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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 AsiaPacific. 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
Investment Strategy - Outlook 2015
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 ................................................................................................................... 9
USD/JPY: Foreign diversification weighs on the yen.............................................................................................................. 10
EUR/CHF: Struggling to maintain the floor ............................................................................................................................. 10
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
3
Investment Strategy - Outlook 2015
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
Alan Mudie
Head of Investment Strategy
(41) 22 819 0255
[email protected]
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 breakup 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.
Xavier Denis
Global strategist
(852) 2166 4683
[email protected]
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
Claudia Panseri
Global strategist
(33)1 42 14 58 88
[email protected]
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
Luis Cameirao
Strategist
(33)1 42 13 14 97
[email protected]
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.
François Cardi
Strategist
(41) 22 819 0496
[email protected]
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.
Caroline Davies
Editor
(33) 1 56 37 39 61
[email protected]
[email protected]
December 2014
4
Investment Strategy - Outlook 2015
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
With global disinflation and
a stronger USD, the Fed is
in no rush to hike rates.
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
Foreign purchases of US Treasuries (rhs, bn$)
10 year yield (lhs, %)
4
120
100
3.5
80
3
60
40
2.5
20
2
0
-20
1.5
-40
1
2010
-60
2011
2012
2013
2014
Sources: Societe Generale Private Banking, Datastream. Data as at 15/11/2014.
Peripheral eurozone countries in
this context include Spain, Greece,
Ireland, Portugal and Italy. Core
countries include Germany,
France, the Netherlands and
Belgium.
In the eurozone, the European Central Bank (ECB) remains highly likely to embrace fullfledged 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
December 2014
5
Investment Strategy - Outlook 2015
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.
With benchmark yields at
historical lows, spreads will
drive corporate bond
performance.
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
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
December 2014
6
Investment Strategy - Outlook 2015
helped lower debt service payments to historical lows, but this understates the level of
leverage.
More ECB intervention is
set to drive peripheral
yields down further.
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
1100
US High Yield spreads (basis points)
1000
Euro zone High Yield spreads (basis points)
900
800
700
600
500
400
300
2012
2013
2014
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.
December 2014
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Investment Strategy - Outlook 2015
Fixed income theme for 2015
EM sovereign debt: attractive yields still to be had
Investors will continue to
In a context of depressed yields in developed markets and subdued inflation, investors
seek yield in safe
emerging-market issuers –
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
both corporate and
sovereign.
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.
The carry trade consists of
borrowing money where interest
rates are low, and investing it
somewhere where they are higher.
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.
Changes in inflation,
interest rates and the rate
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.
of exchange may have an
adverse effect on the value,
J.P. Morgan EM USD-denominated bond index and US 10-year Treasuries
price and income of
investments. Your capital
may be at risk and you may
not get back the amount
you invest.
800
JPM EM Bond Index USD denominated debt (total return, lhs)
750
10Y US bond yield ( %,rhs)
4.5
4
700
3.5
650
600
3
550
2.5
500
2
450
1.5
400
350
2009
1
2010
2011
2012
Sources: Societe Generale Private Banking, Datastream. Data as at 26/11/2014.
December 2014
8
2013
2014
Investment Strategy - Outlook 2015
Currencies
EUR/USD: The ECB will push the euro down further
Monetary policy divergence
On the back of the European Central Bank (ECB)’s rhetoric and actions, the euro has lost
will drive the euro lower.
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
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.
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 eurodenominated 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
EURUSD (lhs)
Net long positions on futures markets (number of contracts, rhs)
1.6
200000
1.5
100000
1.4
0
1.3
-100000
1.2
-200000
1.1
2008
-300000
2009
2010
2011
Sources: Societe Generale Private Banking, Bloomberg. Data as at 21/11/2014.
December 2014
9
2012
2013
2014
Investment Strategy - Outlook 2015
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
A vanishing current
account surplus and
portfolio diversification will
push the yen lower.
