SocGen Jan 2019 Conference

It’s been a great QE ride. It’s r ide. But don’t look down! 1

A SEASONA SEA SONAL L WAY OF MA MAK K ING PREDICTIONS PREDICTIONS

Source: Twitter

2

ICE A GE PERFORMA PERFORMANCE NCE : B ONDS CATCH CATCH UP

Source: Datastream

3

HOW ICE AGE DE-RATING WORKED IN JAPAN

Source: Datastream

4

QE HAS INTERRUPTED EQUITY ICE AGE DE-RATING

Source: Datastream

5

CENT CE NTRAL RAL BANK BA NK QE QE UN UNWI WIND ND – WHAT IMPA IMPA CT?

Source: Zero Hedge, Deutsche Bank

6

TOT OTA A L CENTRAL CENTRAL B ANK QE TUR TURNS NS INT INTO QT THI THIS S YEAR YEAR

Source: Datastream

7

FED BALANCE SHEET UNWIND HAS ONLY JUST STARTED!

Source: St Loui s Fed

8

VA L UATION: FORWA FORWA RD PE

Source: Datastream

9

THE FED HAS TIGHTENED MORE THA THA N RATES SUGGEST SUGGEST 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

Recession Reces sion period period Cum Changes in Effective Fed Funds Rate since last rate trough Attrib Attributa utable ble to QE suspension suspension (shadow rate) rate)

10

Source: SG Quant, Quant, using shadow Fed Funds from Wu, J C and Xia, F D (2016 (2016)) methodolo gy

THE FED HAS TIGHTENED MORE THA THA N RATES SUGGEST SUGGEST 20.0 15.0 10.0 5.0 0.0 -5.0

Rec ess i o n p er i o d s Shado Shado w Fed Fed Fund s Rate Rate

Ef f ec t i v e Fed Fu n d s Rat e

Source: SG Quant, Quant, using shadow Fed Funds from Wu, J C and Xia, F D (2016 (2016)) methodolo gy

11

CYCLICALL CYCLICAL LY A DJ DJUST USTED ED PRIMA PRIMA RY BAL BA L A NCE (% OF GDP) GDP)

Source: Datastream

12

CHANGE CH ANGE IN CY CYL L ADJ PR PRIM IMARY ARY BA BALA LANC NCE E (% (% OF GD GDP) P)

Source: Datastream

13

TAILWINDS BECOME HEADWINDS

Source: Zero Hedge, Goldman Sachs

14

GLOBAL PMI PMI SLO SLOWI WING NG - IN LINE WI WITH TH BA BASE SE ME MET TAL ALS S

Source: Datastream

15

IT’S THE CYCLE STUPID

Source: Hedgeye

16

IMF WOR WORLD LD GRO GROWTH WTH FORE FORECASTS CASTS LOOK L OOK OPTIMIST OPTIMISTIC IC

Source: Datastream

17

CEOS NOT VER VERY Y CONFID CONFIDENT ENT!!

Source: Datastream

18

TITLE

Source: Advisor Perspectives

19

10Y US B OND: CROSS CROSSED ED B ACK BELOW B ELOW TREN TREND D

Source: SG Technicals

20

AL A L L FED TIGHTENING EXPECTED EXPECTED IN 2019 HAS GONE!

Source: Datastream

21

CURVE STEEPING PRECEDES RECESSION!

Source: Datastream

22

CURVE STEEPENING PRECEDES PAYROLL UNWIND

Source: Datastream

23

J OBS GROWTH CAN SPIKE JUST J UST A HEAD OF RECESSIO RECESSIONS NS

Source: Twit ter, @LanceRoberts @LanceRoberts

24

NEGATIVE US 10Y LOOKS A SILLY FORECAST…FOR NOW!

Source: Datastream

25

“WHAT ARE THE TWO TOP ISSUES FACING THE EU NOW”? SPOT THE ODD ONE OUT

Source: YouGov Poll, April 201 2018 8

26

ITAL IT ALY’S Y’S TERRIBLE TER RIBLE PRODUCTIVITY PERFORMANCE

Source: FT, OECD

27

SCHOOL SCHO OL PERFORMANCE PERFORMANCE OF 15 YEAR OLDS: SCOR SCORE E REL TO AV

Source: FT, OECD

28

ITALY UNIT LABOUR COSTS STILL UNCOMPETITIVE 150

Euro area Germany

140

France

Spain 130

120

Italy Portugal

110

100

90 2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

Source: SG Econom Econom ics

29

10 YE YEARS ARS AGO ITA ITA LIA LIAN N UNEMP UNEMP WAS BELOW B ELOW GERMANY'S GERMANY'S

Source: Datastream

30

CURRENT 30%+ RATE OF ITA ITA L IA IAN N YOUTH UNEMPLOYMENT UNEM PLOYMENT IS NORMAL NORMALL LY A CYCLICAL CYCL ICAL PEAK

Source: Trading Trading Econo mics.com

31

ITA IT A L IAN YOUNG DISLIK DISLIKE E EU – EU – IN CONTRAST WITH FRANCE ETC

Source: Source: Polotico Magaz Magazine ine

32

BUT IT ITAL ALY’S Y’S POOR P OOR GDP HAS BEE B EEN N A RECE RECENT NT EVEN EVENT T

Source: Datastream

33

CYCLICAL LY A DJUSTED PE CYCLICALL EUROPE HAS DIVERGED ONLY SINCE THE 2011 CRISIS

Source: Datastream

34

REPORT CARD: HOW EURO-AREA COUNTRIES FARED ON VARIOUS CURRENCY-AREA METRICS

Source: Bloo mberg, As th e Euro Turns 20, a Look Back at Who Fared the Best. And Worst

