INVESTMENT STRATEGY & MARKETS INSIGHTS · January 2013. INVESTMENT STRATEGY & MARKETS INSIGHTS. RIDE THE WAVE. Kim March. Emerging Markets Strategist. ... but we assume the debt ceiling

MONTHLY EDITION

January 2013

INVESTMENT STRATEGY & MARKETS INSIGHTS

RIDE THE WAVE

Kim MarchEmerging Markets StrategistSociété Générale Private [email protected]

Claudia PanseriEquity StrategistSociété Générale Private [email protected]

Ollivier CourcierFixed Income Head & StrategistSociété Générale Private [email protected]

Xavier DenisChief EconomistSociété Générale Private [email protected]

2

TABLE OF CONTENTS

GLOBAL STRATEGY VIEWS

GLOBAL ASSET ALLOCATION

MACRO OUTLOOK: DEVELOPED MARKETS

MACRO OUTLOOK: EMERGING MARKETS

INVESTMENT VIEWS BY REGIONS

US 7

Eurozone 8

United Kingdom 9

Japan 10

Asia 11

Latin America 12

CEEMEA 13

FOREX

COMMODITIES

3

4

5

6

14

15

INVESTMENT STRATEGY & MARKET INSIGHTS

3

RIDE THE WAVE

The forces driving risky assets’ performance are now in place: world economic growth is finally strengthening while monetary policies remain easy. In the US, economic data has recently surprised on the upside and it should continue to do so as visibility on fiscal policy has improved post fiscal cliff agreement. The US consumer is expected to remain resilient, driven by income/employment gains and the housing recovery, and capital investments may soon start rising. A battle between the Obama Administration and House Republicans looms, but we assume the debt ceiling will be increased by early March. In the Euro area, negative German GDP growth may be the catalyst for less fiscal tightening, paving the way for a timid recovery in business activity. In Asia, Chinese exports and imports have strengthened with the region as a whole benefiting from the revival in external and internal demand. In Japan, the announced fiscal stimulus program will likely drive up economists’ and strategists’ expectations about GDP and profit growth. Finally, for now, inflation does not represent a risk, allowing central banks in developed and emerging markets to maintain and easy policy stance and in some case to cut rates further (i.e., India, Korea). On the corporate side, profit recovery is underway. Earnings in the Eurozone and Japan are expected to grow by 8% and c.15%, respectively, this year, after two years of contraction. In the US, profit growth should be flat or slightly up (c.5% according to our forecasts). That said, as bond prices erode and equity prices keep grinding higher, we expect to see a reverse in fund flows out of sovereign bonds mainly into equities and high yield bonds.

In this context, we continue to favor risky assets, namely equities and high yield bonds vs. sovereign and now investment grade corporate bonds.

By asset class, within the equity universe, we continue to prefer Euro-zone and Japan to other developed markets (including the US and UK). In emerging we Overweight Asian equities (especially Korea, Taiwan and China) versus Latin America and EMEA. Sectorwise, we like Financials worldwide, capex-related sectors in the US, exporters in Japan, Basic Materials in the UK, and Tech and Consumer Discretionary in Asia.

In the Developed Markets’ fixed income universe, corporate high yield and subordinated financials are still in a sweet spot. Investment grade corporate bonds are expensive and they could be negatively impacted by a possible rise in sovereign yields, especially in the US. However we remain Neutral on Euro IG as the carry still exists. Within the EM space, we see more upside for Latam corporate bonds vs. EMEA and Asia.

On sovereign bonds, central bank policies have anchored sovereign yield curves at ultra- low levels, making them unattractive. Only short-dated peripheral debt still offers positive real yield.

The above picture is not exempt from risk. Indeed investors’ overconfidence about economic growth could lead to sudden and unexpected surge in bond yields which would probably derail the current positive performance of risky assets.


GLOBAL STRATEGY VIEWS

Kim March Emerging markets strategist(33)1 42 1319 78 [email protected]

Claudia PanseriEquity strategist(33)1 42 14 58 [email protected]

Ollivier CourcierFixed Income Head & Strategist(33)1 42 14 78 70 [email protected]

Xavier DenisChief economist(33)1 56 37 38 [email protected]

4


GLOBAL ASSET ALLOCATION

USA Eurozone UK JAPAN ASIA LATAM EMEA

Govies - - - - - = =

Equities = + = + + = =Energy = = -/= = = = +Basic Materials + = + = - - =Industrials + = = + - - =Consumer Discretionary - + =/+ = + + +Consumer Staples = - - - = = +Health Care + + = = - nm =Financials + + + + + + +Information Technology + = - = + nm nmTelecoms - - - - = = =Utilities - - = - = = -

Credit = = = - = + +IG - = = - = + +

HY + + + - = = =

= M arket weight

+ Overweight

- Underweight

* Arrows show monthly changes

5


MACRO OUTLOOKDEVELOPED MARKETS

After the fiscal cliff has been averted, markets have remained upbeat lifted by the growth turnaround in Asia and the above consensus macro data in the US.

