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It’s been a great QE ride.

But don’t look down!


1
A SEASONAL WAY OF MAKING PREDICTIONS

Source: Twitter 2
ICE AGE PERFORMANCE : BONDS 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
CENTRAL BANK QE UNWIND – WHAT IMPACT?

Source: Zero Hedge, Deutsche Bank


6
TOTAL CENTRAL BANK QE TURNS INTO QT THIS YEAR

Source: Datastream 7
FED BALANCE SHEET UNWIND HAS ONLY JUST STARTED!

Source: St Louis Fed 8


VALUATION: FORWARD PE

Source: Datastream 9
THE FED HAS TIGHTENED MORE THAN RATES 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 period
Cum Changes in Effective Fed Funds Rate since last rate trough
Attributable to QE suspension (shadow rate)

Source: SG Quant, using shadow Fed Funds from Wu, J C and Xia, F D (2016) methodology 10
THE FED HAS TIGHTENED MORE THAN RATES SUGGEST
20.0

15.0

10.0

5.0

0.0

-5.0

Recession periods Effective Fed Funds Rate


Shadow Fed Funds Rate
Source: SG Quant, using shadow Fed Funds from Wu, J C and Xia, F D (2016) methodology 11
CYCLICALLY ADJUSTED PRIMARY BALANCE (% OF GDP)

Source: Datastream 12
CHANGE IN CYL ADJ PRIMARY BALANCE (% OF GDP)

Source: Datastream 13
TAILWINDS BECOME HEADWINDS

Source: Zero Hedge, Goldman Sachs 14


GLOBAL PMI SLOWING - IN LINE WITH BASE METALS

Source: Datastream 15
IT’S THE CYCLE STUPID

Source: Hedgeye 16
IMF WORLD GROWTH FORECASTS LOOK OPTIMISTIC

Source: Datastream 17
CEOS NOT VERY CONFIDENT!

Source: Datastream 18
TITLE

Source: Advisor Perspectives 19


10Y US BOND: CROSSED BACK BELOW TREND

Source: SG Technicals 20
ALL FED TIGHTENING EXPECTED IN 2019 HAS GONE!

Source: Datastream 21
CURVE STEEPING PRECEDES RECESSION!

Source: Datastream 22
CURVE STEEPENING PRECEDES PAYROLL UNWIND

Source: Datastream 23
JOBS GROWTH CAN SPIKE JUST AHEAD OF RECESSIONS

Source: Twitter, @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 2018


26
ITALY’S TERRIBLE PRODUCTIVITY PERFORMANCE

Source: FT, OECD 27


SCHOOL PERFORMANCE OF 15 YEAR OLDS: SCORE REL TO AV

Source: FT, OECD 28


ITALY UNIT LABOUR COSTS STILL UNCOMPETITIVE
150
Euro area
Germany
140
France
Spain
130
Italy
Portugal
120

110

100

90
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Source: SG Economics 29
10 YEARS AGO ITALIAN UNEMP WAS BELOW GERMANY'S

Source: Datastream 30
CURRENT 30%+ RATE OF ITALIAN YOUTH
UNEMPLOYMENT IS NORMALLY A CYCLICAL PEAK

Source: Trading Economics.com 31


ITALIAN YOUNG DISLIKE EU – IN CONTRAST WITH FRANCE ETC

Source: Polotico Magazine 32


BUT ITALY’S POOR GDP HAS BEEN A RECENT EVENT

Source: Datastream 33
CYCLICALLY ADJUSTED PE
EUROPE HAS DIVERGED ONLY SINCE THE 2011 CRISIS

Source: Datastream 34
REPORT CARD: HOW EURO-AREA COUNTRIES FARED ON
VARIOUS CURRENCY-AREA METRICS

Source: Bloomberg, As the Euro Turns 20, a Look Back at Who Fared the Best. And Worst 35
CHINA: WATCH THE GROWTH SQUID NOT THE SHARK

Source: Hedgeye 36
CHINA’S HARD LANDING HAS LONG BEEN PREDICTED

37
SLOWLY IS THE KEY WORD IN THE TITLE!

Source: Twitter, @georgenmagnus1 38


CHINA’S RESERVES ARE SHRINKING AGAIN

Source: Datastream 39
40
CHINESE INDUSTRIAL PROFITS ARE FALLING AGAIN

Source: Zero Hedge 41


BLOOMBERG SAY PROFITS ARE FAR WEAKER

Source: Bloomberg, NBS 42


CHINA’S MANUFACTURING PMI’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 a much weaker 2019 as plentiful borrowing by
state and private firms is failing to boost growth”

"Services and retailing followed 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.”