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.
billion JPY
BoJ balance sheet
USD/JPY (rhs)
3400000
120
115
2900000
110
105
2400000
100
95
1900000
90
85
1400000
80
75
900000
2012
70
2013
Sources: Societe Generale Private Banking, Datastream. Data as at 2/11/2014.
December 2014
10
2014
Investment Strategy - Outlook 2015
EUR/CHF: Struggling to maintain the floor
The Swiss national bank
Renewed euro weakness has pushed the Swiss franc up further. It is trading close to the 1.20
will fight CHF appreciation.
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
Commodity exporters will
feel the pain, while
commodity importers will
outperform as long as their
policy mix remains
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.
appropriate.
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.
December 2014
11
Investment Strategy - Outlook 2015
Equity markets
2015 returns set to be low in developed countries
Unimpressive profit growth
expectations for 2015 leave
us with low upside
potential for developed
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.
market index returns.
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,
Price to earnings ratio (P/E):
share price divided by earnings
per share.
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
100%
90%
UK
80%
AUSTRALIA
70%
SINGAPORE
60%
CANADA
50%
SWITZERLAND
40%
EMERGING MARKETS
30%
JAPAN
20%
US
10%
EURO ZONE
0%
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
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.
December 2014
12
Investment Strategy - Outlook 2015
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.
Eurozone trailing P/E
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
19
13
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,
11
representing growth of close to 8% vs 2013. Our 2015 forecast is again for 8% EPS growth.
17
15
9
With margins close to record levels, we see the US stock market as fairly valued.
7
5
03 04 05 06 07 08 09 10 11 12 13 14
Country allocation
Q4 2014
Sources: Datastream, Societe Generale
Private Banking. Data as at 21/11/2014)
Trailing P/E is the current stock
price divided by the past 12
months of earnings.
United States
Neutral
Euro zone
Neutral
UK
Neutral
Europe ex euro zone
Overweight
Asia Pacific incl. Japan
Overweight
Emerging Market
Neutral
CHANGES
Q1 2015
Neutral



Underweight
Overweight
Overweight
Overweight

Overweight
Sources: Societe Generale Private Banking. Data as at 21/11/2014.
We stick with a cyclical
sector allocation in the US
and remain fairly defensive
in the euro area.
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
US banks set to perform well
1.8
80
1.6
70
1.4
60
1.2
50
1
40
0.8
30
0.6
20
0.4
10
0.2
0
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
US Home Builders survey - pushed forward 1y
Relative performance of US banks
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.
Defence, in particular). We move defensive
Pharmaceuticals and Consumer Discretionary (Media and Hotels/Restaurants/Leisure) to
December 2014
13
Investment Strategy - Outlook 2015
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
1
100%
0.8
80%
0.6
0.4
60%
0.2
EMEA
0
40%
Latam
-0.2
Asia
20%
-0.4
-0.6
Q1 1997
Q1 1998
Q1 1999
Q1 2000
Q1 2001
Q1 2002
Q1 2003
Q1 2004
Q1 2005
Q1 2006
Q1 2007
Q1 2008
Q1 2009
Q1 2010
Q1 2011
Q1 2012
Q1 2013
Q1 2014
0%
-0.8
-1
98
00
02
04
06
08
10
12
14
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.
December 2014
14
Investment Strategy - Outlook 2015
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
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.
major currencies, the euro has only
depreciated relative to the dollar. Investors
Effective exchange rate index – based to 100
Switzerland
Japan
130
tend to think that the recent appreciation of
the dollar and the strengthening of the US
110
economy will drive a recovery of eurozone
profit growth in 2015. We believe that this
90
widely-held idea is only partially true and
that the risk of disappointment is high. Our
70
calculations give us good reason to expect
that some other parts of Europe will benefit
Euro
Sweden
UK
05
06
07
08
09
10
11
12
13
14
Sources: Societe Generale Private Banking, Bloomberg. Data as at
25/11/2014.
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
We prefer non-eurozone
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
European equities.
see earnings per share growing by 10% in both countries.