As expected, global momentum is picking up across the board. US labor market posted stronger than expected job creations and leading indicators have firmed up. Chinese growth is also gaining traction while the Euro area momentum has leveled off. Although the global economy is running at three different speeds (EM, US, Europe), the global economy recovery takes hold supported by lower funding costs, higher visibility and accommodative policy mix across the board.

Some fiscal easing is on the cards. In the Eurozone, fiscal policies are being relaxed somewhat as most targets for 2013 set last year were too ambitious. The fear of worsening the already weak momentum is a strong incentive pushing the European governments and the European Commission to adopt a more flexible approach. Even in the UK, the government hinted at some easing as continuous retrenchment has been a significant headwind to growth so far. In the US, although fiscal dynamics is unsustainable, a great bargain leading to a massive adjustment this year is quite unlikely and a large fraction of the needed adjustment will be put off to following years. Last but not least, the Japanese cabinet decided a massive fiscal stimulus amounting to 2.2% of GDP in an effort to prop up activity after a new slide into recession.

On the monetary front, policies are set to remain very accommodative. Although no further action has been signaled by the ECB – no extension of LTRO, no new rate cut – receding financial stress has eased banks’ liquidity conditions. In the US, we do not anticipate a pull back or even a streamlining of the QE3 (USD 85bn asset purchases per month) before a confirmation of the recovery strength that will be dented in Q1 by the lagging effect of the fiscal cliff fear and some spending cuts and income tax hikes. In Japan, the BoJ may embark on a significant monetary easing with the objective to lower the yen and walk away from the lingering deflation, something already played by the market with the sharp fall of the JPY since early November.

Although the backdrop looks rather supportive for risky assets, some downside risks may nevertheless show up in the coming months. Spain remains in dire shape and too much delay in a bail out request could foster volatility as debt refinancing will be challenging in 2013. Also, domestic politics may feed into nervousness with the ongoing negotiation about the US debt ceiling and the scheduled Parliamentary elections in Italy. But for the time being, so far, so good.

Global PMI manufacturing

Source: Bloomberg, Société

Générale Private Banking

ECB systematic stress indicator

Source: ECB, Société


0

0,2

0,4

0,6

0,8

1999 2000 2002 2004 2006 2008 2010 2012

40

45

50

55

60

08-0

9

04-1

0

12-1

0

08-1

1

04-1

2

12-1

2

Global EurozoneUS JapanChina

expansion

contraction

6


MACRO OUTLOOKEMERGING MARKETS

The more benign risk backdrop and more constructive growth environment (US and China) bode well for EM. Although the rally on the back of the 11th hour US fiscal cliff ‘resolution’ could see some pullback over the coming months, we expect an eventual agreement which will clear the way for stronger investment spending, boosting growth in H2. For those able to ride out the near-term uncertainty, the setting looks quite good for selective EM outperformance: reduced systemic risk, stronger global growth, relatively benign inflation pressure, and still flowing global liquidity, with EM fundamentals still outshining their DM peers.

ASIARecent data point to a pick-up of growth. Manufacturing PMIs are on the rise (Korea posted its first >50 reading in seven months, China continues to pick up), and export growth is turning a corner and will likely receive greater support from global inventory restocking (largely China and US demand, particularly once the fiscal cliff uncertainty is cleared). Barring a shift in the more constructive global scenario, the recent stimulus out of Japan is the main threat to our positive view on Korea, given the loss of competitiveness due to the stronger KRW/JPY. Disappointing growth there could make the case for additional stimulus, monetary (rate cuts) alongside fiscal (supplementary budget). While the KRW continues to face upward pressure, expect intervention to limit volatility.

EMEA

With the Eurozone remaining in recession, including slow expansion in Germany, the region is expected to lag other EM regions again in 2013. Oil/commodities exporters, including many African countries (Ghana, Nigeria, Saudi Arabia, Russia), will likely post decent growth, and Turkey is heading into 2013 on solid footing (stronger PMI, see table, with growth expected to rise to 4% from 2.5% in 2012, though inflation could become a concern), while the rest of the region will struggle. Russia in our view presents a status quo growth outlook, but with the advantage of potentially declining inflation by mid-year, which may open the door to rate cuts in H2.

