art 3 multiassetportfolio
DESCRIPTION
hbTRANSCRIPT
Societe Generale (“SG”) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that SG may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision. PLEASE SEE APPENDIX AT THE END OF THIS REPORT FOR THE ANALYST(S) CERTIFICATION(S), IMPORTANT DISCLOSURES
AND DISCLAIMERS AND THE STATUS OF NON-US RESEARCH ANALYSTS.
GLOBAL ASSET ALLOCATION
Outlook 2013
Multi Asset Portfolio 2013: European assets strike back
More quantitative easing in both developed and
emerging markets
EM ASSETS
Continue to re-weight EM Bonds &
Equities,
but remain cautious on FX
CURRENCIES
Bull US$ for 2013
Keep Sterling, Avoid Yen
GOV BONDS
Switch USTs into MBS
Short Bunds
Buy Eurozone Peripherals
CREDIT
Top slice: IG segment
Focus on:
US High Yield & Financials
EQUITY
Favour Eurostoxx & Nikkei
backed by more liquidity
Improving cyclical signals in China (H1) and US (H2):
Europe bottoms out
Spain asks for assistance
Cost of capital falls in Europe
COMMODITIES
Limited expected returns
Prefer Gold, backed by QEs
OUR STORY
Central Banks inflate, wedon’t fight them. Benign
bond markets in H1 enable
us t o take risks elsewhere
Three themes: European assets strike back,
Safe assets suffer,
Be more contrarian
Markets more volatile in H2
OUR SCENARIO
OUR STRATEGY
Three key risks:Sovereign downgrades
Talk of US exit strategiesChina hard landing
Global Asset Allocation Alain Bokobza Head of Strategy team +33142138438
Philippe Ferreira Strategist
Roland Kaloyan Strategist
Arthur van Slooten Strategist
Praveen Singh Strategist
Global Head of Cross Asset Research Patrick Legland
Economics Michala Marcussen
Aneta Markowska
Wei Yao
James Nixon
Rates Vincent Chaigneau
Julian Wiseman
Takuma Sugawara
FX Kit Juckes
Sebastien Galy
Emerging markets Benoît Anne
Guillaume Salomon
Credit Simon Surtees
Guy Stear
Ken Elgarten
J
a
Commodities Michael Haigh
Michael Wittner
Jesper Dannesboe
Equity Strategy Paul Jackson
Alain Kayayan
Equity Derivatives and Equity-Linked Vincent Cassot
Cross Asset Strategy Ahmed Behdenna
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Multi Asset Portfolio
Outlook 2013 2
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Multi Asset Portfolio
Outlook 2013 3
SG MAP Global Asset Allocation Table p4
Our story – Investment recommendations p5
Seven Key Calls p6
Key Call 1: European assets strike back
Key Call 2: Safe assets are being sold off
Key Call 3: Spain asks for assistance
Key Call 4: The Fed soon starts to buy Treasuries outright
Key Call 5: China accelerates in the first half of 2013
Key Call 6: Risk-on for Global Emerging Markets in H1 2013
Key Call 7: Overheating expected in investment grade credit
Multi Asset Portfolio performances p7
Tables of SG Forecasts p8
EDITORIAL
Overall stance p10
Too much background noise, fundamental improvements expected in 2013/2014 p11
Implementing another year of highly accommodative policy p14
End-of-momentum strategies: time to reweight the “Value”(or contrarian) investment style p17
ECONOMIC SCENARIO p21
PORTFOLIO CONSTRUCTION TOOLS p28
ASSET CLASSES UNDER REVIEW
Cash p40 Fixed Income
US Government Bonds p46
Japanese Government Bonds p47
European Government Bonds p48
UK Government Bonds p49
European Credit p50
US Credit p51
Equity
US Equity Market p41
Japanese Equity Market p42
Euro Equity Market p43
UK Equity Market p44
Emerging Equity Market p45
Forex Market
Foreign Exchange €/$ p52
Foreign Exchange €/£ p53
Foreign Exchange€/¥ p54
Other
Commodities p55
Alternative inv.: hedge funds p56
Report completed on 26 November 2012
Multi Asset Portfolio Fourth quarter 2012
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Multi Asset Portfolio
Outlook 2013 4
SG MAP Global Asset Allocation
One-year strategic timeframe, revisited every quarter
Tactical adjustments can be made according to market conditions and risk control
Authorised bands Asset classes Asset allocation
Min Max Old SG MAP
(October 2012)
New SG MAP
(December 2012)
Major
changes
Current
reco
30% 70% EQUITIES* 42% 50% N
5% 15% Europe ex-UK equities 15% 15% MAX
0% 10% UK equities 6% 5% N
5% 35% US equities 7% 10% UW
0% 10% Japanese equities- HEDGED 8% 10% MAX
0% 10% Global EM equities 3% 7% OW
0% 5% Global Income stocks 3% 3% OW
5% 50% GOVERNMENT BONDS* 20% 20% = UW
0% 15% Government bonds (10Y) – Core Eurozone 1% 0% MIN
0% 5% Government bonds (10Y) – UK 5% 3% UW
0% 15% Government bonds (10Y) - US 7% 5% UW
0% 15% Government bonds (10Y) - Japan 0% 0% MIN
0% 10% Government bonds (10Y) - EM 4% 7% OW
0% 5% Mortgage Backed Securities - US 3% 5% MAX
0% 25% CORPORATE BONDS* 18% 15% OW
0% 10% Corporate Credit IG – Europe 5% 5% N
0% 10% Corporate Credit IG – US 9% 5% N
0% 5% Corporate Credit High Yield – US 4% 5% MAX
5% 30% CASH* 5% 5% = UW
0% 10% Cash in € 0% 0% MIN
0% 10% Cash in £ 5% 5% N
0% 10% Cash in $ 0% 0% MIN
0% 10% Cash in ¥ 0% 0% MIN
0% 20% ALTERNATIVE ASSETS 15% 10% N
0% 10% COMMODITIES 6% 5% N
of which: Precious Metals OW
Base Metals OW
Agri & Livestock UW
Energy UW
0% 5% DIVIDENDS – Europe 1% 3% N
0% 5% IMPLIED VOLATILITY – US 5% 2% N
Allocation based on common currency: all assets are recommended with their currency exposure (i.e. without hedging). Source: SG Cross Asset Research
* Assets including FX exposure. Authorised bands based on the asset’s market capitalisation. Major changes: only strategic and tactical moves are highlighted.
OW: Overweight, N: Neutral, UW: Underweight, MIN: Minimum, MAX: Maximum, EM: Emerging. HEDGE versus USD.
Implied currency exposure of SG MAP Asset Allocation
Median Currencies Asset allocation
Weighting (**) Old SG MAP
(October 2012)
New SG MAP
(December 2012)
Major
Changes
25% Euro 24% 26%
30% Dollar 38% 42%
15% Yen 8% 0%
15% Sterling 17% 13%
10% EM FX 7% 14%
5% Commodities 6% 5%
**Median weighting based on the minimum/maximum authorised for each asset class in the SG MAP Asset Allocation. Major changes: only strategic and tactical moves are highlighted. Source: SG
Cross Asset Research
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Multi Asset Portfolio
Outlook 2013 5
Our story – Investment summary
SG MAP Global Asset Allocation
Min Max Asset OLD NEW Change Reco
30% 70% Equities 42% 50% +8 N
5% 50% Bonds 20% 20% UW
0% 25% Credit 18% 15% -3 OW
5% 30% Cash 5% 5% UW
0% 20% Alternatives 15% 10% -5 N
0% 5% (of which volatility) (6%) (5%) n
Source: SG Cross Asset Research
The balance between fundamentals (“growth”) and liquidity should gradually switch in favour
of growth by summer 2013. In due course, this is likely to put the US bond market in danger
(H2 2013) and potentially destabilise global markets. Risk assets could be particularly hard hit
after a good 2012. Stronger US growth also means a stronger US dollar.
Against considerable background noise, Europe should climb its wall of worries, forcing flow-
of-funds to continue reallocating into ultra-cheap European assets. In EM, central banks could
open the door to unexpected policy loosening, backing our stronger weighting both in EM
bonds and EM equities – although we advise being selective in EM currencies.
1) European assets strike back
Background noise relates to potential policy failures and other risks, as shown by the
performance of the deep-value assets. Ahead of Spain asking for assistance, we recommend
re-weighting European assets (both in Bonds, Equities and Credit) according to three ideas:
prefer the periphery to the core, re-weight banks and prefer Spain to Italy.
2) Safe assets finally suffer
Safe assets have had an unusually good run over the last few years, backed by all sorts of
fears. With Europe climbing its wall of worries, the US stepping away from the fiscal cliff and
China avoiding a hard landing, for now, the steep valuations of the most high-profile safe
assets should come down, namely: US Treasuries (H2), Nasdaq (already started), oil, the yen,
German Bunds.
3) Be more contrarian than usual
Momentum-based investment strategies have been highly rewarding since end-2008; but
since H2 2012, some have started to fail. The most vulnerable, “overheated”, old-
momentum plays are US assets (both S&P500 and US Treasuries) and high grade Credit.
We would arbitrage into global financials (both in Equities and Credit) and into LatAm (buy
BRL as a proxy).
Median Currency OLD NEW Change
25% Euro 24% 26% +2
30% Dollar 38% 42% +4
15% Yen 8% 0% -8
15% Sterling 17% 13% -4
10% EM FX 7% 14% +7
5% Commodities 6% 5% -1
Global Macro
Three core
investment themes
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Multi Asset Portfolio
Outlook 2013 6
Seven key calls
European assets strike back
Eurozone equities are currently trading at a historical discount relative to US equities (50%on price-
to-book value ratio). The outperformance of the Eurostoxx 50 (SX5E) vs the S&P 500 (SPX) has
already started and should continue. Positive newsflow and better market perception should
support eurozone assets.
Long Eurostoxx 50 (SX5E) / Short S&P 500 (SPX)
Safe assets are being sold off
Fundamentals are gradually improving in peripheral Europe, and the easing of tail risks leaves the
Bund exposed. Expect the BoJ to be more aggressive in 2013 (Eco Analysis), which would weaken
the Japanese currency.
Short Bunds outright, Buy USD/JPY
Spain asks for assistance
We expect Spain to ask for support early in 2013. At that time, SPGB issuance should pick-up
sharply, necessitating support in the absence of a convincing programme of long-term deficit
reduction. ECB support would certainly be risk-on, and less stress would support the banking
sector. See Fixed Income Outlook.
Long Bonos / Short Bunds, Long Eurozone Banks / Short Stoxx 600 (SXXP)
The Fed soon starts to buy Treasuries outright
Gold should benefit from additional US monetary easing. Inflation-linked bonds and
mortgage-backed securities should also benefit from the Fed actions. We prefer non-agency
mortgage-backed securities due to the higher yield compared to agency MBS.
Buy Gold, Buy US Inflation-linked bonds, Buy non-agency MBS
China accelerates in the first half of 2013
Base metals are a proxy for Chinese growth and would benefit from China’s acceleration. On
the other side, the WTI discount versus Brent should narrow. See Commodity Outlook.
Long Base Metals / Short Brent, Long EM equities/ Short DEV equities
Risk-on for Global Emerging Markets in H1 2013:
LatAm should outperform its peers over the next six months. This is essentially driven by the
expected recovery of the BRL – we project a rebound in the real from its currently low level to
2.01 against the USD by June 2013. See EM outlook.
Long BRL/USD
Overheating expected in investment grade credit
Fundamentals remain strong for credit (sound corporate balance sheets, lot of liquidity and
improving cyclical indicators in the US). Investors are still starving for yield. US High Yield
offers a highly attractive risk / reward profile compared to other major asset classes and
investment grade credit particularly, which is probably overbought now.
Long US High Yield
Key Call 1
Key Call 2
Key Call 3
Key Call 4
Key Call 5
Key Call 6
Key Call 7
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Multi Asset Portfolio
Outlook 2013 7
Multi Asset Portfolio performance Multi Asset Portfolio and Global Balanced Funds (as reported by Bloomberg)
Performances since April 2008 launch of the SG Index Multi Asset Portfolio (SGI MAP)
Performance since January 2012
Data as of 22 November 2012. Performance in euro and total return. Cash: EONIA. Global bonds: Lehman global aggregate index. Global equity:
MSCI World. Commodities: CRB index. Bloomberg balanced funds mix represents balanced funds (domiciled in US, JP, UK, FR, SW & NL) based
on Bloomberg's Active Indices for Funds. Source: SG Global Cross Asset Strategy, SGI Index, S&P Custom Indices
Note: Past performance is not indicative of future results. Portfolio presented assumes no transaction costs. For additional details on portfolio
performance, including interim recommendations or a different performance horizon, please contact us.
75
80
85
90
95
100
105
110
115
120
125
75
80
85
90
95
100
105
110
115
120
125
Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May -10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov -12
SG MAP index performance
Mix of Balanced Funds
performance
50
60
70
80
90
100
110
120
130
140
150
160
170
50
60
70
80
90
100
110
120
130
140
150
160
170
Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13
Global bonds
Cash
SGI MAP
Global Equities
Commodities
88
92
96
100
104
108
112
116
120
88
92
96
100
104
108
112
116
120
Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13
Global Bonds
Cash
SGI MAP
Global Equities
Commodities
The SG MAP has strongly
outperformed its peer group: the
global balanced funds represent
the aggregation of all balanced
funds, equally weighted, whose
performance is reported in
Bloomberg.