Sales breakdown by stock market (%)
UK
Western
Europe
Rest of the World
North
America
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
SMI
FTSE 100
DAX
OMX
Topix
Euro Stoxx
50
Sources: Societe Generale Private Banking, Factset. Data as at 31/12/2013 (taken from annual reports).
December 2014
15
CAC 40
IBEX
Investment Strategy - Outlook 2015
Equity themes for 2015
2. Made in the USA
Competitive labour costs
The US economic recovery is back on track and near-term prospects are favourable. What is
and low energy prices
highlight the attractiveness
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
of the US manufacturing
sector.
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)
140
Other
Labour
Electricity
Natural gas
130
120
110
100
90
80
Brazil
Russia
South Korea
Taiwan
China
Mexico
Thailand
India
Indonesia
Australia
France
Belgium
Switzerland
Italy
Germany
Canada
Netherlands
Japan
United Kingdom
Spain
60
United States
70
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).
December 2014
16
Investment Strategy - Outlook 2015
Equity themes for 2015
3. Eurozone dividends return to the spotlight
Low inflation and mediocre
economic growth highlight
the attractiveness of
sectors and stocks which
pay regular and increasing
dividends.
P/E : share price divided by
earnings per share.
Growth stocks are characterised by
relatively high valuation ratios
(price-to-book and price-toearnings), and by earnings growth
which is expected to be above the
market average and less sensitive
to economic cycles.
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 (%)
10.0
%
9.0
Dividend payers outperform when interest rates are low
10y US bond yield (inverted left hand scale, %)
1
9.1
2
7.4
8.0
1,6
S&P Aristocrats index vs S&P500 (rhs, x)
8.4
1,4
3
6.0
1,2
3.7
4.0
4
1
2.0
5
0.0
0,8
6
UK
US
Div idend Y ield
France
Div idend growth
Germany
Japan
Valuation ratio expansion
Sources: Societe Generale Private Banking, Datastream. Data from MSCI indexes, as at
13/11/2014.
7
0,6
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
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.
December 2014
17
Investment Strategy - Outlook 2015
Equity themes for 2015
4. Water scarcity: Blue gold
Water is set to become a
As the world’s population should reach 9 billion by 2050, and living standards and
vital physical commodity,
and the necessary
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
transformation of the water
industry offers investors
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
many opportunities.
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
An area is experiencing water
stress when annual water supplies
3
drop below 1,700m per person.
When annual water supplies drop
3
below 1,000m per person, the
population faces water scarcity,
3
and below 500 m absolute water
scarcity.
Source: United Nations Website.
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. Water remains underpriced, and stricter regulation
and market pricing would help manage 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)
300
250
200
150
100
50
2004
2005
2006
2007
S&P Global Water
2008
2009
2010
Stoxx 600
Sources: Societe Generale Private Banking, Datastream. Data as at 27/11/2014.
December 2014
18
2011
2012
2013
2014
MSCI World
Investment Strategy - Outlook 2015
Alternatives
Hedge funds: The importance of managing risk
We favour Equity MarketNeutral strategies, which
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
are less dependent on
market direction but which
equities, and where we identify the broadest range of opportunities for managers.
require high-quality risk
management.
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.
December 2014
19
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
Declining demand
continues to weigh on
gold’s safe-haven
appeal.
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
(tonnes)
1500
(USD/oz)
2000
1800
1300
1600
1100
1400
900
1200
700
1000
500
800
600
300
400
100
Central banks
Technology
Investment
Jewellery
Gold price (rhs)
200
0
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
-100
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 4year lows. Abundant supply continues to outpace demand – the International Energy Agency
After a 30% decline since
June, we believe oil
prices may fall even
further in the short term
before beginning to
stabilise.
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.
December 2014
20
Investment Strategy - Outlook 2015
Alternatives theme for 2015
German residential real estate
News about the German economy over the past few months has hardly been reassuring.
High demand and short
supply have led to a
sharp increase in
German property prices
this year. However,
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.
residential housing in
Germany still looks
High demand and short supply have led to a sharp increase in German property prices and
affordable compared
with London and Paris.
