2014Q1 Investment Strategy Outlook en

ANNUAL EDITION
December 2013
INVESTMENT STRATEGY
2014 OUTLOOK
GREEN LIGHT AHEAD, MIND THE SPEED LIMIT
Most asset prices could shift upward given

current extraordinary conditions, but this is not a
guarantee of extraordinary long-term returns
TABLE OF CONTENTS
Foreword
Global strategy
Currency
Fixed income
10
Equity
12
Emerging markets
14
Alternative investments
16
Major risks
17
7 Convictions for 2014
18
Conviction # 1 - US bond yields back up!
18
Conviction # 2 Value in European short duration high yield
19
Conviction # 3 European banks beauty contest
20
Conviction # 4 Investment cycle gathering speed
21
Conviction # 5 Upside for depressed energy sector
22
Conviction # 6 Emerging pockets of value
23
Conviction # 7 German stocks Rocket-borne
24
25
Global economic outlook

2014: Four seasons of leverage
25
Regional perspectives
27
Key economic focus: Womanomics
28
Forecasts
29
This document is provided for information purposes only and does not constitute a recommendation or advice.
Socit Gnrale Private Banking does not represent that such information is complete or suitable for you and it
should not be relied on as such or acted on without further discussions with your private banker.
INVESTMENT STRATEGY 2014 OUTLOOK
FOREWORD
GREEN LIGHT AHEAD, MIND THE SPEED LIMIT !
Mourtaza Asad-Syed
Head of Strategy
mourtaza.asad-syed@socgen.com
Xavier Denis
Currency strategist
xavier.denis@socgen.com
2013 has clearly been a great year for equities and risky assets in general. What we called
the fall of safe havens early this year fully unfolded when US and German government
bonds declined and gold dropped as economic improvements materialised. It was also a
remarkable year for the financial community as the Nobel Prize in Economics was attributed
to Professors Eugene Fama, Lars Peter Hansen and Robert Shiller for their empirical
analysis on asset prices. According to our records, it has been 23 years since the Nobel
Academy last distinguished a work that relates to investor needs in terms of investments,
asset allocation, or strategy.
2014 appears to be a year of further economic normalisation, which should remain
supportive for cyclical and risky assets especially in advanced economies. The call for better
economic prospects in 2014 remains unchanged, but our confidence is now higher. There is
clearly better visibility, with fewer identified uncertainties: geopolitical tensions have greatly
eased, Eurozone sovereign stress has waned, the US fiscal dispute is over, etc. In fact,
there are even more potential positive surprises ahead: Japans economic policies may
prove a success thanks to innovative initiatives (see our focus on The third arrow of
Abenomics: Womanomics), Eurozone structural reforms on internal competitiveness could
be decided, and China might surprise the world by succeeding in a smooth transition from its
planned export-driven economy to a liberalised consumer-driven economy, averting a hard
landing.
International investors increasingly share the sentiment of better visibility, currently driving
asset prices higher. This trend should continue. In a world of low interest rates and abundant
liquidity, stocks and high yield bonds still have room to appreciate further.
Kim March
Emerging markets strategist
kim.march@socgen.com
Claudia Panseri
Equity strategist
claudia.panseri@socgen.com
Yet, we cannot help tempering our optimism for 2014 with some reminders of caution.
Improved visibility on what is known should not to be confused with lower risks overall. The
world is of course, full of uncertainties and surprises! Keeping in mind Robert Shillers
impressive record of tracking investor exuberance by warning for bubbles in 2000 and again
in 2005-2007, we have to remember his conclusions:
Long-term asset returns are conditioned by structural equilibrium in economic

conditions, such as interest rates, growth rate, corporate profitability, etc. This
equilibrium prevails over cyclical fluctuations, and over long periods, the main
economic drivers such as unemployment, profits, or inflation, revert to their average
trends.
Therefore, relevant predictors of long-term returns are not short-term trends but
valuation metrics that show the relationship between asset price and a long-term
average of an economic indicator such as stock index/GDP, stock prices/tangible
assets, stock prices/profits, bond yields/average inflation. Note that these metrics do
not give any valuable information for short-term returns.
Bubbles do exist, and appear when investors fall prey for "irrational exuberance"
confusing short-term market trends with long-term expected returns.
In conclusion, beware of possible market exuberance building up in 2014 as global growth

accelerates, thus be ready to reverse positions if needed. Most asset prices could perform
well given current economic and financial conditions, but this is not a guarantee of
extraordinary long-term returns, especially if the current conditions are themselves
extraordinary. In non-Nobel wording: tall trees cant grow to the sky.
GRADINGS
As of November 27, 2013

Advanced markets
2014Q1
Global
EM
Eurozone
US
UK
Japan
Cash
Fixed-income
Government
Corporate
Investment Grade
High Yield
Duration
3-5y
1-3y
3-5y
1-3y
Equities
Alternative
Commodities
Hedge Funds
Currencies
Upgrade since previous investment strategy
Downgrade since previous investment strategy
How to read the table:

Gradings
Investments
Portfolio
(vs. Benchmark)
Absolute expectations
(vs cash)
Relative expectations
(vs history)
++
Buy!
Strong overweight
High capital gain
High capital gain
Buy on dips
Overweight
Capital appreciation
Above average return
Hold
Neutral
Yield return*
Average return
Sell on rebond
Underweight
Cash return
Below average return
--
Sell!
Strong underweight
Capital loss
Capital loss
*Yield return: Money market rate for FX, coupon yield for bonds, and earnings yield for stocks
CONVICTIONS
2014
#
CONVICTIONS
Summary
Recommendations
US bond yields
back up!
US monetary policy is entering a multi-year tightening

phase and US long-yield will keep rising in line with
accelerating activity.
This is a major trend that impacts portfolio structure and
investments in bonds, currency and diversification
techniques.
Prefer short-duration bonds

Hedge interest rate risk on existing bonds
Focus on USD vs other currencies, especially the
ones in the Dollar-Zone
Value in European
short duration
high yield
Default rates in European High Yield are set to stay low

while short maturity bonds provide protection against
the risk of rising long-term yields
Structural factors are supporting increased market
liquidity
Focus on short-duration European High Yield

bonds
Switch from Investment Grade to High Yield
European banks
beauty contest
Economic turn around and accommodative monetary

policy will further ease funding conditions. Asset Quality
Revue performed by the ECB will ease market concerns
about the soundness of the Eurozone banking sector
and will increase investors appetite. Bond redemptions
will continue to overtake bond issuance providing a
support to the financial bond market.
Positive on Eurozone banking stocks

Positive on banks senior debt and covered bonds
Be selective on subordinated banks debt (Tier 1
and Tier 2)
Investment cycle
gathering speed
Business fixed investment has been relatively week in

developed markets for several years but we now expect
a recovery in the capex in Japan, US and Europe
(especially in Germany and in the UK). As financing
conditions remain accommodative, companies cash
flow is at very high levels and that global growth is now
accelerating we expect an increase in investments.
Favour Capital Goods related sectors in US,

Europe and Japan
Favour stocks in Tech Hardware, Semiconductor
and Industrial sectors
Upside for the

energy sector
Free cash flow generation is key for avoiding the

ongoing Big Oil de-rating. Improved visibility on Big-Oils
future cash flow, relative valuation to the market near
ten year lows and higher cash returns to shareholders
should attract investor appetite for energy stocks. In
addition, the oil sectors defensive profile and high
dividend yield look attractive for those investors wanting
to avoid likely increase in the equity market volatility.
Favour Global Energy stocks

In Europe, prefer Integrated companies rather to
Oil services
In the US, favour Integrated and Services
Emerging pockets
of value
While 2013 has seen high correlation among Emerging

markets equity, in 2014 EMs that have nurtured
domestic growth drivers, pushed needed reforms and
possibility to cut rates (low inflation) will eventually
outperform those that have relied excessively on
external and domestic credit as well as fiscal stimulus.
Current valuation levels highlight
some value
opportunities, especially when countries are exposed to
the global cycle or exporting to US, Germany and
Japan.
Favour markets with current account surplus and

low valuation. Our preference goes to Korea,
Taiwan and then to lesser extend Poland,
Philippines and Mexico
Among the BRICs, China will outperform Brazil,
India and Russia.
We would avoid Brazil, South Africa, Indonesia,
Turkey and India.
German stocks:
rocket-borne
Low interest rate environment, attractive effective

exchange rate and accelerating economic growth are all
the necessary factors to drive German stocks further
up. In the Eurozone the DAX remain our preferred index
as valuation is cheap.
Small & Mid caps in Germany are still attractive despite
the 20% premium they show relative to large caps in
the region.
Favour the DAX to the other European indices.

German small and mid caps are set to outperform
again in the coming 12 months
Favour consumer discretionary, technology and
capital goods
GLOBAL STRATEGY
2014 market catalysts: more of the same with more dispersion

Most diversified portfolios performed well in 2013 thanks to double-digit stock market
performances in advanced countries. Going forward, we expect the four major 2013 drivers
to persist, namely:
Very accommodative monetary policies in advanced economies, with a hint that the US
intends to normalise its policy,
Fiscal policies, which have been restrictive in most advanced countries in 2013, will be
less of a drag,
Economic growth that improved steadily across most advanced economies and has
shown signs of weakness in emerging countries, and
Dynamic global credit cycle that is still at work, and which allowed US corporate releverage and recovery.
As economic conditions normalise and systemic risks fade, investors are shifting their focus
and are now able to dig with greater details into each asset class, each country, sector, and
each company individually, opening the door for more fundamental analysis and
differentiation. By collectively chasing all remaining investment opportunities, investors will
make financial flows increasingly important in market behaviour. In the end, markets are
likely to be driven by:
The sustainability of growth, which will define the length of the current cycle,
Chinas economic transition, which impacts global trade and commodity prices,
Profit growth and margins, which will be key to assess fair value of equity markets,
Liquidity and financial flows, which are driving most short-term moves in financial
markets.
The macro view: green light ahead for advanced economies
We expect the policy-mix in advanced economies to support growth thanks to
accommodative monetary conditions and less restrictive fiscal policies. The four main OECD
central banks (Fed, ECB, BOJ and BOE) are not concerned about inflation. On the contrary,
deflation is still cited as a major risk by authorities. None are willing to increase rates in 2014.
The US Federal Reserve has stated that it will reduce its asset purchase program in the
coming months as the economy improves. We see this as healthy rebalancing, not monetary
tightening. Fiscal policy uncertainty has been greatly dispelled in the US with the Republicans
lifting their blockade on the budget, and in the Eurozone there is a greater acceptance that
austerity is a hard cure that has to be softened to promote growth.
Recent indicators show that growth is already accelerating across major advanced
economies, at an annual rate now above 1.5% vs 1% on average in 2013 and heading
toward 2% in 2014. The large emerging markets (EM) are running high at 5.5%, but no
notable acceleration is likely in 2014. EM might face accelerating inflation which could bring a
tighter policy-mix and growth disappointment.
The long-awaited capital expenditure bounce is already visible from business surveys and
capital goods order books in the US, Japan and Germany. This could mean a sustained
growth cycle. Nevertheless, it has yet to be confirmed by faster employment gains in the US
and abroad, and greater consumer purchasing power will be needed to foster growth beyond
2014 into 2015.
GLOBAL STRATEGY
China and other emerging market countries will face challenges to correct accumulated
excesses, but should manage a soft landing that will not disrupt global activity. Global trade is
already rebounding, and the US-led recovery should spread further abroad.
Profits should post satisfactory growth in 2014 and margins remain steady in the absence of
any major changes in commodity prices. Despite US monetary normalisation, financial
liquidity should remain abundant as banks take up the relay from central banks as capital
buffers have been rebuilt.
Tactical allocation: still overweight on risky assets with increased diversification
Our global outlook assumes accelerating growth in 2014, normalising slowly to potential
growth, but low inflation leaving monetary policies accommodative. This economic backdrop
translates into an overweight position in risky assets at the expense of cash and defensive
assets. We maintain a bias towards equities and high yield bonds, and underweight
government bonds, gold and cash. We favour equity markets in Japan, the US, and the
Eurozone which we upgrade at the expense of the UK. In fixed income, as it is increasingly
challenging to capture value at acceptable risk, we focus on European high yield bonds,
especially short duration bonds. In moving further away from investment grade bonds,
opportunities could be found within alternative investments, especially hedge funds that
should be favoured at the expense of commodities. Gold remains our least preferred asset;
any technical rebound in the first quarter would be an opportunity to reduce any positions.
We maintain our expectations for greater differentiation and performance dispersion
expressed in 2013, which translates into digging into sectors and countries across our seven
key convictions for 2014:
1. US bond yields back up: favour short-duration bonds and hedge long-duration
portfolio taking exposure to volatility,
2. Value in European short duration high yield: switch investment grade bonds into
short-duration high yield bonds,
3. European banks beauty contest: take advantage of increasing visibility on European
assets, buying bank stocks and bonds, including senior and subordinated bonds,
4. Investment cycle gathering speed: with capital on the rise, favour Industrials and
Technology sectors in the US, Japan and Eurozone equity markets,
5. Upside for depressed energy sector: invest in undervalued energy stocks that have
completed their investment plans,
6. Emerging pockets of value: take advantage of a generalised EM asset sell-off during
the year, by buying stocks in Korea, Taiwan, Mexico, the Philippines and Poland,
7. German stocks: rocket-borne: invest in German stocks, especially those sensitive to
expansionary monetary policy and regional consumption.
Managing risks: beware of market exuberance and excess confidence