Volatility level
Asset Volatility
SGI MAP 5.5%
Commodities 13.2%
Global equities 10.2%
Global Bonds 7.1%
Cash 0.0%
Volatility based on daily data from January
2012. Source: SG Cross Asset Research
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Multi Asset Portfolio
Outlook 2013 8
SG key market forecasts
SG global equity index targets
Index Current (23/11) Q1 13e Q2 13e Q3 13e Q4 13e
S&P 500 1409 1500 1550 1350 1450
Nikkei 225 9367 9200 9200 9500 9500
DJ Stoxx 600 273 253 265 282 278
FTSE 100 5819 5300 5500 5900 5800
CAC 40 3529 3225 3380 3650 3600
Dax 30 7309 6800 7000 7350 7250
FTSE MIB 15636 14000 14900 16400 16250
IBEX 35 7910 7200 7600 8200 8100
Source: SG Cross Asset Research
Key central bank rate forecasts
Current (23/11) Q1 13e Q2 13e Q3 13e Q4 13e
USA 0.13 0.13 0.13 0.13 0.13
Japan 0.10 0.10 0.10 0.10 0.10
Eurozone 0.75 0.75 0.75 0.75 0.75
UK 0.50 0.50 0.50 0.50 0.25
10-year bond yield (local market convention)
Current (23/11) Q1 13e Q2 13e Q3 13e Q4 13e
USA 1.69 2.00 1.75 2.00 2.35
Japan 0.74 0.80 0.75 0.90 1.00
Eurozone (Bund) 1.44 2.00 1.50 1.70 2.00
UK 1.84 2.20 1.70 1.80 2.00
Exchange rate forecasts
Current (23/11) Q1 13e Q2 13e Q3 13e Q4 13e
USD/JPY 82.4 80.0 82.0 84.0 86.0
GBP/USD 1.60 1.60 1.56 1.55 1.54
EUR/USD 1.30 1.27 1.25 1.21 1.19
EUR/GBP 0.81 0.79 0.79 0.78 0.77
Commodities
Forecast as of Current (23/11) Q1 13e Q2 13e Q3 13e Q4 13e
Aluminium ($/t) 1983 2150 2225 2125 2240
Copper ($/t) 7777 8200 8400 7800 7500
Zinc ($/t) 1961 2000 2100 2070 2150
Nickel ($/t) 16620 18000 19000 18000 18000
Gold ($/t) 1753 1800 1850 1800 1750
Oil Brent ($/t) 111 109.7 104.7 113 112.3
Source: Datastream, SG Cross Asset Research
V
o
l
a
t
i
l
i
t
y
l
e
v
e
l
Asset Volatility
SGI MAP 7.6%
Commodities 15.2%
Global
equities
15.0%
Global Bonds 8.0%
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Multi Asset Portfolio Edito
Outlook 2013 9
Editorial
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Multi Asset Portfolio Edito
Outlook 2013 10
Overall stance
SG MAP Global Asset Allocation
Min Max Asset OLD NEW Change Reco
30% 70% Equities 42% 50% +8 N
5% 50% Bonds 20% 20% UW
0% 25% Credit 18% 15% -3 OW
5% 30% Cash 5% 5% UW
0% 20% Alternatives 15% 10% -5 N
0% 5% (of which Commodities) (6%) (5%) N
Source: SG Cross Asset Research
Add Equities (Upgrade to Neutral)
Take advantage of the recent market consolidation to continue adding equities to portfolios.
On a global basis, valuations remain attractive compared to long-term standards. Markets
should price in the US cyclical rebound in H2 sooner rather than later. The risk premium
related to the eurozone sovereign crisis is likely to come down as well as a result of the ECB’s
actions. Accommodative monetary conditions look set to continue in 2013.
Start taking profits on Corporate Bonds (still Overweight)
Fundamentals remain strong: corporates are cash-rich with low levels of debt. The asset class
put in an extraordinarily strong performance in 2012, as investors sought out safe havens with
reasonable income. The Investment Grade segment is somewhat rich (i.e. low rich). Although
we are sticking to an Overweight stance (Maximum on US High Yield), we suggest taking
some profit and reallocating into equities.
Government Bonds: potential danger in H2 2013 (Underweight reiterated)
Government bonds are richly valued as investors have looked for safe havens over the last
few years. While it seems too early to cut exposure to the asset class (more QE to come and
no immediate rebound in economic activity), market concerns about exit strategies from
central banks could gradually gain momentum by end-2013.
Hold Commodities (Neutral)
Prices should continue to be driven by cyclical indicators (upside pressure from China in H1
and the US in H2), geopolitical factors (Middle East tension, OPEC policy) and liquidity
conditions (still ample). The increase in oil prices is nonetheless likely to be limited by rising
non-OPEC supply. There is scope for a relief rally on base metals on stronger Chinese data
and a resolution to the US fiscal cliff. Gold could be support by additional monetary easing.
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Multi Asset Portfolio Edito
Outlook 2013 11
Too much background noise, fundamental
improvements expected in 2013/2014
#1) Rebalancing is taking place in peripheral Europe
Current accounts deficits disappear… …Primary budget surpluses appear
% of GDP Source: Eurostat, European Commission forecasts, SG Cross
Asset Research.
% of GDP The primary balance is the budget balance excluding interest
payments on government liabilities. Source: Eurostat, European
Commission forecasts, SG Cross Asset Research.
Unit labour costs fall Greece’s budget deficit halved in Jan-Oct 12
2005=100. Nominal unit labour costs; 2005=100; seasonally adjusted.
Source: Eurostat, SG cross Asset Research
* January-October. Central government state budget execution includes
ordinary budget and public investment program. Source: Ministry of
Finance (Greece), SG Cross Asset Research
#2) Systemic risk in the eurozone is easing significantly
Mario Draghi has effectively improved market conditions in the eurozone (Composite Indicator of
Systemic Stress in the eurozone)
The composite Indicator of systemic stress comprises all segments of the Eurozone financial system: financial intermediaries, money markets, equity
and bond markets, as well as foreign exchange markets. Source: Hollo, Kremer and Lo Duca (2012), SG Cross Asset Research.
-20
-15
-10
-5
0
5
10
Ireland Greece Spain
Italy Portugal
Forecast
-15
-10
-5
0
5
Ireland Greece Spain
Italy Portugal
-28
Forecast
95
100
105
110
115
120
95
100
105
110
115
120
05 06 07 08 09 10 11 12 13
Ireland Spain Italy
Portugal Greece-25
-20
-15
-10
-25
-20
-15
-10
2009* 2010* 2011* 2012*
0
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0.2
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0
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0.9
00 01 02 03 04 05 06 07 08 09 10 11 12 13
9/11Subprime
Lehman
Nasdaq Collapse
EFSF
EZ crisis act II
LTROs
Draghi joins ECB
High financial stress
Low financial stress
OMTs
Collapsing of composite
indicator of systemic stress in
the eurozone
Risk assets, and in particular bank
equities, have benefited from the
easing of “convertibility risk” in the
eurozone.
Noticeably, Greece’s budget deficit
(on a cash basis) has been reduced
significantly on the back of lower
expenditures. Yet, fiscal
sustainability remains a long way
off due to the growth dynamics
and the level of public debt.
Fundamentals are gradually
improving in peripheral Europe:
- External accounts are
improving;
- In 2013, primary budget
balances are expected to be
positive in Italy, Portugal and
Greece;
- Unit labour costs are falling
(except in Italy).
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Multi Asset Portfolio Edito
Outlook 2013 12
#3) Low political uncertainty: the 2013 electoral calendar in the
G10 is light; continuity likely to prevail in Germany and Italy
Compared to 2012, the global electoral calendar in 2013 involves much lower political risk and
uncertainty. Among the G10, only two countries will experience critical parliamentary
elections: Italy in April and Germany in September (specific dates have not yet been
announced). In both countries, these elections are unlikely to bring significant changes. Italy
involves more risks due to the special role of Mario Monti who is leading a technocrat
government and who does not represent a political party. Nonetheless, there have been
increasing signals lately that he will retain a prominent role after the election.
Germany: Merkel likely to be re-elected in the Sept. election Italy: Monti likely to stay in power after the April elections
Source: Forschungsgruppe Wahlen: Politbarometer, SG Cross Asset Research Source: SWG institute, SG Cross Asset Research
#4) Germany’s deceleration supports the ECB dovish stance
Germany is decelerating and our proprietary newsflow indicator suggests it will continue to do
so in the coming months. The fact that most, if not all, eurozone economies face similar
cyclical headwinds facilitates the job of the ECB, which is expected to remain very dovish
throughout 2013.
Germany’s newsflow suggests industrial production growth will continue to contract
Left: German industrial production, year-on-year performance. Right: SG Proprietary Newsflow for Germany, pushed forward 5 months: number of
news items on economic strength as a percentage of total economic news articles. Above 50% (more positive news than negative news in press
articles), the indicator signals an expansion of the economy. Below 50%, it highlights signs of recession. Source: Datastream, Dow Jones, SG Cross
Asset Research
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45
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13
CDU/CSU SPD
Grüne FDP
Political parties' support, % polled
0
10
20
30
40
50
60
70
80Conf idence in Mario Monti, %
20
30
40
50
60
70
80
-25
-20
-15
-10
-5
0
5
10
15
20
25
06 08 10 12 14
Industrial Production
(Left hand scale)
SG Newsflow indicator - Germany(right hand scale)
Bad news in Germany becomes
good news for the eurozone.
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Multi Asset Portfolio Edito
Outlook 2013 13
The fiscal cliff in the US: not expected to be a repeat of the
2011 debacle, but this is already priced in
Surprises in the US have been positive lately: economists are revising up their forecasts
The economic surprise index compares actual economic releases to expectations (Bloomberg survey median).
Source: Bloomberg, Datastream, Citi, SG Cross Asset Research
Political uncertainty is high ahead of the fiscal cliff, but is expected to come down
The policy uncertainty index has three components: i) newspaper coverage of policy-related economic uncertainty; ii) number of federal tax code
provisions set to expire in future years; iii) disagreement among economic forecasters. Source: Policy uncertainty, Bloomberg, SG Cross Asset Research
US stocks are trading at an all-time high (in total return)
Total return index, base 100 = 01/01/1973. Source: Datastream, SG Cross Asset Research
-30
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0
10
20
30
-150
-100
-50
0
50
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150
10 11 12 13
QE1 starts28 Nov ember 2008
QE2 starts27 August 2010
QE3 13 September 2012
S&P500 3 month % change (Right HS)
Economic Surprise Indicator (Lef t HS)
Economistsbecome (too) optimistic
Economistsbecome (too) pessimistic
0
10
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60
70
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300
90 92 94 96 98 00 02 04 06 08 10 12
VIX index (Right HS)
US policy uncertainty index (Lef t HS)
1000
2000
3000
4000
5000
1000
2000
3000
4000
5000
95 98 01 04 07 10 13
All time high!
Obama is increasingly adopting a
bi-partisan approach and
Republicans have shown signs that
they are ready to engage into
constructive discussions.
US stocks have rebounded on the
back of positive surprises on the
economy. But as economists’ are
upgrading their figures, there is
less and less room for economic
releases to beat expectations.
US stocks seem to be pricing in a
smooth resolution of the fiscal cliff.
The materialisation of this scenario
is thus unlikely to trigger an
upward move in US risk assets.
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Multi Asset Portfolio Edito
Outlook 2013 14
Implementing another year of highly
accommodative policy
Buy the Nikkei. Careful with the euro
Central banks’ balance-sheet expansion since the beginning of the subprime crisis
100= August 2008. Central banks balance sheets in local currency. Source: Bloomberg, SG Cross Asset Research
We expect the BoJ to be more aggressive in 2013 (Eco Analysis), which would weaken the
Japanese currency. The best way to leverage such a scenario is to keep strong exposure to
Japanese equities (see the correlation below), which have already start to deliver (+11% year
to date).
The Nikkei is highly sensitive to USD/JPY swings EUR/USD: in anticipation of US QE3
Source: SG Cross Asset Research, Datastream Evolution of the Fed balance sheet in USD relative to ECB balance sheet in EUR.
Source: IMF, Bloomberg, SG Cross Asset Research
Over the last four years, the EUR/USD has been very sensitive to central bank balance sheets
in the US and in the eurozone (Fed / ECB ratio). We maintain our view that the Spanish
government will require official assistance, allowing the ESM/ECB to become fully operational.
This perspective is putting pressure on the euro. SG’s FX strategists forecast a EUR/USD of
1.19 by December 2013.
50
150
250
350
450
50
150
250
350
450
Aug-08 Aug-09 Aug-10 Aug-11 Aug-12
ECB
FED
BoE
BoJ
75
77
79
81
83
85
87
8000
8500
9000
9500
10000
10500
11000
01/11 04/11 07/11 10/11 01/12 04/12 07/12 10/12 01/13
Nikkei index
USD/JPY (rhs)
0.8
1
1.2
1.4
1.6
1.15
1.25
1.35
1.45
1.55
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13
EUR/USD(Lef t HS)
FED/ECBbalance sheet ratio
(Right HS)
BoJ and ECB have room to catch
up
Since Lehman’s failure, the G4
central banks have printed money
(i.e. balance-sheet expansion): the
ECB and the BoJ, very moderately;
but the Fed and the BoE have
done so extensively.