LATIN AMERICAThe region is poised to post the greatest growth improvement in 2013. This is due to Brazil, which grew a paltry 1% last year, expected to pick up towards 3.5% this year even if we are uncomfortable with the policy mix (excessive government intervention). Given the region’s still strong domestic demand amid tight labour markets, inflationary pressure will likely creep back up later in the year, but we expect macro prudential measures to be preferred to rate hikes at least initially. Mexico continues to benefit from strengthening domestic demand dynamics and reform momentum; we expect continued MXN appreciation with low intervention risk.

KRW Losing Competitiveness to JPY



Manufacturing PMI

Source: Bloomberg, HSBC, SGPB

Dec 12 Nov 12 Oct 12Global 50,2 49,6 48,8US 50,7 49,5 51,7Eurozone 46,1 46,2 45,4UK 51,4 49,2 47,3Japan 45,0 46,5 46,9China 50,6 50,6 50,2India 54,7 53,7 52,9Indonesia 50,7 51,5 51,9Korea 50,1 48,2 47,4Singapore 48,6 48,8 48,3Taiwan 50,6 47,4 47,8Brazil 51,1 52,2 50,2Mexico 52,8 52,9 52,0Russia 50,0 52,2 52,9Turkey 53,1 51,6 52,5South Africa 49,5 47,1

>/= 50 and rising >/= 50 and falling (or same)</= 50 and rising (or same)</= 50 and falling

Latin America: Regional GDP Growth to Rise on Brazil

Source: BCB, Banxico, BCRP, Banrep, IMF, Bloomberg, SGPB

012345678

Peru Chile Colombia Mexico Brazil

2012 2013

3,93,2

LA avg

950

1000

1050

1100

1150

1200

12-11 02-12 05-12 08-12 10-12 01-136570

7580

8590

95

KRWUSD USDJPY (rhs)

7


INVESTMENT VIEWSUS FOCUS

Short-term uncertainties related to the debt ceiling should prevent US risky assets to outperform Euro peers. In a US portfolio we still favor equities and high yield over Treasury and IG corporate bonds.

US EQUITIES SET TO UNDERPERFORM EURO STOCKS

The debt ceiling debate and uncertainty around spending cuts may continue to weigh on the US stocks relative performance vs the rest of the world. While valuation multiples have improved (2013e P/E 13.3x) we still believe that risk linked to the Q1 drag on household income is not priced in, at least in consumer related sectors. With regard to business spending, we take considerable relief from indications that capital expenditures came back to life over the past few months. We therefore expect capex related sectors (Tech and Industrials) to be the best beneficiary. Tactically we upgrade cheap Industrials from Neutral to Overweight (2013e P/E 13.5x) and downgrade expensive (2013e P/E 15.7x) Consumer Discretionary from Overweight to Underweight. We keep Financials at Overweight as we expect the recovery in the housing market continuing to support the sector.

I While we see US equities continuing to underperform other developed markets (Japan and Euro) we continue to like capex sectors and Financials.

THE FIXED INCOME SHIELD COULD BE HIGH YIELD MARKETS

Same diagnosis as for all developed countries: sovereign debt markets are expensive and likelihood of rising yields is high. But we consider the US Treasuries as the most vulnerable sovereign debt market, in spite of Fed non conventional measures. A few reasons support our view: 1) better growth prospects in the US on a relative basis 2) debt ceiling debate and “new spike in awareness” of the indebtedness of the US (even amongst FOMC members) 3) alternative investment opportunities (Eurozone) that lead to reduced investor’ appetite on Treasuries 4) massive refinancing needs in 2013 whatsoever. Additionally, volatility may be important on Treasuries going forward (linked to labor markets data releases).

So should we favor US credit markets? Yes, but for carry strategies only. Indeed, US credit markets are exposed to duration (more than Eurozone’s), fundamentals are only stabilizing, at best (EBITDA growth trend negative now). Lastly, we anticipate a resurgence of shareholder friendly activity. Technicals, driven by ETFs, are set to trigger volatility.

I We keep an UW stance on Treasuries. Corporates only are a carry play. Over performance of the HY depends very much on the potential speed of Treasuries’ rise.

