exposed to

US sales, at 26% and 23% respectively vs only 13% for the Euro Stoxx 50 index (which

covers 50 leading stocks from 12 eurozone countries). When we add to this the fact that the

euro has barely moved against other currencies, we conclude that investor expectations for

euro area profit growth are too optimistic. On the other hand, next year’s consensus profit

growth forecasts for British and Swiss corporates are low compared to our expectations: we

see earnings per share growing by close to 10% in both countries.

Sales breakdown by stock market (%)

Sources: Societe Generale Private Banking, Factset. Data as at 31/12/2013 (taken from annual reports).

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

SMI FTSE 100 DAX OMX Topix Euro Stoxx 50

CAC 40 IBEX

UK WesternEurope

Rest of the World NorthAmerica

Effective exchange rate index – based to 100

Sources: Societe Generale Private Banking, Bloomberg. Data as at

25/11/2014.

70

90

110

130

05 06 07 08 09 10 11 12 13 14

Switzerland

Japan

Euro

Sweden

UK

The effective exchange rate is a

weighted average of the bilateral

exchange rate of a country with

each its main trading patners. The

bilateral exchange rates are

weighted according to the

importance of each partner

country’s share of trade.

We prefer non-eurozone

European equities.


December 2014 16


2. Made in the USA The US economic recovery is back on track and near-term prospects are favourable. What is

striking is that US industrial production is at a record high, while German and Japanese output

remains below the 2008 peak. Thanks to competitive labour costs and low energy prices, the

US manufacturing sector is enjoying a particularly strong revival.

US manufacturing output is at a record high, and we believe that a number of factors could

support ongoing steady increases in the years ahead. These factors include low interest rates

and domestic energy prices, the boom in shale oil and gas exploration and production and

significant increases in labour costs in emerging markets - especially China. The

transformation of China from the world’s workshop to an economy driven by consumer

spending should further accelerate the US manufacturing revival. Several economies are

losing market share in global manufacturing output,including China, whose cost advantages

over the US have decreased, and Brazil. Since 2004, manufacturing cost-competitiveness has

improved in the US, which is now the most competitive country in the developed world. This

development could drive an important shift in the global economy as companies are prompted

to reassess their manufacturing footprint. In this environment, we could see a relocation of

global manufacturing, with “Made in China” becoming “Locally made” or indeed “Made in the

USA”. Considering that the US consumer is still the main driver of global growth, US

companies would be the main beneficiaries of this relocation.

Manufacturing cost-competitiveness index (US-based index)

Sources: Societe Generale Private Banking, Boston Consulting Group. Data as at 24/11/2014. Costs are broken down into various elements, and

overall manufacturing costs in each country are compared to those in the US, which is based at 100.

Looking to job creation in manufacturing, we can identify three sectors which should be

positively impacted by the “Made in the USA” phenomenon: Information Technology,

Machinery and Basic Materials (particularly Chemicals).

60

70

80

90

100

110

120

130

140

Un

ite

d S

tate

s

Sp

ain

Un

ite

d K

ing

do

m

Ja

pa

n

Ne

the

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s

Ca

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da

Ge

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ny

Ita

ly

Sw

itze

rla

nd

Be

lgiu

m

Fra

nce

Au

stra

lia

Ind

on

esi

a

Ind

ia

Th

ail

an

d

Me

xic

o

Ch

ina

Ta

iwa

n

So

uth

Ko

rea

Ru

ssia

Bra

zil

Other Labour Electricity Natural gas

Competitive labour costs

and low energy prices

highlight the attractiveness

of the US manufacturing

sector.


December 2014 17


3. Eurozone dividends return to the spotlight Lacklustre economic growth and eurozone deflation risk should direct investors’ attention

towards dividends. We find that long-term “dividend growers” traditionally outperform in times

of persistent deflationary risks and volatile equity markets.

Anaemic economic growth and low inflation in the euro zone should limit price-to-earnings

(P/E) increases in the coming years. This means that price returns will be weak, so extra

emphasis will naturally be put on dividends - especially more reliable ones. One way to assess

the reliability of dividend payments is by looking at a company’s long-term track record of

dividend growth. Historical figures show that long-term dividend increases are generally made

by non-cyclical growth stocks, and they usually outperform when the economy is stuck in a

low-growth, low-inflation environment.

The charts below show the dominance of dividends in equity returns since the early 1980s,

and indicate that investment strategies focused on steady dividend growth can lead to

consistent long-term outperformance when interest rates remain at very low levels.