Our position biased towards risky assets makes our portfolio vulnerable to growth
disappointments and financial shocks, although in the immediate months, we are more
concerned about excessive optimism. Our main risks by decreasing importance include: i) a
market sell-off following a period of excessive optimism in the first quarter, ii) an interest rate
shock from tighter monetary policy, and iii) slowing economic growth in any major region.
GLOBAL STRATEGY
CURRENCY
EUR/USD: EVENTUALLY A LOWER

DOWNSIDE TOO SHOULD BE LIMITED
DRIFT
BUT
Although US momentum gained traction over 2013 and the

Eurozone slipped back into recession, the EUR continued
to appreciate in the second part of the year, even briefly
topping 1.38. As the Fed remained at a standstill,
preferring to postpone QE, the EUR benefited from
receding tail risks and returning foreign investors wishing
to take advantage of low valuations in some hard hit
peripheral markets. Also, the Eurozone current account
balance improved significantly as domestic demand was
depressed and exports advanced. The growth differential,
with US growth expected to exceed 2% in 2014, should
feed diverging monetary policy trends. The ECB is set to
infuse additional liquidity to fight ongoing deflationary
pressures whereas US real interest rates should continue
to rise, mirroring better economic conditions and a gradual
shift in the Feds policy stance.
EUR/USD & Rate differentials
Source: Bloomberg, Socit Gnrale Private Banking
I We are keen on maintaining our dovish view on the EUR

although downside is likely to be limited as investors look
more eager to increase exposure to Eurozone assets and
the ECB is unlikely to be excessively aggressive
(EUR/USD: 1.30 in six months and 1.25 in one year).
GBP/USD: THE BoE EXPECTED TO WIN THE SNAILS

RACE AGAINST THE US FED
As the British economy surprised on the strong side, the
GBP has rallied against the USD, gaining 10% since the
trough recorded in July. It is true that the UK economy is
expected to continue to do quite well in 2014 (with a
growth rate forecast well above 2% and significant job
creation) but the BoE is set to remain on hold for a long
period of time, and probably even longer than the Fed as
UK inflation expectations have recently eased. As the
housing market is heating up, the central bank seems
more inclined to use prudent macro measures to prevent a
bubble building up rather than tightening its monetary
policy stance. This should ease market pressure on the
BoE to start a hiking cycle earlier than desired.
I Although the GBP may continue to trade on the strong
side ahead of the much-awaited tapering, we think that the
British pound should gradually lose ground vs the USD
(1.60 at six month and 1.55 in one year). As for the
EUR/GBP, we do not expect a major move, but the GBP
is likely to trade on the strong side vs the EUR (EUR/GBP:
0.83 at six and 0.81 at twelve months).
Recent GBP appreciation looks overdone

1.5
1
US 10 yr real yield
1.65
GBPUSD (RHS)
0.5
1.6
0
1.55
-0.5
1.5
-1
1.45
-1.5
-2
01-12
1.4
07-12
01-13
07-13
1.7
UK 10 yr real yield (LHS)
GLOBAL STRATEGY
CURRENCY
EUR/CHF:
NON-DOMESTIC
FACTORS
FAVOUR MODEST DEPRECIATION
SHOULD
Although upward pressure on the CHF has been alleviated

as the Eurozone debt crisis has eased, the CHF has not
significantly depreciated, trading in a narrow range of 1.231.24 for most of 2013. The CHFs strength stems from a
persistent current account surplus, lingering capital inflows
seeking a safe haven in the European environment, and
recent speculation on the removal of the 1.20 floor set by
the central bank to counter the overshooting of the Swiss
franc. Since financial fragmentation in the Eurozone should
recede further and the CHF is about 15% overvalued in
real terms, a normalising environment should pave the way
for a gradual weakening of the CHF.
I We reiterate our dovish view on the CHF but its softening
is set to be gradual as structural factors are supporting its
strength (EUR/CHF: 1.25 in six months, 1.28 in one year).
Improving terms of trade combined with domestic

economic booms and sound financial systems have
attracted foreign inflows looking for yield in a safe
environment. The wind has now turned, and overvaluation
looks difficult to sustain. From a fundamental viewpoint,
the AUD looks the most at risk for further depreciation as
China has embarked on a decelerating growth trend and
hard metals or coal, of which Australia is a big exporter,
are likely to fall further. We are more confident in the NOK
or the CAD, as the oil price should remain broadly flat
throughout the year and since those currencies are less
overvalued from a structural perspective (purchasing
power parity).
Rising inflation expectations weigh on the JPY
105
2
1.8
100
USD/JPY: A NEW YEN DROP IN SIGHT
1.6
1.4
95
Japanese authorities succeeded in massively weakening

the JPY vs the USD by close to 20% over 2013, the first
arrow of the Abenomics strategy. This greatly helps
sustain the economy with inflation steadily drifting upward.
As the BoJ is firmly committed to anchoring inflation at 2%
on a sustainable basis, we are pretty confident that an
additional round of quantitative easing lies ahead. The
VAT hike scheduled in spring 2014 should trigger preemptive action from the BoJ to mitigate its contractionary
impact on consumer demand. Certainly the Japanese
economy has not fully pulled out of the deflation trap, but
substantial progress has been recorded and a weaker Yen
remains a key driver to revive the economy. Also, the
deterioration of the current account balance as well as
renewed capital outflows fostered by domestic institutional
investors seeking higher returns overseas will constitute
additional weakening factors.
I We maintain our dovish view on the yen vs. the USD as a
further rise in inflation expectations should continue to
lower Japanese real interest rates, driving the yen lower.
(USD/JPY: 105 in six months, 108 in one year).
1.2
90
1
0.8
85
0.4
80
75
11-12
Breakeven inflation rate (%)
The super-commodity cycle has been a powerful engine

underpinning the strengthening of commodity currencies.
05-13
08-13
11-13
Lower commodity prices drag down the AUD

1.2
550
500
1.1
450
1
400
0.9
350
300
0.8
0.6
2008
AUDUSD (LHS)
250
Industrial Metals
Price (S&P)
200
150
2009
2010
2011
2012
0.2
0
02-13
0.7
OTHER G10 CURRENCIES: COMMODITY PRICES AND

VALUATION METRICS WILL BE THE DRIVERS
0.6
USDJPY (LHS)
2013
GLOBAL STRATEGY
FIXED INCOME
FURTHER YIELD RISE MAKES GOVERNMENT BONDS

UNATTRACTIVE
INVESTMENT GRADE (IG): BEWARE OF RETURNING

VOLATILITY ON SPREADS
2013 was characterised by a significant yield pick-up at the

long end of the curve (around 100bp between May and
August for the 10Y) as the Fed chairman prematurely
signaled in May the need for tapering. Since the Fed
surprised the market in September by delaying tapering,
the 10Y UST yield has moved sideways. The new Fed
Chairman, Janet Yellen, to succeed Ben Bernanke in
January 2014, recently highlighted forward guidance as
the new preferred policy tool for Fed action, so that the US
central bank is unlikely to hike its policy rate before mid2016, with the aim of managing the inevitable yield rise in
2014.
As already advocated for a while, we are keen on

reiterating our negative view on investment grade bonds.
I As we expect QE3 to be scaled back in Q1 2014 before

coming to an end in September with the US recovery
gaining pace, additional yield pick-up is on the cards in the
70 to 100bp range across 2014.
In the UK, more buoyant growth combined with stabilising

inflation expectations will nevertheless feed into higher
long-term yields as the market will start pricing in a hiking
cycle. Forward guidance is also a watchword for the BoE
as a way to avert overreaction from the bond market, but
higher interest rates are to be expected there as well. In
the Eurozone, deflationary forces have pushed down
headline and core inflation well below the 2% target,
raising the odds of additional liquidity injections in the form
of long-term refinancing operations, a way to mitigate
possible money market tension ahead of the redemption of
the 1st LTRO that is due in late 2014. As US and
European bond markets show a high correlation (60% on
average over the past five years), German bond yields will
not be immune from a rise in US yields, but the magnitude
is likely to be smaller.
I The immediate implication is our negative view for both
US and European government bonds.
Spreads have significantly tightened across 2013 and

there is probably no more room for spread compression,
and some widening cannot be ruled out.
Clearly, volatility is set to bounce back on financial markets
and credit markets will not be an exception as central bank
communication will be put to the test.
I As maturities have been extended and investors as well
as issuers have come down the ratings ladder, there is no
more value to pursue in the investment grade universe.
Interest rate risk has returned as US monetary policy is set
to gradually move towards a less accommodative stance.
ISM new orders & change in 10-year UST yields
Yet there is at least one exception to that: peripheral debt

markets where we still see potential for spread
compression in a more benign economic environment,
warranting a Neutral rating for this specific bucket.
10
GLOBAL STRATEGY
FIXED INCOME
Investment Grade (IG) bond performance has not been

impressive this year. The year-to-date total return in the
Eurozone is about 2.5% and -1.5% for the US market, as
the yield curve has markedly steepened. Issuers balance
sheets tend to deteriorate with more debt issued to fund
equity buybacks.
EU investment grade bonds spread and leverage
I The further acceleration of the capex cycle we expect in