35

CHINA: WATCH THE GROWTH GROWTH SQUID NOT THE SHARK

Source: Hedgeye

36

CHINA’S HARD LANDING HAS LONG BEEN PREDICTED

37

SLOWL SL OWLY Y IS THE THE KEY K EY WORD IN THE THE TITLE! TITL E!

Source: Twitter, @georgenmagnus1

38

CHINA’S RESERVES ARE SHRINKING AGAIN

Source: Datastream

39

40

CHINESE CHIN ESE INDUSTR INDUSTRIAL IAL PROFI PROFITS TS A RE FA FA L L ING A GAIN

Source: Zero Hedge

41

B L OOMBERG SAY SAY PROFITS PROFITS A RE FA FA R WEAKER WEAK ER

Source: Bloomberg, NBS

42

CHINA’S CHINA ’S MANUFACTURING PMI’S PM I’S SHOW CONTRACTION

Source: Datastream

43

CHINA’S HARD DATA EXPORTS SET TO SLUMP?

Source: Datastream

44

CHINA’S LABOUR MARKET IS STRUGGLING

Source: Datastream

45

CHINA’S Q4 BEIGE BOOK WAS DOWNBEAT

“China’s economy is deteriorating and risks heading for fo r a much much wea weaker ker 2019 as ple plentif nt iful ul borro bo rrowi wing ng by state and private firms is failing to boost growth” "Se "Servic rvice es and reta retail ilin ing g foll follow owe ed manufacturing’s sluggish pace with both recording double-digit drops in profit growth. Sales revenue in services also faded sharply, with retail not far behind. Overall weakness hit the jobs market, too, with hiring falling for the first time since early 2016 said the report.” report. ” “China Beige Book Says Plentiful Borrowing Fails to Boost Growth” Bloomberg, 27 December 2018

46

WE NEED OUR INVESTMENT INVESTMENT SAFETY GOGGLES GOGGL ES

Source: Twitter

47

January 2019

NO MORE EASY MONEY!

And rew Lap th or ne

Phone: +44 20 7762 5762

Societe Generale (“SG”) does and seeks to do business business with companies companies covered covered in its research research reports. reports. As a result, result, investors investors should should be aware aware that SG may have a confli conflict ct of intere interest st that that could could affect affect the objec objectiv tivity ity of this this report report.. Invest Investors ors shoul should d consid consider er this this report report as only only a single single facto factorr in makin making g their their inves investme tment nt decision. PLEASE SEE APPENDIX AT THE END OF THIS REPORT FOR THE ANALYST(S) CERTIFICATION(S), IMPORTANT IMPORTANT DISCLOSURES AND DISCLAIMERS. ALTERNATIVELY, ALTERNATIVELY, VISIT OUR GLOBAL RESEARCH RESEARCH DISCLOSURE WEBSITE

FROM 2012-2016 VA VA L UATION CHANGE WAS THE KEY K EY DRIVER Valuation change (12m PE), earnings and MSCI World price index i ndex to 100

Peak QE!

Source: SG Cross Asset Research/Equity Quant, MSCI

THIS BULL MARKET HAS UNUSUALLY BEEN DRIVEN BY VALUATION Five year rolling decomposition of MSCI World returns


IN EUROPE IT IS EVEN WORSE. Five year rolling decomposition of EUROPE World returns


EUROPEAN EQUITY MARKETS ARE LOSING THEIR RELEVANCE. Profit and market capitalisation share by region in MSCI MSCI All Country World

20.0

Market capitalisation

24

Earnings

20

16.0

16

12.0

12 8

8.0

4.0

4

Eurozone Japan China UK

0.0 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 9 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 - - - - - - - - - - - - - - - - - - - - c c c c c c c c c c c c c c c c c c c c c e e e e e e e e e e e e e e e e e e e e e D D D D D D D D D D D D D D D D D D D D D


0 -4 -8

Eurozone Japan China UK 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 9 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 - - - - - - - - - - - - - - - - - - - - c c c c c c c c c c c c c c c c c c c c c e e e e e e e e e e e e e e e e e e e e e D D D D D D D D D D D D D D D D D D D D D

AVERAGE COMPA COMPA NY SIZE PER PER REGION Yes US US companies are bigg er than Europ ean ean com panies but this thi s w as the case in 1999 1999 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0