Nominal return breakdown, calculated since 1980 (%) Dividend payers outperform when interest rates are low

Sources: Societe Generale Private Banking, Datastream. Data from MSCI indexes, as at

13/11/2014.

Sources: Societe Generale Private Banking, Datastream. Data as at 13/11/2014. The S&P

Aristocrats Index consists of companies which have increased their dividends every year for at

least 10 consecutive years and have float-adjusted market capitalisation above $3bn.

Eurozone sectors that should do relatively well in a low-growth/low-inflation environment are

characterised by 1) low financial leverage, 2) high cash-flow generation and 3) low

earnings cyclicality. The eurozone companies with these characteristics are mainly to be

found in the following sectors: Health Care, Information Technology, Food Products,

Household & Personal Products and Luxury Goods. We highlight the absence of such stocks

in Metals & Mining and Autos.

Past performance should not be seen as an indication of future performance. Investments may be subject to market

fluctuations and the price and value of investments and the income derived from them can go down as well as up. Your

capital may be at risk and you may not get back the amount you invest. The amount paid out in dividends may change

each year, and there is no guarantee that dividends will be paid out.

9.0 9.18.4

7.4

3.7

0.0

2.0

4.0

6.0

8.0

10.0

UK US France Germany Japan

Div idend Yield Div idend growth Valuation ratio expansion

%

0,6

0,8

1

1,2

1,4

1,61

2

3

4

5

6

7

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

10y US bond yield (inverted left hand scale, %)

S&P Aristocrats index vs S&P500 (rhs, x)

P/E : share price divided by

earnings per share.

Growth stocks are characterised by

relatively high valuation ratios

(price-to-book and price-to-

earnings), and by earnings growth

which is expected to be above the

market average and less sensitive

to economic cycles.

Low inflation and mediocre

economic growth highlight

the attractiveness of

sectors and stocks which

pay regular and increasing

dividends.


December 2014 18


4. Water scarcity: Blue gold As the world’s population should reach 9 billion by 2050, and living standards and

urbanisation will continue to increase, demand for fresh water will continue to outstrip supply.

According to the United Nations, by 2050 60% more food will be needed, and water

consumption for agriculture will have risen by almost 20%. About a third of the population

across Western Europe and the United States currently live in water stress areas, and by 2025

1.8 billion people will live in regions with absolute water scarcity. Although agriculture remains

the biggest consumer of water, new forms of energy like biofuel and shale gas extraction with

hydraulic fracturing also require vast quantities of water.

Many regions of the world are currently susceptible to important water supply disruptions due

to underinvestment and mismanagement. Stricter regulations and better supply management

would help preserve this finite resource. This would in turn generate revenues facilitating badly

needed investment in water infrastructure and more efficient water treatment and recycling.

The water sector is thus facing major challenges, and will increasingly have to focus on

improvements in global infrastructure: according to the OECD (Infrastructure to 2030:

Telecom, land transport, water and electricity), USD 1 trillion in investment is needed every

year between now and 2030. With the structural increase in water demand, the need for new

and better water supplies will only increase in coming decades. Meeting this need will have

wide-ranging benefits: better access to water services and improved management of water

resources contribute substantially to political stability and also to economic growth, through

increased business productivity and development.

Water – also known as “blue gold” - is set to become one of the most important physical

commodities. The water industry offers investors many opportunities, as it is less exposed to

economic cycles and economic downturns than other sectors. Transforming this industry will

require hundreds of billions of dollars of investment to address the important structural issues.

All these factors create a positive long-term environment for companies in this sector.

S&P Global Water index vs European Stoxx 600 and MSCI World stock indexes (rebased to 100)


50

100

150

200

250

300

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

S&P Global Water Stoxx 600 MSCI World

An area is experiencing water

stress when annual water supplies

drop below 1,700m3 per person.

When annual water supplies drop

below 1,000m3 per person, the

population faces water scarcity,

and below 500 m3 absolute water

scarcity.

Source: United Nations Website.

Water is set to become a

vital physical commodity,

and the necessary

transformation of the water

industry offers investors

many opportunities.


December 2014 19

Alternatives

Hedge funds: The importance of managing risk In today’s context of low growth, “lowflation” and low liquidity, investors should focus on

those hedge fund strategies which have exposure to our preferred asset class, which remains

equities, and where we identify the broadest range of opportunities for managers.