“China Beige Book Says Plentiful Borrowing Fails to Boost Growth”


Bloomberg, 27 December 2018
46
WE NEED OUR INVESTMENT SAFETY GOGGLES

Source: Twitter
47
January 2019

NO MORE EASY MONEY!

Andrew Lapthorne Phone: +44 20 7762 5762

Societe Generale (“SG”) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that SG may have a
conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment
decision. PLEASE SEE APPENDIX AT THE END OF THIS REPORT FOR THE ANALYST(S) CERTIFICATION(S), IMPORTANT DISCLOSURES AND DISCLAIMERS.
ALTERNATIVELY, VISIT OUR GLOBAL RESEARCH DISCLOSURE WEBSITE
FROM 2012-2016 VALUATION CHANGE WAS THE KEY DRIVER
Valuation change (12m PE), earnings and MSCI World price index to 100

Peak QE!

Source: SG Cross Asset Research/Equity Quant, MSCI

15/01/2019 49
THIS BULL MARKET HAS UNUSUALLY BEEN DRIVEN BY VALUATION
Five year rolling decomposition of MSCI World returns

Source: SG Cross Asset Research/Equity Quant, MSCI

15/01/2019 50
IN EUROPE IT IS EVEN WORSE.
Five year rolling decomposition of EUROPE World returns

Source: SG Cross Asset Research/Equity Quant, MSCI

15/01/2019 51
EUROPEAN EQUITY MARKETS ARE LOSING THEIR RELEVANCE.
Profit and market capitalisation share by region in MSCI All Country World

20.0
Market capitalisation 24
Earnings
20
16.0
16
12.0 12
8
8.0
4
Eurozone
Japan 0
4.0 Eurozone
China Japan
UK -4
China
0.0 -8 UK
Dec-98
Dec-99

Dec-01
Dec-02

Dec-04
Dec-05

Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-00

Dec-03

Dec-06

Dec-98
Dec-99

Dec-01
Dec-02

Dec-04
Dec-05

Dec-07
Dec-08

Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-00

Dec-03

Dec-06

Dec-09
Source: SG Cross Asset Research/Equity Quant, MSCI

15/01/2019 52
AVERAGE COMPANY SIZE PER REGION
Yes US companies are bigger than European companies but this was the case in 1999
50000

45000

40000

35000

30000

25000

20000

15000

10000

5000

0
Dec-98

Dec-02

Dec-06

Dec-10

Dec-14

Dec-18
Dec-00

Dec-04

Dec-08

Dec-12

Dec-16
World Japan US UK Eurozone
Source: SG Cross Asset Research/Equity Quant, MSCI

15/01/2019 53
MEDIAN STOCK VALUATIONS ARE NOT PARTICULARLY CHEAP
Median reported PE ratios for MSCI US, Japan and Europe
28.0

26.0 US
Europe
24.0
Japan
22.0
Reported Price to Earnings

20.0

18.0

16.0

14.0

12.0

10.0

8.0
Dec-04

Dec-05

Dec-06

Dec-07

Dec-12

Dec-13

Dec-14

Dec-15
Dec-02

Dec-03

Dec-08

Dec-09

Dec-10

Dec-11

Dec-16

Dec-17

Dec-18
Source: SG Cross Asset Research/Equity Quant, MSCI

15/01/2019 54
THE EFFECTS OF QE ON VALUATION HAS BEEN UNEVEN
Forward PE of two global portfolios based on trailing 5 year correlation to US bonds.