8 9 c e D

0 0 c e D

2 0 c e D

4 0 c e D

Wo rl d Source: SG Cross Asset Research/Equity Quant, MSCI

6 0 c e D

J ap an

8 0 c e D

US

0 1 c e D

UK

2 1 c e D

Eu roz o ne

4 1 c e D

6 1 c e D

8 1 c e D

MEDIAN STOCK VA LUATIONS ARE NOT PA PA RTICU RTICUL L A RL RLY Y CHEAP Median reported PE ratios for MSCI US, Japan and Europe 28.0 26.0

US Europe

24.0

Japan

s 22.0 g n i n 20.0 r a E o 18.0 t e c 16.0 i r P d 14.0 e t r o p 12.0 e R

10.0 8.0

2 0 c e D

3 0 c e D

4 0 c e D

5 0 c e D

6 0 c e D


7 0 c e D

8 0 c e D

9 0 c e D

0 1 c e D

1 1 c e D

2 1 c e D

3 1 c e D

4 1 c e D

5 1 c e D

6 1 c e D

7 1 c e D

8 1 c e D

THE EFFECTS EFFECTS OF OF QE ON ON VAL UATI UATION ON HAS BEEN B EEN UNEVEN UNEVEN Forward PE of tw o global port folio s based on trailing 5 year year co rrelation to US bonds. 22.0 20.0 E P 18.0 n a i d e M16.0 d r a w r 14.0 o F

12.0 Stocks with the highest NEGATIVE c orrelation orrelation to bonds

10.0

Stocks with the h ighest POSITIVE correlation to bonds 8.0

3 0 c e D

4 0 c e D

5 0 c e D

6 0 c e D

7 0 c e D

8 0 c e D

9 0 c e D

0 1 c e D

1 1 c e D

2 1 c e D

3 1 c e D

4 1 c e D

5 1 c e D

6 1 c e D

7 1 c e D

8 1 c e D

Source: SG Cross Asset Research/Equity Quant

EFFECT OF QE WILL CHANGE THE BOND EQUITY CORRELATION “Bond Proxy” stocks now bigger the more cyclical assets. 30.0 Stocks with the highest NEGATIVE correlation to bonds

28.0

Stocks with the highest POSITIVE correlation to bonds

26.0 p a C t e k r a M d l r o W f o %

24.0 22.0 20.0 18.0 16.0 14.0 12.0

3 0 c e D

4 0 c e D

5 0 c e D

6 0 c e D

7 0 c e D

8 0 c e D

9 0 c e D

0 1 c e D

1 1 c e D

2 1 c e D

3 1 c e D

4 1 c e D

5 1 c e D

6 1 c e D

7 1 c e D

8 1 c e D


THE EFFECTS EFFECTS OF OF QE ON ON VAL UATI UATION ON HAS BEEN B EEN UNEVEN UNEVEN Forward PE of Global Quality versus Global Value 23 21 19 17 E P15 d r a w r o13 F

11 9 7 5

Quality

0 9 c e D

1 9 c e D

2 9 c e D

3 9 c e D

4 9 c e D

5 9 c e D

6 9 c e D

7 9 c e D

8 9 c e D

Value

9 9 c e D

0 0 c e D

1 0 c e D

2 0 c e D

3 0 c e D

4 0 c e D

5 0 c e D

6 0 c e D

7 0 c e D

8 0 c e D

9 0 c e D

0 1 c e D

1 1 c e D

2 1 c e D

3 1 c e D

4 1 c e D

5 1 c e D

6 1 c e D

7 1 c e D

8 1 c e D


LONG/SHORT FACTOR PERFORMANCE IN 2018 Value suffered suffered i n H1 201 2018, 8, but held up in H2 when Growth factors stru ggled 1.30 1.25

Value

1.20

Quality

e c n1.15 a m r o1.10 f r e P 1.05 e v i t a1.00 l e R

Growth

0.95 0.90 0.85

7 8 1 - 1 c n e a D J

8 1 n a J

8 1 b e F

8 1 b e F

8 8 8 8 8 8 8 1 1 1 1 1 1 - 1 r r r r y n a a p p y a a u M M A A M M J


8 1 n u J

8 1 n u J

8 1 l u J

8 1 l u J

8 8 8 8 8 8 8 8 8 8 8 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 t v v v c c g g p p c t c o o o e e u u e e A A S S O O N N N D D

SPIKE IN US BONDS BROKE BROK E THE BACK BA CK OF THE GROWTH GROWTH RALL RAL LY 3.30

1.20 1.15

3.10

1.10 1.05

2.90

1.00 2.70

0.95 0.90

2.50

US bond yield y ields s

0.85

long/short US Growth vs v s Quality Quality

0.80

2.30

0.75 2.10 De c-1 7

Fe b- 18


Ap r-18

J un -18

Au g-1 8

Oct-18

0.70 De c-1 8

VAL UE + BONDS B ONDS IS A BETTE B ETTER R MIX THAN EQUITIES + BONDS 195 190 185 180 175 170 165 160 155 150 145 140 135 130 125 120 115 110 105 100 95

US bonds (95%) + Global Equity (5%) US bonds (95%) + SGVB Value (5%) US Bonds

3 0 b e F

4 0 b e F

5 0 b e F

6 0 b e F

7 0 b e F

8 0 b e F

9 0 b e F

0 1 b e F

1 1 b e F

2 1 b e F

3 1 b e F

4 1 b e F

5 1 b e F

6 1 b e F

7 1 b e F

Source: SG Cross Asset Research/Equity Quant, FactSet Note: Past performance is not indicative of of future performance. Portfolio presented assumes no transaction costs. For additional details on portfolio performance please contact us.

