share buyback: an investment case governments will …

12 SEPTEMBER 2014#0

SG CIB GLOBAL MARKETS NEWSLETTER

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER TO PAST PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA.

FOR INSTITUTIONAL INVESTOR USE ONLY

NOT FOR DISTRIBUTION IN THE US

GOVERNMENTS WILL SET THE ECB POLICY MULTIPLIERWill it work? Few doubt that the latest ECB stimulus will, at least initially, underpin risky assets, but the debate remains open on just how much real economic growth it will deliver. President Draghi was clear; it's up to the governments. Our baseline scenario assumes (1) a still slow pace of structural reform, (2) “growth friendly fiscal consolidation” and (3) a modest common EU investment programme. Combined with ECB stimulus and global recovery, this should lift euro area real GDP growth from 0.0% qoq annualised in 2Q14 to around 1.5% by late 2015 and then remain close to this level over our forecast horizon (out to 2018). Should governments deliver the full check list of measures, our numbers could be doubled! We see very little indication, however, that such a scenario is materialising leaving the euro area vulnerable to new shocks and at the political risk of mounting dissatisfaction with unemployment remaining all too high.

Michala Marcussen,Cross Asset Research – Economics

Exract from ‘ Sunday Snapshort ’, Economics, published on 7 September 2014

SHARE BUYBACK: AN INVESTMENT CASEWhen a corporation buys its own shares on the open market, it is considered a "share buyback". Share buyback programs take advantage of supply and demand by reducing the number of shares outstanding, improving the Return to Equity and, in the long run, increasing the Earnings per Share value and ultimately the price of the shares considered.

In the US, share buyback has been used for many years as a way to pay shareholders (on average on a larger scale than dividends). In Europe and in Japan, the trend is now taking off: although buybacks still gather limited amounts compared to dividends in both areas, they already exceeded USD 50bn per year in Europe and they are still trending up in Japan with around USD 22bn announced year to date.

In the current environment, the Japanese buyback case is particularly compelling: economically first since holding cash is not anymore a preferred strategy at time of rising

prices, companies are cash rich and share valuations remain attractive in spite of last year Abenomics rally. Politics is a factor too, since companies now need to justify unused cash holdings and Abenomics put pressure on corporate to increase governance and shareholder value.

How to invest in European and in Japanese Buybacks?

SG CIB in collaboration with Solactive has developed a range of indices made up with shares of companies having announced a share buyback in the last two months, subject to market cap and liquidity thresholds: the Solactive European Buyback index (BUYEU) and the Solactive Japanese Buyback index (BUYJP).

With an index base date of late 2008, both indices have outperformed their respective benchmarks, by 10% per year on average for BUYEU and by 9% per year on average for BUYJP with a relatively low volatility.

BUYBACK INDEX AS AN ALPHA INVESTMENT

0.80

1.00

1.20

1.40

1.60

1.80

Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14

BUYJP Index/TPXDDVD Index BUYEU Index/SXXR Index

Source: SG CIB Global Engineering & Strategy

Lionel Phillips Franjou, Antoine Garaialde, Frank Benzimra,Global Engineering & Strategy Global Engineering & Strategy Asia Advisory

WILL ECB ACTIONS HAVE AN IMPACT ON EUROZONE GROWTH?

HIGHLIGHT

YES NONO

OPINION

http://www.sgcib.com/en/market-sentinel/

http://www.sgcib.com/en/market-sentinel/#1







SCOTTISH REFERENDUMRationale

As we get closer to the Scottish referendum on the 18th September (question being “Should Scotland be an independent country?”), uncertainty is increasing and the pound has fallen across the board this week.