22.0

20.0
Forward Median PE

18.0

16.0

14.0

12.0

10.0 Stocks with the highest NEGATIVE correlation to bonds


Stocks with the highest POSITIVE correlation to bonds
8.0
Dec-03

Dec-05

Dec-06

Dec-08

Dec-11

Dec-13

Dec-14

Dec-16

Dec-18
Dec-04

Dec-07

Dec-09

Dec-10

Dec-12

Dec-15

Dec-17
Source: SG Cross Asset Research/Equity Quant

15/01/2019 55
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
% of World Market Cap

24.0

22.0

20.0

18.0

16.0

14.0

12.0
Dec-07
Dec-03

Dec-04

Dec-05

Dec-06

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18
Source: SG Cross Asset Research/Equity Quant

15/01/2019 56
Forward PE

11
13
15
17
19
21
23

5
7
9
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97

Quality
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Value
Dec-04
Dec-05
Forward PE of Global Quality versus Global Value

Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
THE EFFECTS OF QE ON VALUATION HAS BEEN UNEVEN

Dec-16
Dec-17
15/01/2019

Dec-18
57
Source: SG Cross Asset Research/Equity Quant
LONG/SHORT FACTOR PERFORMANCE IN 2018
Value suffered in H1 2018, but held up in H2 when Growth factors struggled
1.30

1.25
Value
1.20
Quality
Relative Performance

1.15
Growth
1.10

1.05

1.00

0.95

0.90

0.85
May-18
May-18
Dec-17

Nov-18
Nov-18
Nov-18
Dec-18
Dec-18
Sep-18
Sep-18
Aug-18
Aug-18
Feb-18
Feb-18
Mar-18
Mar-18

Jul-18
Jul-18
Jan-18
Jan-18

Jun-18
Jun-18
Jun-18

Oct-18
Oct-18
Apr-18
Apr-18

Source: SG Cross Asset Research/Equity Quant, MSCI

15/01/2019 58
SPIKE IN US BONDS BROKE THE BACK OF THE GROWTH RALLY

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 yields 0.85
long/short US Growth vs Quality 0.80
2.30
0.75

2.10 0.70
Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18

Source: SG Cross Asset Research/Equity Quant

15/01/2019 59
VALUE + BONDS IS A BETTER MIX THAN EQUITIES + BONDS

195
190
185
180 US bonds (95%) + Global Equity (5%)
175 US bonds (95%) + SGVB Value (5%)
170
165 US Bonds
160
155
150
145
140
135
130
125
120
115
110
105
100
95
Feb-03

Feb-07

Feb-08

Feb-09

Feb-12

Feb-14

Feb-15
Feb-04

Feb-05

Feb-06

Feb-10

Feb-11

Feb-13

Feb-16

Feb-17

Feb-18
Source: SG Cross Asset Research/Equity Quant, FactSet
Note: Past performance is not indicative of future performance. Portfolio presented assumes no transaction costs. For additional details on portfolio performance please contact us.

15/01/2019 60
VALUE + BONDS DRAWDOWN BETTER THAN EQUITIES + BONDS

Source: SG Cross Asset Research/Equity Quant, FactSet


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

15/01/2019 61
ADDING JUST A LITTLE BIT OF VALUE TO THE 60/40 PORTFOLIO

Source: SG Cross Asset Research/Equity Quant, FactSet


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

15/01/2019 62
WHEN IT COMES TO VALUE, VALUATION REALLY MATTERS!

Decomposition of Value returns Decomposition of Quality returns


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

14.0 15.0

12.0
10.0
10.0
5.0
8.0

6.0 0.0

4.0
-5.0
2.0
-10.0
0.0

-2.0 -15.0
Total Price Y ield Valuation Growth Fx Total Price Y ield Valuation Growth Fx
Return Return Return Return
Source: SG Cross Asset Research/Equity Quant

Source: SG Cross Asset Research/Equity Quant, FactSet


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

15/01/2019 63
WHEN VALUE IS REALLY CHEAP, PERFORMANCE IS VERY STRONG

12m relative performance based on starting absolute valuation


14

12 Since 2009 Since 1999 Since 1989


Annualised relative return (%)

10

0
1 2 3 4 5 6 7 8 9 10
Ranked absolute valuation of the Value factor (1=cheapest, 10=most expensive)