8 1 b e F

VAL ALUE UE + BONDS B ONDS DRAWDOWN DRAWDOWN BETTER B ETTER THAN EQUITIES + BONDS


ADDING J UST A LITTL LI TTLE E BIT B IT OF VAL VALUE UE TO THE 60/40 PORTFOLIO PORTFOL IO


WHEN IT COMES TO VALUE, VALUATION REALLY MATTERS!

(global, long-short, 1990-2016, %)

(global, long-short, 1990-2016, %)

14.0

15.0

12.0

10.0

10.0 5.0

8.0

0.0

6.0 4.0

-5.0

2.0 -10.0 0.0 -15.0

-2.0 Total Return

Price Return

Y ield

Valuat ion

Growt h

Fx

Total Return

Price Return

Y ield

Valuat ion

Growt h

Fx



WHEN VALUE IS REALLY CHEAP, PERFORMANCE IS VERY STRONG 12m 12m r elative elative perfor mance based based on starting absolute valuation 14 12

Si nce 20 09

Si nce 19 99

Si nce 1989

) % ( 10 n r u t e r 8 e v i t a l e 6 r d e s i l 4 a u n n A 2

0 1

2 3 4 5 6 7 8 9 Ranked absolute valuation of the Value Value factor (1=cheapest, (1= cheapest, 10=most 10=mos t expensive)

10


VA L UE STRATEGIES DO NOT ALW A LWAYS AYS SUFFER DURING A CRISIS Fama-French US Value (L/S) performance during periods of market distress (i.e. SP 500 drawdowns >10%), 1926-2018


Note: Past performance is not indicative indicative of future performance. Portfolio presented assumes no transaction costs. For additional details on portfolio performance please contact us.

UNDERST UNDER STA A NDAB NDABL L E COMPA COMPA RISON TO THE THE TECH BUBBL BUB BL E Comparing the forw ard PE PE of a Value portf olio versus it volatili ty 15

0

14 10

13 12

20

11 10

30

9 40

8 7

Value PE 90d realised volatility (inverted)

50

6 5

Source: SG Cross Asset Research/Equity Quant, FactSet

60

PERFORMANCE OF VALUE AROUND US INTEREST CYCLE Value perform ance in t he US sin ce 1965 1965 aroun d th e US US interest r ate cycle 15%

10%

All Cycles Cycle s Excluding Excluding DOTCONM Crisis Excluding DotCom & 2007 crisis

5%

0%

-5%

2 1 0 9 h 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 - 8 - 7 - 6 - 5 - 4 - 3 - 2 - 1 - t 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 n - - o M k a e P

-10% Source: SG Cross Asset Research/Equity Quant, FAMA and French

LARGE EQUITY MARKET MOVES TEND TO HURT EQUITY MARKETS Perfor Perfor mance of th e S&P S&P 500 500 ranked in o rder of daily absol ute pric e moves 30.0 s n r u t 25.0 e r e t u l o20.0 s b a y b d15.0 e k n a r

Smallest absolute daily price moves

Biggest absolute daily price moves

e10.0 c n a m r o 5.0 f r e P

0.0 % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % 0 3 5 8 0 3 5 8 1 3 6 8 1 4 6 9 1 4 6 9 2 4 7 9 2 4 7 0 2 5 7 0 2 5 8 0 3 5 8 1 1 1 1 2 2 2 2 3 3 3 3 4 4 4 4 5 5 5 5 6 6 6 7 7 7 7 8 8 8 8 9 9 9 9 Abs A bs ol ut e

Source: SG Cross Asset Research/Equity Quant, S&P

daily ranked performance in percentiles

VALUE PERFORMANCE IS CONCENTRATED IN EXTREME MOVES Perfor Perfor mance of Value Value ranked ranked in o rder of daily absolu te price moves 30.0 s n r u t 25.0 e r e t u l o20.0 s b a y b d15.0 e k n a r

Smallest absolute daily price moves

Biggest absolute daily price moves

e10.0 c n a m r o 5.0 f r e P

0.0 % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % 0 3 5 8 0 3 5 8 1 3 6 8 1 3 6 8 1 4 6 9 1 4 6 9 2 4 7 9 2 4 7 0 2 5 7 0 2 5 8 1 1 1 1 2 2 2 2 3 3 3 3 4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 8 8 8 8 9 9 9 9 Abs A bs ol ut e

Source: SG Cross Asset Research/Equity Quant,

daily ranked performance in percentiles

60% OF GLOBAL STOCKS ARE IN A BEAR MARKET Percentage of FTSE World stocks down 20% or more from 2 year highs 100