The continued boom in corporate activity (such as mergers and acquisitions, spin-offs and

restructurings) has created a favourable tailwind for Special Situations and Event-Driven

strategies. However, these strategies face challenges such as the US administration’s

clampdown on “tax-inversion” takeovers (where a US company buys a target in a low-tax

jurisdiction with the express aim of transferring its tax domicile). One of the largest healthcare

deals this year, Abbvie’s bid for Shire, which is domiciled in the Channel Islands, collapsed

recently, hurting the performance of those funds which had positioned themselves to benefit

from its completion. This reinforces the importance of identifying experienced specialist

managers who are well-versed in identifying deals which are driven more by industrial logic

than by financial engineering.

Regarding Equity Long/Short, we continue to focus on managers who specialise in those

markets where the lack of analyst coverage creates attractive return potential for careful

stockpickers. Many such markets are to be found in our preferred Asia-Pacific region: the fact

that the expected upside in prices is highest there only adds to their attraction.

Our spotlight is currently on Equity Market-Neutral strategies. As the name suggests, these

cover funds which combine long and short positions in their portfolios in such a way that the

net exposure to the direction of the market will be neutralised. As a result, performance is

purely a result of the quality of the manager’s stock-picking, and positive returns are

achievable irrespective of the trend in the broader market.

This strategy requires great discipline from managers and high-quality risk management

processes, which we believe will be of key importance in 2015. Last October served to

demonstrate just how quickly sentiment can turn from positive to negative and volatility can

spike sharply before tumbling again. Given that the large advances registered by developed

market equities since March 2009 have been driven more by expanding valuations than by

rising profits, such sell-offs cannot be ruled out in 2015. This argues in favour of rotating

portfolios towards Equity Market-Neutral in order to seek returns which are not dependent on

the trend in equity indices.

We favour Equity Market-

Neutral strategies, which

are less dependent on

market direction but which

require high-quality risk

management.


December 2014 20

Gold and oil: Continued downside pressure Declining demand is still weighing on gold’s safe-haven appeal. Since the beginning of this

year, physical demand for gold has fallen sharply in China and to a lesser extent in India - the

two largest buyers globally. However, we note that gold demand for jewellery has much less

impact on prices than demand for gold as an investment: for example, the strong rebound in

jewellery demand from India in the third quarter (+60%) did not reverse the downward trend in

gold prices. More significantly, financial instruments linked to gold are falling out of favour,

with gold exchange-traded funds (ETFs) experiencing continued outflows. Further, the US

Federal Reserve has begun to normalise its monetary policy (the end of quantitative easing

was announced on 29 October), although the market has continued to push back rate hike

expectations in the current “lowflation” environment. As the US dollar is strengthening against

other major currencies, the negative correlation between gold and the USD is also adversely

affecting the precious metal. We therefore remain Underweight on gold.

Global gold demand vs gold prices

Sources: World Gold Council, Societe Generale Private Banking, Bloomberg. Data as at 20/11/2014.

As far as “black gold” is concerned, oil prices have fallen by more than 30% since June to 4-

year lows. Abundant supply continues to outpace demand – the International Energy Agency

recently revised down its oil demand forecast for 2014. US oil production remains high, and

members of OPEC (Organization of the Petroleum Exporting Countries) prefer to sell at lower

prices rather than to cut supply and lose market share. The resumption of the negative

correlation between the US dollar and oil should also maintain pressure on oil prices, as we

see further upside potential for the USD. However, we have identified several factors that

could support oil prices in the medium term. Among them, we expect the global economy to

pursue its gradual expansion, which will lead to a pickup in oil demand. Further, the current

low oil prices offer an opportunity for China to beef up its strategic reserves, which should be

supportive for prices. Lastly, geopolitical tensions (Iraq, Syria, Lybia, Iran, etc.) could hit crude

oil production. As a result of these factors, we remain Neutral on oil.

0

200

400

600

800

1000

1200

1400

1600

1800

2000

-100

100

300

500

700

900

1100

1300

1500

Q1

-09

Q2

-09

Q3

-09

Q4

-09

Q1

-10

Q2

-10

Q3

-10

Q4

-10

Q1

-11

Q2

-11

Q3

-11

Q4

-11

Q1

-12

Q2

-12

Q3

-12

Q4

-12

Q1

-13

Q2

-13

Q3

-13

Q4

-13

Q1

-14

Q2

-14

Q3

-14

(USD/oz)(tonnes)

Central banks

Technology

Investment

Jewellery

Gold price (rhs)

Declining demand

continues to weigh on

gold’s safe-haven

appeal.

After a 30% decline since

June, we believe oil

prices may fall even

further in the short term

before beginning to

stabilise.