Source: SG Cross Asset Research/Equity Quant, FactSet


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

15/01/2019 64
VALUE STRATEGIES DO NOT ALWAYS SUFFER DURING A CRISIS

Fama-French US Value (L/S) performance during periods of market distress (i.e. SP 500 drawdowns >10%), 1926-2018

Source: SG Cross Asset Research/Equity Quant

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

15/01/2019 65
UNDERSTANDABLE COMPARISON TO THE TECH BUBBLE
Comparing the forward PE of a Value portfolio versus it volatility
15 0

14
10
13

12
20
11

10 30

9
40
8
Value PE
7
90d realised volatility (inverted) 50
6

5 60

Source: SG Cross Asset Research/Equity Quant, FactSet

15/01/2019 66
PERFORMANCE OF VALUE AROUND US INTEREST CYCLE
Value performance in the US since 1965 around the US interest rate cycle
15%

10% All Cycles

Excluding DOTCONM Crisis

Excluding DotCom & 2007 crisis


5%

0%

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
-12
-11
-10

1
2
3
4
5
6
7
8
9
-9
-8
-7
-6
-5
-4
-3
-2
-1
Peak Month

-5%

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

15/01/2019 67
LARGE EQUITY MARKET MOVES TEND TO HURT EQUITY MARKETS

Performance of the S&P 500 ranked in order of daily absolute price moves
30.0
Performance ranked by absolute returns

25.0
Biggest absolute daily
Smallest absolute price moves
20.0
daily price moves

15.0

10.0

5.0

0.0
0%
3%
5%
8%
10%
13%
15%
18%
21%
23%
26%

41%
44%
46%
49%
52%
54%

70%
72%
75%
77%
80%
82%
28%
31%
34%
36%
39%

57%
59%
62%
64%
67%

85%
88%
90%
93%
95%
98%
Absolute daily ranked performance in percentiles

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

15/01/2019 68
VALUE PERFORMANCE IS CONCENTRATED IN EXTREME MOVES

Performance of Value ranked in order of daily absolute price moves


30.0
Performance ranked by absolute returns

25.0
Biggest absolute daily
Smallest absolute price moves
20.0
daily price moves

15.0

10.0

5.0

0.0
5%
8%
0%
3%

13%
15%
18%

23%
26%

33%
36%

44%
46%

54%
56%

64%
67%

74%
77%

82%
85%
87%

92%
95%
10%

21%

28%
31%

38%
41%

49%
51%

59%
62%

69%
72%

80%

90%

98%
Absolute daily ranked performance in percentiles

Source: SG Cross Asset Research/Equity Quant,

15/01/2019 69
60% OF GLOBAL STOCKS ARE IN A BEAR MARKET
Percentage of FTSE World stocks down 20% or more from 2 year highs
100

80
% of stocks down 20%

60

40

20

0
1987 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2011 2013 2015 2017

Source: SG Cross Asset Research/Equity Quant, FTSE

15/01/2019 70
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
% of stocks down 50%

40

20

0
1987 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2011 2013 2015 2017

Source: SG Cross Asset Research/Equity Quant, FTSE

15/01/2019 71
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
US (S&P 1500)

US (S&P 500)
% of stocks

40

20

0
1995 1996 1997 1999 2000 2002 2003 2004 2006 2007 2009 2010 2012 2013 2014 2016 2017

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

15/01/2019 72
WHAT 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
Dec-98

Dec-02

Dec-06

Dec-10

Dec-14

Dec-16
Dec-00

Dec-04

Dec-08

Dec-12

Dec-18
US UK Eurozone Japan

Source: SG Cross Asset Research/Equity Quant, MSCI

15/01/2019 73
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
Dec-91
Dec-92

Dec-94

Dec-97

Dec-99
Dec-00

Dec-02

Dec-04
Dec-05

Dec-07

Dec-09
Dec-10

Dec-12

Dec-14
Dec-15

Dec-17
Dec-90

Dec-93

Dec-95
Dec-96

Dec-98

Dec-01

Dec-03

Dec-06

Dec-08

Dec-11

Dec-13

Dec-16

Dec-18
Source: SG Cross Asset Research/Equity Quant, FactSet
Note: Past performance is not indicative of future performance. Portfolio presented assumes no transaction costs. For additional details on portfolio performance please contact us.