80 % 0 2 n 60 w o d s k c o t s 40 f o %

20

0 1 987 1 98 8 1 99 0 199 2 1 994 1 99 6 1 99 8 2 00 0 200 2 2 004 2 006 2 00 8 201 0 2011 2 01 3 2 01 5 2 01 7

Source: SG Cross Asset Research/Equity Quant, FTSE

IN A RECESSION 1 IN 4 STOCKS LOSE 50% OR MORE! Percentage of FTSE World stocks down 50% or more from 2 year highs 80

60

% 0 5 n w o d s40 k c o t s f o %

20

0 1 98 7 198 8 1 990 1 99 2 1 99 4 1 99 6 199 8 2 00 0 2 00 2 2 00 4 200 6 2 008 2 010 2 01 1 2 01 3 2 015 2 017

Source: SG Cross Asset Research/Equity Quant, FTSE

US DOESN’T LOOK SO GREAT WHEN YOU MEASURE DECLINERS Percentage of stocks down 50% or more from 2 year highs by index 80

Europe 60 s k c o t s40 f o %

US (S&P 1500) US (S&P 500)

20

0 199 5 1 99 6 1 99 7 1 99 9 2 00 0 2 00 2 2 003 2 00 4 2 006 2 00 7 2 009 2 01 0 201 2 2 01 3 2 01 4 2 01 6 2 01 7

Source: SG Cross Asset Research/Equity Quant, FTSE, S&P

WHAT WHA T DOESN’T GO UP MAY NOT GO DOWN AS MUCH! Post-crisis European stocks have really suffered Equal-weighted company performance by region in local currency 350 300 250 200 150 100 50

8 9 c e D

0 0 c e D

2 0 c e D

4 0 c e D

US Source: SG Cross Asset Research/Equity Quant, MSCI

6 0 c e D

UK

8 0 c e D

Eurozo ne

0 1 c e D

2 1 c e D

Jap an

4 1 c e D

6 1 c e D

8 1 c e D

QE YEARS SAW A SIGNIFICANT BUILD UP IN US CORPORATE DEBT 30.0 25.0 20.0 15.0 10.0 5.0 0.0 -5.0 -10.0

YoY growth in Net Debt (%)

-15.0

YoY growth in Gross Cashflow (%)

-20.0

0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 - 9 - 9 - 9 - 9 - 9 - 9 - 9 - 9 - 9 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 c c c c c c c c c c c c c c c c c c c c c c c c c c c c c e e e e e e e e e e e e e e e e e e e e e e e e e e e e e D D D D D D D D D D D D D D D D D D D D D D D D D D D D D


PEAK LEVERAGE LE VERAGE AT AT THIS POINT IN CYCLE IS I S HIGHLY UNUSUAL US non-financial leverage ratios 30

60 Debt % Assets

28 ) % ( s 26 t e s s a l 24 a t o t o t t b 22 e D

Debt % Equity

) % 50 ( y t i u q 45 E o t t b e 40 D

20

18

55

35

30

8 8 9 9 0 0 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 0 0 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 - 9 - 9 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 9 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 c c c c c c c c c c c c c c c c c c c c n n n n n n n n n n n n n n n n n n n n n c u e u e u e u e u e u e u e u e u e u e u e u e u e u e u e u e u e u e u e u e u e J D J D J D J D J D J D J D J D J D J D J D J D J D J D J D J D J D J D J D J D J D

Source: SG Cross Asset Research/Equity Quant, Company Report and Accounts

US CORPORA CORPORATE TE DEBT NEVER BEEN THIS HIGH 50

45

40

35

30

25

20

US Corporate Debt as % of US GDP

1 3 5 7 9 1 3 5 7 9 1 3 4 6 8 0 2 4 6 8 0 2 4 6 7 9 1 3 5 7 9 1 3 5 7 6 7 9 9 1 1 5 - 6 - 8 - 0 - 6 - 7 - 8 - 9 - 1 - 5 - 6 - 8 - 9 - 0 - 1 - 5 - 5 - 5 - 6 - 7 - 7 - 8 - 8 - 9 - 0 - 0 - 0 - 7 - 9 l l l t t r r r r b r b r b c v t c v c v y y y p g p g p g n n n n n u u u c c c a a a e o u a p u a p e u J u a p e u e u e a e o e a e o e J M A M F J D N O S A J J M A M F J D N O S A J J M A M F D N O S A

Source: SG Cross Asset Research/Equity Quant, Thomson Reuters Datastream

GROSS BUYB BUYBACKS ACKS FOR FOR THE THE S&P 1500 800 700 Total market 600 Total ex-fina ex -financial ncial 500 n b

400

D S U

300 200 100 0

5 9 c e D

6 9 c e D

7 9 c e D

8 9 c e D

9 9 c e D

0 0 c e D

1 0 c e D

2 0 c e D

3 0 c e D

4 0 c e D


5 0 c e D

6 0 c e D

7 0 c e D

8 0 c e D

9 0 c e D

0 1 c e D

1 1 c e D

2 1 c e D

3 1 c e D

4 1 c e D

5 1 c e D

6 1 c e D

7 1 c e D

8 1 c e D

WE KNOW WHERE ALL THE DEBT WENT! S&P 1500 non-financial net buybacks versus change in net debt 550000