2014 in the US and to a lesser extent in the Eurozone is
another argument to shy away from the investment grade
market as cash positions are set to shrink across the
board.
There are nevertheless some exceptions to this view. We
think that there is value in European corporate financial
bonds in Europe and more specifically in bonds issued by
banks, including covered bonds, in the Eurozone in
particular. An economic turnaround, even modest,
underpinned by a more aggressive monetary policy stance
and no negative surprises expected from the ECBs Asset
Quality Review should help reduce the risk premium
attached to financial issuers.
I For these reasons, we expect bank bonds to outperform

this year.
HIGH YIELD: VALUE REMAINS FOR THE TAKING
Annual default rates (%)
The high yield universe is certainly a segment where we

still see value in 2014. First of all, default rates are likely to
remain low and certainly below historical averages.
Moodys speculative default rate reached 3.3% at endSeptember 2013 (vs 4.78% for the 13-year average) and
the recovery unfolding in developed markets will help
anchor it below historical averages. Loose monetary
conditions will preserve a favourable funding environment
allowing refinancing at attractive conditions while lingering
investor appetites for high-yielding assets will maintain
good liquidity conditions. Also, 2014 should show a
positive correlation again between high yield and equities.
But expected returns are set to be lower than in previous
years: after an expected total return around 10% in 2013 in
the Eurozone market and 7% in the US, the performance
looks set to be lower in 2014, but should be more
appealing in the Eurozone as there is greater room for
spread compression and more positive surprises are
possible.
Forecasts
30-year average (US)
Source: Moodys, Socit Gnrale Private Banking
I In any case, duration risk needs to be closely monitored

against a steepening yield curve backdrop so we strongly
recommend focusing investments on short-duration bonds.
11
GLOBAL STRATEGY
EQUITY
FROM LIQUIDITY-DRIVEN MULTIPLES EXPANSION TO

AN EARNINGS-DRIVEN CYCLE
2013 has been a year of strong stock market recovery in
most developed countries. The end of the recession in the
Eurozone and of deflation in Japan, along with postponed
Fed tapering, are all factors which have helped reduce
investor risk aversion and drive 20% expansion in
multiples. In our view, there is less room for additional
Price/Earnings (P/E) re-rating now, so we feel it is
imperative that we see a clear rebound in earnings for the
equity outlook to remain positive over the medium-term
horizon. Our top-down forecasts point to 10% profit growth
in the US and the UK, which is largely in line with
consensus forecasts; 8% for the Eurozone (vs 16% for the
consensus); and Japan remaining in the double digits.
Therefore, while valuations appear less attractive than a
year ago, we still see potential for positive returns over the
coming 12 months.
P/E expansion may continue even when bond yields rise

8
R = 0.59
10y US bond yield (%)
7
6
5
4
3
2
Trailing P/E (x)
1
0
10
15
20
25
30
35
Source: Datastream, Socit Gnrale Private Banking
I For next year, our regional preference is again for

developed vs emerging countries. Japan should enjoy the
best upside, followed by the Eurozone with Germany in
particular, and the US.
US STOCKS SLOW BUT TREND IS STILL POSITIVE
As long as US wages keep falling, US margins not at risk
Despite an upward shift in US stocks and the rise in

valuations, the prospects for US equities remain attractive
relative to other asset classes in the region and in absolute
terms. Returns are likely to slow but remain strong. We
continue to believe that the critical time for equities is likely
to be the period around the first Fed funds rate hike (mid2016). While we forecast a modest P/E expansion, US
stocks should be buoyed by resilient profit growth and high
margins. Low interest rates and low local energy costs
continue to support net profit margins in US margins vs
other regions. One additional driver of these high margins
is the low cost of labour which does not seem likely to
reverse any time soon. Cyclical peaks in the profit share of
GDP have tended to occur at least ten months after wage
growth has started to accelerate and have also tended to
occur when hourly wage inflation was running between
3.5% and 4%. That said, we are convinced that the
S&P500 index may overshoot in the coming months.
Sector wise, U.S. mid- and late-cycle sectors (Industrials,
Energy, Technology) and financials are best positioned to
experience an improvement in relative ROE (Return on
Equity) and to outperform the rest of the market.
60%
59%
5%
Wages % GDP (lhs)
6%
58%
7%
57%
8%
56%
9%
55%
10%
54%
11%
53%
12%
52%
13%
60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11
I US stocks may overshoot, driven by positive profit

growth, but returns are expected to be lower next year
than in 2013.
12
Profits % GDP (rhs, inverted)
GLOBAL STRATEGY
EQUITY
PROFIT GROWTH AT A TURNING POINT

Since July 24, 2012 when European Central Bank
President Mario Draghi promised to do whatever it takes
to save the EUR, Eurozone stocks have performed well
(+30%). Lowering the probability of systemic risk and a
EUR break-up, Mr Draghis speech was the catalyst for the
market re-rating over the past year and a half. As interest
rates were driven down in peripheral countries by the
comeback of investor appetite, this also gave some
countries the time to move forward with reforms (i.e.
Spain). Since deflation risk remains a threat and the
economys recovery is still fragile, we believe that any
additional positive market performance would only be
fostered by favourable surprises on the corporate side.
With the ECB expected to act if there is no recovery, and
considering that for the first time in three years, Eurozone
profits will see high single-digit growth in 2014 (about 8%),
we upgrade the Eurozone to Overweight from Neutral.
In terms of allocation in the Eurozone, we tend to
prefer German stocks to French names. Indeed within
the core countries of the Eurozone, valuations are fully in
line however potential for a rebound is stronger for
Germany than France due to the higher risk of deflation in
the latter. In the peripheral countries, we prefer Spanish
stocks to Italians as Spains recovery is one step ahead. In
addition Spanish stocks offer an impressive high yield
(5%) one of the highest in the world equity markets.
Sector wise, we tend to Overweight Financials which are
expected to benefit from better visibility after the ECBs
Asset Quality Review; Energy thanks to its extremely low
valuation and high dividend yield; and Pharmaceuticals for
the sectors growth appeal.
I With profit growth now expected to turn positive, we
move to Overweight on Eurozone stocks.
AMONG UK STOCKS WE STILL PREFER SMALL & MID
TO LARGE CAPS
UK stocks enjoy one of the best economic climates: a solid
recovery in the housing market, the strongest
manufacturing expansion, cheap valuations, and
accommodative monetary policy. In this context we tend to
prefer the most cyclical part of the market, namely
financials and small & mid caps. This is the reason why we
continue to reiterate our preference for the FTSE 250
rather than the large cap benchmark (the FTSE 100).
END OF DEFLATION IN JAPAN PLAYS A MAJOR ROLE

IN P/E EXPANSION
Thanks to the governments efforts to boost corporate
investment, the investment cycle is likely to show a strong
upward trend by 2014. In this kind of climate, company
precautionary savings are likely to decline, and capex
should generate strong demand. In addition, further
depreciation of the yen relative to the dollar should keep
exports growing, supporting another year of double-digit
profit growth in Japan (according to our calculations, EPS
should grow by 18% in 2014 estimate). As valuations are
still very attractive and deflation is coming to an end, P/E
expansion is set to continue next year, keeping the
structural re-rating of Japanese stocks alive. We therefore
remain positive and maintain our Overweight stance.
Sector wise, we continue to Overweight Financials and
Consumer Staples. We upgrade Consumer Cyclicals from
Neutral to Overweight as potential wage hikes should
easily offset the expected increase in VAT. We downgrade
both Technology and Telecoms stocks after the impressive
performance.
I Additional monetary policy easing, strengthening
domestic demand, and expectations of a capex recovery
are the ingredients for a strong stock performance in the
coming 12 months.
Restocking should sustain Eurozone profit growth next

year
40
30
20
10
0
-10
-20
-30
-40
-50
-60
-70
Euro Area profits growth (%)

New Order minus Inventories (%)
Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4
1986 1988 1991 1993 1996 1998 2001 2003 2006 2008 2011 2013
I We continue to Overweight Industrial stocks exposed to

US capex; we move to Overweight on Energy at the
expense of Consumer Staples. We also Overweight
Financials as they find additional support in the steepening
of the yield curve.
13
GLOBAL STRATEGY
EMERGING MARKETS
A YEAR OF HOPE AND FEAR

Emerging Markets (EM) assets are entering 2014 less
overpriced than they were at the start of 2013, though
probably not as cheap as they will yet become.
EM citizens may approach 2014 and the elections with hope
of structural reforms to reignite the EM growth story, EM
investors with hope that the waning tide of global liquidity
and less supportive financial conditions will be mitigated by
true Developed Markets (DM) recovery, and global demand.
However, side by side with this, we expect 2014 to also be
characterized by fear. Notably, fear of the unknown fallout of
Fed tapering, particularly if policymakers react to win votes
(taking a pro-growth stance which could further weaken
fundamentals) rather than to appease financial markets
(tightening policy to address persistent external
imbalances).
Less dynamic growth across EM and receding global
liquidity as the US Fed gears up to end asset purchases
(QE) imply that the recent era of artificially low long-term
rates is coming to an end. In this scenario, upward pressure
on borrowing costs will likely further dent EM growth, which
has been largely supported by domestic demand amid
strong credit growth. Furthermore, China has become less
supportive for EM, weighing in turn on global commodities.
This, at a time when developed markets are finally picking
up pace. EM are simply less attractive relative to DM than
they used to be. While a global recovery (US growth nearing
3%, Eurozone exiting recession, trade picking up) would be
a good thing for EM - particularly manufacturing export EM
(Mexico, Korea, Poland) the simultaneous withdrawal of
liquidity, and retrenchment of capital flows to EM are likely
to offset this boost.
EMERGING MARKETS RATES & CURRENCIES
accompany the change in global monetary conditions.

Some select currenciesMXN, PLN, PHP, CNYappear
less likely to come under such pressure given an
improving economic outlook and still supportive external
accounts, though upside is likely to be bumpy.
I Currencies and interest rate risk is coming under

additional pressure in 2014 as the US shifts away from
asset purchases. Some select FX (MXN, PHP, PLN) may
outperform given more supportive growth and external
account dynamics.
EM FX and USD Index
EM FX Index
USD Index (DXY, rhs)
115
86
110
84
105
82
80
100
78
76
95
90
85
74
72
FX depreciation
80
70
10
11
12
13
EM Bank Lending Conditions (Index, 50 = Neutral)
Local markets have seen their worst selloff since 2008,

driven by the May Fed taper talk. EM yields rose sharply this
summer, later gaining back some of their losses. Yet, we
expect more downside into 2014 as the shift to a less
accommodative US monetary policy puts further upward
pressure on global policy rates, EM included. The same
dynamic is expected for EM currencies, which weakened
even despite persistent USD weakness, which we expect to
reverse in 2014 as the USD strengthens. Furthermore,
given the risks to EM growth from higher borrowing costs,
FX remains the key channel for macro adjustment. This is
most true in countries which have the greatest external
imbalancesBrazil, South Africa, Turkey, India, Indonesia
(BRL, ZAR, TRY, INR, IDR)but may also play out across
most EM. The argument for carry-based FX upside will
remain subject to risk given the likely volatility which could
52
51
50
49
48
47
46
45
44
43
42
41
49,9
49,1
48,6
48,6
50,6
49,5
48,3
44,7
Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13
*Values above 50 (improving conditions); below 50 (deteriorating conditions)
Source: IIF, Socit Gnrale Private Banking
14
50,5
GLOBAL STRATEGY
EMERGING MARKETS
EMERGING MARKET CREDIT

