SocGen Jan 2019 Conference

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
CENTRAL BANK QE UNWIND – WHAT IMPACT?
Source: Zero Hedge, Deutsche Bank

6
TOTAL CENTRAL BANK QE TURNS INTO QT THIS YEAR
FED BALANCE SHEET UNWIND HAS ONLY JUST STARTED!
Source: St Louis Fed 8

VALUATION: FORWARD PE
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)
CHANGE IN CYL ADJ PRIMARY BALANCE (% OF GDP)
TAILWINDS BECOME HEADWINDS
Source: Zero Hedge, Goldman Sachs 14

GLOBAL PMI SLOWING - IN LINE WITH BASE METALS
IT’S THE CYCLE STUPID
Source: Hedgeye 16
IMF WORLD GROWTH FORECASTS LOOK OPTIMISTIC
CEOS NOT VERY CONFIDENT!
TITLE
Source: Advisor Perspectives 19

10Y US BOND: CROSSED BACK BELOW TREND
Source: SG Technicals 20
ALL FED TIGHTENING EXPECTED IN 2019 HAS GONE!
CURVE STEEPING PRECEDES RECESSION!
CURVE STEEPENING PRECEDES PAYROLL UNWIND
JOBS GROWTH CAN SPIKE JUST AHEAD OF RECESSIONS
Source: Twitter, @LanceRoberts 24

NEGATIVE US 10Y LOOKS A SILLY FORECAST…FOR NOW!
“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
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
CYCLICALLY ADJUSTED PE
EUROPE HAS DIVERGED ONLY SINCE THE 2011 CRISIS
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
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
CHINA’S HARD DATA EXPORTS SET TO SLUMP?
CHINA’S LABOUR MARKET IS STRUGGLING
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
15/01/2019 50
IN EUROPE IT IS EVEN WORSE.
Five year rolling decomposition of EUROPE World returns
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
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
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
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
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
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
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
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

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

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

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)

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
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
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
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
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
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
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
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

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

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
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
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
15/01/2019 85
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
15/01/2019 86
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
15/01/2019 87
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
15/01/2019 88
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
15/01/2019 89
WITH A GROWING DIVIDEND, QUALITY EQUITY INCOME EASILY BEATS JUNK BONDS
Source: SG Quantitative Research/ Equity Quant, FactSet.

15/01/2019 90
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.
15/01/2019 91
APPENDIX
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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.
15/01/2019 92
APPENDIX - DISCLAIMER
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15/01/2019 93
APPENDIX - DISCLAIMER
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It’s been a great QE ride.

But don’t look down!

Source: Zero Hedge, Deutsche Bank

Source: St Louis Fed 8

Recession periods Effective Fed Funds Rate

Source: Zero Hedge, Goldman Sachs 14

Source: Advisor Perspectives 19

Source: Twitter, @LanceRoberts 24

Source: YouGov Poll, April 2018

Source: FT, OECD 27

Source: FT, OECD 28

Source: Trading Economics.com 31

Source: Polotico Magazine 32

Source: Twitter, @georgenmagnus1 38

Source: Zero Hedge 41

Source: Bloomberg, NBS 42

“China’s economy is deteriorating and risks heading

"Services and retailing followed manufacturing’s

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

NO MORE EASY MONEY!

Andrew Lapthorne Phone: +44 20 7762 5762

Source: SG Cross Asset Research/Equity Quant, MSCI

Source: SG Cross Asset Research/Equity Quant, MSCI

Source: SG Cross Asset Research/Equity Quant, MSCI

10.0 Stocks with the highest NEGATIVE correlation to bonds

Source: SG Cross Asset Research/Equity Quant, MSCI

Source: SG Cross Asset Research/Equity Quant

Source: SG Cross Asset Research/Equity Quant, FactSet

Source: SG Cross Asset Research/Equity Quant, FactSet

Decomposition of Value returns Decomposition of Quality returns

Source: SG Cross Asset Research/Equity Quant, FactSet

12m relative performance based on starting absolute valuation

12 Since 2009 Since 1999 Since 1989

Source: SG Cross Asset Research/Equity Quant, FactSet

Source: SG Cross Asset Research/Equity Quant

Source: SG Cross Asset Research/Equity Quant, FactSet

10% All Cycles

Excluding DOTCONM Crisis

Excluding DotCom & 2007 crisis

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

Performance of Value ranked in order of daily absolute price moves

Source: SG Cross Asset Research/Equity Quant,

Source: SG Cross Asset Research/Equity Quant, FTSE

Source: SG Cross Asset Research/Equity Quant, FTSE

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

Source: SG Cross Asset Research/Equity Quant, MSCI

-15.0 YoY growth in Gross Cashflow (%)

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

Debt to Equity (%)

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

Overseas cash repatriation

Net Buybacks Change in Debt

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

Source: SG Cross Asset Research/Equity Quant, FactSet

Source: SG Cross Asset Research/Equity Quant, FactSet

15.0 Good Balance Sheets

Best Balance Sheets vs Russell 2000 index

Total returns indexed to 100

230.0 SG Quality Income Index

Source: SG Quantitative Research/ Equity Quant, FactSet.

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

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.

European Specialty Sales