0

10

20

30

40

50

60

70

Sep-14 Aug-14

Jul-14

Jun-14

May-14

Apr-14

Mar-14 Feb-14

Dec-13 Nov-1

3 Sep-13

Aug-13

May-13

Feb-13 Oct-12

Feb-12

Yes No Don't know

Source: SG Cross Asset Research, UK Polling Report

Indeed, the “Yes” campaign is gaining momentum, and there is danger for more weakness going forward. In case of “yes”, a 3% to 5% potential downside is expected. Short term impact of Scotland’s independence is hard to tell, and people argue about the budgetary consequences. But in the medium term, it would be very likely that the 2015 General Election would lead to a Conservative led government, raising the risk of a UK exit from the European Union, which would in turn hurt the sterling.

The GBPUSD volatility smile has moved since July, with higher vol levels and a more asymmetrical profile, highlighting that GBP Puts have become more expensive relative to GBP Calls.

According to DTCC data, the concentration so far has been in the 1M tenor, with vol almost 2 vols higher since the beginning of August. We would therefore recommend trading longer maturity where vols have not spiked so much, 3M for example.

Implementation Buy a 3 month 1.6460 GBP Put with a European KI 1.60 Cost 0.87% GBP (vs 1.23% GBP for a vanilla put)*

Risks Loss of invested premium

Market referencesSpot ref 1.6460 Vol 3M ATM 5.79

* Price as of 5 September 2014

Darren Charnock,Foreign Exchange Sales

TRADE IDEA

MARKET ANALYSIS

AGENCY VS. PRINCIPAL EXECUTION: IT’S YOUR CHOICE In the changing market environment, Agency Execution has become something of a popular conversation with significant advantages. But principal execution will remain the solution for those looking for bespoke investment solutions.

As the agency broker does not hold positions, he is totally independent, sourcing the right liquidity from several different places, acting anonymously for your benefit, using in-depth knowledge and market access to ensure best execution pricing. Of course, market access will be a key differentiating factor in the choice of your broker.

Nevertheless, when you require the advice of a financial expert or risk specialists, for tailor-made investment and hedging strategies, then principal execution is the solution. In this case, you will need a partner with strong financial analysis, engineering, financing capabilities, solid credit rating and a fortress balance sheet as a guarantee.

Our new integrated platform, combining both SG CIB and Newedge value propositions, provides you with the choice between the two, through one single counterpart. You can decide to use both agency and principal execution services simultaneously.

In order to protect your interests, Société Générale has created a dedicated internal unit whose role is to ensure anonymity and segregation of activities to guarantee the independence of your broker.

Providing access to over 125+ different markets across all asset classes with one of the largest engineering teams in the industry, Societe Generale will go above and beyond to find smarter solutions for your financial needs.

Steeve Charvet, Stephane Mattatia,Newedge Agency Broking Global Macro Group





Where would you invest this year?The Eurozone; It ticks the right boxes (loose monetary policy, improving growth, reforms, banks turn-around, etc.) while client sentiment (bar US and Spanish investors) is still cautious towards the region.

Give two markets indicators you monitor first in the morning?Frankly, the market wraps we get from US and Asia Trading are all I need to get a good sense of how markets are shaping up for the day here in Europe. But DMMV and MMAP on Bloomberg are nice complements to this, to get a global cross-asset picture.

What is your motto? What would be your golden advice?I'll pass that one. As Oscar Wilde said, "I'm not young enough to know everything".

What is next on your watch list?The SX5E/EURUSD correlation. For me, it reverting properly to negative territory will be the sign that the situation has really normalised in the Eurozone.

One thing you would like to highlight to investors?Short yield as a tail hedge. You can sell a Dec16 2,000 put on SX5E to buy one DEDZ7 85 put and receive 37bp. Vanilla, listed, fairly long-dated, and convex on the way down (dividends beta increase if markets stress): what more can you ask for?

Charles de BoissezonGlobal Engineering & Strategy

5 QUESTIONS TO...

Short yieldwhat?

correlation

WH

ER

E?

tail hedge

LOF

F?

Eurozone

SX5

E EU

RU

SD

BUY STRANGLES ON BRAZILIAN ELECTIONThe Brazilian economy looks grim going into a Presidential election year. On August 13, 2014, a small plane carrying Presidential candidate Eduardo Campos crashed and he was killed, which changed the dynamics of the Brazilian elections.