Buy Nikkei, but hedged, as
the yen should weaken
Careful with the euro
(SGe: EUR/USD = 1.19 by
December 2013)
B17118
Multi Asset Portfolio Edito
Outlook 2013 15
Buy Gold, MBS & TIPS to leverage Fed’s policy
Gold price is very sensitive to monetary expansion
The rationale for M0 projections is based on QE1 and QE2: treasury purchases pass-through to M0 is close to 100%; MBS purchases pass-through
to M0 is close to 50%. We expect the Fed to engage in $40bn of MBS purchases and $45bn of Treasury purchases per month throughout 2013 (see
Focus US) US monetary base (M0) in billions of USD. Gold price in on/$. Source: SG Cross Asset Research, Federal Reserve Bank Saint Louis
What the Fed wants? To decrease the
Mortgage rate
Inflation-linked bonds (TIPS): the best way
to protect portfolios from inflation fears
The 30y mortgage bank rate is a national average calculated bank
rate. Source: Bloomberg, SG Cross Asset Research
Spread between government-bond yield and TIPS (Treasury
Inflation Protected Securities). Latest weekly data 15/10/12. Global
Inflation newsflow relative to deflation newsflow, as of 15/10/12.
Source: Federal Reserve, Dow Jones, SG Cross Asset Research
10-year US Treasuries: rich versus our
proprietary valuation model
Yield gap (actual – fair value of US
Treasury): back to extreme rich value
The model is based on the Fisher equation that links nominal bond yields to growth and inflation expectations. Instead of the potential growth, we
use a measure relation to the adaptive nature of expectations, being the average growth rate of the past 10 years. Source: Bloomberg, SG Cross
Asset Research
500
1000
1500
2000
2500
3000
3500
4000
200
500
800
1100
1400
1700
2000
2300
2600
05 06 07 08 09 10 11 12 13 14
US Monetary base (M0)(Right HS)
Gold Price(Lef t HS)
SG f orecast
1
1.5
2
2.5
3
3.5
4
4.5
5
5.5
1
1.5
2
2.5
3
3.5
4
4.5
5
5.5
01/10 07/10 01/11 07/11 01/12 07/12 01/13 07/13
10Y UST yield
Cur.CouponMortgage rate
Agency MBS rate
30Y MortgageBank rate
0
50
100
150
200
250
300
350
40
50
60
70
80
90
06 07 08 09 10 11 12 13
TIPS spread(Right HS)
SG Global Inf lation relativ e to def lation
Newsf low
(Lef t HS)
0
2
4
6
8
10
12
14
16
18
0
2
4
6
8
10
12
14
16
18
68 72 76 80 84 88 92 96 00 04 08 12
%10y UST y ield
Model
%
-2
-1.5
-1
-0.5
0
0.5
1
1.5
-200
-150
-100
-50
0
50
100
150
90 93 96 99 02 05 08 11
nb of Std Deviation (RHS)
1 432 5
y ield gap (LHS, bp)
Gold and the debasement of the
USD: a very simple equation:
The price of gold is quoted in USD.
When the Fed increases its
balance sheet, it prints more USD.
However, the amount of gold
available in the world cannot
increase at the same speed.
Everything else being equal, an
ounce of gold would trade at a
higher price in USD.
Buy Gold
US Treasuries richly valued
After the end of operation twist 2 in
December 2012, the Fed will
probably continue to buy US
Treasuries (i.e. QE3.5).
However, we do not recommend
increasing exposure to US
Treasuries. Given the current
growth and inflation expectations,
Treasuries are already historically
richly valued at the current yield
(see model) and a serious pick-up
in the US economy (H2 2013?)
would trigger TALKS OF EXIT
STRATEGIES (too early to be
implemented today).
Don’t fight the Fed, buy
mortgage-backed securities
(MBS).
Inflation fears: a comeback in
2013? With all the money printing
during successive and global QEs -
the one by the Fed is even without
an expiry date - it is rational that
the market should starts to worry
about inflation risk sooner than
later.
Buy Treasury Inflation
Protected Securities (TIPS)
B17118
Multi Asset Portfolio Edito
Outlook 2013 16
EM: cyclical acceleration in 2013 but monetary stance to
remain loose
EM equities: value aspect is back Fall in the EM / DEV equities correlation
EM equities versus developed equities: relative price to book value.
Source: Datastream, MSCI, SG Cross Asset Research
Correlation based on 1Y daily data in local currency.
Source: Datastream, MSCI, SG Cross Asset Research
Starving for yield? Buy EM bonds, which are lagging the drop in US equity volatility
Global EM Bonds spread = JP Morgan GBI Composite Yield – US 10Y Treasury yield. Vix index = US equity volatility. Low regime = VIX index
between 10% and 20%. Source: SG Cross Asset Research, Datastream
Beware of FX volatility when buying EM bonds EM FX under pressure despite S&P 500
recovery
Volatility based on 1-year daily data on JP Morgan Emerging Markets
Currency Index and .JP Morgan GBI Composite Yield
Source: Bloomberg, Datastream, SG Cross Asset Research
JP Morgan Emerging Markets Currency Index.
Source: Bloomberg, SG Cross Asset Research
-15%
-10%
-5%
0%
5%
10%
15%
20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
06 07 08 09 10 11 12
EM equities expensive
EM equities cheap35%
40%
45%
50%
55%
60%
65%
70%
75%
80%
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%
01 02 03 04 05 06 07 08 09 10 11 12 13
10
15
20
25
30
35
40
45
50
250
300
350
400
450
500
03/09 09/09 03/10 09/10 03/11 09/11 03/12 09/12
LOW VOLATILITY REGIME
Global EM Bonds spread(over UST yield, LHS)
VIX index(RHS)
0
2
4
6
8
10
12
14
0
2
4
6
8
10
12
14
03 04 05 06 07 08 09 10 11 12 13 14 15
EM FXVolatility
EM BondsVolatility
75
80
85
90
95
100
105
110
115
600
800
1000
1200
1400
1600
00 01 02 03 04 05 06 07 08 09 10 11 12 13
S&P 500 (LHS)
Global EM FX Index (RHS)
Dovish stance in EM in H1 would
support EM equities
Outright treasury purchases by the
Fed in 2013 would support a
dovish stance by central banks in
the EM world. While Latam seems
to be done with the easing cycle,
there is more to come in EMEA and
Asia. This would be welcomed by
EM equities which are now trading
at a c.10% discount relative to DEV
equities and have some
diversification appeal (i.e. fall in
correlation with DEV equities).
Tactically add EM equities. In
the MAP, we move to Overweight
(from Underweight)
Quest for yield: Buy EM bonds
We believe that there is still some
potential of compression in Global
EM bonds spread (over US 10Y
treasuries).
Buy EM Bonds, with a
preference for EMEA bonds
Beware EM FX volatility in risk
off environments
Volatility is higher for EM FX than
on EM Bonds.
EM currencies have
underperformed other risky assets
in 2012 (see chart on the right), but
we could see some catching-up.
We are moderately bullish on EM
FX as appetite for global emerging
markets should return at year-end.
We particularly like high-beta Asian
FX. In EMEA, we prefer the RUB
and the PLN, but differentiation will
be key.
Be selective on EM FX
exposure
EM correlated with DEV Equities
EM decorrelated with DEV Equities
B17118
Multi Asset Portfolio Edito
Outlook 2013 17
End-of-momentum strategies: time to reweight the
“Value”(or contrarian) investment style
Eurozone assets look set to strike back in 2013
Eurozone bond market more attractive than US
Treasuries
Eurozone equities relative valuation is at a
historical low (versus US)
Eurozone 10y bond yield is an average of all the countries (excl. Greece),
weighted by the outstanding medium- and long-term debt securities (> 1
year). Source: Eurostat, Bloomberg, SG Cross Asset Research
Eurozone equities relative price to book value to US equities.
Source: Datastream, SG Cross Asset Research
Which sector is cheaper in the eurozone than in the US? The answer is…ALL OF THEM!
Valuation discount based on price to book value ratio. Eurozone sectors relative to US sectors. Source: Datastream, SG Cross Asset Research
The narrowing energy price gap between US & Europe would help European assets
Dot points = SG forecasts. US / European equity market: relative price performance in USD. Oil Brent / WTI spread: Oil Brent (USD/bbl) – Oil WTI
Crude price (USD / bbl). Source: Datastream, SG Cross Asset Research
-150
-50
50
150
250
350
-150
-50
50
150
250
350
03 04 05 06 07 08 09 10 11 12 13
Eurozone 10y spread v s. US (bp)
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
80 84 88 92 96 00 04 08 12
ERM Eurozone crisis
Eurozone expensiv e v s US
Eurozone cheap v s US
av erage
-60%
-50%
-40%
-30%
-20%
-60%
-50%
-40%
-30%
-20%
Eurozone relative to US sector valuation discount (in %)
50
60
70
80
90
100
110
-10
-5
0
5
10
15
20
25
30
35
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
US / European equity market(USD, RHS)
Oil Brent / WTI spread (LHs)
Prefer eurozone bonds over US
Treasuries
The average eurozone bond yield
should theoretically be lower than
the average US Treasury yield as
growth is lower in the eurozone!
Obviously, at present, this is not
the case - eurozone yields being
higher due to eurozone crisis. We
recommend increasing weights in
eurozone assets ahead of the
ESM/ECB intervention.
Prefer eurozone equities over US
equities
Eurozone equities are currently
trading at a historical discount
relative to US equities (50% in
price to book value ratio).
The valuation gap is not solely due
to sector composition. EVERY
sector is cheaper in the eurozone
compared to the US, with
European stocks trading at
discount ranging from a 35% for
Pharmaceuticals to 60% discount
for Financials.
Spread WTI / Brent to fall from
$23/b to $10/b
Over the past four years, the lower
cost of energy has been one of the
positive factors in favour of US
equities. SG oil experts forecast
the Brent/WTI spread narrowing in
the coming quarters. This would be
positive news for the eurozone
relative to the US.
SG forecasts
$/b WTI ICE Brent Spread
Latest* 87.3 110.5 23
Q1 2013 94.7 109.7 15
Q2 2013 89.7 104.7 15
Q3 2013 100.5 113.0 13
Q4 2013 102.3 112.3 10
Latest: 22/101/12
Source: Datastream, SG Cross Asset Research
B17118
Multi Asset Portfolio Edito
Outlook 2013 18
In the eurozone: short Bunds, buy Financials (Credit & Equity)
German assets (Bunds & DAX) are due to underperform peripheral assets. They should suffer
from deteriorating economic newsflow, from outflows if peripherals come back into favour and
from contagion liabilities (particularly on Bunds).
Reweight the very attractively priced Financials (both Credit and Equities). After the two
rounds of LTRO, the link between Financials and Sovereigns has been reinforced. If cost of
capital in the eurozone falls thanks to action from policymakers, then Financials would be
expected to outperform.
Time to switch out of German assets into peripheral assets
(both Bonds and Equity)
Banking is a value sector and highly sensitive to stress in the
eurozone
Relative performance of Dax versus Ibex. Base 85 = 06/01/2010. Spread of 10 year Spanish
government bond yield minus 10 year German government bond yield, in bp Source: Datastream,
SG Cross Asset Research
Relative performance of European Banks versus European Equity market. Base 100 = 08/01/2010.
Spread of 10-year Spanish government bond yield minus 10-year German government bond yield,
in bp. Source: Datastream, MSCI, IBES, SG Cross Asset Research
Start to trim UK assets - a proxy for US assets
Even if we continue to favour UK assets over US ones (see US equities in danger zone: switch
into UK assets), both markets are strongly correlated. UK and US equities are both trading at
all-time highs (dividend included) and 10Y Gilt and Treasuries are moving together.
Furthermore, UK assets could lose the support of the BoE, which could turn less aggressive in
2013 (SG expectations: only £50bn, probably in Q4 2013). That would support sterling, still
one of the most undervalued currencies (FX valuation model on request).
UK equities, like US ones, have totally recovered US Treasury and UK Gilt: six of one, half a dozen of the other
Equity market total return index rebased 07/2007 in local currency. Source: Datastream, SG Cross
Asset Research
Bond yield in %. The eurozone 10y bond yield is an average of all the countries (excluding Greece),
weighted by the outstanding medium- and long-term debt securities (> 1 year). Source: Eurostat,
Bloomberg, SG Cross Asset Research, Datastream, SG Cross Asset Research
0
100
200
300
400
500
600
700
75
100
125
150
175
200
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13
Dax v ersus Ibex(lef t HS)
10 Bond Yield spreadSpain - Germany
(right HS, bp)
0
1
2
3
4
5
6
750
60
70
80
90
100
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13
European Banks v s. European Equity
(lef t HS)
10 BY spreadSpain - Germany
(right HS, inv ersed, bp)
40
50
60
70
80
90
100
110
120
40
50
60
70
80
90
100
110
120
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12
UK equities
US equities
Euro zone equities
1
2
3
4
5
6
1
2
3
4
5
6
05 06 07 08 09 10 11 12 13
10Y UK Gilts
10Y US Treasuries
10Y Eurozone weighted-av erage bonds
(%)
Trim UK assets (Neutral FTSE
and Gilts), but keep Sterling as
the cheapest of the G10
currencies
In the eurozone, prefer
peripheral assets over German
ones
Buy eurozone Financials
(both Credit and Equities)
B17118
Multi Asset Portfolio Edito
Outlook 2013 19
In the US: keep your long Banks / short Nasdaq
Growth segment starting to disappoint: the example of Apple
Source: Bloomberg, SG Cross Asset Research
Buy US banks if you want to leverage the recovery of the US housing market
US Banks relative performance. US NAHB = National Association Of Home Builders Housing Market Index. Source: SG Cross Asset Research,
Datastream
Our long US banks / short Nasdaq strategy has started to delivered…much more to come
Nasdaq composite index relative to US banks Datastream index. 100 = 01/01/1980. Source: Datastream, SG Cross Asset Research
400
450
500
550
600
650
700
750
400
450
500
550
600
650
700
750
Jan-12 Mar-12 May -12 Jul-12 Sep-12 Nov -12
Apple share price ($)
14 Septemberlaunch of iPhone 5
0
10
20
30
40
50
60
70
80
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
US Home Builders (NAHB) survey (RHS)
US Banks relative performance (LHS)
40
60
80
100
120
140
160
180
200
220
240
40
60
80
100
120
140
160
180
200
220
240
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Nasdaq performance relative to US banks
US banks to leverage the US
housing market recovery
To benefit from the improving US
housing market, we recommend
buying US banks. The correlation
between housing and the Real
Estate sector or Construction
Material sectors is far less
impressive than with banks (charts
on request).