US de-rating vs Euro continues, but premium has narrowed

Relative 12m forward P/E vs Euro areaSource: MSCI, Société


Foreign buying of Treasuries ($bn)

Source: JPMorgan

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

95 97 99 01 03 05 07 09 11

8


INVESTMENT VIEWSEUROZONE FOCUS

As financial stress indicators have receded and profits should recover as early as Q1, we still favor euro equities and high yield vs core government bonds and investment grade.

NOT TIME YET TO CLOSE THE OVERWEIGHT STANCE

Considering the strong region outperformance over the last months, the question we raise is how long the euro area may continue to perform so well. In our opinion, the trend is set to last as the OMT program has removed the systemic risk and peripheral banks are now enjoying lower borrowing costs. In addition recent changes to the liquidity coverage ratio announced by the Basel Committee should add momentum to the banking sector and so to Euro equities.

As multiples have improved from previous lows, valuation is less attractive than it was three month ago (2013e P/E 10.9x). However considering that profits are expected to recover in the Q1 we still favor cyclicals and financials vs. defensive. We upgrade Industrials from Underweight to Neutral and move Basic Materials from Overweight to Neutral.

I We continue to favor Euro vs US equities. We still like Financials and we move to Neutral on Industrials on accelerating economic momentum in US and Asia.

TREES DO NOT GROW TO THE SKY

In the Eurozone sovereign debt market, the risk-on mode, driven by – still – low equity valuations (see above) and excessively high pricing of bonds (global Eurozone bonds yield 2% on average, the 10-yr Bund stands at 1.57% as we write) convince us that the steepening of curves is here for good, in spite of timid growth and low anticipation of resuming inflation. As such, we do not see any reason for changing our recommendation of underweighting global sovereign bonds. That obviously applies to core/north Europe countries. However, the core/PIIGS countries’ convergence we have been advocating for a while now, is gaining momentum. Therefore, we remain constructive on Portugal, Ireland and Italy. We may see volatility ahead of elections on the latest though, as well as on Spain, which has not requested ECB’s assistance yet. However, Spanish Bonos remain an attractive opportunity on the 0/3-year bucket.

Credit markets now reach a limit. In spite of the January markets’ rally, investment grade bonds hardly perform. That is due to their richness and we adopt a cautious view on IG corporates now. Favor short term maturities. We are more constructive on those bonds that offer a spread protection (ie the HY asset class), especially in the context of still good fundamentals and supportive technicals.

I Remain exposed to financials’ subordinated debts and to High Yield. Remain short duration ahead of steepening curves.

Re-rating is still underway

Relative 12m forward P/E vs Developed MarketsSource: MSCI, Société


Sovereign spreads are still tightening on non-core countries



0.7

0.75

0.8

0.85

0.9

0.95

1

1.05

1.1

95 97 99 01 03 05 07 09 11

EURO ZONE Average

0

200

400

600

800

1000

1200

1400

1600

1800

Jan‐11 May‐11 Sep‐11 Jan‐12 May‐12 Sep‐12 Jan‐13

Italy Spain Portugal

Ireland France Germany

9


INVESTMENT VIEWSUK FOCUS

With the UK economic outlook being uninspiring we still favor risky assets in other countries. However cheap equities and high dividend yield should prevent equities from massively underperforming.

LOW MULTIPLES AND HIGH DIVIDEND YIELD HELP. WE SWITCH OUT OF UTILITIES INTO BASIC MATERIALS

While the UK market remains cheap vs. other developed countries (2013e 10.8x vs. 12.7x) and despite it offers a nice dividend yield (2013e 4.2% vs. 2.9% for DM), we believe that it still lacks a positive catalyst to outperform. Indeed, as manufacturing output was very disappointing in November and so retail sales, we expect little surprise from earnings (2013e EPS growth: consensus +8% vs. our forecasts at 0%).

Sectors wise, despite improving US and Asia data, UK global sectors are cheap (Basic Materials’ 2013e P/E 11.4x). On the contrary UK high dividend yield sectors are now particularly expensive (Utilities’ 2013e P/E 12.7x). We therefore, switch out from UK Utilities (now at Neutral) into Basic Materials (now at Overweight) and keep Banks at Overweight thanks to their strong correlation with the Euro banking sector.

I With earnings forecasts at risk of downgrades, we do not see cheap valuations as a sufficient catalyst to outperform vs. other developed countries. We favor global sectors such as Basic Materials to expensive Utilities.

NOT A COMPELLING MARKET AT ALL, DUE TO HIGH DURATION AND REDUCED VISIBILITY.