15/01/2019 74
Debt to total assets (%)

18
20
22
24
26
28
30
Jun-98
Dec-98
Jun-99
Dec-99
Jun-00
Dec-00
Jun-01
Dec-01
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
US non-financial leverage ratios

Jun-05
Dec-05
Jun-06

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


Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Debt % Equity

Jun-09
Debt % Assets

Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
PEAK LEVERAGE AT THIS POINT IN CYCLE IS HIGHLY UNUSUAL

Dec-18
15/01/2019
30
35
40
45
50
55
60

75

Debt to Equity (%)


20
25
30
35
40
45
50
Dec-51
Nov-53
Oct-55
Sep-57
Aug-59
Jul-61
Jun-63
May-65
Apr-67
Mar-69
Feb-71
Jan-73
Dec-74
Nov-76

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


Oct-78
Sep-80
Aug-82
Jul-84
Jun-86
May-88
Apr-90
Mar-92
Feb-94
Jan-96
Dec-97
Nov-99
Oct-01
Sep-03
Aug-05
US Corporate Debt as % of US GDP
US CORPORATE DEBT NEVER BEEN THIS HIGH

Jul-07
Jun-09
May-11
Apr-13
15/01/2019

Mar-15
76

Feb-17
GROSS BUYBACKS FOR THE S&P 1500

800

700
Total market
600
Total ex-financial
500
USD bn

400

300

200

100

0
Dec-95

Dec-98
Dec-99
Dec-00

Dec-03
Dec-04

Dec-05

Dec-09

Dec-10
Dec-11

Dec-14

Dec-15
Dec-16
Dec-96

Dec-97

Dec-01

Dec-02

Dec-06

Dec-07

Dec-08

Dec-12

Dec-13

Dec-17

Dec-18
Source: SG Cross Asset Research/Equity Quant, Company Report and Accounts

15/01/2019 77
WE KNOW WHERE ALL THE DEBT WENT!
S&P 1500 non-financial net buybacks versus change in net debt
550000

Overseas cash repatriation


450000

Net Buybacks Change in Debt


350000

250000
USD mn

150000

50000

-50000

-150000
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Source: SG Cross Asset Research/Equity Quant, Company Report and Accounts

15/01/2019 78
THE GOOD NEWS IS THAT QE HELPED BOOST WAGES!
Percentage of quarterly buybacks used for option issuance – expect a pick up in Q1 2019
45

40
% of buybacks used for option issuance

35

30

25

20

15

10

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

15/01/2019 79
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 1
Dec-04

Dec-06

Dec-07

Dec-08

Dec-09

Dec-11

Dec-12

Dec-13

Dec-15

Dec-17

Dec-18
Dec-03

Dec-05

Dec-10

Dec-14

Dec-16
Source: SG Cross Asset Research/Equity Quant, Factset

15/01/2019 80
LEVERAGE BY REGION

Source: SG Cross Asset Research/Equity Quant, FactSet


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

15/01/2019 81
REGIONAL BALANCE SHEET PERFORMANCE
Long/short balance sheet performance based on Merton’s distance to default

Source: SG Cross Asset Research/Equity Quant, FactSet


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

15/01/2019 82
THE BUILD-UP OF US SMALLCAP DEBT IS SIGNIFICANT
Russell 2000 non-financial net-debt & ebitda

500

400
Net Debt EBITDA
US$ Bln

300

200

100

0
Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17
Dec-02

Dec-03

Dec-04

Dec-10

Dec-11

Dec-12
Source: SG Cross Asset Research/Equity Quant, Company Report and Accounts

15/01/2019 83
THE BIGGEST US COMPANIES ARE DISGUISING PROBLEMS ELSEWHERE
Interest cover by market capitalisation segment – US non-financial
18

16 Biggest 10%
Next 10%
14
Bottom 50%
EBIT interest cover (x)

12 Average

10

0
Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-17

Dec-18
Dec-98

Dec-99

Dec-00

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16
Source: SG Cross Asset Research/Equity Quant, Company Report and Accounts