On top of that, US banks are
trading at historically low
valuations.
Long US banks / short Nasdaq
The relative performance of Nasdaq
versus Banks reached an extreme
level this year, the same as in
January 2000. No need to remind
you how this exuberant situation
ended!
Warning signs flashing for the
Nasdaq
Since May, our advice has been to
stay away from the Nasdaq and IT
companies (see Nasdaq still
running, but out on low battery).
The Nasdaq has been the worst
performing index (-6%) as profit
warnings have multiplied since
September.
B17118
Multi Asset Portfolio Edito
Outlook 2013 20
Prefer Equities to Investment Grade Credit, keep high yield
Fundamentals remain positive for corporate bonds: strong corporate balance sheets (low
debt, high level of cash); positive market mood (i.e. low volatility); and better US macro
newsflow (US housing market bottoming).
However, US investment grade corporate bonds are starting to be rich. Their yield has never
been so close to US equity dividend yields. The excellent performance of credit has attracted
many investors, who are likely to sell their holdings well before maturity. We prefer US High
Yield Credit grade, which is still lagging the equity recovery.
US Corporate Bonds IG: somewhat richly valued US High Yield has lagged equity volatility
Corporate bonds = Barclays US corp. Index. Source: Datastream, SG Cross Asset Research US High Yield Credit spread = Barclays US corp. yield – 10Y Bond yield.
Source: Bloomberg, SG Cross Asset Research
Our correlation matrix highlights a strong correlation between the equity and credit markets
over the past five years, but with more volatility in equity. In order to leverage positive
newsflow in the eurozone, we prefer the equity market more than the credit market.
On top of that, Equity dividend yields at a historically high spread compared to Corporate
bond yields in the eurozone (not the case in the US!). Except for Insurance, all sectors offer
higher dividend yields than bond yields (more than 4% yield in Telecoms and Utilities).
Starving for yield? Prefer Equity to Credit in the eurozone Eurozone Equities offer a premium yield to Credit
10Y Gov. Bonds: weighted average of eurozone government bond market. Equities: dividend yield.
Corporate bonds: iboxx indexes (redemption yield). Source: SG Cross Asset Research, Datastream
Corporate bonds: iboxx indexes (redemption yield). Equity: Datastream indexes (12-month forward
dividend yield). Source: SG Cross Asset Research, Datastream
0
2
4
6
8
10
0
2
4
6
8
10
00 02 04 06 08 10 12
Corp. Bond y ield
Gov t. bond y ield
Equity div idend y ield
(%)
10
15
20
25
30
35
40
45
50
200
300
400
500
600
700
800
900
1000
10 11 12 13
US Equity VolatilityVIX Index (RHS)
US High Yield Credit spread (LHS)
1
2
3
4
5
6
7
8
1
2
3
4
5
6
7
8
00 02 04 06 08 10 12
Corp. Bond yield
Equity dividend yield
Govt. bond yield
(%)
-50
50
150
250
350
450
-50
50
150
250
350
450
Ins
ura
nc
e
Food
& B
ev
.
Te
ch
no
log
y
Bas
ic R
es
.
Ind
us
trie
s
Health c
are
Auto
mobile
Bank
Media
En
erg
ies
Tele
com
Utilit
ies
Equity dividend yield - Corpoate Bond yield (in bp)
We do not dislike Credit, but
we prefer Equity in the eurozone
Buy US High Yield bonds
B17118
Multi Asset Portfolio Economic Scenario
Outlook 2013 21
Important Notice: The circumstances in which this publication has been produced are such that it is not appropriate to characterise it as independent
investment research as referred to in MiFID and that it should be treated as a marketing communication even if it contains a research recommendation.
This publication is also not subject to any prohibition on dealing ahead of the dissemination of investment research. However, SG is required to have
policies to manage the conflicts which may arise in the production of its research, including preventing dealing ahead of investment research.
Economic Scenario
B17118
Multi Asset Portfolio Economic Scenario
Outlook 2013 22
SG Economic Scenario
Global - Exiting policy uncertainty: Policy uncertainty has been a negative. We expect
this to lift in US early 2013 and more gradually in the euro area.
Growth: Good news for the global economy, as US and euro area policy uncertainty has
spilled-over to other regions.
Economic balances: Reduction of uncertainty will facilitate debt deleveraging.
Monetary policy: Easing of pressure to remove tail risks. Financial regulation uncertainty
may still weigh on credit expansion.
US - From stall speed to sustainable recovery: It’s finally the government’s turn to
deleverage, but this will pave the way for sustainable recovery.
Growth: SG view below consensus in 2014 in the expectation of more austerity..
Economic balances: US twin deficits are set to decline. New Energies is part external
rebalancing.
Monetary policy: Still ample spare capacity will keep inflation in check. We look for an
additional $1.1tn of QE over the coming 12 months.
Euro area - More compromise, more austerity: More compromise will see more
austerity on the cards for 2014.
Growth: SG view above consensus for 2014 due to slowing trend potential.
Economic balances: Austerity traps will remain a concern for the European periphery. We
see easing of austerity as of 2015.
Monetary policy: ECB will act as lender of last resort via OMTs and LTROs. Further easing
targeted to address specific liquidity shortages.
Asia - cyclical recovery in a structural slowdown: Reduced global policy
uncertainty and policy stimulus drive cyclical bounce. Structurally, however, growth is slowing.
Growth: SG view below consensus for 2014 due to slowing trend potential.
Economic balances: China current account surplus to stabilize as foreign companies
struggle to win market share for China consumer.
Monetary policy: Some further easing in the pipeline. BoJ unlikely to switch to aggressive
action near-term.
B17118
Multi Asset Portfolio Economic Scenario
Outlook 2013 23
Global trade - Offshoring to onshoring: Subtle shift in trade patterns driven by size
factors, relative ULCs and energy.
Growth: Cyclical recovery in global trade, but a structurally slower pace of growth.
Economic balances: In the euro area, rebalancing is internal to the region.
Monetary policy: On shoring could over time see a shift in wage dynamics – this will matter
for central banks.
Inflation - Managing expectations: Deflation risks in euro area periphery. Lower
energy price inflation. Large excess capacity. QE risks.
Growth: Ample spare capacity to keep inflation in check. Worrying trends on the supply-
side of euro area periphery.
Economic balances: FX caught between fundamentals and inflation expectations. Medium-
term, dollar set to be strongest G4 currency.
Monetary policy: Fragmentation in the euro area; but the solution must come from
governments not the ECB. Unemployment will be key for the Fed.
Monetary policy - The new unorthodox: Continued accommodation. Emerging
Europe has ample room to ease.
Growth: Monetary transmission mechanisms still impaired in advanced economies.
Economic balances: QE spill-over to EM would see a renewed increase of FX reserve
accumulation.
Monetary policy: Credit is the key indicator to watch for signs of repaired transmission
mechanisms. Unemployment is key signal for the Fed.
For further detail, please see SG Global Economic Outlook.
B17118
Multi Asset Portfolio Economic Scenario
Outlook 2013 24
SG Growth and Inflation Outlook
Source: SG Cross Asset Research (from Global Economic Outlook)
Real GDP CPI
P*= previous forecast 2011 2012f P* 2013f P* 2014f P* 2015f P* 2016f P* 2017f 2011 2012f P* 2013f P* 2014f P* 2015f P* 2016f P* 2017f
World (Mkt FX weights) 3.0 2.6 2.7 2.7 2.8 3.3 3.3 3.5 3.6 3.7 3.8 3.8 4.1 3.3 3.3 3.1 3.1 3.1 3.0 3.0 3.0 3.1 3.1 2.9
World (PPP FX weights) 3.8 3.2 3.4 3.3 3.4 3.8 3.9 4.0 4.1 4.2 4.3 4.2 4.9 4.1 4.0 3.8 3.7 3.6 3.4 3.4 3.4 3.4 3.4 3.3
Developed countries (PPP) 1.6 1.2 1.4 1.2 1.4 2.0 2.1 2.3 2.4 2.6 2.7 2.8 2.7 2.0 2.0 1.7 1.7 1.9 1.9 1.8 1.9 1.9 2.0 1.9
Emerging countries (PPP) 6.1 5.2 5.4 5.3 5.5 5.5 5.6 5.5 5.7 5.6 5.7 5.5 7.3 6.2 6.2 5.9 5.7 5.2 4.9 4.9 4.8 4.8 4.7 4.6
G5
Euro area 1.5 -0.4 -0.4 -0.3 -0.1 0.5 0.9 1.1 1.4 1.4 1.7 1.5 2.7 2.5 2.6 2.2 2.3 1.5 1.7 1.3 1.9 1.4 2.0 1.6
Germany 3.1 0.9 0.9 0.8 1.1 1.2 1.4 1.4 1.4 1.4 1.3 1.4 2.5 2.1 2.2 2.2 2.3 2.2 2.5 2.4 2.6 2.4 2.5 2.4
France 1.7 0.1 0.2 0.0 0.0 0.3 0.5 1.1 1.4 1.7 1.9 1.9 2.3 2.3 2.5 2.1 2.1 2.4 2.0 1.8 2.2 1.7 1.9 1.9
Italy 0.6 -2.1 -2.4 -1.3 -1.4 -0.1 0.1 0.8 1.0 1.2 1.2 1.2 2.9 3.3 3.1 1.9 2.6 1.1 1.9 0.7 2.0 0.8 1.9 1.2
Spain 0.4 -1.3 -1.6 -1.7 -2.3 -0.8 -0.6 0.1 0.3 0.8 1.0 1.1 3.1 2.5 2.6 2.8 3.0 -0.5 1.2 -0.5 1.4 -0.1 1.5 0.3
United States 1.8 2.1 2.3 1.8 1.8 2.9 2.5 3.2 3.2 3.7 3.7 3.9 3.1 2.1 1.9 1.4 1.5 2.1 1.9 1.9 1.8 1.9 1.9 2.0
China 9.3 7.7 7.7 7.4 7.4 7.2 7.2 6.9 6.9 6.9 6.9 6.5 5.4 2.8 2.9 3.0 3.0 2.5 2.5 3.0 3.0 3.5 3.5 3.0
Japan -0.8 1.7 2.4 0.7 1.0 1.4 1.7 0.7 0.6 0.9 0.8 1.3 -0.3 0.0 0.1 0.1 0.2 2.0 1.7 1.5 1.2 1.8 1.3 0.8
United Kingdom 0.9 -0.1 -0.1 1.1 1.2 1.5 1.8 1.7 2.0 2.1 2.3 2.5 4.5 2.7 2.7 2.0 1.9 2.0 2.0 2.3 2.3 2.4 2.7 2.5
Other advanced
Sweden 3.9 1.8 1.0 1.3 2.0 2.4 2.5 2.6 2.6 2.6 2.6 2.6 3.0 0.9 1.1 0.9 1.4 2.4 2.4 2.6 2.2 2.2 2.0 2.0
Norway 2.5 3.8 3.8 2.6 2.7 2.7 2.7 2.6 2.6 2.6 2.5 2.6 1.3 0.7 0.7 1.5 1.6 2.2 2.2 2.5 2.5 2.5 2.5 2.5
Switzerland 1.9 1.0 1.0 1.1 1.4 1.8 1.8 1.8 2.9 1.8 1.9 1.9 0.2 -0.6 -0.6 0.3 0.7 0.8 1.2 1.3 1.7 1.5 2.0 1.7
Australia 2.1 3.6 3.6 2.7 2.6 3.1 3.2 3.1 3.4 3.0 3.2 2.9 3.3 1.9 1.6 3.0 2.3 2.7 2.1 2.9 2.5 2.6 2.6 2.7
S. Korea 3.6 2.3 2.7 3.4 3.6 3.2 3.8 3.7 3.9 3.4 3.7 3.3 4.0 2.3 2.1 2.8 2.5 2.5 3.0 2.8 3.0 3.0 3.0 3.0
Emerging economies
Russia 4.3 3.6 3.7 3.3 3.6 3.9 4.2 4.0 4.4 3.7 4.2 3.7 8.4 5.1 5.1 6.6 7.0 5.7 5.7 5.2 5.4 4.8 5.1 4.5
Poland 4.3 2.4 2.8 1.9 2.1 3.0 3.0 3.5 3.5 4.0 4.0 4.5 4.3 3.8 3.9 2.6 2.7 2.5 2.5 3.0 3.0 2.5 2.5 3.5
Czech Republic 1.7 -0.8 -1.1 0.3 0.4 1.7 1.7 2.3 2.1 2.5 2.5 2.1 1.9 3.3 3.6 2.5 2.7 0.9 0.9 1.4 1.7 2.1 2.0 2.4
Slovakia 3.3 2.5 2.3 2.0 2.1 3.0 3.6 3.3 3.3 3.5 3.2 3.3 4.1 3.7 3.4 2.9 2.5 2.4 1.8 2.0 2.0 2.3 2.0 2.4
Romania 2.5 1.1 1.4 2.0 1.8 2.6 2.6 4.0 4.0 4.4 4.2 3.5 5.6 3.5 3.1 4.9 3.4 3.1 3.2 2.9 na 3.0 na 3.8
Ukraine 5.2 0.8 2.1 2.8 3.0 3.3 3.3 3.4 3.4 3.2 3.2 3.2 7.5 0.5 2.1 7.2 7.9 6.9 6.9 6.5 5.0 6.3 4.9 6.0
Kazakhstan 7.5 5.1 5.3 5.3 5.5 5.8 6.0 5.9 6.0 6.0 6.0 5.8 8.4 5.3 5.1 6.4 6.3 5.2 5.2 4.9 4.9 4.7 4.7 4.4
B17118
Multi Asset Portfolio Economic Scenario
Outlook 2013 25
SG monetary policy rate and FX short-term outlook
The "neutral rate" for key rates and the "trend fair value" for bond yields give our estimate of "fair value" assuming an output gap of zero and inflation at trend. The trend fair value for currencies reflects a PPP based valuation. End of period figures.