December 2014 21

Alternatives theme for 2015

German residential real estate News about the German economy over the past few months has hardly been reassuring.

Gross domestic product expanded by just 0.1% in the third quarter, and Industrial Production

and Purchasing Managers indices have dispappointed. The idea that Germany is the euro

zone’s engine room is increasingly challenged. However, we believe the country still enjoys a

few tailwinds, one of which is the sustained upturn in the German housing market.

High demand and short supply have led to a sharp increase in German property prices and

rents this year, with housing in some cities becoming 10% more expensive. In response to

this, a new rent-cap policy (the “Mietpreisbremse”) – expected to come into force in early

2015 – has been agreed in order to avoid a housing bubble. However, we believe that since

this rent cap only applies to quite a limited area (it excludes rents for newly built or refurbished

apartments, for instance), its adverse impact on residential property companies will be fairly

muted. Though the pace of rental growth should slow, rents should remain on an upward

trend.

It is also important to bear in mind that given current record low interest rates and relatively

strong purchasing power, German housing still looks affordable,looking at prices compared

to average income. In particular, residential housing in Berlin, Hamburg or Munich remains

significantly cheaper than London and Paris.

Given the attractiveness of the residential property segment in Germany, we like real estate

companies (REITs and non-REITs) focusing on residential investment. These companies offer

a high dividend yield, which is consistent with our preference for high-yielding equities. As

distributable income is almost entirely generated by rental incomes, we should take into

account that:

Lease terms contractually bind tenants to their landlords over long periods – in

Germany, lease length averaged 7.5 years in 2013 – income is reliable, with high

visibility.

Income will grow gradually thanks to rents that should remain on an upward trend in

Germany.

House prices (rebased to 100) and interest rates on residential mortgage loans (%)

Sources: Societe Generale Private Banking, Bloomberg. Data 20/11/2014.

0

1

2

3

4

5

6

80

90

100

110

120

130

2006 2007 2008 2009 2010 2011 2012 2013 2014

House prices (rebased to 100, lhs)

Interest rates on residential real estate mortgage loans (initial rate fixation from 1 to 5 years)

%

REITs (Real Estate Investment

Trusts): companies which own

income-generating residential

and/or commercial real estate

and are traded on major

exchanges. They represent a

liquid type of instrument for real-

estate investment.

High demand and short

supply have led to a

sharp increase in

German property prices

this year. However,

residential housing in

Germany still looks

affordable compared

with London and Paris.

German real estate

companies can

potentially offer high and

sustainable dividends.

yield.

Past performance should

not be seen as an

indication of future

performance. Invesments

may be subject to market

fluctuations and the price

and value of investments

and the income derived

from them can go down as

well as up. Your capital



you invest. The amount

paid out in dividends may

change each year, and

there is no guarantee that

dividends will be paid out.


December 2014 22

Follow-up on convictions

Open strategies

Inception

date

Conviction CUR Perf. since

inception (%)

Perf. over the

past 3m (%)

YTD

perf. (%) Status

Time

horizon*

20/02/2013 Capital expenditure recovers in the US US$ 26.5% 6.0% 8.4% Open Strategic

01/12/2013 European banks beauty contest (Bonds) EUR 9.0% 1.2% 9.0% Open Strategic

01/12/2013 Euro banks beauty contest (Equity) EUR 1.8% -1.6% 0.9% Open Strategic

01/12/2013 Investment cycle gathering speed US$ 7.0% 0.5% 2.8% Open Strategic

19/03/2014 TOPIX - Multiples rerating still underway EUR 16.2% 1.8% 6.5% Open Strategic

12/06/2014 Asia : Go east EUR 5.8% 0.1% 9.9% Open Strategic

12/06/2014 Eastern Europe back in the game EUR 5.5% 5.1% 13.7% Open Tactical

12/09/2014 We recommend switching from European value to USD-exposed

growth stocks EUR 1.9% 3.3% 6.6% Open Tactical

12/09/2014 We highlight the cheap valuations in Scandinavian equities EUR 2.0% 2.0% 8.6% Open Tactical

12/09/2014 Looking for yields in Australian bonds AUD 2.6% 2.0% 10.8% Open Tactical

25/11/2014 Eurozone dividends return to the spotlight (Aristocrats) EUR

Open Tactical

25/11/2014 Made in the USA US$

Open Strategic

25/11/2014 Dollar appreciation: who stands to benefit most? EUR

Open Tactical

25/11/2014 Water scarcity EUR

Open Strategic

25/11/2014 Time to buy EM sovereign debt US$

Open Tactical

25/11/2014 Sustained upturn in the German housing market EUR

Open Tactical

Sources: Societe Generale Private Banking, Datastream. Data as at 25/11/2014. * Strategic: 1-3 years. Tactical: 3-12 months

Closing strategies US De-Equitisation: the process of “de-equitisation” – when share buybacks outnumber new

equity issues –is still under way in the US, sustained by large cash piles on company balance

sheets. However, this strategy’s performance has been good so far, so we close it and favour

companies launching share buyback programmes outside the US.