The election now has two major candidates that are tied (each with 34% of the vote) according to the polls going into the October 5, 2014 election: incumbent President Dilma Rouseff of the liberal pro-labor Worker Party (WP) and the new Presidential Candidate Marina Silva of the more moderate Brazilian Socialist Party (PSB), who took the place of Eduardo Campos. In a run-off election on October 26, 2014, the polls are showing Silva would win the necessary 50% of the vote to Rousseff’s 43%.

Since May 2014 to the present, we have seen EWZ rally approximately 15%; however, USDBRL is essentially unchanged. EWZ maybe pricing-in a potential Silva win.

n If Rousseff wins, EWZ could drop below 40.

n If Silva wins, EWZ could rally to 60.

In Figure 1 , 2M ATM implied volatility is high at the 93%-tile near 28 implied volatility and skew is flatter.

FIGURE 1: EWZ 2M ATM IMPLIED AND UPSIDE & DOWNSIDE SKEW (JAN-12 TO SEP-14)

15

17

19

21

23

25

27

29

31

33

35

0

1

2

3

4

5

6

7

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Im

plie

d Vo

latil

ity (%

)

Skew

(Vol

atili

ty P

oint

s)

2M EWZ 90%-ATM Spread (Vol. Pts.) (LHS)

2M EWZ ATM-110% Spread (Vol. Pts.) (LHS)

2M EWZ ATM Implied Volatility (RHS)

2M implied volatility at high level of 93%-tile since Jan-13

2M ATM-110% upside skew is at 49%-tile since Jan-13

2M 90%-ATM downside skew dropped to the 5%-tile since Jan-13

Source: SG Global Engineering & Strategy, DataStream, Bloomberg

We suggest playing both outcomes of this election with 1 by 2 call and put spreads.

n Buy the EWZ Nov-14 46 put & sell 2 times the EWZ Nov-14 41 puts for $0.33 (0.61%)*

n Buy EWZ Nov-14 55 call & sell 2 times the EWZ Nov-14 61 calls for $1.29 (2.4%)*

n Total cost of $1.62 [EWZ @ 53.9; Net delta is long 0.08]*

James Hosker,Global Engineering & Strategy

1 "Silva widens lead ahead of Brazil presidential election poll", Reuters, 29-Aug-14.

* Price as of 5 September 2014

TRADE IDEA

7004

00 –

Stu

dio

Soc

iete

Gen

eral

e –

09/2

014



THIS IS A MARKETING DOCUMENT. PLEASE READ THE IMPORTANT INFORMATION BELOW

INFORMATION FOR SPECIFIC INVESTORS For Investors Receiving This Document From SG Se-curities (HK) Limited : This document is distributed to you by SG Securities (HK) Limited (CE: AAD941) ("SG") as an activity that is wholly incidental to its carrying out of a regulated activity for which it is already licenced. Details of SG's licence can be provided upon request. For Documents Distributed in Hong Kong : This docu-ment is issued solely to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Or-dinance. SG Securities (HK) Limited has authorised the sending of this message. If you wish to be removed from the distribution list for this message, please respond to this email to that effect. For Documents Distributed in Singapore : This docu-ment is distributed by MAS licensed representatives of Societe Generale, Singapore Branch and may only be provided to accredited investors, expert investors and institutional investors, as defined in Section 4A of the Securities and Futures Act. Any such investor wishing to discuss this document or effect transactions in any secu-rity discussed herein should do so with or through MAS licensed representatives of Societe Generale, Singapore Branch. If you are an accredited investor or expert inves-tor, please be informed that in our dealings with you, we are relying on certain exemptions to the Financial Advisers Act (“FAA”) - (1) the exemption in Regulation 33 of the Financial Advisers Regulations (“FAR”), which exempts us from complying with Section 25 of the FAA on disclosure of product information to clients; (2) the exemption set out in Regulation 34 of the FAR, which exempts us from com-plying with Section 27 of the FAA on recommendations; and (3) the exemption set out in Regulation 35 of the FAR, which exempts us from complying with Section 36 of the FAA on disclosure of certain interests in securities. For Documents Distributed in Japan : This document is distributed in Japan by Societe Generale Securities (North Pacific) Ltd., Tokyo Branch, which is regulated by the Financial Services Agency of Japan. This document is intended only for the Professional Investors as defined by the Financial Instruments and Exchange Act in Japan and only for those people to whom it is sent directly by Soci-ete Generale Securities (North Pacific) Ltd., Tokyo Branch, and under no circumstances should it be forwarded to