Source: SG Cross Asset Research (from Global Economic Outlook)
Monetary Policy - Key Rates Long Gvt. Bond Yield (10Y) Foreign ExchangeNov Mar Jun Sep Dec Neutral Nov Mar Jun Sep Dec Trend Nov Mar Jun Sep Dec Trend
17 2013 2013 2013 2013 rate 17 2013 2013 2013 2013 Fair Value 17 2013 2013 2013 2013 Fair Value
G5
Euro area 0.75 0.75 0.75 0.75 0.75 3.75 1.35 2.00 1.50 1.70 2.00 4.50 EURGBP 0.81 0.79 0.79 0.78 0.77 0.75
US 0.13 0.13 0.13 0.13 0.13 4.00 1.59 2.00 1.75 2.00 2.35 4.75 EURUSD 1.28 1.27 1.25 1.21 1.19 1.20
China 3.00 3.00 3.00 3.00 3.00 3.50 3.53 3.60 3.80 3.60 3.50 4.00 USDCNY 6.23 6.22 6.18 6.21 6.19 5.75
Japan 0.10 0.10 0.10 0.10 0.10 1.75 0.74 0.80 0.75 0.90 1.00 2.50 USDJPY 81.1 80.0 82.0 84.0 86.0 100.0
UK 0.50 0.50 0.50 0.50 0.25 4.50 1.73 2.20 1.70 1.80 2.00 5.00 GBPUSD 1.59 1.60 1.56 1.55 1.54 1.60
Other advanced
Sweden 1.25 1.00 1.00 1.00 1.50 4.25 1.45 1.95 1.50 1.70 2.00 4.50 EURSEK 8.64 8.65 8.55 8.50 8.50 8.50
Norway 1.50 1.50 1.50 1.75 2.00 4.50 2.05 2.50 2.00 2.20 2.50 4.80 EURNOK 7.35 7.40 7.35 7.30 7.30 7.65
Switzerland 0.00 0.00 0.00 0.00 0.25 2.50 0.42 1.05 0.70 0.80 1.00 2.75 EURCHF 1.20 1.21 1.21 1.21 1.23 1.40
Australia 3.25 3.00 3.00 3.00 3.00 5.00 3.04 3.00 3.00 3.25 3.25 5.00 AUDUSD 1.03 1.08 1.10 1.08 1.06 0.90
Korea 2.75 2.75 2.75 3.00 3.25 4.50 2.96 2.85 2.95 3.30 3.65 5.00 USDKRW 1087 1070 1060 1050 1040 900
Emerging economies
Russia 5.50 5.50 5.50 5.25 5.25 5.00 7.38 7.05 7.35 7.20 7.15 6.50 USDRUB 31.64 30.1 31.5 32.4 33.2 33.0
Poland 4.50 4.75 4.50 4.25 4.25 4.50 4.24 4.05 4.10 4.20 4.20 5.10 EURPLN 4.15 3.90 4.00 3.90 3.90 3.85
Czech Rep. 0.05 0.05 0.05 0.05 0.05 3.50 1.91 2.61 2.72 2.77 2.83 5.00 EURCZK 25.55 25.5 25.5 25.3 25.2 24.8
Romania 5.25 5.25 5.25 5.00 5.00 5.50 6.85 6.80 7.00 6.80 6.60 6.00 EURRON 4.54 4.45 4.40 4.45 4.42 4.30
Ukraine 7.50 8.00 8.00 7.75 7.75 6.00 na na na na na na USDUAH 8.22 8.8 8.8 8.8 8.8 9.00
Kazakhstan 5.50 5.50 5.00 5.00 5.00 5.00 na na na na na na USDKZT 150 150 150 149 150 149
The "neutral rate" for key rates and the "trend fair value" for bond yields give our estimate of "fair value" assuming an output gap of zero and inflation at trend. The trend fair value for currencies reflects a PPP based valuation.
End of period figures
B17118
Multi Asset Portfolio Economic Scenario
Outlook 2013 26
SG monetary policy rate and FX long-term outlook
The "neutral rate" for key rates and the "trend fair value" for bond yields give our estimate of "fair value" assuming an output gap of zero and inflation at trend. The trend fair value for currencies reflects a PPP based valuation. Average over the year figures.
Source: SG Cross Asset Research (From Global Economic Outlook
Monetary Policy - Key Rates Long Gvt. Bond Yield (10Y) Foreign ExchangeNov Neutral Nov Trend Nov Trend
0 17 rate 17 Fair Value 0 17 Fair Value
G5
Euro area 0.75 0.75 0.75 1.00 1.96 2.96 3.75 1.35 1.80 2.30 3.00 3.50 3.75 4.50 EURGBP 0.81 0.78 0.75 0.77 0.80 0.80 0.75
US 0.13 0.13 0.13 0.13 1.15 2.84 4.00 1.59 2.03 2.50 3.25 4.00 5.10 4.75 EURUSD 1.28 1.23 1.17 1.15 1.10 1.10 1.20
China* 3.00 3.00 na na na na 3.50 3.53 3.63 3.50 3.75 4.00 4.00 4.00 USDCNY 6.23 6.20 6.30 6.20 6.20 6.00 5.75
Japan 0.10 0.10 0.10 0.10 0.10 0.10 1.75 0.74 0.86 1.00 1.20 1.50 1.50 2.50 USDJPY 81.1 83.0 90.0 95.0 100.0 110.0 100.00
UK 0.50 0.44 0.25 0.50 2.06 3.75 4.50 1.73 1.93 2.50 3.50 4.10 4.45 5.00 GBPUSD 1.59 1.56 1.56 1.49 1.38 1.38 1.60
Other advanced
Sweden 1.25 1.13 1.88 2.69 3.63 4.00 4.25 1.45 1.79 2.30 3.00 3.50 3.75 4.50 EURSEK 8.64 8.55 8.28 8.33 8.44 8.50 8.50
Norway 1.50 1.69 2.69 3.75 4.00 4.00 4.50 2.05 2.30 2.80 3.30 3.75 4.00 4.80 EURNOK 7.35 7.34 7.28 7.38 7.45 7.52 7.65
Switzerland 0.00 0.06 0.63 1.25 1.75 2.00 2.50 0.42 0.89 1.30 2.00 2.40 2.70 2.75 EURCHF 1.20 1.22 1.23 1.22 1.21 1.21 1.40
Australia 3.25 3.00 3.60 4.00 4.50 5.00 5.00 3.04 3.13 3.25 4.20 4.50 4.60 5.00 AUDUSD 1.03 1.08 1.05 1.00 0.90 0.90 0.90
Korea 2.75 2.94 3.56 4.31 5.00 5.00 4.50 2.96 3.19 3.60 4.50 5.00 5.00 5.00 USDKRW 1087 1055 1000 950 900 900 900.00
Emerging economies
Russia 5.50 5.38 5.00 4.75 4.50 4.25 5.00 7.38 7.19 7.00 6.85 6.50 6.25 6.50 USDRUB 31.64 31.79 32.98 32.79 33.01 33.49 33.00
Poland 4.50 4.75 4.25 4.50 4.50 4.50 4.50 4.24 4.14 5.00 5.50 5.80 5.80 5.10 EURPLN 4.15 3.93 3.80 3.70 3.60 3.60 3.85
Czech Rep. 0.05 0.05 0.05 0.60 1.75 2.53 3.50 1.91 2.73 2.88 3.30 3.68 3.98 5.00 EURCZK 25.55 25.38 24.73 24.31 24.06 23.73 24.80
Romania 5.25 5.13 4.63 4.50 4.50 4.50 5.50 6.85 6.80 6.70 6.50 6.20 6.10 6.00 EURRON 4.54 4.43 4.40 4.30 4.28 4.28 4.30
Ukraine 7.50 7.88 7.19 6.50 6.00 6.00 6.00 na na na na na na na USDUAH 8.22 8.80 9.00 9.00 9.00 9.00 9.00
Kazakhstan 5.50 5.13 5.00 4.81 4.63 4.50 5.00 na na na na na na na USDKZT 150 150 149 149 149 149 149.00
The "neutral rate" for key rates and the "trend fair value" for bond yields give our estimate of "fair value" assuming an output gap of zero and inflation at trend. The trend fair value for currencies reflects a PPP based valuation.
Average over the year figures.
* We expect China to accelerate the liberalisation of bank deposit and lending interest rates and to migrate to a new policy rate in 2013/14.
2015 20162013 2014 2015 2016 20132017 20172013 2014 2015 2016 20142017
B17118
Multi Asset Portfolio Portfolio construction tools
Outlook 2013 27
Portfolio construction tools
B17118
Multi Asset Portfolio Portfolio construction tools
Outlook 2013 28
Tactical Asset Allocation model: major conclusions
The conclusions below are the results of our methodology (see our report of 3 December 2007),
both in common currency terms and in local currencies. Our optimisation process enables us
to take account of different investment profile requirements in our allocation: risk-averse, risk-
balanced and dynamic.
Main conclusions from the tactical asset allocation tools:
Tactical Asset Allocation results summary
Asset Classes Tools Level 3M trend Key Messages
Equities
Expected return *** Double-digit return expected (except for Japan)
Expected volatility ** = European Equities the most volatile (17%)
Weight N = US, EM and European Equities
Bonds
Expected return *** = Double-digit returns expected for EM Bonds
Expected volatility * = JGBs, the least volatile
Weight OW = OW Euro bonds
FX
Expected return ** = Yen, $, £ (+), € (-)
Expected volatility ** = Double-digit expected volatility for EUR/JPY &
EUR/USD
Weight nm nm Yen only
Credit Spread IG
Expected return * =
Expected volatility * =
Weight MIN =
Commodities
Expected return *** Higher expected return (from 4% last quarter to
7%)
Expected volatility ** Close to Equity volatility levels
Weight MIN =
3M trend: change over the last 3 months. Level: from * (the lowest level) to *** (the highest level). Weight: based on the local currency portfolio.
Source: SG Cross Asset Research
Expected returns With the exception of Europe ex-UK equities, 12-month return
expectations have generally declined. Apart from Japanese equities, investors continue to
have double-digit return expectation for equities. Among fixed income assets, EM bonds are
expected to deliver double-digit returns over the next 12 months.
Volatility Over the last few months, developed market central banks have repeatedly
expressed their intention to curtail tail risk. This has resulted in declining volatility
expectations. Currently, conditional volatility of most asset classes is in the 1st quartile of the
long-term range. Among equities, European equity (ex UK) continues to remain the most
volatile.
Correlation Our correlation matrix still highlights a negative correlation between government
Bonds and Equities and a strong positive correlation within Equities and Bonds. Japanese
assets continue to offer some diversification based on a regional approach.
NOTE TO OUR READERS
The Tactical Asset Allocation
model is based on historical price
& risk momentum. The model is
one of several decision-making
tools we use to determine
strategic allocation (MAP). As a
result, our active MAP allocations
can deviate temporarily from the
model’s recommendations.
Deviations have been significant
since Lehman Brothers’ failure, as
valuations (NOT taken into
account in our mathematical
models) have substantially
deviated from their norm on
Bonds, Equities and Credit.
B17118
Multi Asset Portfolio Portfolio construction tools
Outlook 2013 29
Track record of our Tactical Asset Allocation model
Our Tactical Asset Allocation model results in three types of portfolios:
- Risk-averse portfolio, which seeks to minimise risk (lowest possible volatility).
- Dynamic portfolio, which seeks to maximise expected return (with high volatility).
- Risk-balanced portfolio, which offers an attractive expected return at reasonable risk.
Performance of our three portfolios since 1994 *
Back tests’ track record based on quarterly rebalancing. Performance in total return and in euro. Source: SG Cross Asset Research
* Past performance is not indicative of future performance. Portfolio presented assumes no transaction costs. For additional details on portfolio
performance, including interim recommendations or a longer performance horizon, please contact us.
Performance of our three portfolios since January 2012 *
Performance in total return and in euro. Source: SG Cross Asset Research
* Past performance is not indicative of future performance. Portfolio presented assumes no transaction costs. For additional details on portfolio
performance, including interim recommendations or a longer performance horizon, please contact us.
Year to date, the Balanced portfolio has delivered +9.2% (performance in euro, taking into
account dividends and coupons) and the Risk Averse portfolio had a very low volatility level,
only 5.3% and maximum drawdown (3.3%). Over longer periods, our Dynamic portfolio has
been the best performer, delivering an 8.0% return per year on average since 1994.