Overseas cash repatriation 450000

350000

n m D S U

Net Buybacks

Change in Debt

250000

150000

50000

-50000

-150000

0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 - 9 - 9 - 9 - 9 - 9 - 9 - 9 - 9 - 9 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 c c c c c c c c c c c c c c c c c c c c c c c c c c c c c e e e e e e e e e e e e e e e e e e e e e e e e e e e e e D D D D D D D D D D D D D D D D D D D D D D D D D D D D D


THE GOOD NEWS IS THAT QE HELPED BOOST WAGES! Percentage Percentage of quarterly bu ybacks used for o ption issu ance – expect a pic k up in Q1 2019 2019 45 40 e c n a35 u s s i n30 o i t p o r 25 o f d e s20 u s k c a b15 y u b f 10 o %

5 0


CREDIT RISK AND EQUITY VOLATILITY IS THE SAME THING 1.00 19 0.90

Cross sectional stock volatility (60d)

17

0.80

15

0.70

High Yield Credit Spreads (r.h.scale)

13

0.60

11

0.50

9

0.40

7

0.30

5

0.20

3

0.10

3 0 c e D

4 0 c e D

5 0 c e D

6 0 c e D

Source: SG Cross Asset Research/Equity Quant, Factset

7 0 c e D

8 0 c e D

9 0 c e D

0 1 c e D

1 1 c e D

2 1 c e D

3 1 c e D

4 1 c e D

5 1 c e D

6 1 c e D

7 1 c e D

1

8 1 c e D

LEVERAGE BY REGION


REGIONAL BALANCE SHEET PERFORMANCE Long/short balance sheet performance based on Merton’s distance to default


THE BUILD-UP OF US US SMAL SMALLCA LCAP P DEBT IS SIGN SIGNIFI IFICANT CANT Russell 2000 non-financial net-debt & ebitda 500

400 Ne t De bt

EBI TDA

n l B 300 $ S U

200

100

0 2 0 c e D

3 0 c e D

4 0 c e D

5 0 c e D

6 0 c e D

7 0 c e D

8 0 c e D


9 0 c e D

0 1 c e D

1 1 c e D

2 1 c e D

3 1 c e D

4 1 c e D

5 1 c e D

6 1 c e D

7 1 c e D

THE BIGGEST B IGGEST US COMPANIES COMPANIES ARE DISGUIS DISGUISING ING PROBLEMS PROBL EMS ELSEWHERE Interest Interest cover by market capitalisation s egment egment – US non-financial 18 16

Biggest 10% Next 10%

14

) x ( r 12 e v o c10 t s e r e 8 t n i T I 6 B E

Bottom 50% Average

4 2 0

8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 - 9 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 c c c c c c c c c c c c c c c c c c c c c e e e e e e e e e e e e e e e e e e e e e D D D D D D D D D D D D D D D D D D D D D


SHORT-INTEREST BY MERTON QUINTILE IN THE RUSSELL 2000 Good Balance Sheets 2 3 4 Bad Balance Sheets

15.0 14.0 13.0 12.0 ) 11.0 % ( t 10.0 s e 9.0 r e t n 8.0 i t r 7.0 o h S 6.0

5.0 4.0 3.0 2.0

5 0 c e D

6 0 c e D

7 0 c e D

8 0 c e D

Source: SG Cross Asset Research/Equity Quant, Factset

9 0 c e D

0 1 c e D

1 1 c e D

2 1 c e D

3 1 c e D

4 1 c e D

5 1 c e D

6 1 c e D

7 1 c e D

8 1 c e D

STRONG BALANCE SHEET PERFORMANCE IN US SMALLCAP 125

120

Best Balance Sheets vs Equal-weighted index Best Balance Sheets vs Russell 2000 index

115

110

105

100

95

6 1 c e D

7 1 n a J

7 1 b e F

7 7 1 1 r r a p M A

7 7 1 - 1 y n a u M J

7 1 l u J

7 1 g u A

7 1 p e S

7 1 t c O

7 1 v o N

7 1 c e D

8 1 n a J

8 1 b e F

8 8 1 1 r r a p M A

8 8 1 - 1 y n a u M J

8 1 l u J

8 1 g u A

8 1 p e S

8 1 t c O

8 1 v o N


8 1 c e D

THERE IS IS ANOTHER PL PL A CE WHERE BAL BA L ANCE SHEET RISK RISK IS HIGH HIGH Long/short balance sheet sheet ris k in the UK FTSE FTSE 350 350

1.9 1.7 1.5 1.3 1.1 0.9 0.7 0.5

3 0 c e D

4 0 c e D

5 0 c e D

6 0 c e D

7 0 c e D

8 0 c e D

9 0 c e D

0 1 c e D

1 1 c e D

2 1 c e D

3 1 c e D

4 1 c e D

5 1 c e D

6 1 c e D

7 1 c e D


8 1 c e D

JUNK BONDS & QUALITY EQUITY INCOME (SGQI) HAVE BEEBN HIGHLY CORRELATED Total returns indexed to 100 100