Higher US bond yields and moderate EM growth
expectations paint a challenged backdrop for EM credit in
2014, although the year is not likely to be a complete
washout either. Attractive carry in EM corporate HY and
modest spread tightening potential in both sovereign and
corporate EM as macro fundamentals stabilize mean that
opportunities will remain (particularly for long-term
investors).
Despite the sharp selloff in 2013, we see only select
potential for sovereign spread tightening in 2014. These
include Indonesia, given signs that policymakers are
addressing imbalances, Mexico due to structural reforms,
and CEE on stronger regional growth prospects. The theme
of avoiding current account deficit sovereigns otherwise
remains, many of which are also holding elections (Brazil,
Indonesia, Turkey, South Africa), risking policy missteps on
the back of lower global liquidity. Corporate credit provides
greater potential upside but will also remain highly sensitive
to global rates. High yield could outperform in this regard
given its shorter duration and lower interest rate sensitivity.
Regionally speaking, Asia appears buffered by its relatively
stronger external accounts (India and Indonesia
notwithstanding) and strong local investor base. Latam was
punished in 2013 by higher default rates, which could face a
reprieve in 2014; select opportunities in IG and HY Latam
credits are possible.
for a more constructive view in the coming year despite the

global pressure of weaker currenciesand higher rates. In a
more general sense, EM with current account surpluses,
low inflation and possible room for manoeuvre in terms of
policy support (rate cuts, fiscal strength) may exhibit
upside. Furthermore, despite Chinas less helpful outlook
to EM, the Chinese equity market itself stands to re-rate to
some degree given the policy clarity provided by the Third
Plenum in November.
I Pockets of EM Equity upside are likely in 2014, namely

from those countries best positioned to benefit from the US
recovery and least exposed to external financing risk.
Sovereign and Corporate BBB Spreads to US Corps (bps)
EM BBB Svgn - US corp BBB
EM BBB Corp - US corp BBB
UST 10y (rhs)
200
150
4,5
4,0
3,5
3,0
2,5
2,0
1,5
1,0
0,5
0,0
100
50
0
-50
-100
-150
I Sovereign EM bonds will likely perform better than EM

corporate taken together, but opportunities in EM corporate
(HY Asia, Latam) may offer decent upside potential, on a
selective basis.
EMERGING MARKET EQUITIES
10
11
12
13
EM Policy Buffers and Equity Performance
The recovery of DM growth stands to provide some support

to EM in 2014, albeit less across the board than has
previously been witnessed. As stated above, Chinas slower
growth outlook implies less demand for global commodities,
upon which many EM are largely dependent. As such, and
given the removal of support to domestic demand from easy
financial conditions, EM as a group are less likely to rally in
the coming year than has historically been the case.
However, we see some standouts among EM in 2014. To
start, not all EM are so commodity dependent. EM export
manufacturers, particularly those with open economies, will
likely gain from the pickup in US and Eurozone growth. In
this regard, Korea, Taiwan, Mexico and some CEE
countries may enjoy support in the coming year. A few EM
have also taken reform measures to improve their
fundamental backdrop (Mexico, Philippines), which argue
10
Turkey
India
R = 0,40
South Africa
Bubble size
is 2013 profit
growth
Russia
Brazil
Mexico4
Poland
2
2013e Current
Czech Rep
Account (% GDP)
Philippines
China
Hungary Malaysia
Taiwan
Korea
-10
-5
15
2013e Inflation (%)
12
Indonesia
10
15
GLOBAL STRATEGY
ALTERNATIVE INVESTMENTS
COMMODITIES : NEUTRAL
Oil prices: WTI and Brent
Energy (WTI oil): Neutral (Spot: $94, 3m: $101, 6m:

$95). Our oil outlook is for a broadly balanced physical
market in 2014. Projected global demand growth next year
is unchanged at 1.2 Mb/d, led by emerging markets. NonOPEC production growth has been increased, driven by
the US and Canada. We expect Saudi Arabia to continue
to take the lead in balancing the physical markets. Our
forecast is for OPEC crude output to be cut by 0.3 Mb/d
next year. We slightly revised down our forecast on oil
prices for 2014, due to slightly weaker fundamentals than
previously expected, and less of an upward bias from
geopolitical risk, due to Iran normalisation.
I Oil prices continue to be driven by fundamentals, and our
outlook is for a broadly balanced physical market in 2014.
Gold: Negative (Spot: 1254, 3m: $1250, 6m: $1100). On
a tactical basis, downward pressures on gold might ease
as sentiment has turned excessively negative lately, but
beyond February, gold should again be heading lower,
very likely below $1200. Indeed, ongoing US monetary
normalisation will drive real yields higher reducing the
attractiveness of holding gold.
Gold still in downward trend with short-term exaggeration
I Gold still faces serious headwinds, because the trend in

real yields is upward, and with growth accelerating
throughout the year, 2014 is unlikely to be positive for gold
investments.
HEDGE FUND : POSITIVE
The economic and investing backdrop presents a fertile
opportunity for hedge fund managers to generate
performance. Equities remain a core favoured strategy
and Special Situations also provide good opportunities.
However, Long/Short credit strategy and Commodity
Trading Advisory (CTA) funds are still challenging and are
not likely to provide very strong returns in the next quarter.
I Hedge Funds as a whole remain an attractive asset class

on the basis of risk-adjusted returns especially compared
to investment grade positions. They are likely to continue
to generate positive returns as financial normalization
takes place and economic data recovers.
Source: SG Cross Asset Research, Lyxor
16
GLOBAL STRATEGY
MAJOR RISKS TO OUR SCENARIO
We envision three main downside risks and one upside risk. Some risks could hurt our
positions, but most of our current tactical bias mitigates downside risks.
DOWNSIDE RISKS:
Market sell-off following a period of euphoria! A major brutal pullback on all risk
assets during the first quarter, after excessive optimism in December-January. Most
risky assets suffer a 5-10% decline, returning to early November levels.
Increase exposure to volatility by buying short-term protection. Take

profits whenever equity markets rally by 10% in Q1.
Interest rate shock. US 10-year rates overshoot towards 4%. US housing recovery is
halted, firms stop re-leveraging. Stock markets drop by 10%-15%, EM assets bleed
further.
Remain long USD, underweight EM assets (FX), and underweight interestsensitive US stocks.
Slowing economic growth. Eurozone relapses into recession, US economy misses

consensus estimates and Prime Minister Abe fails to drive Japan out of deflation.
Defensive assets perform well (US, German government bonds and gold) while equities
drop. The USD depreciates.
Increase exposure to volatility by buying medium-term protection.

UPSIDE RISKS:
China economic growth surprises to the upside. EM markets and commodities start
outperforming.
No hedge. A portfolios with risky assets will benefit directly but it would
probably underperform if under-invested in EM.
17
CONVICTION # 1
US BOND YIELDS BACK UP!
The Federal Reserve was very clear in its policy guidance:

it will now focus on normalising its monetary policy. First,
by reducing direct asset purchases, then by increasing
short-term interest rates. We expect purchase reductions
to begin in the first quarter and the rate hikes to occur by
early 2016.
There is still great uncertainty on the exact timing and
potential additional delays if the Fed is still concerned
about the persistent unemployment rate. But higher rates
seem quite certain. The Federal Reserve is determined to
act and the recent run-up in asset prices will put pressure
on the board to prevent any new asset bubbles.
HIGHLIGHTS
I US monetary policy is entering a multi-year tightening

phase
I US long-term yields will keep rising in line with

accelerating activity
I This is a major trend that impacts currency trends and

optimal portfolio structure
US Treasury yields drivers
It is unlikely that bond markets and long-term yields will

wait for 2016 to adjust upward. In just two months, US 10year bond yields increased by a full 100bp, followed by
German bonds and most OECD bond markets.
Forecasts
We expect long-term yields to continue their journey

upward for two reasons:
The bond market should revert to its natural driver,
nominal GDP growth, once asset purchases dissipates.
The US nominal growth trend is heading to 5% by 2016
bringing the 10-year equilibrium yield to about 4.5-5.5%, a
long way to go from the current 2.8%. We think 3.5% is
reachable in 2014.
The government bond market has now started to

behave pro-cyclically, thus reducing its diversification
benefits for institutional investors. Structural fixed income
positions for long-term investors should decline
continuously in 2014 pushing prices down and yields up.
Rising yields generate opportunities and risks for investors.
First, after selling US government bonds, especially the
ones with 5-year maturities, it is wise to reduce the
portfolios duration (interest rate sensitivity) either by
preferring short-duration bonds, or by hedging existing
bonds. Second, opportunities could be found among
currencies by buying USD versus other currencies, namely
the CAD, AUD, NZD, JPY and other Asian and Latin
American currencies.
The USD tends to experience multi-year appreciation

cycles when its yields are rising with stable to declining
inflation. Third, we believe investors with multi-asset
portfolios should diversify with assets uncorrelated to the
economic cycle, such as volatility indices that still behave
contra-cyclically as opposed to stocks, commodities and
bonds.
INVESTMENT CONCLUSIONS
Prefer short-duration bonds
Hedge interest rate risk on existing bonds
Underweight/sell US government USD bonds
Focus on USD vs other currencies, especially the

ones in the Dollar-Zone
18
CONVICTION # 2
VALUE IN EUROPEAN SHORT DURATION HIGH YIELD
Global Corporate High Yield (HY) has widely outperformed HIGHLIGHTS

other fixed income instruments over the past decade,
particularly in terms of risk adjusted return. The asset class The economic backdrop supports the case for HY credit,
which furthermore offers elements of comfort, such as preis supported by structural factors, but the attractiveness of
set maturity and coupon
European HY is also due to fundamental and cyclical
reasons. In the current macroeconomic environment, we
Short-maturity bonds provide buffer against the risk of
particularly like the short maturity bucket of this asset
rising long-term yields
class, as it offers greater protection against rising longterm yields. This short-duration performance should,
Default rates in European High Yield are set to stay low
become increasingly relevant as global rates rise while
given comfortable liquidity conditions
short rates are held steady by forward guidance or, in the
Eurozones case, by the potential even of additional policy
easing.
European HY number of issuers & market size
Some key factors should be taken into account when
250 000
500
investing in HY corporate bonds:
1) Credit fundamentals. Todays accommodative
monetary environment remains a positive backdrop for
Corporate HY. The significant liquidity in the system allows
comfortable refinancing possibilities for the private sector
and, as such, offers good protection against rising default
rates. Cash flows and profitability likewise benefit from
reduced refinancing costs. The most defensive part of the
asset class (BB-rated issuers) is particularly attractive
because it is made up of well-known and sound
corporations.
Number of issues (RS)
Nominal Value (m)
200 000
3) Liquidity risk. With Basel 3, banking disintermediation

is well underway. Eurozone High Yield is only 20%
financed on bond markets (vs. 80% in the US), but with
more and more issuance in the pipeline, liquidity is rapidly
improving (250bn outstanding, five times the level seen in
2009). The investor base, especially insurance companies
and pension funds, likes it.
150 000
300
250
100 000
200
150
50 000
100
50
9/
30
6/ /19
30 99
/
3/ 20 0
3
0
12 1/20
/3 01
1/
9/ 2 0
30 01
/
6/ 20 0
30 2
3/ /20
3 03
12 1/20
/3 04
1/
9/ 2 00
30 4
6/ /20
30 05
3/ /20
31 06
12 /20
/3 07
1
9/ /2 0
30 07
6/ /20
30 08
3/ /20
31 09
12 /20
/3 10
1
9/ /2 0
30 10
6/ /20
30 11
/
3/ 20 1
31 2
/2
01
3
Source: BofA ML, Socit Gnrale Private Banking
Current Eurozone market conditions - low growth, low

inflation, high artificial albeit stable liquidity in the
system - support the case for investment in European
HY.
We prefer Integrated Companies vs. Services.
19
400
350
2) The interest rate environment. The Eurozone is only

slowly moving out of recession, and credit channels are
still not working properly. For this reason, we do not think
policymakers will risk removing liquidity. This is a
supportive element for the long end of the EUR yield
curve. Also, HY credit spreads are wide enough to offer
decent protection against rising yields. At the short end
which is the favorite maturity bucket for HY corporate
issuancethe greater likelihood of the ECB cutting, rather
than raising, rates is a further positive.
450
CONVICTION # 3
EUROPEAN BANKS BEAUTY CONTEST
As the Eurozone is heading towards a more supportive HIGHLIGHTS