German stocks – Rocket-borne: While we still believe that German stocks are the most

attractively valued in the eurozone, our concerns related to deflation risks drive our decision to

temporarily reduce our exposure to euro stocks. We therefore close this strategy.

Qatar – Haven from turmoil: Qatar joined the MSCI emerging market index in June 2014 and

experienced a liquidity boost with the MSCI reclassification. Following its excellent

performance, we close the strategy opened in March 2014.

The dividend edge: There are many reasons why dividend-paying stocks should be favoured

over non-dividend stocks, and why dividends should generally be seen as offering some

protection against downside. We continue to believe that investors should adopt this strategy,

but we now favour stocks outside the eurozone which are able to increase their dividends

steadily over the years. We therefore close the dividend edge strategy and open a new one,

“Eurozone dividends return to the spotlight”.

Inception

date

CUR

Perf. since

inception (%)

YTD perf.

(%) Status

Closing

date

01/09/2013 US De-Equitisation US$ 28.9% 21.4% Closed 25/11/2014

01/12/2013 German stocks – Rocket-borne EUR 4.9% 3.2% Closed 25/11/2014

19/03/2014 Qatar : Haven from turmoil EUR 25.0% 33.2% Closed 25/11/2014

12/06/2014 The dividend edge EUR -2.4% 14.4% Closed 25/11/2014


Past performance should

not be seen as an

indication of future

performance. Investments

may be subject to market

fluctuations and the price

and value of investmens

and the income derived

from them can go down as

well as up. Your capital



you invest.


December 2014 23

Global economic forecasts

GDP and CPI forecasts

% changes yoy Real GDP (f: forecast) CPI

2013 2014f 2015f 2016f 2013 2014f 2015f 2016f

World (Mkt FX weights) 2.7 2.8 3.3 3.4 2.9 2.8 2.7 3.0

World (PPP* weights) 3.2 3.3 3.8 4.0 4.0 3.7 3.7 3.8

Developed countries (PPP) 1.4 1.8 2.4 2.5 1.4 1.4 1.3 1.9

Emerging countries (PPP) 4.7 4.4 4.8 5.0 6.1 5.5 5.4 5.1

Developed countries US 2.2 2.3 3.5 3.3 1.5 1.7 1.3 2.4

Euro area -0.4 0.8 0.9 1.3 1.4 0.5 0.7 1.1

Germany 0.1 1.4 0.9 1.3 1.6 0.8 0.8 1.2

France 0.4 0.4 0.8 1.2 1.0 0.6 1.0 1.1

Italy -1.9 -0.3 0.6 0.8 1.3 0.2 0.6 1.2

Spain -1.2 1.2 1.3 1.2 1.5 -0.1 0.1 0.5

Japan 1.5 0.3 1.2 1.9 0.4 2.8 1.4 1.4

UK 1.7 3.0 2.5 1.9 2.6 1.5 1.7 2.3

Switzerland 1.9 1.7 1.5 1.7 -0.2 0.0 0.2 0.7

Australia 2.3 3.2 2.8 3.1 2.4 2.5 2.0 2.7

Emerging countries Brazil 2.5 0.2 1.1 1.7 6.2 6.4 6.3 5.6

India 4.7 5.4 6.2 6.5 9.5 6.9 6.4 5.5

China 7.7 7.3 6.8 6.4 2.6 2.0 2.1 2.8

South Korea 3.0 3.4 3.6 3.6 1.3 1.3 1.9 2.2

Taiwan 2.1 3.5 3.6 3.4 0.8 1.3 1.5 2.0

Poland 1.5 3.3 3.4 3.5 0.9 0.1 1.0 2.0

Czech Republic -0.7 2.3 2.3 2.9 1.4 0.4 0.7 1.8

Slovakia 0.9 2.1 2.7 2.8 1.5 0.0 0.6 1.9

Mexico 1.7 2.2 3.6 3.9 3.8 4.0 3.7 3.5

Chile 4.1 1.8 2.5 3.2 2.1 4.4 3.9 3.1

Indonesia 5.8 5.1 5.3 5.8 7.1 6.2 7.4 6.0

Sources: SG Cross Asset Research / Economics, IMF (data published on 25 November 2014) * PPP: Purchasing Power Parity

Forecast figures are not a reliable indicator of future performance.