250.0 230.0 210.0

SG Quality Income Index IBOXX High Yield Corporate Bonds

190.0 170.0 150.0 130.0 110.0 90.0

9 9 0 0 0 0 1 1 1 1 2 2 2 2 3 3 3 3 4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7 8 8 0 - 0 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 g v b y g v b y g v b y g v b y g v b y g v b y g v b y g v b y g v b y u o e a u o e a u o e a u o e a u o e a u o e a u o e a u o e a u o e a A N F M A N F M A N F M A N F M A N F M A N F M A N F M A N F M A N F M

Source: SG Quantitative Research/ Equity Quant, Bloomberg Note: Past performance is not indicative of future performance. performance. Portfolio presented assumes no transaction costs. For additional details on portfolio performance performance please contact us.

FINALLY GETTING SOME MORE QUALITY INCOME NAMES TO BUY Scarcity of hig h quality stocks at 4% dividend yields (FT World World ex financial universe) 7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 8 - 9 - 9 - 9 - 9 - 9 - 9 - 9 - 9 - 9 - 9 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D

WITH A GROWING DIVIDEND, DIVIDEND, QUALITY QUALITY EQUITY INCOME INCOME EASILY EASILY BEATS JUNK BONDS

Source: SG Quantitative Research/ Equity Quant, FactSet. Note: Past performance is not indicative of future performance. performance. Portfolio presented assumes no transaction costs. For additional details on portfolio performance performance please contact us.

CONCLUSIONS

1. Without QE expensive equity valuations will come under pressure. 2. Value Value stocks did not benefit from QE and are cheap, but risks remain 3. Value is the better hedge to rising bond yields than equity. 4. Value Value performance is during extreme events. 5. Corporate leverage is the biggest risk facing investors today. today. 6. US Smallcap Smallcaps s will be in the the eye of the the storm. storm. 7. Quality Income is the better alternative to credit.

APPENDIX

All pricing information included in this report report is as of market close, unless otherwise stated.

: The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an “as is” basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are service marks of MSCI and its affiliates or such similar language as may be provided by or approved in advance by MSCI.

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Inve Invest stmen ments ts in gene genera ral, l, and deri deriva vati tive ves s in part particu icula lar, r, invo involv lve e nume numero rous us risk risks, s, inclu includi ding ng,, among among other others, s, mark market et,, coun counte terp rpar arty ty defa defaul ultt and liqu liquid idity ity risk. risk. Trad Tradin ing g in opti options ons invol involves ves addit additio iona nall risk risks s and and is not not suita suitabl ble e for for all all inve invest stor ors. s. An optio option n may beco become me wort worthle hless ss by its its expi expira rati tion on date date,, as it is a depr depreci eciat atin ing g asse asset. t. Op titi on on o wn wn er ers hi hi p c ou ou ld ld r es es ul ul t i n s ig ig ni ni fific an ant l os os s o r ga in in , e sp sp ec ec ia ia llll y f or or o pt pt io io ns ns o f un he he dg dg ed ed p os os itit io io ns ns . P rrii or or t o bu yi yi ng ng or s el el lili ng ng a n o pt pt io io n, n, i nv nve st st or ors m us us t re vi vi ew ew t he he "Chara "Characte cterist ristics ics and Risks Risks of Standa Standardi rdized zed Options Options"" at http://www.o http://www.optionsclearing.com/about/publications/character-risks.jsp ptionsclearing.com/about/publications/character-risks.jsp or from from your your SG repr represe esenta ntativ tive. e. Anal Analys ysis is of optio option n tradin trading g strateg strategies ies does does not conside considerr the cost of commiss commission ions. s. Suppor Supporting ting documen documentat tation ion for option options s tradin trading g strate strategie gies s is availab available le upon upon reques request. t.