UK is probably the market with lowest visibility, which markets dislike. The austerity program put in place will significantly weigh on growth. Public accounts remain in negative territory, trade balance is firmly negative too and we do not anticipate improvement in 2013. At the same time, inflation should stay well above 2%. So question mark remains open on a new round of QE. The UK may lose a –not anymore deserved- AAA rating this year. That should affect negatively the Gilt market. We anticipate the convergence with France’s OATs to continue. The 10-yr Gilt stands at 2.00% as we write vs. 2.11% for the 10-yr OAT.

We do not especially favor the £ credit market either (relative to other credit markets), in spite of good fundamentals and technicals. One of the reasons is the very long duration feature of the market, together with its relatively limited size. Stay on short duration.

I Avoid Gilts and prefer HY and bank subordinated debt within the £ investment universe.

Time to switch into UK Basic Materials

Relative performance: Euro Basic Materials vs UK Basic MaterialsSource: MSCI, Société


Gilt/Corporate Yield (YTM)

Source: FactSet, iBoxx, Yieldbook

0

2

4

6

8

10

12

2008 2009 2010 2011 2012

Gilt (YTM) Corporate (YTM)

0.9

1

1.1

1.2

1.3

1.4

1.5

Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13

10


INVESTMENT VIEWSJAPAN FOCUS

As there is a clear change in the Japanese economic outlook and the Yen continues to depreciate, we would suggest adding more risky assets into the region.

NEW POLICY REGIME STRUCTURALLY CHANGES JAPANESE OUTLOOK. GET MORE CYCLICAL

Despite concrete signs of economic recovery, Japanese equities are extremely cheap, currently trading at P/BV close to 1.0x for 2013 forecasts vs. 1.6x for other developed markets. We believe the current multiples do not fully price in 1) the recent Abe administration’s announcement about the large size of the fiscal stimulus, 2) the possibility to see the BoJ adopting more QE and 3) the cyclical economic recovery in China. We therefore revise up our profits forecasts for this year (from c.12% to 18%) and so our target on the Nikkei (from 10,500 to 11,500).

Sectors wise we would suggest switching into a more cyclical allocation with high exposure to exporters and consumption. We upgrade Basic Materials and Consumer Discretionary to Neutral and Industrials to Overweight. We downgrade Consumer Staples and Telecoms to Underweight and Health Care to Neutral.

I The structural change in the Japanese economy should sustain stocks market re-rating. We still see further upside.

NO DEBATE HERE: SELL FIXED INCOME!

Sovereign Japanese bonds yield 0.63%, Corporates yield 0.65%, with respective durations at 8 years and 4 years. Japanese Fixed Income is very expensive, that is no news. But the recent measures from Abe’s Administration are a crystal clear reason for staying out of fixed income assets. The only light at the end of the tunnel would be the possibility of a part on the JGB’s investor base to buy again as soon as JGB’s yield rise takes place. Why would that happen? Because of an unexpectedly good surprise on the US growth, triggering move into risk assets worldwide. But that does not represent much performance potential still.We reiterate that the only way to find profits is probably to watch those issues attracting specific market attention or impacted by more global negative factors. Keep an eye also on foreign banks (eg, US or Australian) as they are regular issuers of Yen bonds. Watch those corporates which could benefit from reconstruction spendings in the earthquake impacted regions, infrastructure-geared corporates and consumer spending corporates.

I Stay short duration. Prefer Credit.

The Nikkei is strongly supported by the Yen depreciation

Source: MSCI, Société


10y bond yield at all time low (%)

Source: Datastream, Société


6000

8000

10000

12000

14000

16000

18000

20000

07 08 09 10 11 1275

85

95

105

115

125

135

Nikkei (lhs)

JPY vs Yen

0,4

0,6

0,8

1

1,2

1,4

1,6

1,8

2

Jan‐04 Feb‐06 Mar‐08 Apr‐10 May‐12

11


INVESTMENT VIEWSASIAN MARKETS FOCUS

The cyclical recovery in the region is sustaining equity performance on which we are Overweight vs. other emerging markets. In the fixed income space, Asia is already expensive and should be considered a carry play only.

LOW MULTIPLES SUSTAIN ASIAN EQUITIES

Over the last three months, Asian markets have performed particularly well relative to other emerging markets. Strong data coming from the region has indeed supported local equities and this despite the appreciation of Asian exchange rates versus the Japanese yen. The reality is that capital inflows matter and that once again Chinese stocks are enjoying investor appetite after having dropped out of favor for two long years. Therefore, cheap valuation and inflows should keep Chinese (2013e P/E 10.0x) and Korean (2013e P/E 8.7x) equities outperforming other emerging markets. Despite higher multiples, we still like Taiwan (2013e P/E 14.4x) for its exposure to tech companies (55% of the market cap) and we move to Neutral from Underweight on India which may benefit from a gradual liberalization in the selling price of diesel. Sectorwise, we continue to like Financials, IT and Consumer Discretionary sectors.