economic environment and a sounder financial framework,
the financial sector and more specifically banks are Economic turnaround and accommodative monetary policy
will further ease funding conditions
set to outperform in both the equity and the credit
spheres.
The ECBs AQR should ease market concerns about the
First of all, most Eurozone banks have made major
soundness of the Eurozone banking sector
progress in building capital, securing safer funding profiles,
and standing well ahead of Basel III requirements. While Redemptions will continue to overtake bond issuance
providing a support to the financial bond market
still ongoing, their deleveraging is advancing well as
reflected in a significant reduction of their leverage. In
US and European banks - Tier 1 ratio
short, there should be much less regulatory uncertainty in
2014.
They have significantly reduced their risk profiles by
de-risking their investment bank portfolios and closely
monitoring the cost of risk in their lending activities in
spite of a still sluggish macro environment. Clearly,
peripheral banks may remain in the spotlight as fast-rising
non-performing loans and further recapitalisation needs
loom ahead, but the more robust peripheral banks also
offer the biggest potential upside.
Receding tail risks in the Eurozone helped reduce funding
costs, and bank CDS have tightened meaningfully over
2012 and 2013. Also, we think that the ECB will be inclined
to offer new long-term refinancing operations in 2014 to
contain deflationary forces and mitigate the impact on
money market conditions for the redemption of the first
LTRO due late 2014. Consequently, we expect funding
conditions to thaw further for the banking sector as a
whole.
Before taking on its overarching supervisory role of the
banking system, the ECB will perform an Asset Quality
Review (AQR) to shed light on the soundness of individual
banks, before new stress tests will be carried out later in
the year by the European Banking Association. No real
negative surprises are expected on this side, and while
some banks will be asked to strengthen their capital base,
the amount at stake - roughly estimated between 50bn
and 70bn at the aggregate level - remains manageable
from a macro angle. As the ECB will set the playing field,
we can even expect some positive confidence boosts with
no more hidden losses impairing bank valuations that still
trade below book value in spite of the recent equity rally.
From a supply and demand perspective, redemptions will
continue to outpace new issuance with about 250bn of
redemptions vs 100bn of new issuance for senior funding.
Sources: Bloomberg, Socit Gnrale Private Banking
The outcome should be similar for covered bonds with

much more redemptions than issuance, as the banking
sector is focusing on capital. Although there is still
uncertainty regarding the regulatory treatment of
subordinated debt, subordinated debt issuance could
expand a bit depending on the type of instrument and
investor appetite.
We suggest:
Increasing exposure to core and non-core Eurozone

bank equities that are already in line with Basel III
ratios for capital and funding.
Favouring senior and subordinated debt of these

same banks.
Staying away from small peripheral banks that will

continue to struggle in a challenging environment and
may require capital injections.
20
CONVICTION # 4
INVESTMENT CYCLE GATHERING SPEED
Corporate de-leveraging and low risk-taking had been the HIGHLIGHTS

main causes of weak corporate investments over the past
Business fixed investment has been relatively weak in
six years.
developed markets for several years, but we now expect
a recovery in capex in Japan, the US and Europe
While 2013 was supposed to be a year of capex recovery
(especially Germany and the UK)
in the US, companies have been more cautious than
expected. Despite low interest rates and strong balance
sheets, US companies have preferred share buybacks As financing conditions remain accommodative, company
cash flows are at very high levels, and global growth is
over increased investments. Lack of visibility on the debt
now accelerating, we expect an increase in investments
debate and fragile growth in the Eurozone and some
emerging markets have held back spending.
Now that the US fiscal drag has come to an end and
financing rates are still low, we expect an acceleration in
business investment. The trend should be the same in
other regions, especially Japan where companies will
enjoy fiscal incentives to strengthen technological
innovation, and this along with other factors should
increase productivity and revitalise Japanese industry.
Investment intentions in the coming six months

9
Europe
US
Japan
7
6
Why should we expect a recovery now?

Companies have pent-up needs for investment, after
cutting spending more than necessary to cover equipment
depreciation. In Japan, the gap between capex and
depreciation as a percentage of sales has turned positive,
implying that not only are investments necessary for
improving equipment capacity but also those needed to
maintain current capacity had been suppressed.
The combination of fixed investment obsolescence,
normalised
capacity
utilisation,
and
a
still
accommodative monetary policy should support the
global recovery cycle.
The sectors benefitting the most from an increase in
corporate spending are semiconductors, software,
hardware, and some businesses in the Industrial sector.
On the other hand, we expect Energy to cut capital
expenditure and start returning more capital to
shareholders.
3
2
94
96
98
02
04
06
08
10
12
Index equal to 5 means no changes in future investments

Focus on capex-related sectors as they are wellpositioned to expand earnings at an above-market

rate, given ample margin upside and revenue growth
potential.
Favour Global Tech Hardware, Semiconductors

and Industrial sectors. Software earnings growth
has scope to accelerate further, but at a more
modest pace in our view than the more operationallylevered cyclicals.
21
00
CONVICTION # 5
UPSIDE FOR DEPRESSED ENERGY SECTOR
Despite the upside trend enjoyed by oil prices over the HIGHLIGHTS
past few years, the largest energy companies have tended
to underperform the broader market. Volume weakness, Free cash flow generation is key for avoiding the ongoing
Big Oil de-rating
rising capital intensity and consequent lack of free cash
flow have restricted dividend growth and steered investors
Improved visibility on big-oils future cash flow, relative
away from the sector. Indeed, the sharp rise in capex
valuation to the market near 10-year lows and higher cash
plans has made generating free cash flow more difficult
returns to shareholders should whet investor appetite for
during the past 10 years and resulted in the sectors deenergy stocks
rating. Consequently, the oil sector has consistently
underperformed the equity market and de-correlated from
The oil sectors defensive profile and high dividend yield
the rising oil price.
look attractive for those investors wanting to avoid a likely
increase in equity market volatility
While earnings growth expectations have been falling
since early 2012, 2014 and 2015 consensus profit
forecasts have been revised upwards. We expect BigOils positive earnings momentum to drive future cash
flow, generating higher return-on-equity and potentially
increasing shareholder returns. In addition, as valuation
relative to the market is nearing a 10-year low the sector
may also whet value investor appetites and re-rate in a
now expensively priced market. With bond yields below
dividend yields, the sectors ability to finance dividends,
launch share buybacks remains key for global
shareholders willing to have exposure to the equity market
while keeping a limited risk profile.
Global Energy relative valuation* at 10-year lows

1.7
1.5
1.3
1.1
0.9
0.7
Across region, European oil integrated companies

trade at important discounts to US peers and offer
higher dividend yields. Therefore, from a valuation
standpoint we tend to prefer European companies to US
names even though overall we are buyers of the sector.
Among global oil services, while US multi-services
companies remain a must-have in a global equity portfolio,
European names are suffering from additional project
delays.
10-year lows
0.5
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
*relative valuation is calculated using sector P/E vs market P/E
Source: Datastream , Socit Gnrale Private Banking
Overweight the Global Energy sector. The oil sectors

cheap valuation along with attractive and now safe
high dividend yield give the sector an appealing value
profile.
Prefer Integrated Companies vs Services in Europe.
Favour both Integrated and Services in the US.
22
CONVICTION # 6
EMERGING POCKETS OF VALUE
2013 has been a difficult year for emerging market HIGHLIGHTS

equities. Summer fears of Fed tapering, slowing economic
growth and tightening monetary policy have all contributed 2013 has seen high correlation among emerging market
equities
to negative emerging market performance. Despite the
sell-off and interesting valuations, we remain rather
In 2014, EMs that have nurtured domestic growth drivers,
cautious on the segment and we tend to be very
pushed through needed reforms and the possibility to cut
selective. However we recognize that the generalized sellrates (low inflation) will potentially outperform those that
off among emerging stocks has also impacted the most
have relied excessively on external and domestic credit as
resilient countries.
well as fiscal stimulus
Heading into 2014, we believe that emerging market
dispersion will increase. Indeed, some central banks
face a less challenging inflation environment (thanks to
lower oil and commodities prices) and may stop tightening
monetary policy conditions. Secondly, with developed
market growth accelerating (especially in the US, in Japan
and Germany), exporting emerging countries may see an
increase in global demand.
Current
valuation
levels
highlight
some
value
opportunities, especially when countries are exposed to
the global cycle or export to the US, Germany or Japan
Dispersion among Emerging Markets is set to increase (%)
While valuations are now more attractive than a year ago,

we suggest being selective as valuation is not the only
criteria to consider. We avoid any exposure to emerging
markets characterized by the combination of current
account deficit and high inflation, namely Turkey, South
Africa, Brazil, India and Indonesia.
We also suggest avoiding exposure to emerging markets
with high levels of government debt coupled with large
foreign debt service (i.e. Hungary). Despite extremely
cheap valuations we tend to limit exposure to Russian
stocks to just the energy sector.
On the contrary, our preference goes for emerging
markets strongly exposed to the global capex cycle
such as Korea and Taiwan as well as to countries
exporting to the US (i.e. Mexico), Japan (i.e. the
Philippines) and Germany (i.e. Poland). Although the
global emerging market de-rating is expected to continue
next year, we believe that in the above-mentioned buy
cases (Korea, Taiwan, Mexico, Poland and Philippines)
attractive valuations make for an appealing entry point.
Favour emerging markets with current account

surpluses and low valuations, with a preference for
Korea, Taiwan and then to a lesser extend Poland,
the Philippines and Mexico.
Within the BRICs, China should, in our view,

outperform Brazil, India and Russia.
We would avoid Brazil, South Africa, Indonesia,

Turkey and India.
23
CONVICTION # 7
GERMAN STOCKS: ROCKET-BORNE
With Germany definitely closing the door to the old- HIGHLIGHTS

fashioned Schroders public deleveraging program and
opting for growth policies, we expect asset reflation (i.e. Low interest rate environment, attractive effective
exchange rates and accelerating economic growth are all
real estate, equities) to characterize the next German
that is needed to drive German stocks up further
economic cycle.
In this context of strong growth, extremely low interest In the Eurozone, the DAX remains our preferred index
rates (the chart below shows that Eurozone interest rates
are too low in the German economic context and probably Small & Mid caps in Germany are still attractive despite
the 20% premium they show relative to large caps in the
too high for Spain and Italy) and attractive effective
region
exchange rates, the German ground is fertile enough to
feed a strong asset appreciation. Indeed, with the recent
political agreement (between the Social Democrat and
Current monetary policy is too easy for Germany and too
tight for Spain
Christian Democratic Union parties), Chancellor Angela
Merkel is now ready to add 23bn in government spending
15
over the next three years and introduce a minimum wage
in a job market which already enjoys a very low
unemployment rate. Furthermore, other fiscal measures,
10
such as tax incentives, will be introduced for companies
spending on R&D.
In this context of growth, low effective exchange rates and
low interest rates, German equities are set to strongly
outperform the rest of the Eurozone. Indeed, with the
ECB busy to fight deflation risk in the periphery, Germany
will continue to benefit from an extremely accommodative
monetary policy. Valuations are still attractive despite this
years strong stock market performance, profits are set to
grow by 15% in 2014 after this years contraction, and the
high cyclical profile of the local index should support the
relative re-rating of German stocks versus European
peers. Overall our scenario points towards a further DAX
appreciation to 11,000 in the coming 12 months.
In Germany, we would suggest being exposed to small
and mid caps which represent the biggest leverage to
German consumers.
Among sectors, we believe that German consumer
discretionary (Autos and General Retailers) will benefit the
most from the rise in minimum wage, German technology
and capital goods should benefit from the capex recovery
cycle in the region and worldwide.
5
0
Taylor Rule for German rate (%)
-5
ECB Rate (%)