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If you you are an accred accredit ited ed inves investo torr or expert expert inves investo tor, r, pleas please e be info informe rmed d that that in SG's SG's deali dealing ngs s with with you, you, SG is relyi relying ng on the the foll followi owing ng exem exempti ptions o ns to the the Finan Financi cial al Advisers Act, Cap. 110 (“FAA”): (“FAA”): (1) the the exemp exempti tion on in Regul Regulat atio ion n 33 of the the Finan Financi cial al Advis Advisers ers Regul Regulatio a tions ns (“FAR”), which which exemp exempts ts SG from from compl complyi ying ng with with Sect Sectio ion n 25 of the the FAA FAA on discl disclosu osure re of produ product ct inform informat atio ion n to clie client nts; s; (2) the the exemp exempti tion on set set out out in Regu Regula lati tion on 34 of the the FAR, FAR, which which exempt exempts s SG from from compl complyi ying ng with with Sect Sectio ion n 27 of the the FAA FAA on recom recomme mend ndat atio ions;and ns;and (3)the exemp exempti tion on setout in Regu Regula lati tion on 35 of the the FAR, FAR, which c h exem exemptsSG ptsSG from from compl complyi ying ng with with Sect Sectio ion n 36 of the the FAA FAA on discl disclosure o sure of certa certain in inter interes ests ts in secur securit itie ies. s. Notice to Hong Kong Investors: This report is distributed or circulated in Hong Kong only to “professional investors” as defined in the Securities and Futur es es Ordinance (Chapter 571 of the Laws of Hong Kong) (“SFO”). Any such professional investor wishing to discuss this report or take any action in connection with it should s hould contact SG Securities (HK) Limited. This report does not constitute a solicitation or an offer of securities or an invitation to the public w ithin the meaning of the SFO. Notice to Japanese Japanese Investors: Investors: This This public publicati ation on is distri distribut buted ed in Japan Japan by Societ Societe e Genera Generale le Secur Securiti ities es Japan Japan Limite Limited, d, which which is regula regulated ted by the Financ Financial ial Service Services s Agency Agency of Japan. Japan. This This docume document nt is inte intend nded ed only only for for the the Spec Specif ifie ied d Inve Invest stor ors, s, as defi define ned d by the the Fina Financ ncia iall Inst Instru rume ment nts s and and Exch Exchan ange ge Law Law in Japa Japan n and and only only for for thos those e peop people le to whom whom it is sent sent dire direct ctly ly by Soci Societ ete e Gene Genera rale le Secu Securi riti ties es Japan Japan Limi Limite ted, d, and and unde underr no circ circum umst stan ance ces s shou should ld it be forw forwar arde ded d to any any thir third d part party. y. The The prod produc ucts ts ment mentio ione ned d in this this repo report rt may may not not be elig eligib ible le for for sale sale in Japa Japan n and and they they may may not not be suit suitab able le for for all all types types of investo investors. rs. Notice Notice to Korean Korean Inves Investors tors:: This This report report is distri distribut buted ed in Korea Korea by SG Securi Securitie ties s Korea Korea Co., Co., Ltd which which is regula regulatedby tedby the Financ Financial ial Supervi Supervisor sory y Servic Service e and the Financ Financial ial Servic Services es Commis Commissio sion. n. Notice Notice to Austral Australian ian Inves Investor tors: s: Societ Societe e Gener Generale ale is exempt exempt from from the requir requireme ement nt to hold hold an Austra Australia lian n financ financial ial servic services es licenc licence e (AFSL) (AFSL) under under the Corpor Corporati ations ons Act 2001 2001 (Cth) (Cth) in respec respectt of financ financial ial service services, s, in relian reliance ce on AS ASIC IC Class Class Order Order 03/824 03/824,, a copy copy of which which may be obtain obtained ed at the web site site of the Austra Australia lian n Securi Securitie ties s and Invest Investmen ments ts Commis Commissio sion, n, http:/ http://ww /www.a w.asic sic.go .gov.a v.au. u. The class class order order exempt exempts s financ financial ial service services s provid providers ers with with a limite limited d connec connectio tion n to Austr Australi alia a from from the the requir requireme ement nt to hold hold an AFS AFSL L where where they they provid provide e financ financial ial servic services es only only to wholes wholesale ale client clients s in Austr Australi alia a on certai certain n conditi conditions ons.. Financ Financial ial servic services es provid provided ed by Societ Societe e Genera Generale le may be regula regulated ted under under foreig foreign n laws laws and regula regulator tory y requir requiremen ements,which ts,which are differ different ent from from the laws laws apply applying ing in Austra Australia lia.. N ot ot ic ic e t o In d ia ia n I nv nv es es t or or s: s: Soci Societ ete e Gene Genera rale le Glob Global al Solu Soluti tion on Cent Center er Pvt. Pvt. Ltd Ltd (SG (SG GSC) GSC) is a 100% 100% owne owned d subs subsid idia iary ry of Soci Societ ete e Gene Genera rale le,, SA, SA, Pari Paris. s. Soci Societ ete e Gene Genera rale le SA is auth author oris ised ed and and super supervis vised ed by the the Auto Autori rité té de Cont Contrô rôle le Prud Pruden enti tiel el et de Réso Résolu luti tion on (ACP (ACPR) R) and and regu regula late ted d by the the Auto Autori rité té des des Marc Marché hés s Fina Financ ncie iers rs (AMF (AMF). ). Anal Analys ysts ts empl employ oyed ed by SG GSC GSC do not not prod produc uce e rese resear arch ch coverin covering g securi securitie ties s listed listed on any stock stock exchan exchange ge recogn recognise ised d by the Securi Securitie ties s and Excha Exchange nge Board Board of India India (SEBI) (SEBI) and is not licens licensed ed by either either SEB SEBII or the Reserv Reserve e Bank Bank of India. India. http:/ http://ww /www.s w.sgci gcib.c b.com.Copyr om.Copyrigh ight: t: The Societ Societe e Genera Generale le Group Group 2019. 2019. All rights rights reserv reserved. ed. This This public publicati ation on may not be reprod reproducedor ucedor redist redistrib ribute uted d in whole whole in part part withou withoutt the prior prior consentof consentof SG or its affili affiliate ates. s.

SocGen Jan 2019 Conference

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