December 2014 24

Market performance Developed markets performance

1m total return 3m total return YTD total return 12m total return

(in local currency) Current level

S&P 500 2067 0.8% 4.0% 13.9% 17.1%

DJ Euro Stoxx 50 3226 3.5% 2.4% 7.4% 8.8%

FTSE100 6731 0.4% 0.0% 3.2% 4.1%

Topix 1409 1.0% 9.9% 10.3% 14.1%

MSCI AC World (USD) 427 1.0% -0.4% 6.9% 9.2%

(in local currency) Yield to maturity

European IG 1.11% 0.69% 1.30% 7.47% 7.18%

European HY 3.98% 1.04% 0.28% 5.60% 6.60%

US IG 3.09% 0.20% 0.33% 7.20% 7.20%

US HY 6.10% -0.51% -1.40% 4.10% 4.90%

UK 3.29% 1.61% 3.10% 10.44% 9.45%

Japan 0.42% 0.55% 1.06% 3.00% 2.74%

Sources: Societe Generale Private Banking, Bloomberg, Datastream (data as at 25/11/2014)

Emerging markets performance

1m total return 3m total return YTD total return 12m total return

(in USD) Current level

MSCI EM 1009 2.59% -6.62% 3.32% 2.61%

MSCI EM Asia 463 2.44% -5.02% 6.32% 6.47%

MSCI EMEA 309 3.64% -5.89% -2.99% -4.97%

MSCI Latam 3098 2.09% -12.49% -0.32% -2.39%

(in USD) Yield to maturity

BAML EM SVGN 4.93% 0.40% -0.50% 8.49% 8.89%

Asia Svgn 3.95% 1.07% 2.32% 13.31% 13.10%

EMEA Svgn 4.52% 0.48% 0.28% 7.67% 7.96%

Latam Svgn 5.98% -0.01% -2.83% 7.68% 8.45%

BAML EM CORP 4.86% -0.30% -1.12% 5.13% 5.59%

Asia Corp 3.83% 0.42% 0.78% 7.23% 7.26%

EMEA Corp 5.32% -0.84% -1.79% 1.19% 1.90%

Latam Corp 5.59% -0.61% -2.49% 6.51% 7.13%

Sources: Societe Generale Private Banking, Bloomberg, Datastream (data as at 25/11/2014)

BAML : Bank of America Merrill Lynch Corp : Corporate

Svgn : Sovereign IG : Investment Grade

EM : Emerging Market HY : High Yield

EMEA : Europe, Middle East, Africa Latam : Latin America



December 2014 25

Market performance and forecasts Currencies

Performance YTD Current 3-month forecast 6-month forecast

EUR/USD -9.39% 1.25 1.20 1.17

USD/JPY 12.10% 118 118 120

EUR/CHF -1.93% 1.20 1.21 1.21

GBP/USD -5.18% 1.58 1.58 1.56

EUR/GBP -4.57% 0.79 0.76 0.75

Source: Source: Societe Generale Private Banking, Bloomberg, Datastream. Data as at 25/11/2014.

10-year yield

YTD Total return

(local currency)

Current 3-month forecast 6-month forecast

USA 9.7% 2.2% 2.3% 2.5%

GER 14.4% 0.7% 0.8% 0.9%

UK 12.9% 2.0% 2.1% 2.3%


Commodities

Performance YTD Current 3-month forecast 6-month forecast

Gold in USD -0.7% 1197 1150 1050

Oil (Brent) in USD -29.4% 78 80 85

Source: Societe Generale Private Banking, Bloomberg, Datastream. Data as at 25/11/2014.

Equities

YTD Total return

(local currency)

Current 3-month forecast 6-month forecast

S&P 500 13.9% 2067 1850 2150

DJ Euro Stoxx 50 7.4% 3226 2900 3300

Topix 8.2% 1409 1300 1550


BAML : Bank of America Merrill Lynch Corp : Corporate

Svgn : Sovereign IG : Investment Grade

EM : Emerging Market HY : High Yield

EMEA : Europe, Middle East, Africa Latam : Latin America



December 2014 26

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December 2014 27

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December 2014 28

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