Taylor Rule for Spain (%)
Taylor rule for Italy (%)
-10
00
01
02 03
05 06
07
08 09
10
11 12
13
Taylor rule: monetary-policy rule that stipulates how much the central
bank should change the nominal interest rate in response to changes in
inflation, output, or other economic conditions
Source: Socit Gnrale Private Banking, Bloomberg
Within the Eurozone, we continue to prefer the DAX

to other local indices.
German small and mid caps are set to outperform

again in the coming 12 months.
While German consumer discretionary will benefit the

most from the rise in minimum wages, German
technology and capital goods should benefit from
the capex recovery cycle in the region and
worldwide.
24
04
GLOBAL ECONOMIC OUTLOOK

2014 FOUR SEASONS OF LEVERAGE
Like the four seasons, leverage follows well-known patterns. However, just as seasonal
change can be tricky, so too can the leverage cycle. For policymakers and investors alike,
understanding where economies are in the leverage cycle holds the key to success in 2014.
In the US, spring is just around the corner as fiscal tightening eases and the housing
recovery gains traction. For the Fed, this will be a particularly challenging time, managing the
transition from QE to forward guidance. Our expectation is to see yield curves steepen to
new historic highs. Moreover, as the cycle matures, we believe the Fed will be willing to
accept higher inflation. The mechanics of our UK outlook hold many similarities to the US,
albeit with a less dynamic recovery. For the BoE too, 2014 will see the first test of the forward
guidance policy. In Japan, the ultimate success of Abenomics will be judged on its ability to
generate private sector investment and, with that, credit expansion. Of the major central
banks, we believe the BoJ will be the most aggressive when it comes to easing and, if there
is a G4 currency battle to be fought, Japan will win. The Eurozone continues to battle the
headwinds of deflationary pressures and financial fragmentation. 2014 will be a critical year
for European Banking Union; our view remains that the repair will only come slowly. In the
Eurozone, it is still winter. Turning to the major emerging economies of China, Brazil, and
India, autumn is creeping in as these economies embark on a process of deleveraging. The
right structural reform mix however, could significantly alleviate the process. In aggregate,
however, the emerging market growth engine is clearly losing steam.
1. Bumpy growth relay from emerging to advanced: For the first time post-crisis, we
expect advanced economies in 2014 to see a marked increase in their contribution to global
growth. Emerging economies have over the past few years offered a welcome support to
global growth, but this relied in part on a build-up of credit that now needs to be paid down.
The hope is for advanced economies to take the baton from the emerging economies as the
main driver of global growth. The US is now poised for sustainable recovery and in Japan,
hopes remain that Abenomics will work. The Eurozone, however, continues to lag. As such,
the growth relay from emerging to advanced is likely to prove a bumpy process. Commodity
markets will sit at the heart of this dynamic our analysts look for range-bound markets in
2014.
2. From QE to forward guidance 2014 isnt 1994: Spring 2013 saw US 10-year bond
yields gain over 100bp as expectations of a turning point in US monetary policy gained
traction in line with the recovery of the real economy. Given our growth forecast of 2.9% for
2014, tapering is no longer a question of if, but when. Our forecast is for tapering to start in
March 2014 and be completed in July 2014. The Fed has, however, already clearly indicated
its willingness to keep rates well below levels implied by traditional policy rules for much
longer. We expect the first rate hike only in mid-2016. Ultimately, inflationary pressures will
build and we forecast the Fed will act more aggressively and tighten too much too late in the
cycle. This is a question for 2018/2019. For 2014, expect US yield curves to steepen further
and pressure to mount on the more vulnerable emerging economies. Adjustable exchange
rates and overall stronger economic balances should prevent a broad-based emerging
market crisis.
25

2014 FOUR SEASONS OF LEVERAGE
3. Cross-Atlantic uncertainty gap: All eyes will be back on Washington in early 2014. While
a new shutdown and/or debt-ceiling stand-off are risks, we believe the odds favour a more
benign scenario. This, in turn, should allow policy uncertainty in the US to resume the
downward trend established over the course of 2013. In the Eurozone on the other hand,
policy uncertainty is set to ease only very slowly, reflecting a still-challenging political
process. Policy uncertainty is a key driver of investment and hiring decisions and is an
important factor in explaining the gap between our US and Eurozone growth forecasts.
4. Eurozones lost decade: Summer optimism on a Eurozone recovery has faded to grey
winter skies. Looking ahead we see continued weak growth in the region with only a very
gradual recovery. For 2007 to 2018, we expect GDP per capita to be flat, marking a lost
decade of growth for the region. We blame much of this weak performance on slow policy
response in tackling both the sovereign and banking crisis, and the still too slow pace of
structural reform. The fear is now that the Eurozone is on the verge of deflation. The ECB
toolbox is not empty, but in our central scenario of low inflation (and not outright deflation) we
see an additional LTRO and the extension of unlimited liquidity. The risk is that the EUR will
stay stronger for longer, adding to deflationary pressures.
5. Reform of Asian giants to deliver slowly: Each has its own specific challenges, but
Asias three giants (China, India, and Japan) are at a crossroads where structural reform
holds the key to the future economic outlook. In China, reform in a nutshell is about removing
the 100% implicit state guarantee and reining in excess supply capacity. In Japan, we believe
Womanomics holds much of the key to sustainable long-term growth. In India, the challenge
for the new government due to be elected in May is to embrace supply-side reforms.
Monetary policy will play a unique role in each case; we see further tightening from the RBI to
tame inflation and support the INR, further easing from the BoJ to keep the yen weak, and
PBOC intervention to prevent the CNY from appreciating too much.
Risks to our central scenario remain tilted to the downside. Turning points in US monetary
policy are delicate operations to manage and the fear is set to be a replay of 1994. The aim
of forward guidance is clearly to manage such risks. A disorderly market move holds the
greatest risk for the most vulnerable emerging economies. Further risks in the US centre on
the fiscal decisions to be taken in Washington in early 2014. In the Eurozone, risks appear
more balanced relative to our below-consensus central scenario. Fast-track political solutions
including full delivery of banking union hold the greatest upside potential. Chinas reform
transformation will create short-term uncertainty; the danger is a hard landing the
temptation then being to adopt further credit stimulus.
Michala Marcussen
Chief economist
SG Cross Asset Research
26

REGIONAL PERSPECTIVES
US
Eurozone
We believe that structural headwinds to growth are slowly

dissipating. Specifically, we assume that:
Disinflation is now gaining traction, owing to the strength of

the EUR and intense price pressure in peripheral countries.
We see downside risks to our scenario, but no deflation. A
weaker inflation outlook would trigger ECB action.
Housing is now a tailwind to growth, both via residential

investment and knock-on effects from rising home prices;
The effects of fiscal consolidation on growth have already
peaked and will diminish going forward; and
Business investment will be supported by reduced
uncertainty on fiscal policy. If our assumptions prove correct,
GDP growth should accelerate significantly at the turn of the
year, marking the beginning of a multi-year period of abovetrend growth.
The Eurozone is exiting the recession. One of the growth

forecasts for the Eurozone in 2014 (0.6%) is based on
corporate investment behaviour. Political decisions are key
to the growth outlook. Policy uncertainty remains high.
Austerity is set to ease in 2014-2015, but remains significant.
The ECB asset quality review (Oct. 2014) is a potential game
changer in the broader context of building a European
Banking Union. But, we think that achieving financial
consistency will not be easy and that the deleveraging
process will weigh on economic growth.
.
Europe excl. Eurozone
2012 GDP Breakdown
UK: MPC not ready to hike: The BOEs latest (November

Inflation Report) projections show the unemployment rate
falling to 7% in Q4 2014. Even if the economy is still firing on
all cylinders at that time, we do not think the MPC will be
anywhere near ready to contemplate initial tightening of
policy that soon. While we predict a higher inflation rate
profile than the MPC, it would still not be high enough to
warrant a rate increase in 2014. So how does the BOE
convey the message that a rate rise is not yet warranted?
Very simple it lowers the threshold, as has already been
discussed by Deputy Governor Charlie Bean and others. It
will justify this by lowering its estimate of the NAIRU from
6.5% to 6.0%. It looks as though the Fed plans to announce
a lower threshold in 2014, a helpful precedent.
Other advanced
Japan: Thanks to Abenomics, we believe that Japan will
gradually exit deflation. Recent economic indicators highlight
strength in the Japanese economy. So far Abenomics is on
the right track, but for the Japanese economy to move
further towards a lasting exit from deflation, recovery in
corporate activities is essential, as this leads to strong
expansion in aggregate wages. Flexible fiscal policy (the
second arrow of Abenomics) as well as a long-term growth
strategy (the third arrow) and further yen depreciation will
determine the success of Abenomics. We predict that
corporate deleveraging which had been the cause of
deflation is likely to end in 2017.
China
EM excl. China
Reforming China in highly challenging times. The global

economy is expected to grow more slowly than in previous
decades, for a prolonged period of time. Against this
challenging backdrop, Chinese policymakers have to deftly
push through economic reform in order to avoid an economic
hard landing and/or devastating social instability. As we
expected, Chinas new leaders have shown a great deal of
awareness of the fact that the sensible goal is to steer for
relatively less painful deceleration, rather than to sustain fast
growth rates at the cost of deteriorating economic efficiency.
However, given the ingrained structural weaknesses of high
corporate leverage and large-scale excess capacity,
downside risk will persist and a bumpy landing remains our
central scenario.
Brazil: Inflation, monetary tightening and fiscal challenges

will kill off the investment revival seen in H1, dragging growth
significantly below trend in H2 and 2014. Yet the economy
should grow modestly on the back of consumption and
external demand. The low investment ratio and the high
share of government in GDP are key structural challenges
constraining capacity, productivity and growth and, in the
process, increasing inflationary pressure.
Russia: Faced with weak external demand as well as
stagnating investment and decelerating consumer activity,
the Russian economy performed very poorly during Q1-Q3
13. Due to persistent headwinds, we are downgrading our
full-year growth forecast to 1.3% yoy from 1.7% yoy. The
stagnating environment has increased pressure on the
government and the CBR to adopt pro-growth policies.
Source: SG Cross Asset Research/Economics
27
KEY ECONOMIC ISSUES