any third party. For Documents Distributed in Australia by SG Securi-ties (Hong Kong) : This document is distributed by SG Securities (HK) Limited, a Registered Foreign Company and Foreign Financial Services Provider in Australia (ARBN 126058688) that is exempt from the requirement to hold an Australian financial services licence under the Corpo-rations Act 2001 ("Act"). SG Securities (HK) Limited is regulated by the Securities & Futures Commission under Hong Kong laws, which differ from Australian laws. The information contained in this document is only directed to recipients who are wholesale clients as defined under the Act. If you wish to be removed from the distribution list for this publication, please respond to this email to that effect, or alternatively, contact [email protected].

IMPORTANT INFORMATION FOR ALL INVESTORS General Disclaimer Regarding Financial Products And Services : If any financial products or services are described in this document, you should not invest in or utilise them unless you fully understand and are willing to assume the risks associated with them. If you are in any doubt about the risks involved in a product or service, you should seek further clarification of the risks with the distributor or provider of the product or service or seek independent professional advice. Facts are unverified : Any facts contained this document may contain is based upon sources believed to be reli-able, but have not been independently verified and may change without notice. Not Advice or Recommendation : This document does not constitute investment advice nor is it a trade recom-mendation. SG has not determined whether the transac-tions or services described in here are suitable, and inde-pendent financial, tax and legal advice should be sought by you prior to any transaction or engagement of service. Not an Offer or Contract : This document is not a con-tract and no offer to enter into any financial transaction or purchase or sale of any financial product or service is being made in this document. The terms of any transac-tion or service agreed upon following this document will be governed by a separate contract subsequently agreed and executed between the parties or otherwise sent by SG, and not this document.

No further disclosure, reproduction or reliance permit-ted : This document has been prepared solely for persons it has been distributed to directly by SG. Its contents may not be disclosed to, reproduced or used or relied upon by, any other person, or used for any other purpose. No Warranties : No warranties are provided as to the ac-curacy, reliability, completeness, or fitness for any purpose of the information. SG disclaims any liability whatsoever for any reliance on the information contained in this docu-ment and assumes no fiduciary or other responsibility or liability for any or other consequences that may arise from any product or service. No duty to disclose or account for SG's role in securi-ties or derivatives : SG may deal in, profit from the trad-ing of, hold or act as market-makers or act as advisers, brokers or bankers in relation to the securities, or deriva-tives mentioned in this document, or be represented on the board of entities issuing such securities. It is under no obligation to disclose or take account of this document when advising or dealing with or for its customers. General selling restrictions : Financial products or ser-vices may not be bought or subscribed to if investors do not qualify in their local jurisdictions and investors should ensure they contact and deal through appropriately li-censed entity if they wish to purchase any such products or services.If you are a “U.S. person” (as defined by the U.S. Com-modity Futures Trading Commission), please visit http://swapdisclosure.sgcib.com for important information with respect to derivative products. By transacting with Soci-ete Generale, you are deemed to acknowledge that you have read and accepted the information provided on the website.

IMPORTANT DISCLOSURES : Please refer to our websites

http://www.sgcib.com/

http://www.equityderivatives.com/

Copyright: The Societe Generale Group 2014. All rights reserved

CONTACTGlobal Equity Flow AsiaTimothee Bousser, Head of GEF AsiaLevel 38 Three Pacific Place, 1 Queen's Road East, Hong Kong+852 2166 [email protected]