I Asia remains our favorite place to invest among EMs. We particularly like South Korea, Taiwan and China thanks to low valuations and revival in inflows.

ASIA: A SYMBOL OF THE CURRENT RICHNESS OF FIXED INCOME MARKETS

Asia is an interesting case for global investors! As mentioned above, Asian economies are rebounding, and globally, central banks remain accommodative whilst local consumption is picking up. We expect a continuation of massive inflows into hard-currency fixed income in 2013 as local investors may chase yields there. However, we consider $-denominated sovereign bonds as too expensive. As an example, the South Korea 04/2019 USD denominated bond trades at 2.05%. Malaysia’s 07/2021 USD trades at 2.53%. Given its stability, this market should be considered as a defensive play.

While Asia is definitely the most expensive EM credit market, we would still recommend being exposed to it. Indeed, we anticipate sustained demand for the asset class in 2013, not only driven by foreign investors but also by growing local pension funds’ base. Demand—expected at similar levels as in 2012 and mainly China & India driven—should be easily matched. Default rates should remain low (c.2%). Watch the doubtful assets’ data from Chinese banks. If to split between IG and HY universes, the richness of IG compared to international markets is a negative. At the same time, the callable feature of the HY market also weighs a lot.

I Prefer Credit and consider it as a carry play, not more!

3m MSCI indices performance (%, in $)

Source: MSCI, Société


Asia: corporate and government yields vs dividend yield (%)



17.713.7

10.29.28.9

8.47.7

7.24.5

3.72.9

1.3-1.8

-3.2-10.1

-15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 20.0

TurkeyChinaKoreaPolandMexico

South AfricaEmerging Market

Taiw anRussiaBrazil

MalaysiaIndia

IndonesiaHungary

Czech Republic

2

2,5

3

3,5

4

4,5

5

5,5

6

6,5

7

01/03/2011 7/31/2011 2/27/2012 9/21/2012

Corporate Bond YieldGov Bond YieldDividend Yield

12


INVESTMENT VIEWSLATAM MARKETS FOCUS

As the tone of the economic debate remains quite negative in Brazil vs other Emerging Markets (especially Asia), we would suggest keeping a low exposure to risky assets in the region.

NOT CHEAP ENOUGH TO DRIVE CAPITAL INFLOWS

Brazilian economic growth remains below trend. In addition to a difficult economic environment, we believe that the current administration’s determination to limit private sector profitability may provoke further delays in infrastructure investment and further slow 2013 GDP growth. A step in the opposite direction or a notable pickup in growth are needed for a rerating of Brazilian equities. Indeed less government intervention in 2013 on the back of Financial Minister Mantega’s comments in December could be enough to prompt stock performance.

Sectors wise we still keep a defensive profile maintaining an Underweight stance on Basic Materials. However we are now upgrading to Neutral the Energy sector which may finally enjoy an improving profits momentum on the back of an economic recovery in Asia and US.

I Considering the relative expensiveness of the region and lack of profits growth, we would suggest taking more exposure to other EM, namely Asia.

FIXED INCOME STILL LIKES THIS DISREGARDED MARKET!

We believe the improved prospects for growth in Brazil –albeit not as high as expected before- together with Mexico, Chile, Colombia and Peru delivering attractive dynamics (material growth, balanced fiscal policies, positive demographics & contained inflation) constitute stable support for the bonds’ markets. However, US$-denominated bonds are expensive (again). Brazil 01/2021 at 2.08%, Chile 10/2022 at 2.38%. The Sovereign bonds’ markets have been driven by an astonishing performance in 2012. As such, we believe the potential for capital gains lies more in the credit markets for now.

Not only did Latam credit markets underperform Latam Govies in 2012 (+15.7% vs. +17.1%), but they also underperformed other EM credit markets. Latam spreads (OAS) remain the widest (longer duration). Explanatory factors are one-shot and depend mainly on Brazil (major market): slowing of growth; banking crisis (Banco Cruzeiro’s default); sharp drop in iron ore affecting worldwide leader Vale; large issuance needs (Petrobras). Those should be forgotten in 2013. In spite of Argentina and Venezuela, which we see as weak, we anticipate a decline in default rates, reduced issuance (very low refinancing risk) and massive inflows globally.