50
100
150
200
250
300
350
400
450
50
100
150
200
250
300
350
400
450
94 96 98 00 02 04 06 08 10 12 14
Dy namic
Risk-Balanced
Risk-Av erse
98
100
102
104
106
108
110
112
114
116
98
100
102
104
106
108
110
112
114
116
01/12 02/12 03/12 04/12 05/12 06/12 07/12 08/12 09/12 10/12 11/12 12/12 01/13
Dy namic
Balanced
Av erse
Risk and return analysis
(since 1994)
Averse Balanced Dynamic
Annualised return 7.3% 7.4% 8.0%
Volatility 7.5% 9.1% 11.2%
Sharpe ratio 0.96 0.81 0.70
Max drawdown 22% 27% 33%
Performance and ratios in total return and in
euro. Source: SG Cross Asset Research
Risk and return analysis
(since Jan 12)
Averse Balanced Dynamic
Return 6.9% 9.2% 9.4%
Volatility 5.3% 6.3% 7.1%
Sharpe ratio 1.11 1.25 1.13
Max drawdown 3.3% 3.7% 5.5%
Performance and ratios in total return and in
euro. Source: SG Cross Asset Research
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Multi Asset Portfolio Portfolio construction tools
Outlook 2013 30
Three-month asset performance
Three-month asset performance in local currency
Performance calculated between 10/08/12 and 09/11/12. Source: SG Cross Asset Research
Past performance is not indicative of future performance. Portfolio presented assumes no transaction costs. For additional details on portfolio
performance, including interim recommendations or a longer performance horizon, please contact us
Three-month asset performance in common currency
Performance calculated between 10/08/12 and 09/11/12. Source: SG Cross Asset Research
Past performance is not indicative of future performance. Portfolio presented assumes no transaction costs. For additional details on portfolio
performance, including interim recommendations or a longer performance horizon, please contact us.
7%
4%
2%2% 2% 2% 1% 1% 1%
0% 0% 0% 0% 0%
-1%-1% -1% -1%
-3%-4%
-2%
0%
2%
4%
6%
8%
Div
idends (
EU
R)
EM
bonds (
US
D)
UK
gov.
bonds (G
BP
)
Euro
gov.
bonds (E
UR
)
Euro
pe e
x-U
K e
quitie
s (
EU
R)
US
gov.
bonds (U
SD
)
Glo
bal E
M e
quitie
s (
loc)
Euro
pean cre
dit (
EU
R)
Japan g
ov.
bonds (J
PY
)
US
cre
dit (
US
D)
Cash U
K (
GB
P)
Cash U
S (
US
D)
Cash E
uro
pe (E
UR
)
Cash J
apan (J
PY
)
UK
eq
uitie
s (
GB
P)
Alt. in
vestm
ents
(U
SD
)
Japan e
quitie
s (
JP
Y)
US
eq
uitie
s (
US
D)
Com
moditie
s (U
SD
)
7%
2% 2%1%
0% 0% 0%
-1% -2% -2%-3% -3% -3%
-4% -4% -4% -5%-6% -6%-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Div
idends (E
UR
)
Euro
gov.
bonds (E
UR
)
Euro
pe e
x-U
K eq
uitie
s (
EU
R)
Euro
pean cre
dit (
EU
R)
EM
bonds (
EU
R)
UK
gov.
bonds (E
UR
)
Cash E
uro
pe (E
UR
)
Glo
bal
EM
eq
uitie
s (
EU
R)
Cash U
K (
EU
R)
US
gov.
bonds (E
UR
)
UK
eq
uitie
s (
EU
R)
US
cre
dit (
EU
R)
Cash U
S (
EU
R)
Japan g
ov.
bonds (E
UR
)
US
eq
uitie
s (
EU
R)
Alt. in
vestm
ents
(E
UR
)
Cash J
apan (E
UR
)
Japan e
quitie
s (
EU
R)
Com
moditie
s (E
UR
)
Over the last three months,
equities struggled while fixed
income assets delivered positive
returns.
Apart from European equities,
developed market equities
delivered negative returns over
the last three months.
EM bonds delivered the best
returns among fixed income
assets.
Due to the strength of euro,
common currency performance of
most asset classes was negative.
Apart from Europe ex-UK
equities, all other equity markets
delivered negative common
currency total return.
Dividends were the best
performing asset class in local as
well as common currency terms.
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Outlook 2013 31
Efficient frontier and our three portfolio profiles
Future returns and risks by asset class
Expected return (%) – in local currency
The estimated future performance of an asset, based on a mix of a normalised, momentum and risk-derived approach.
Source: SG Cross Asset Research
Past performance is not indicative of future performance. Portfolio presented assumes no transaction costs. For additional details on portfolio
performance, including interim recommendations or a longer performance horizon, please contact us.
Conditional volatility (%) – in local currency
12-month forward volatility is based on the EWMA model. Source: SG Cross Asset Research
Past performance is not indicative of future performance. Portfolio presented assumes no transaction costs. For additional details on portfolio
performance, including interim recommendations or a longer performance horizon, please contact us.
15% 14% 14% 14%
10%
9% 8%7% 7%
5% 4%3%
2% 2% 1% 1% 1%0% -2%
-4%
0%
4%
8%
12%
16%
US
eq
uitie
s (
US
D)
Euro
pe e
x-U
K e
quitie
s (
EU
R)
EM
bonds (
US
D)
Glo
bal E
M e
quitie
s (
loc)
UK
eq
uitie
s (
GB
P)
UK
gov.
bonds (G
BP
)
Euro
gov.
bonds (E
UR
)
US
gov.
bonds (U
SD
)
Com
moditie
s (U
SD
)
Alt. in
vestm
ents
(U
SD
)
Japan g
ov.
bonds (J
PY
)
Div
idends
(EU
R)
Cash U
K (
GB
P)
Cash E
uro
pe (E
UR
)
Cash U
S (
US
D)
US
cre
dit (
US
D)
Euro
pean cre
dit (
EU
R)
Cash J
apan (J
PY
)
Japan e
quitie
s (
JP
Y)
17% 17%15%
14% 14% 14%13%
7%6%
6% 5% 5%
3%2% 2%
0% 0% 0% 0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Euro
pe e
x-U
K e
quitie
s
(EU
R)
Japan e
quitie
s (
JP
Y)
Com
moditie
s (U
SD
)
US
eq
uitie
s (
US
D)
UK
eq
uitie
s (
GB
P)
Div
idends
(EU
R)
Glo
bal E
M e
quitie
s (
loc)
US
gov.
bonds (U
SD
)
Euro
gov.
bonds (E
UR
)
UK
gov.
bonds (G
BP
)
EM
bonds (
US
D)
Alt. in
vestm
ents
(U
SD
)
Euro
pean cre
dit (
EU
R)
Japan g
ov.
bonds (J
PY
)
US
cre
dit (
US
D)
Cash E
uro
pe (E
UR
)
Cash U
K (
GB
P)
Cash U
S (
US
D)
Cash J
apan (J
PY
)
Apart from Japanese equities, all
other asset classes have positive
expected return.
US equities continue to have the
highest expected return among all
asset classes, while EM bonds
have the highest expected return
among fixed income assets.
Return expectations from Europe
ex-UK equities have improved the
most since our last update in Sep
2012.
While conditional volatility
continues to be on a downward
trajectory, Europe ex-UK
equities continue to remain the
most volatile among all asset
classes.
Clear volatility gap between
risky assets (Equities, Dividends
and Commodities) and fixed
income assets (Bonds, Credit,
and Cash).
B17118
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Outlook 2013 32
Efficient frontier
Positioning of asset classes relative to the efficient frontier in local currency
Anticipated risk: 12-month forward volatility is based on the EWMA model. Expected return: the estimated future performance of an asset, based on a mix of a normalised, momentum and risk-derived
approach. Source: SG Cross Asset Research
Eur ex-UK Equities
UK Equities
Japan Equities
EmergingEquities
UK GovBonds
EM Bonds
US Gov Bonds
Japan Gov Bonds
Eur. Credit
US Credit
Cash UK
Cash EuroCash US
Cash Japan
Eur. Gov Bonds
Commodities
Alternativ e inv estments
Div idends
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Risk-averse
Dynamic
Risk-averse
Risk-balanced
US Equities
EM Bonds are above the efficient
frontier (frontier built under
constraints)
Dividends and Commodities are on the
right of the mean variance charts, with
volatility level similar to Equities.
Anticipated risk
Expected return
Low risk content from Credit
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Outlook 2013 33
Response from the Markowitz-based Tactical Asset Allocation model
Our optimisation process allows us to take different investment profile requirements into
account. These requirements are organised into three types of portfolios:
Tactical Asset Allocation model in local currency
Authorised bands Asset classes
Min Max Risk-averse Risk-balanced Dynamic
30% 70% EQUITIES 30% 51% 70%
5% 20% Europe ex-UK equities 5% 11% 20%
0% 10% UK equities 5% 0% 10%
5% 30% US equities 10% 30% 30%
0% 10% Japanese equities 0% 0% 0%
0% 10% EM equities 10% 10% 10%
5% 50% BONDS 49% 44% 25%
0% 15% European government bonds 12% 15% 10%
0% 5% UK government bonds 5% 5% 5%
0% 15% US government bonds 15% 14% 0%
0% 15% Japanese government bonds 15% 0% 0%
0% 10% EM bonds 1% 10% 10%
0% 20% CREDIT 0% 0% 0%
0% 10% Corporate credit – Europe 0% 0% 0%
0% 10% Corporate credit – US 0% 0% 0%
5% 30% CASH 5% 5% 5%
0% 10% Eurozone 0% 0% 0%
0% 10% UK 5% 5% 5%
0% 10% US 0% 0% 0%
0% 10% Japan 0% 0% 0%
0% 20% ALTERNATIVES 16% 0% 0%
0% 10% Commodities 10% 0% 0%
0% 5% Alternative investments 5% 0% 0%
0% 5% Dividends 1% 0% 0%
52-week expected return 8.6% 11.6% 12.4%
52-week conditional volatility 2.9% 5.9% 9.0%
Sharpe ratio (excluding costs) 2.9 1.9 1.4
Calculations based on local currency. Conditional volatility: 12-month forward volatility is based on the EWMA model. Expected return: the estimated future performance of an asset, based on a mix of
a normalised, momentum and risk-derived approach. The Sharpe ratio indicates the amount of probability for one unit of risk. Sharpe ratio <0% indicates that the anticipated return of the sector is lower
than the risk-free rate (EONIA). The higher the Sharpe ratio, the greater the return on risk. Source: SG Cross Asset Research
Risk-averse portfolio
minimises risk (lowest
possible volatility)
Risk-balanced
portfolio
is in the middle of the
efficient frontier
Dynamic portfolio
maximises expected return
B17118
Multi Asset Portfolio Portfolio construction tools
Outlook 2013 34
Correlation matrix (in local currency)
Eur ex UK
equities
(EUR)
UK
equities
(GBP)
US
equities
(USD)
Japanese
equities
(JPN)
Global
emg eqt
(loc cur)
Euro gov
bonds
(EUR)
UK gov
bonds
(GBP)
US gov
bonds
(USD)
Jap.gov
bonds
(JPN)
EM gov
bonds
(USD)
European
credit
(EUR)
US
credit
(USD)
Cash
Europe
(EUR)
Cash
UK
(GBP)
Cash
US
(USD)
Cash
Japan
(JPN)
Commo
(USD)
Alt.
Inv
(USD)
Dividends
(EUR)
Eur ex UK equities (EUR) 100% 91% 88% 64% 72% -57% -65% -70% -50% 40% 32% 81% -9% -4% 1% 7% 41% 78% 68%
UK equities (GBP) 100% 85% 64% 78% -45% -60% -69% -50% 48% 36% 78% 0% 2% 4% 6% 42% 81% 67%
US equities (USD) 100% 58% 73% -56% -58% -67% -48% 39% 33% 84% 6% 10% 4% 4% 50% 89% 55%
Japanese equities (JPN) 100% 69% -48% -64% -58% -52% 17% 37% 64% 0% 2% 2% 4% 24% 58% 53%
Global emg eqt (loc cur) 100% -35% -49% -52% -38% 49% 34% 72% -7% -7% 1% 9% 43% 80% 55%
Euro gov. bonds (EUR) 100% 77% 64% 56% -13% -23% -52% 2% 4% -4% -14% -32% -54% -35%
UK gov. bonds (GBP) 100% 75% 59% -13% -32% -60% 3% 0% -2% -3% -29% -57% -40%
US gov. bonds (USD) 100% 63% -9% -23% -62% 5% 9% 4% 4% -34% -60% -41%
Jap. gov. bonds (JPN) 100% 6% -21% -39% 0% 9% -5% 4% -9% -42% -38%
EM gov. bonds (USD) 100% 34% 45% -12% 0% -4% 14% 46% 49% 39%
European credit (EUR) 100% 48% -13% -4% -5% 1% 15% 35% 29%
US Credit (USD) 100% -2% 8% 2% 9% 44% 80% 54%
Cash Euro (EUR) 100% 79% 48% 35% 4% 9% -8%
Cash UK (GBP) 100% 34% 40% 5% 11% -9%
Cash US (USD) 100% 29% 13% 5% 6%
Cash Japan (JPN) 100% 14% 13% 9%
Commodities (USD) 100% 67% 34%
Alternative Inv (USD) 100% 55%
Dividends (EUR) 100%
Correlation in euro currency. Can range between -100% and 100%. A correlation coefficient of zero indicates a complete lack of relationship, whereas a coefficient of 100% demonstrates a perfect linear relationship. Source: SG Cross Asset Research
European Equities / Dividends
correlation has dropped from 88%
to 67% over the last 3 months.