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
German real estate
companies can
potentially offer high and
sustainable dividends.
yield.
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 realestate investment.
rents this year, with housing in some cities becoming 10% more expensive. In response to
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.

Past performance should
not be seen as an
indication of future
performance. Invesmtnets
House prices (rebased to 100) and interest rates on residential mortgage loans (%)
and value of investments
and the income derived
100
you invest. The amount
paid out in dividends may
change each year, and
there is no guarantee that
6
5
120
110
may be at risk and you may
not get back the amount
%
130
may be subject to market
fluctuations and the price
from them can go down as
well as up. Your capical
Income will grow gradually thanks to rents that should remain on an upward trend in
Germany.
4
3
2
90
80
2006
1
0
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)
Sources: Societe Generale Private Banking, Bloomberg. Data 20/11/2014.
dividends will be paid out.
December 2014
21
Follow-up on convictions
Open strategies
Inception
date
Conviction
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
EUR
5.5%
5.1%
13.7%
Open
Tactical
EUR
1.9%
3.3%
6.6%
Open
Tactical
12/09/2014
Eastern Europe back in the game
We recommend switching from European value to USD-exposed
growth stocks
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
12/09/2014
CUR
Perf. since
Perf. over the
YTD
Status
inception (%) past 3m (%) perf. (%)
Time
horizon*
* Strategic: 1-3 years. Tactical: 3-12 months
Sources: Societe Generale Private Banking, Datastream. Data as at 25/11/2014.
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.
Past performance should
German stocks – Rocket-borne: While we still believe that German stocks are the most
not be seen as an
indication of future
attractively valued in the eurozone, our concerns related to deflation risks drive our decision to
performance. Investments
may be subject to market
fluctuations and the price
and value of investmens
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.
and the income derived
from them can go down as
The dividend edge: There are many reasons why dividend-paying stocks should be favoured
well as up. Your capital
may be at risk and you may
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
not get back the amount
you invest.
steadily over the years. We therefore close the dividend edge strategy and open a new one,
“Eurozone dividends return to the spotlight”.
over non-dividend stocks, and why dividends should generally be seen as offering some
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
Sources: Societe Generale Private Banking, Datastream. Data as at 25/11/2014.
December 2014
22
Investment Strategy - Outlook 2015
Global economic forecasts
GDP and CPI forecasts
GDP and CPI forecasts
% changes yoy
2013
Real GDP (f: forecast)
2014f
2015f
CPI
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
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
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
Developed countries
Emerging countries
* PPP: Purchasing Power Parity
Source: SG Cross Asset Research / Economics, IMF (data published on 25 November 2014)
Forecast figures are not a reliable indicator of future performance.
December 2014
23
Market performance
Developed markets performance
(in local currency)
1m total return
3m total return
YTD total return
12m total return
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%
1m total return
3m total return
YTD total return
12m total return
2.61%
Source: Societe Generale Private Banking, Bloomberg, Datastream (data as at 25/11/2014)
Emerging markets performance
(in USD)
Current level
MSCI EM
1009
2.59%
-6.62%
3.32%
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%
Source: 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
Forecast figures are not a reliable indicator of future performance.
December 2014
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Investment Strategy - Outlook 2015
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
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%
Source: Source: Societe Generale Private Banking, Bloomberg, Datastream. Data as at 25/11/2014.
10-year yield
Source: Source: Societe Generale Private Banking, Bloomberg, Datastream. Data as at 25/11/2014.
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
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
Source: Societe Generale Private Banking, Bloomberg, Datastream. Data as at 25/11/2014.
Equities
Source: Source: 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
Forecast figures are not a reliable indicator of future performance.
December 2014
25
Important disclaimer
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December 2014
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Investment Strategy - Outlook 2015
to any use of this document or its content. Employees of Societe Generale Group, and more particularly of Societe Generale Private Banking
division, offer no implicit or explicit guarantees as to the accuracy or exhaustivity of the information or as to the profitability or performance of the
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The historical data, information and opinions provided herein have been obtained from, or are based upon, external sources that Societe
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