I We reiterate our OW on Latam. Stay mainly on IG until US growth is confirmed. Get prepared for switch to HY.

Brazil is more expensive than China

Relative 12m forward P/E vs China Source: MSCI, Société


Spreads between Latam HY and IG (bps)

Source: Société

Générale Private Banking, Bloomberg

0.30.40.50.60.70.80.91.01.11.2

01 02 03 04 05 06 07 08 09 10 11 12 13

300

350

400

450

500

550

600

650

700

750

800

100

300

500

700

900

1100

1300

1500

01/03/2011 5/23/2011 10/07/2011 2/27/2012 7/13/2012 11/30/2012

HY - IG spread (bps, rhs) High Yield (lhs) IG (lhs)

13


INVESTMENT VIEWSCEEMEA MARKETS FOCUS

With some countries in the Central Europe suffering from weakness in external and domestic demand we keep a low risk profile in the region.

RUSSIA REMAIN OUR BEST PICK WITHIN THE REGION

The deep contraction in the Euro area economy is being mirrored in Central Europe. Hungary and the Czech Republic are in recession, consistent with the larger share of export- oriented sectors like cars and electronics in their overall production. Elsewhere in the CEEMEA region (Turkey) industrial activity is far better but valuation multiples are less attractive (2013e P/E at 10.7 vs EM 10.6x and PBV at 1.7x vs 1.5x for the EM) and may be negatively impacted by rising fears about inflation. Within CEEMEA, Russia still remains our preferred spot as valuations are extremely cheap and thanks to its exposure to the Energy sector. That said we keep a Neutral stance on CEEMEA with an Overweight rating on Russia.

Sectors wise we like the attractiveness of the Energy market in Russia (2013e P/E 4.1x) and the fundamental risk-reward offered by Russian Banks (2013e P/E 6.0x) which are short- term driven by EU banks (Overweight).

I Low potential for profits growth may prevent the region from outperforming. Extremely cheap multiples call for an Overweight stance on Russia.

RUSSIA IS AN ATTRACTIVE SPOT INDEED

It is pretty challenging to address the region from a top down perspective as the dynamics of Russia or Turkey are doing well (for various reasons) whereas Central Europe suffers from its close links to Eurozone, Middle East depends very much on geopolitical risk, and Africa is a nascent “frontier” market. However, we globally anticipate commodities’ exporters (Russia, Ghana, Nigeria) to do well and we anticipate sovereign upgrades (Turkey). In that context, we are selectively constructive on sovereigns, in spite of the outperformance vs. other EM year to date (that applies to credit markets too – see below).

As for credit markets, we believe bond picking is key again. We very much favor Eastern Europe vs. Africa (for liquidity reasons) and Middle East (less yieldy but inherently less volatile too).

I Very diversified in itself, this market requires a bottom approach. With this in mind, we remain constructive on all subparts of the market, for different reasons.

Russia trades at 50% discount to other Emerging Markets

Relative 12m forward P/E vs Emerging Markets Source: MSCI, Société


EM credit market spreads (bps)



0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

01 02 03 04 05 06 07 08 09 10 11 12 13

200

300

400

500

600

700

Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12

Asia EMEA Latin America

14


INVESTMENT VIEWSFOREX

EUR/USD: RANGEBOUND IN THE MONTHS AHEAD BEFORE A FALL BACK

As market sentiment turned more positive, most EUR short positions have settled, lifting the single currency upward since mid-summer. Unsterilized QE3 launched by the Fed is weakening the USD as the ECB monetary stance has been kept on hold. Spain requesting a bailout would be a short-term positive. While we keep a constructive view on the EUR in the short term, we still consider that the single currency may falter later this year as the peripheral debt crisis has been mitigated but not solved.

I The EUR should remain in the 1.30-1.35 range at a three- month horizon.

$/JPY: POLITICAL SHIFT WILL FURTHER LOWER THE YEN

LDP victory in December has been a game changer. The new cabinet has already taken action for a maximum relaxation of policymaking so as to aggressively lower the yen and stimulate domestic economy by fiscal measures. Market has anticipated these moves and the trade-weighted yen already depreciated by more than 10% since early November. Although forex markets tend to overshoot short term, there is potentially further to go across 2013 as long as the BoJ acts accordingly to meet the 2% inflation target. The more risk-on environment we still see unfolding is also a weakening factor for the yen. Yet, some consolidation may take place but the direction for the yen is further down later on.