B17118
Multi Asset Portfolio Portfolio construction tools
Outlook 2013 35
Mu l t i A s s e t P o r t f o l i o
Mu l t i A s s e t P o r t f o l i o Mu l t i A s s e t P o r t
Efficient frontier and our three portfolio profiles
Future return and risk by asset class
Expected return (%) in common currency
Common currency: euro. Expected return: the estimated future performance of an asset, based on a mix of a normalised, momentum and risk-derived
approach. Source: SG Cross Asset Research
Conditional volatility (%) in common currency
Common currency: euro. 12-month forward volatility is based on the EWMA model. Source: SG Cross Asset Research
20% 19%
15%14%
12%11% 10%
8%7% 7%
5% 5%5%
3%3% 3%
2% 2% 1%
0%
4%
8%
12%
16%
20%
US
eq
uitie
s (
EU
R)
EM
bonds (
EU
R)
UK
eq
uitie
s (
EU
R)
Euro
pe e
x-U
K eq
uitie
s
(EU
R)
Glo
bal
EM
eq
uitie
s (
EU
R)
UK
gov.
bonds (E
UR
)
US
gov.
bonds (E
UR
)
Euro
gov.
bonds (E
UR
)
Japan g
ov.
bonds (E
UR
)
Cash J
apan (E
UR
)
Com
moditie
s (E
UR
)
Japan e
quitie
s (
EU
R)
Alt. in
vestm
ents
(E
UR
)
US
cre
dit (
EU
R)
Div
idends (
EU
R)
Cash U
S (
EU
R)
Cash U
K (
EU
R)
Cash E
uro
pe (E
UR
)
Euro
pean cre
dit (
EU
R)
17%
15%14% 14% 14% 14% 14%
13%12% 12%
10% 9% 9%8% 8%
6% 6%
3%
0%
0%
4%
8%
12%
16%
20%
Euro
pe e
x-U
K e
quitie
s (
EU
R)
Glo
bal E
M e
quitie
s (
EU
R)
Div
idends
(EU
R)
UK
eq
uitie
s (
EU
R)
Japan e
quitie
s (
EU
R)
Com
moditie
s (E
UR
)
US
gov.
bonds (E
UR
)
Japan g
ov.
bonds (E
UR
)
Cash J
apan (E
UR
)
US
eq
uitie
s (
EU
R)
UK
gov.
bonds (E
UR
)
Cash U
S (
EU
R)
EM
bonds (
EU
R)
US
cre
dit (
EU
R)
Alt. in
vestm
ents
(E
UR
)
Cash U
K (
EU
R)
Euro
gov.
bonds (E
UR
)
Euro
pean cre
dit (
EU
R)
Cash E
uro
pe (E
UR
)
Taking the currency effect into
account (models in common
currency), expected return for all
asset classes is positive.
Among equities, US equities have
the highest expected return, while
among fixed income assets, EM
bonds have the highest expected
return.
The yen and USD have the highest
volatility, as highlighted by Cash
Japan, at 12%, and Cash US at
9%.
The GBP is less volatile for a
eurozone investor (Cash UK at
6%).
B17118
Multi Asset Portfolio Portfolio construction tools
Outlook 2013 36
Efficient frontier
Positioning of asset classes relative to the efficient frontier in common currency
Common currency: euro. Anticipated risk: 12-month forward volatility is based on the EWMA model. Expected return: the estimated future performance of an asset, based on a mix of a normalised,
momentum and risk-derived approach. Source: SG Cross Asset Research
Eur ex-UK Equities
UK Equities
Japan Equities
EmergingEquities
UK Gov Bonds
Eur. Gov Bonds
US Gov Bonds
Japan Gov Bonds
Eur. Credit
US Credit
Cash UKCash Euro
Cash US
Cash Japan
Commodities
Alternativ es
EM bonds
Div idends
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
US Credit
Risk-averse
US Credit
Risk-averse
Dynamic
Risk-averse
Risk-balanced
US Equities
US Credit has a better positioning than US Cash for a
eurozone investor: more return for less volatility
Expected return
Anticipated risk
Taking into account US dollar exposure, US
Equities and EM Bonds have a good risk-
reward profile
B17118
Multi Asset Portfolio Portfolio construction tools
Outlook 2013 37
Response from the Markowitz-based Tactical Asset Allocation model
Our optimisation process allows us to take different investment profile requirements into
account. These requirements are organised into three types of portfolios:
Tactical Asset Allocation model in common currency
Authorised bands Asset classes
Min Max Risk-averse Risk-balanced Dynamic
30% 70% EQUITIES 30% 44% 70%
5% 20% Europe ex-UK equities 8% 11% 20%
0% 10% UK equities 3% 2% 10%
5% 30% US equities 12% 30% 30%
0% 10% Japanese equities 4% 0% 0%
0% 10% EM equities 4% 0% 10%
5% 50% BONDS 26% 43% 25%
0% 15% European government bonds 15% 15% 0%
0% 5% UK government bonds 5% 5% 5%
0% 15% US government bonds 4% 13% 10%
0% 15% Japanese government bonds 1% 0% 0%
0% 10% EM bonds 1% 10% 10%
0% 20% CREDIT 4% 0% 0%
0% 10% Corporate credit – Europe 4% 0% 0%
0% 10% Corporate credit – US 0% 0% 0%
5% 30% CASH 20% 10% 5%
0% 10% Eurozone 10% 0% 0%
0% 10% UK 0% 0% 0%
0% 10% US 0% 0% 0%
0% 10% Japan 10% 10% 5%
0% 20% ALTERNATIVES 20% 3% 0%
0% 10% Commodities 10% 3% 0%
0% 5% Alternative investments 5% 0% 0%
0% 5% Dividends 5% 0% 0%
52-week expected return 8% 14% 15%
52-week conditional volatility 3.1% 5.3% 7.5%
Sharpe ratio (excluding costs) 2.6 2.5 2.0
Common currency: euro. Calculations based on local currency. Conditional volatility: 12-month forward volatility is based on the EWMA model. Expected return: the estimated future performance of an
asset, based on a mix of a normalised, momentum and risk-derived approach. The Sharpe ratio indicates the amount of probability for one unit of risk. Sharpe ratio <0% indicates that the anticipated
return of the sector is lower than the risk-free rate (EONIA). The higher the Sharpe ratio, the greater the return on risk. Source: SG Cross Asset Research
Risk-averse portfolio
minimises risk (lowest
possible volatility)
Risk-balanced
portfolio
is in the middle of the
efficient frontier
Dynamic portfolio
maximises expected return
B17118
Multi Asset Portfolio Portfolio construction tools
Outlook 2013 38
Correlation matrix (in common currency)
Eur ex UK
equities
(EUR)
UK equities
(EUR)
US equities
(EUR)
Japanese
equities
(EUR)
Global emg
eqt (EUR)
Euro gov
bonds
(EUR)
UK gov
bonds
(EUR)
US gov
bonds
(EUR)
Jap.gov
bonds
(EUR)
EM gov
bonds
(EUR)
European
credit
(EUR)
US credit
(EUR)
Cash Europe
(EUR)
Cash UK
(EUR)
Cash US
(EUR)
Cash Japan
(EUR)
Common
(EUR)
Alt. Inv
(EUR)
Dividends
(EUR)
Eur ex UK equities (EUR) 100% 80% 66% 27% 55% -57% -56% -68% -61% -27% 32% -36% -9% -25% -48% -58% 13% -5% 67%
UK equities (EUR) 100% 82% 43% 74% -31% -16% -33% -31% 18% 29% 7% 3% 21% -7% -25% 30% 38% 65%
US equities (EUR) 100% 42% 66% -29% -6% -16% -17% 26% 21% 27% 14% 27% 14% -8% 36% 56% 51%
Japanese equities (EUR) 100% 59% -6% -1% 11% 7% 25% 18% 33% 10% 23% 26% 16% 18% 47% 46%
Global emg eqt (EUR) 100% -15% -7% -15% -13% 29% 21% 16% -3% 21% 4% -7% 37% 46% 55%
Euro gov. bonds (EUR) 100% 67% 65% 63% 40% -23% 41% 2% 31% 47% 59% -4% 19% -30%
UK gov bonds (EUR) 100% 84% 78% 64% -31% 67% 7% 80% 72% 76% 11% 52% -26%
US gov. bonds (EUR) 100% 87% 73% -28% 81% 9% 66% 87% 88% 6% 60% -37%
Jap. gov. bonds (EUR) 100% 60% -33% 66% 13% 56% 73% 97% 16% 52% -34%
EM gov. bonds (EUR) 100% -5% 86% 2% 71% 84% 66% 34% 77% 2%
European credit (EUR) 100% -15% -13% -18% -23% -30% 1% -4% 17%
US credit (EUR) 100% 9% 77% 98% 73% 21% 86% -8%
Cash Euro (EUR) 100% 6% 9% 13% 11% 18% 5%
Cash UK (EUR) 100% 76% 61% 23% 70% 1%
Cash US (EUR) 100% 79% 17% 80% -19%
Cash Japan (EUR) 100% 17% 58% -27%
Commodities (EUR) 100% 45% 28%
Alternative Inv (EUR) 100% 17%
Dividends (EUR) 100%
Common currency: euro, Can range between -100% and 100%. A correlation coefficient of zero indicates a complete lack of relationship, whereas a coefficient of 100% demonstrates a perfect linear relationship. Source: SG Cross Asset Research
Japanese Equities in yen continue to
offer significant decorrelation – more
than EM Equities.
B17118
Multi Asset Portfolio Asset classes under review
Outlook 2013 39
Asset classes
under review
B17118
Multi Asset Portfolio Asset classes under review
Outlook 2013 40
Cash: Risk-free rate Underweight (Cash)
Fed Funds Rate versus Taylor rule
Definition of the Taylor Rule used in this chart: Prescribed Central Bank Rate = Neutral Real Rate + Inflation Rate + 0.5*(Inflation Rate - Inflation Target) + 0.5*2*(NAIRU - Unemployment Rate). * Given
the zero bound on interest rates and the unorthodox policy measures adopted by the Fed, traditional Taylor Rules are less useful than in the past for forecasting the path of policy rates. Of the rules
presented above, the Taylor 1999 specification probably does the best job capturing the Fed's current reaction function. This version of the rule doubles the employment gap coefficient relative to the
standard approach. Source: SG Cross Asset Research
Earnings yield ratio relative to short-term yield - US Earnings yield ratio relative to short-term yield - Europe
Earnings yield ratio: Central bank yield divided by inverted equity market P/E.
Source: SG Cross Asset Research, Datastream
Earnings yield ratio: Central bank yield divided by inverted equity market P/E.
Source: SG Cross Asset Research, Datastream
-8
-6
-4
-2
0
2
4
6
8
10
90 92 94 96 98 00 02 04 06 08 10 12 14 16
%
Fed Funds Rate
Taylor 1993 version
Taylor 1999 version
Empirical, post 1987 fit
Projections based on SG economic
forecasts
0
20
40
60
80
100
120
140
160
180
200
0
20
40
60
80
100
120
140
160
180
200
90 92 94 96 98 00 02 04 06 08 10 12
0
20
40
60
80
100
120
140
0
20
40
60
80
100
120
140
90 92 94 96 98 00 02 04 06 08 10 12
Fed to keep a dovish stance
in the coming years
B17118
Multi Asset Portfolio Asset classes under review
Outlook 2013 41
Equity: US equity market Underweight
Annual return (%) Conditional volatility (%)
YTD = up to 16/11/2012. Source: SG Cross Asset Research 12-month forward volatility is based on the EWMA model.
Source: SG Cross Asset Research
Equity risk premium – US Fed model - US
Equity risk premium: Internal rate of return minus 10-year bond yield.
Source: SG Cross Asset Research
Earnings yield ratio: 10-year government nominal bond yield divided by inverted equity market
P/E. Source: SG Cross Asset Research, Datastream, R. Shiller (Yale University)
Correlation with global equities Correlation with a 50% bonds/50% equities portfolio
Correlation is based on weekly data. Source: SG Cross Asset Research Correlation is based on one-year weekly data. Benchmark is composed of 50% global equities
and 50% global bonds. Source: SG Cross Asset Research
-2%
31%
7%10%
2%
38%
24%
34%
31%
22%
-13%
-12%
-23%
29%
11%
6%
15%
6%
-37%
27%
18%
2%8%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
5%
10%
15%
20%
25%
30%
35%
40%
45%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
1%
2%
3%
4%
5%
6%
7%
1%
2%
3%
4%
5%
6%
7%
90 92 94 96 98 00 02 04 06 08 10 12
Bonds cheap relative to Equities
Equities cheap relative to Bonds
20
40
60
80
100
120
140
160
180
200
20
40
60
80
100
120
140
160
180
200
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Expensiv e
Cheap
Av erage
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
02 03 04 05 06 07 08 09 10 11 12 13-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
02 03 04 05 06 07 08 09 10 11 12 13
Conditional volatility still
on a downward trend
The Equity Risk Premium
is currently mean-
reverting
Strong positive
performance YTD
B17118
Multi Asset Portfolio Asset classes under review
Outlook 2013 42
Equity: Japanese equity market Maximum
Annual return (%) Conditional volatility (%)
YTD = up to 16/11/2012. Source: SG Cross Asset Research 12-month forward volatility is based on the EWMA model.
Source: SG Cross Asset Research
Equity risk premium – Japan Fed model - Japan
Equity risk premium: Internal rate of return minus 10-year bond yield.