THE THIRD ARROW OF ABENOMICS: WOMANOMICS
Japans recovery is on the right track so far, boosted by

the fiscal and monetary policies of Abenomics (first and
second arrow). However, for the current cyclical economic
recovery to turn into sustainable higher growth (third
arrow), the governments long-term growth policies must
succeed. There is a multitude of policy areas that merit
attention, but in our view promoting a more active role for
women in the economy is of key importance. It would
address the labour shortage in Japan, and it could also
raise productivity given the high level of education attained
by many Japanese women. PM Abe has fully grasped this,
as illustrated in a speech in April 2013 where he said
women are Japans most underutilised resource. The PM
outlined some measures aimed at closing the gender gap
in the Japanese workforce, and stressed that
womanomics* is one of the most important elements in his
long-term growth strategy.
Data produced by the OECD suggests that the overall
female participation rate in Japan is actually higher than
the OECD average (see table below). However, the OECD
figures are influenced by some member states with very
low rates (Turkey, Mexico, Chile, etc). Compared to other
(western) advanced economies, the rate is indeed low.
What is striking about Japan is that the labour force
participation rates of women with tertiary education are
particularly low compared with other nations: compared to
the OECD average, it is an astonishing 13.8pp lower
(again, see table below) This means that there are many
highly educated Japanese women who are not working
either due to a lack of childcare facilities or other reasons
such as a lack of flexible working conditions. If these
obstacles were removed, Japanese women could
substantially bolster the labour force and hence potential
economic growth.
Abes growth strategy focuses on this point (womanomics)
as a measure to boost economic growth in the long term. It
is important to accurately address what the obstacles are
for parenting-age women to continue working, and how
these obstacles can be removed. The problem needs to be
solved from two points of view. One is to increase the
number of childcare places, which means increasing the
number of nurseries and nursery staff this is a job
primarily for the public sector. The other is to change the
working environment so as to make it easier to balance
work with childcare primarily a responsibility of the
private sector. And, more importantly, to narrow the
equality gap in pay, which is particularly large in Japan
(30.2% vs 20.1% in the US), according to the PM.
Female participation rates
Prime age (25-54)

participation rates,
%, 2012
Germany
82.2
France
83.4
Canada
82.3
UK
79.0
US
74.5
Italy
66.4
Japan
72.3
OECD
71.1
Region
Participation rates of
women with tertiary
education, %, 2011
86.3
85.3
83.0
79.6
79.6
79.3
69.3
83.1
Source: OECD, SG Cross Asset Research/Economics
So far, Abe has promised to increase the number of

childcare places as a matter of urgency. The total number
of children accepted into childcare institutions will increase
by 200k by FY14 and by 200k by FY17 (vs 130k in the five
years from 2007 to end-2011). Creating a better working
environment for working mothers is also a necessity.
According to studies by the Ministry of Health, Labour and
Welfare, about 26.1% of female workers who had to leave
a job during pregnancy or after childbirth cited the difficulty
of balancing work and childcare. Another 9% cited
dismissal or suggestion to leave work by the employer,
and about 2.6% cited change in job duties..
Abe has already set out some goals to be achieved by
2020: to increase womens labour force participation rates
(for women between 25-44 years old) to 73% from 68% in
2012; support women continuing to work after the birth of
their first child so that 55% of such women can continue to
work vs only 38% in 2010; increase the share of men who
take parental leave to 13% from a negligible 2.6% in 2011;
and push up the percentage of women in executive
positions to at least 30%.
Back in 1999, Kathy Matsui estimated that by tapping
further into the female work pool, Japan could raise its
GDP by 15%. While such estimates are of course subject
to uncertainty and debate, one thing is clear: the growth
dividend of womanomics for Japan could be very large
indeed.
Source: SG Cross Asset Research/Economics
28

FORECASTS
% change year over year

World (Mkt FX weights)
Advanced countries
Emerging countries
Eurozone
Germany
France
Italy
Spain
United States
China
Europe excl. Eurozone
United Kingdom
Switzerland
Other advanced
Japan
Australia
South Korea
Taiwan
Emerging excl. China
Brazil
Russia
India
Mexico
Poland
Czech Republic
Slovakia
Chile*
Real GDP
CPI
2012
2013f
2014f
2015f
2012
2013f
2014f
2015f
2.7
1.4
5.0
-0.6
0.9
0.0
-2.6
-1.6
2.8
7.7
2.5
1.2
4.5
-0.4
0.5
0.2
-1.9
-1.3
1.7
7.7
3.1
2.1
4.9
0.6
1.4
0.5
0.3
0.0
2.9
6.9
3.4
2.4
5.2
1.2
1.3
1.2
1.0
1.2
3.3
6.7
3.4
2.0
6.2
2.5
2.1
2.2
3.3
2.4
2.1
2.7
3.2
1.4
6.3
1.4
1.6
1.0
1.3
1.5
1.5
2.7
3.1
1.7
5.7
1.0
1.6
1.2
0.9
-0.2
1.6
3.0
3.1
1.9
5.2
1.4
1.8
1.5
1.1
0.5
2.0
3.0
2.3
1.8
2.8
-0.7
2.6
-0.2
2.8
0.6
1.5
3.0
3.5
3.4
0.0
1.8
2.2
1.9
0.3
2.4
1.2
1.0
2.7
2.9
2.0
1.3
5.4
5.1
7.5
4.1
3.7
3.3
3.7
3.0
6.2
6.5
6.1
3.7
1.1
1.4
1.5
1.8
5.7
4.9
5.8
3.3
2.3
0.8
1.2
2.8
0.1
1.0
1.5
1.8
2.7
1.7
1.9
3.7
2.0
1.3
1.9
2.4
2.7
1.9
1.7
2.4
3.5
3.0
0.9
3.4
4.1
3.7
1.9
-0.9
1.8
5.6
2.8
1.3
3.4
1.6
1.3
-1.4
1.0
4.6
2.1
2.4
5.1
4.1
2.7
1.4
2.1
3.5
2.9
3.1
6.1
3.8
3.5
2.7
2.2
4.1
Significant changes from previous forecasts

Up
Down
* IMF forecasts as of June 2013

Source: SG Cross Asset Research/Economics, IMF
29
3.2
1.3
2.0
2.5
2.5
1.6
5.3
3.9
4.8
3.4
3.0
1.5
1.8
2.8
GLOBAL FINANCIAL OUTLOOK

MARKET PERFORMANCES & FORECASTS
Advanced Markets Performance

(in local currency)
S&P500
DJ Euro Stoxx 50
FTSE100
Nikkei 225
MSCI World ($)
(in local currency)
European IG
European HY
US IG
US HY
UK
Japan
MSCI
MSCI
MSCI
MSCI
EM
EM Asia
EMEA
Latam
(in USD)
BAML EM SVGN
Asia Svgn
EMEA Svgn
Latam Svgn
BAML EM CORP
Asia Corp
EMEA Corp
Latam Corp
Currency forecasts
EUR/USD
USD/JPY
EUR/CHF
GBP/USD
EUR/GBP
10-year yield forecasts

USA
GER (Eurozone)
UK
Commodity forecasts
Gold in USD
Oil (WTI) in USD
% ch. 3m
% ch. YTD
% ch. 12m
2.8%
1.3%
-1.7%
9.3%
0.9%
10.8%
12.1%
2.7%
16.4%
10.0%
27.0%
17.3%
12.9%
50.7%
21.7%
28.5%
19.7%
13.4%
66.6%
23.9%
0.57
1.24
-0.35
0.54
-0.88
0.19
2.03
4.50
2.37
4.09
2.33
0.67
2.65
9.22
-1.30
6.75
2.70
1.72
3.50
12.20
-1.28
8.87
3.04
1.73
% ch. 1m
% ch. 3m
% ch. YTD
% ch. 12m
-2.4%
-0.1%
-5.7%
-6.4%
9.9%
10.8%
9.1%
7.7%
-4.1%
0.5%
-7.6%
-14.0%
0.8%
4.7%
-0.5%
-9.1%
2.7%
-3.2%
-0.9%
-2.8%
2.1%
0.0%
-0.3%
-1.2%
2.9%
6.3%
3.6%
2.4%
2.6%
3.6%
3.2%
3.2%
-3.3%
-8.0%
-1.9%
-7.9%
-0.5%
0.0%
0.6%
-3.8%
-1.1%
-8.2%
-0.9%
-5.5%
1.1%
0.7%
2.2%
-2.3%
Performance YTD
Current*
3-month forecast
6-month forecast
3.3%
18.2%
1.9%
0.8%
2.1%
1.36
102
1.23
1.63
0.83
1.33
103
1.25
1.60
0.83
1.30
105
1.25
1.60
0.81
Performance YTD
Current*
3-month forecast
6-month forecast
-4.0%
0.0% (3.9%)
-3.5%
2.8
1.7 (2.4)
2.8
3.0
1.9 (2.5)
3.1
3.3
2.0 (2.4)
3.3
Performance YTD
Current*
3-month forecast
6-month forecast
-27.4%
0.5%
1251
94
1250
100
1100
110
Current Level
1812
3091
6657
15662
1629
Yield to Mat
1.93
4.94
3.24
6.26
3.86
0.46
Emerging Markets Performance

(in USD)
% ch. 1m
Current Level
1012
450
330
3267
Yield to Mat
5.32%
4.79%
4.69%
6.50%
4.99%
4.23%
4.77%
5.87%
*As of the 29th November 2013, INVESTMENT STRATEGY 2014 OUTLOOK

Source: Societe Generale Private Banking
30
GLOBAL FINANCIAL OUTLOOK

EQUITY DETAILS
Country and Sector allocation Q1 2014

MSCI (%)
SEPT. 2013
OVERWEIGHT
DEC. 2013
OVERWEIGHT
10.2%
3.4%
10.4%
13.6%
10.5%
12.1%
15.9%
17.8%
2.6%
3.0%
OW
N
OW
N
UW
OW
OW
OW
UW
UW
OW
N
OW
N
UW
N
OW
OW
N
UW
NEUTRAL
OVERWEIGHT
US
Energy
Basic Materials
Industrials
Consumer Discretionary
Consumer Staples
Health Care
Financials
Information Technology
Telecoms
Utilities
EURO
Germany
France
Italy
Spain
Netherlands
Belgium
27%
34%
8%
11%
8%
5%
Energy
Basic Materials
Industrials
Consumer Staples
Health Care
Financials
Telecoms
Utilities
6.7%
6.8%
13.8%
15.7%
12.3%
6.7%
20.2%
4.7%
5.5%
7.4%
Energy
Basic Materials
Industrials
Consumer Staples
Health Care
Financials
Telecoms
Utilities
15.3%
9.9%
6.4%
7.5%
17.6%
7.6%
22.6%
0.9%
7.8%
3.7%
UK
JAPAN
EMERGING MARKET
Asia
Latam
EMEA
CHANGES
OW
N
N
OW
N
N
OW
UW
N
N
N
OW
N
N
N
N
OW
UW
N
N
N
OW
OW
N
UW
N
OVERWEIGHT
NEUTRAL
N/UW
N/UW
OW
OW
N
OW
N
UW
N
N
OW
UW
OW
OW
UW
OW
OW
UW
N
N
OVERWEIGHT
UNDERWEIGHT
OVERWEIGHT
UNDERWEIGHT
N
UW
N
N
UW
UW
61.0%
20.7%
18.3%
31
STRATEGY PUBLICATIONS
Description
Publication dates
Investment Strategy
March 24th, 2014
A comprehensive quarterly document that presents in full

details our investment strategy for the next six months and
our key themes, as defined during the Investment
Committee
June 9th, 2014

September 15th, 2014
December 1st, 2014
Detailed coverage includes our economic outlook and

forecasts, our global strategy and recommended asset
allocation, and detailed asset reviews. Occasionally it also
includes expert interviews
30-40 pages for sophisticated investors
January 20th, 2014
Market Insights
A monthly document aimed at reviewing recent market
trends, and summarizing our tactical positions, including
possible marginal changes between investment
committees
6 short sections on strategy, macro, equities, bonds, EM
assets and world currencies
February 24th, 2014

April 20th, 2014
May, 2014
July, 2014
October, 2014
8 pages for all investors
November, 2014
Investment Focus
Occasional releases
A focus on one issue that relates to an investment on any

asset class, region, or sector.
A 300-word summary followed by a fact-based rationale
and a selection of investment solutions
3 pages for sophisticated investors
Released 6 -10 times per year
Released on Fridays
Weekly update
A weekly document covering market events and data
releases, including a short-term investment idea
4 sections on major events or investment ideas, review of
recent macro data, currency views, and market data
4 pages for active investors
32
GLOSSARY
BRIC: Brazil, Russia, India, China