15/01/2019 84
SHORT-INTEREST BY MERTON QUINTILE IN THE RUSSELL 2000

15.0 Good Balance Sheets


14.0 2
3
13.0
4
12.0
Bad Balance Sheets
11.0
Short interest (%)

10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
Dec-05

Dec-06

Dec-08

Dec-09

Dec-11

Dec-14

Dec-16

Dec-17
Dec-07

Dec-10

Dec-12

Dec-13

Dec-15

Dec-18
Source: SG Cross Asset Research/Equity Quant, Factset

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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
May-17

May-18
Dec-16

Nov-17
Dec-17

Nov-18
Dec-18
Aug-17

Aug-18
Sep-18
Sep-17

Mar-18
Feb-17
Mar-17

Feb-18
Jul-17

Jul-18
Jan-17

Apr-17

Jun-18
Jun-17

Jan-18

Apr-18
Oct-17

Oct-18
Source: SG Cross Asset Research/Equity Quant, FactSet
Note: Past performance is not indicative of future performance. Portfolio presented assumes no transaction costs. For additional details on portfolio performance please contact us.

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THERE IS ANOTHER PLACE WHERE BALANCE SHEET RISK IS HIGH
Long/short balance sheet risk in the UK FTSE 350
1.9

1.7

1.5

1.3

1.1

0.9

0.7

0.5
Dec-03

Dec-05

Dec-06

Dec-08

Dec-09

Dec-11

Dec-12

Dec-14

Dec-17
Dec-04

Dec-07

Dec-10

Dec-13

Dec-15

Dec-16

Dec-18
Source: SG Cross Asset Research/Equity Quant, FactSet
Note: Past performance is not indicative of future performance. Portfolio presented assumes no transaction costs. For additional details on portfolio performance please contact us.

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JUNK BONDS & QUALITY EQUITY INCOME (SGQI) HAVE BEEBN HIGHLY CORRELATED

Total returns indexed to 100

250.0

230.0 SG Quality Income Index

210.0
IBOXX High Yield Corporate Bonds

190.0

170.0

150.0

130.0

110.0

90.0
Feb-10

Feb-11

Feb-12

Feb-13

Feb-14

Feb-15

Feb-16

Feb-17

Feb-18
Aug-09

Aug-12

Aug-13

Aug-14

Aug-16

Aug-17
Aug-10

Aug-11

Aug-15
Nov-09

Nov-10

Nov-12

Nov-13

Nov-14

Nov-17
Nov-11

Nov-15

Nov-16
May-10

May-11

May-14

May-15
May-12

May-13

May-16

May-17

May-18
Source: SG Quantitative Research/ Equity Quant, Bloomberg
Note: Past performance is not indicative of future performance. Portfolio presented assumes no transaction costs. For additional details on portfolio performance please contact us.

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FINALLY GETTING SOME MORE QUALITY INCOME NAMES TO BUY

Scarcity of high quality stocks at 4% dividend yields (FT World ex financial universe)
7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%
Dec-90
Dec-91

Dec-93
Dec-94

Dec-96
Dec-97

Dec-99

Dec-02

Dec-05

Dec-08

Dec-11

Dec-14

Dec-17
Dec-89

Dec-92

Dec-95

Dec-98

Dec-00
Dec-01

Dec-03
Dec-04

Dec-06
Dec-07

Dec-09
Dec-10

Dec-12
Dec-13

Dec-15
Dec-16

Dec-18
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WITH A GROWING DIVIDEND, QUALITY EQUITY INCOME EASILY BEATS JUNK BONDS

Source: SG Quantitative Research/ Equity Quant, FactSet.


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

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CONCLUSIONS

1. Without QE expensive equity valuations will come under pressure.

2. 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 performance is during extreme events.

5. Corporate leverage is the biggest risk facing investors today.

6. US Smallcaps will be in the eye of the storm.

7. Quality Income is the better alternative to credit.

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APPENDIX

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APPENDIX - DISCLAIMER

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APPENDIX - DISCLAIMER

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