I The speed of depreciation may even stall in the weeks ahead (90/USD at three months), but the slide is set to continue across 2013.

EUR/GBP: THE POUND IS SET TO RECOVER

As the United Kingdom should see better economic conditions in 2013 than the Eurozone (modest growth vs. slight contraction) and the BoE could further postpone additional QE thanks to easier fiscal policy, this should stage a positive effect on the pound's performance. Even a potential rating downgrade is unlikely to hinder such an upward move.

I We expect the GBP to stabilize (0,82/EUR at three months) before grinding higher.

EUR/CHF: LIMITED DROP FOR THE CHF

The dissipation of financial stress supplemented by the reduced likelihood of a rate cut by the ECB have triggered a fall of the CHF. The EUR may continue to inch up vs. the CHF driven by higher risk appetite. But most of this trend may be short-lived, as we foresee the structural weakness of the Euro area to be a drag on the single currency later in 2013.

I We revise upward our forecast at 1.25/EUR at three months.

FOREX Forecasts



Trade Weighted Exchange Rate (based to 100 on 02/01/12)



85

90

95

100

105

110

01/1

2

02/1

2

03/1

2

04/1

2

05/1

2

06/1

2

07/1

2

08/1

2

09/1

2

10/1

2

11/1

2

12/1

2

01/1

3

USD EUR JPY GBP

Cross Rates Spot 3M Forecast 12M Forecast

21/01/13

EUR/USD 1,33 1,32 1,25

EUR/GBP 0,84 0,82 0,78

EUR/CHF 1,25 1,25 1,20

USD/JPY 90 90 92

USD/CAD 0,99 0,99 0,97

AUD/USD 1,04 1,04 1,02

15


INVESTMENT VIEWSCOMMODITIES

OIL: PRICE SHOULD INCH UP BUT NOT BEFORE LATE 2013

Brent oil price has remained pretty stable since early November trading around USD 110/b with falling volatility. As the global economy is experiencing a growth turnaround, upward pressure may materialize at some point but probably not before H2 when the demand has significantly edged up. In the months ahead, two offsetting factors may prevent price to gain ground. First, current prices still embed high geopolitical risk premium (around USD 15/b according to most analysts) and its tightening could weigh on prices. Second, the embargo on Iranian oil exports has already been factored in and marginal production cost hovers around USD 90/b. Downward market expectations are reflected in oil futures prices in backwardation (future prices lower than current prices). With growth bottoming out in EM economies and US growth accelerating in H2, demand should gradually gain pace, pushing up prices albeit moderately.

I In this context, we consider that the price of a barrel should range trade (USD 100-110/b) before regaining ground above USD 110/b under the effect of improved economic conditions in emerging and developed economies.

GOLD: WEAKNESS SHORT TERM BUT POTENTIAL UPSIDE LATER

Gold price consolidated significantly over Q4.2012 as receding lower financial stress and sells from ETF have put downward pressure. Receding systemic risks in the Eurozone have probably dragged down the yellow metal.

This is not fully consistent with the monetary easing being carried out across the board, particularly in developed economies. QE3 in the US and the upward revision of the asset purchases by the BoJ will further inflate global liquidity, a structural driver for gold. Across the board, monetary policies will keep a very accommodative stance as inflation risks are still remote.

Fear of currency debasement that translates into a search for an inflation hedge will continue to support the appetite for gold, probably more so in H2 than in the months ahead. Retail demand from China and India is the biggest source of demand for physical gold. While there is still demand growth to expect in 2013, the increment is likely to be more modest than in previous years, reflecting stronger appetite for risky assets and a low- valued rupee.

I We do not see significant upside and even anticipate potentially some weakness for gold in the coming three months. We nevertheless consider that current prices are a good entry point.

Net positions on oil futures markets are still long

Source: Datastream, CFTC, Société


Gold price and Euro sovereign CDS have decorrelated



-8 0-4 0

04 08 0

1 2 01 6 02 0 02 4 02 8 0

01-0

6

01-0

7

01-0

8

01-0

9

01-1

0

01-1

1

01-1

2

01-1

3

3 04 05 06 07 08 09 01 0 01 1 01 2 01 3 01 4 01 5 0L o n g -S h o rt W TI (R H S )

$/b'000

0

100

200

300

400

500

10-0

9

02-1

0

06-1

0

10-1

0

01-1

1

05-1

1

09-1

1

01-1

2

05-1

2

09-1

2

01-1

3

1000

1200

1400

1600

1800

2000

CDS SpreadGold (rhs)

16

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