Budget deficit: the budget situation of a state when its revenues (taxes, duties
etc.) are lower than its expenses. It is generally expressed as a % of GDP.
CDS (Credit Default Swap): a CDS is an agreement that the seller of the CDS
will compensate the buyer in the event of a loan default. The buyer of the CDS
makes a series of payments (the CDS "fee" or "spread") to the seller and, in
exchange, receives a payoff if the loan defaults.
CPI: Consumer Price Index
EBITDA: Earnings Before Interests, Taxes, Depreciation and Amortization
ECB (European Central Bank): created in 1998, the European Central Bank
determines the monetary policy to be adopted within the Eurozone. To do so, it
has various means, in particular the key interest rates. The ECB is responsible
for the single currency. Its main mission consists of maintaining price stability
within the Eurozone.
EMTN: Euro Medium Term Note, a vehicle for raising funds by borrowing from
the capital markets or from private investors. The EMTN program itself is a
platform, under a standard documentation framework, from which to launch such
issues, like structured products, on an ongoing basis.
EMU: European Monetary Union
Fair Value: In the futures market, fair value is the equilibrium price for a futures
contract. This is equal to the spot price after taking into account compounded
interest (and dividends lost because the investor owns the futures contract rather
than the physical stocks) over a certain period of time.
GDP (Gross Domestic Product): GDP is an economic measure of the wealth of
a country. It is the sum of the values added of all companies located on the
national territory.
GIIPS: Greece, Italy, Ireland, Portugal, Spain
High Yield: a qualifier given by rating agencies to companies having a rating less
than or equal to BB+ according to the Standard & Poor's (S&P) classification
scale. This qualifier involves issuers having a higher probability of default
according to the rating agencies.
IMF (International Monetary Fund): an international institution created in 1945.
It provides financial assistance to Member States that have temporary difficulties
making payments in foreign currencies. Its registered office is located in
Washington.
Investment Grade: a qualifier given by rating agencies to companies having a
rating greater than or equal to BBB- according to the Standard & Poor's (S&P)
classification scale. This qualifier is reserved for issuers having a low probability
of default according to the rating agencies. They are in contrast to bonds with a
lower rating (from BB+ to D according to S&P), commonly called High Yield,
whose probability of default is generally higher.
Key rate: interest rates fixed daily by the central bank of a country or a monetary
union in order as a means of regulating economic activity.
LTV: The loan to value ratio (LTV) tells you how much of a securities is being
financed through a loan. It is a lending risk assessment ratio that financial
institutions and others lenders examine before approving a loan.
Maximum drawdowns: the peak to trough decline during a specific record
period of an investment
P/Book ratio (Price/Book ratio): it is the ratio of a stock's price divided by the
book value per share. The book value is the total value of the company's assets
that shareholders would theoretically receive if a company were liquidated
(calculated by total assets minus intangible assets and liabilities)
P/E ratio (Price/Earning ratio): the ratio [Share price/earnings per share]
reflects the trading price of a share in relation to the expected earnings. As such,
the higher this ratio, the more expensive the stock, and vice versa. Note: the P/E
ratio also depends on profit growth; companies with high profit growth tend to
have a higher P/E
PPP: Purchasing Power Parity
Public debt: all loans taken out by the government (e.g. government bonds or
bills). It is generally expressed as a % of GDP.
Sovereign risk: risk attached to the state and public sector of a given country
and to its ability to repay its credits and meet its commitments
REIT: A corporation or trust that uses the pooled capital of many investors to
purchase and manage income property (equity REIT) and/or mortgage loans
(mortgage REIT)
VEGA: represents the amount that an option contract's price changes in reaction
to a 1% change in the volatility of the underlying asset.
33
IMPORTANT DISCLAIMER PLEASE READ
This document has been prepared by the Strategy team of Socit Gnrale
Private Banking . The information provided is an objective and independent
explanation of the content of this document. The name and function of the
person having prepared the document is indicated in the first page of this
document. This document is provided to you for private use only and may not be
passed on or disclosed to any other person (with the exception of external
advisors on the condition that they themselves respect this confidentiality
undertaking), nor copied in whole or in part, without the prior written consent of
the Socit Gnrale group of companies ("SG").
The information herein is not intended to be in whole or in part an offer,

recommendation or advice to buy or sell, or a solicitation of an offer to buy or
sell, any securities. The material is not intended to provide, and should not be
relied on for, accounting or legal purposes. The information herein, including any
expression of opinion, has been obtained from, or is based upon, sources
believed to be reliable but is not guaranteed as to accuracy or completeness.
Any price levels, rates, simulations, illustrations, terms or conditions contained
herein are indicative only, provided for illustration or discussion purposes only
and may vary in accordance with changes in market conditions or market
fluctuations.
The investment product(s)/asset class(es) described in this document may not

be eligible for sale or subscription in all jurisdictions or to certain categories of
investors. This document is not intended for distribution to a person or within a
jurisdiction where such distribution would be restricted or illegal. It is the
responsibility of any person in possession of this document to investigate and
observe all applicable laws and regulation of the relevant jurisdiction.
SG is under no obligation to disclose or take account of this document when

providing services to or dealing with or on behalf of customers. The views of SG
reflected in this document may change without notice. In addition, SG may issue
other reports that are inconsistent with, and reach different conclusions from,
the information presented in this report and is under no obligation to ensure that
such other reports are brought to the attention of any recipient of this report.
No information, explanations or communication (written or oral) of SG shall be

considered as investment advice or recommendation to enter into any
transaction(s) described in this document or deemed to be an assurance or
guarantee as to the expected results of transaction(s) involving such investment
product(s)/asset class(es).
This document does not purport to list or summarise all of the terms and
conditions, nor to identify or define all or any of the risks that would be
associated with the purchase or sale of the investment product(s)/asset
class(es) described herein.
The price and value of investments and the income derived from them can go
down as well as up. Changes in inflation, interest rates and the rate of
exchange may have an adverse effect on the value, price and income of
investments.
The value of securities and financial instruments may be subject to currency
exchange rate fluctuation that may have a positive or negative effect on the
price, value of such securities or financial instruments and the income derived
from such investments.
Any services and investments referred to may have tax consequences and it is
important to bear in mind that SG does not provide any tax advice. The level of
taxation depends on individual circumstances and such levels and bases of
taxation can change.
Past performance is not necessarily a guide to future performance. Estimates of
future performance are based on assumptions that may not be realized.
Investments in general, and derivatives in particular, involve numerous risks,
including, among others, market, counterparty default and liquidity risk.
The investment product(s)/asset class(es) described herein may be issued by
issuer(s) which credit rating given by any rating agency in the market may be
inferior to that of the companies in SG and SG is not responsible nor liable for
any risk in respect of such issuer(s) including but not limited to risk of default on
the part of such issuer(s). Further, SG assumes that investors are aware of the
risks, including any risk which may be in relation to or arise from the issuer(s),
and practices described herein.
CONFLICTS OF INTEREST
To the maximum extent possible at law, SG does not accept any liability
whatsoever (financial or otherwise) arising from the use of the material or
information contained herein nor in respect of actions taken by recipients on the
basis of the research. Moreover, no member of SG makes any warranty,
expressed or implied, as to the accuracy or the completeness of the information
or on the profitability or performance of any investment product(s)/asset
class(es), countries, markets or companies. SG is not responsible, in any
circumstances, for the financial, legal or tax consequences of investing into the
investment product(s)/asset class(es) described in this document, nor the
performance of this investment(s).
The investment product(s)/asset class(es) described in this document are

destined to prospective investors who possess sufficient knowledge, based on
their own experience, to evaluate the advantages and the risks inherent to such
investment product(s)/asset class(es). In addition, the financial instrument
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of investing in financial instruments or implementing strategies discussed herein
and/or enabling them to understand any applicable tax, legal or accounting
consequences and other risks arising in respect of such investment and/or
related to their own particular circumstances and financial conditions. For this
purpose, investors must, to the extent they deem necessary, obtain independent
advice from competent legal, financial, tax, accounting and other professionals.
This research contains the views, opinions and recommendations of SGPB

Strategists. Trading desks may trade, or have traded, as principal on the basis
of the analyst(s) views and reports. In addition, strategists receive compensation
based, in part, on the quality and accuracy of their analysis, client feedback,
trading desk and firm revenues and competitive factors. As a general matter,
SG normally makes a market and trade as principal in fixed income securities
discussed in research reports.
Companies within SG may from time to time deal in, profit from trading on, hold
on a principal basis or act as market-makers, advisers or brokers in relation to
the investment product(s)/asset class(es) mentioned in this document or provide
banking services to the companies and their affiliates mentioned herein.
Employees of SG or persons/entities connected to them may from time to time
have position in or are holding any of the investment product(s)/asset class(es)
mentioned in this document.
SG may have (or may liquidate) from time to time positions in the investment
product(s)/asset class(es), security or securities and/or underlying assets
(including derivatives thereof) referred to herein, if any, or in any other asset,
and therefore any return to prospective investor(s) such as yourself under the
investment product(s)/asset class(es) described herein may directly or indirectly
be affected. Specific disclosures are made in the first part of this document.
34
DISTRIBUTION
Unless otherwise expressly indicated, this document is issued and distributed by
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ANNUAL EDITION

GREEN LIGHT AHEAD, MIND THE SPEED LIMIT

Most asset prices could shift upward given

7 Convictions for 2014

Conviction # 1 - US bond yields back up!

Conviction # 2 Value in European short duration high yield

Conviction # 3 European banks beauty contest

Conviction # 4 Investment cycle gathering speed

Conviction # 5 Upside for depressed energy sector

Conviction # 6 Emerging pockets of value

Conviction # 7 German stocks Rocket-borne

Global economic outlook

Key economic focus: Womanomics

GREEN LIGHT AHEAD, MIND THE SPEED LIMIT !

Long-term asset returns are conditioned by structural equilibrium in economic

In conclusion, beware of possible market exuberance building up in 2014 as global growth

INVESTMENT STRATEGY 2014 OUTLOOK

As of November 27, 2013

Downgrade since previous investment strategy

How to read the table:

High capital gain

High capital gain

Above average return

Below average return

INVESTMENT STRATEGY 2014 OUTLOOK

US monetary policy is entering a multi-year tightening

Prefer short-duration bonds

Default rates in European High Yield are set to stay low

Focus on short-duration European High Yield

Economic turn around and accommodative monetary

Positive on Eurozone banking stocks

Business fixed investment has been relatively week in

Favour Capital Goods related sectors in US,

Upside for the

Free cash flow generation is key for avoiding the

Favour Global Energy stocks

While 2013 has seen high correlation among Emerging

Favour markets with current account surplus and

Low interest rate environment, attractive effective

Favour the DAX to the other European indices.

INVESTMENT STRATEGY 2014 OUTLOOK

2014 market catalysts: more of the same with more dispersion

INVESTMENT STRATEGY 2014 OUTLOOK

Managing risks: beware of market exuberance and excess confidence

INVESTMENT STRATEGY 2014 OUTLOOK

EUR/USD: EVENTUALLY A LOWER

Although US momentum gained traction over 2013 and the

EUR/USD & Rate differentials

Source: Bloomberg, Socit Gnrale Private Banking

I We are keen on maintaining our dovish view on the EUR

GBP/USD: THE BoE EXPECTED TO WIN THE SNAILS

Recent GBP appreciation looks overdone

Source: Bloomberg, Socit Gnrale Private Banking

INVESTMENT STRATEGY 2014 OUTLOOK

UK 10 yr real yield (LHS)

Although upward pressure on the CHF has been alleviated

Improving terms of trade combined with domestic

USD/JPY: A NEW YEN DROP IN SIGHT

Japanese authorities succeeded in massively weakening

Breakeven inflation rate (%)

The super-commodity cycle has been a powerful engine

Source: Bloomberg, Socit Gnrale Private Banking

Lower commodity prices drag down the AUD