Source: SG Cross Asset Research
Earnings yield ratio: 10-year government nominal bond yield divided by inverted equity market P/E.
Source: SG Cross Asset Research, Datastream, R. Shiller (Yale University)
Correlation with global equities Correlation with a 50% bonds/50% equities portfolio
Correlation is based on weekly data. Source: SG Cross Asset Research Correlation is based on one-year weekly data. Portfolio is composed of 50% global equities and 50%
global bonds. Source: SG Cross Asset Research
-39%
0%
-23%
11%9%
2%-6%
-19%-7%
60%
-25%
-19%
-18%
25%
11%
45%
3%-11%
-41%
8%
-16%
5%
-60%
-40%
-20%
0%
20%
40%
60%
80%
90 92 94 96 98 00 02 04 06 08 10 12
5%
10%
15%
20%
25%
30%
35%
40%
45%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
0%
1%
2%
3%
4%
5%
6%
0%
1%
2%
3%
4%
5%
6%
90 92 94 96 98 00 02 04 06 08 10 12
Bonds cheap relative to Equities
Equities cheap relative to Bonds
0
50
100
150
200
250
300
350
400
0
50
100
150
200
250
300
350
400
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Expensiv e
Cheap
Av erage
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
02 03 04 05 06 07 08 09 10 11 12 13-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
02 03 04 05 06 07 08 09 10 11 12 13
According to the
model, Japanese
equities have never
been so cheap
Conditional volatility stable
on low levels
Weak positive
correlation with Global
Equities
B17118
Multi Asset Portfolio Asset classes under review
Outlook 2013 43
Equity: Euro equity market Maximum
Annual return (%) Conditional volatility (%)
YTD = up to 16/11/2012 Source: SG Cross Asset Research 12-month forward volatility is based on the EWMA model.
Source: SG Cross Asset Research
Equity risk premium – Europe Fed model - Europe
Equity risk premium: Internal rate of return minus 10-year bond yield.
Source: SG Cross Asset Research
Earnings yield ratio: 10-year government nominal bond yield divided by inverted equity market P/E.
Source: SG Cross Asset Research, Datastream, R. Shiller (Yale University)
Correlation with global equities Correlation with a 50% bonds/50% equities portfolio
Correlation is based on weekly data. Source: SG Cross Asset Research Correlation is based on one-year weekly data. Portfolio is composed of 50% global equities and
50% global bonds. Source: SG Cross Asset Research
-21%
14%
2%
43%
-6%
13%
28%
46%
24%
38%
-1%
-18%
-32%
19%
14%
28%
22%
6%
-42%
30%
-4%
-8%
12%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
90 92 94 96 98 00 02 04 06 08 10 12
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
.
0%
2%
4%
6%
8%
10%
0%
2%
4%
6%
8%
10%
90 92 94 96 98 00 02 04 06 08 10 12
Bonds cheap relative to Equities
Equities cheap relative to Bonds
10
20
30
40
50
60
70
80
90
100
110
120
130
140
10
20
30
40
50
60
70
80
90
100
110
120
130
140
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Expensiv e
Cheap
Av erage
0.5
0.55
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
0.5
0.55
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
02 03 04 05 06 07 08 09 10 11 12 13 -0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
02 03 04 05 06 07 08 09 10 11 12 13
Outperformed US
Equities year to
date
Intra-equity
correlation
increased sharply
last quarter
B17118
Multi Asset Portfolio Asset classes under review
Outlook 2013 44
Equity: UK equity markets Neutral
Annual return (%) Conditional volatility (%)
YTD = up to 16/11/2012. Source: SG Cross Asset Research 12-month forward volatility is based on the EWMA model.
Source: SG Cross Asset Research
Equity risk premium-UK Fed model - UK
Equity risk premium: Internal rate of return minus 10-year bond yield.
Source: SG Cross Asset Research
Earnings yield ratio: 10-year government nominal bond yield divided by inverted equity market P/E.
Source: SG Cross Asset Research, Datastream
Correlation with global equities Correlation with a 50% bonds/50% equities portfolio
Correlation is based on weekly data. Source: SG Cross Asset Research Correlation is based on one-year weekly data. Portfolio is composed of 50% global equities and
50% global bonds. Source: SG Cross Asset Research
-8%
20%19%
27%
-7%
22%
16%
28%
16%16%
-5%
-12%
-23%
19%
11%
20%15%
7%
-28%
28%
12%
-2% 3%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
90 92 94 96 98 00 02 04 06 08 10 12
Bonds cheap relative to Equities
Equities cheap relative to Bonds
0
50
100
150
200
0
50
100
150
200
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Expensiv e
Cheap
Av erage
0.4
0.5
0.6
0.7
0.8
0.9
1
0.4
0.5
0.6
0.7
0.8
0.9
1
02 03 04 05 06 07 08 09 10 11 12 13
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
02 03 04 05 06 07 08 09 10 11 12 13
Weaker performance
than peers year to
date
B17118
Multi Asset Portfolio Asset classes under review
Outlook 2013 45
Equity: Emerging equity market Overweight
Annual return (%) Conditional volatility (%)
YTD = up to 16/11/2012 Source: SG Cross Asset Research 12-month forward volatility is based on the EWMA model.
Source: SG Cross Asset Research
China: economic newsflow India: economic newsflow
Newsflow indicators count the number of newspapers articles highlighting themes related to key
parameters. Weekly data, data as of 06/09/2012. Sources: Dow Jones, SG Cross Asset Research
Newsflow indicators count the number of newspapers articles highlighting themes related to key
parameters. Weekly data, data as of 06/09/2012. Sources: Dow Jones, SG Cross Asset Research
Correlation with global equities Correlation with a 50% bonds/50% equities portfolio
Correlation is based on weekly data. Source: SG Cross Asset Research Correlation is based on one-year weekly data. Portfolio is composed of 50% global equities and
50% global bonds. Source: SG Cross Asset Research
41%
118%
65%
185%
28%
1%
14%5%
-20%
77%
-25%8%
-7%
47%
16%
36%
29%34%
-46%
63%
3%
-10%
8%
-100%
-50%
0%
50%
100%
150%
200%
90 92 94 96 98 00 02 04 06 08 10 12
0%
10%
20%
30%
40%
50%
60%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
20
30
40
50
60
70
20
30
40
50
60
70
06 07 08 09 10 11 12 13
positive
negative
10
20
30
40
50
60
70
80
10
20
30
40
50
60
70
80
06 07 08 09 10 11 12 13
positive
negative
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
02 03 04 05 06 07 08 09 10 11 12 13
-0.5
-0.3
-0.1
0.1
0.3
0.5
0.7
0.9
-0.5
-0.3
-0.1
0.1
0.3
0.5
0.7
0.9
02 03 04 05 06 07 08 09 10 11 12 13
Economic newsflow
still in negative
territory
Positive performance
year to date
B17118
Multi Asset Portfolio Asset classes under review
Outlook 2013 46
Fixed Income: US government bonds Underweight
Annual return (%) Conditional volatility (%)
YTD = up to 16/11/2012. Source: SG Cross Asset Research 12-month forward volatility is based on the EWMA model.
Source: SG Cross Asset Research
Global inflation indicator Yield curve
Global inflation newsflow indicator: news stories, on deteriorating inflation prospects as
percentage of all new items on inflation and deflation, 13 week moving averages,in %.
Source: Dow Jones, SG Cross Asset Research
Yield curve: 10Y bond yield – 3M bond yield. Source: SG Cross Asset Research.
Correlation with global bonds Correlation with a 50% bonds/50% equities portfolio
Correlation is based on weekly data. Source: SG Cross Asset Research Correlation is based on one-year weekly data. Portfolio is composed of 50% global equities and
50% global bonds. Source: SG Cross Asset Research
10%11%
-4%
26%
2%
10%10%
-4%
15%
8%
20%
3%
6%
3% 3%
9%
23%
-8%
10%
18%
7%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
2%
4%
6%
8%
10%
12%
14%
16%
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
.
0
200
400
600
800
1000
1200
0
200
400
600
800
1000
1200
06 07 08 09 10 11 12
-2
-1
0
1
2
3
4
-2
-1
0
1
2
3
4
90 92 94 96 98 00 02 04 06 08 10 12 14
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
02 03 04 05 06 07 08 09 10 11 12 13
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
02 03 04 05 06 07 08 09 10 11 12 13
Strong performance year
to date
B17118
Multi Asset Portfolio Asset classes under review
Outlook 2013 47
Fixed Income: Japanese gov. bonds Minimum
Annual return (%) Conditional volatility (%)
YTD = up to 16/11/2012. Source: SG Cross Asset Research 12-month forward volatility is based on the EWMA model.
Source: SG Cross Asset Research
Japanese newsflow Yield curve
Newsflow indicators count the number of newspaper articles highlighting themes related to key
parameters. Weekly data, data as of 14/11/2011. Sources: Dow Jones, SG Cross Asset Research
Yield curve: 10Y bond yield – 3M bond yield. Source: SG Cross Asset Research.
Correlation with global bonds Correlation with a 50% bonds/50% equities portfolio
Correlation is based on weekly data. Source: SG Cross Asset Research Correlation is based on one-year weekly data. Portfolio is composed of 50% global equities and 50%
global bonds. Source: SG Cross Asset Research
12%
20%
-4%
17%
7%
11%
2%
6%5%
7% 7%
-2%
1% 1%1%
3%2%
1%
5%4% 4%
-5%
0%
5%
10%
15%
20%
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
0%
2%
4%
6%
8%
10%
12%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
.
20
30
40
50
60
70
80
20
30
40
50
60
70
80
06 07 08 09 10 11 12 13
positive
negative
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
90 92 94 96 98 00 02 04 06 08 10 12 14
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
02 03 04 05 06 07 08 09 10 11 12 13
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
02 03 04 05 06 07 08 09 10 11 12 13
Conditional volatility
still on low levels.
B17118
Multi Asset Portfolio Asset classes under review
Outlook 2013 48
Fixed Income: European gov. bonds Minimum
Annual return (%) Conditional volatility (%)
YTD = up to 16/11/2012. Source: SG Cross Asset Research 12-month forward volatility is based on the EWMA model.
Source: SG Cross Asset Research
Correlation US/Europe rates Yield curve
Source: SG Cross Asset Research Yield curve: 10Y bond yield – 3M bond yield. Source: SG Cross Asset Research.
Correlation with global bonds Correlation with a 50% bonds/50% equities portfolio
Correlation is based on weekly data. Source: SG Cross Asset Research Correlation is based on one-year weekly data. Portfolio is composed of 50% global equities and
50% global bonds. Source: SG Cross Asset Research
15%
17%
-5%
20%
9%
12%
15%
-5%
7%8%
12%
6%
10%
7%
-2%0%
5% 6%6%
13%
10%
-10%
-5%
0%
5%
10%
15%
20%
25%
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
2%
3%
4%
5%
6%
7%
8%
9%
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
.
1
1.5
2
2.5
3
3.5
4
4.5
5
5.5
1
1.5
2
2.5
3
3.5
4
4.5
5
5.5
07 08 09 10 11 12 13
10Y US Bonds
10Y Euro Bonds
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
90 92 94 96 98 00 02 04 06 08 10 12 14
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
02 03 04 05 06 07 08 09 10 11 12 13
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
02 03 04 05 06 07 08 09 10 11 12 13
Strong performance
year to date.
B17118
Multi Asset Portfolio Asset classes under review
Outlook 2013 49
Fixed Income: UK government bonds Underweight
Annual return (%) Conditional volatility (%)
YTD = up to 16/11/2012. Source: SG Cross Asset Research 12-month forward volatility is based on the EWMA model.
Source: SG Cross Asset Research
UK newsflow Yield curve
Sector P/BV relative to FTSP Europe excl. emerging markets.
Source: SG Cross Asset Research, MSCI
Sector DY relative to FTSP Europe excl. emerging markets.
Source: SG Cross Asset Research, MSCI
Correlation with global bonds Correlation with a 50% bonds/50% equities portfolio
Correlation is based on weekly data. Source: SG Cross Asset Research Correlation is based on one-year weekly data. Portfolio is composed of 50% global equities and
50% global bonds. Source: SG Cross Asset Research
9%
17%
21%21%
-7%
18%
8%
15%
19%
-4%
10%
3%
10%
2%
6%8%
0%
7%
15%
-1%
10%
16%
5%
-10%
-5%
0%
5%
10%
15%
20%
25%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
0%
2%
4%
6%
8%
10%
12%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
30
40
50
60
70
30
40
50
60
70
06 07 08 09 10 11 12 13
positive
negative
-2
-1
0
1
2
3
4
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
90 92 94 96 98 00 02 04 06 08 10 12 14
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
02 03 04 05 06 07 08 09 10 11 12 13
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
02 03 04 05 06 07 08 09 10 11 12 13
Newsflow heading back
into positive territory
B17118
Multi Asset Portfolio Asset classes under review
Outlook 2013 50
Fixed Income: European Credit Neutral
Annual return (%) Conditional volatility (%)
YTD = up to 16/11/2012. Source: SG Cross Asset Research 12-month forward volatility is based on the EWMA model.
Source: SG Cross Asset Research
Starving for yield? Prefer Equity to Credit in the eurozone Eurozone Equities offer a premium yield to Credit
10Y Gov. Bonds: weighted average of eurozone government bond market. Equities: dividend yield.
Corporate bonds: iboxx indexes (redemption yield). Source: SG Cross Asset Research, Datastream
Corporate bonds: iboxx indexes (redemption yield). Equity: Datastream indexes (12-month forward
dividend yield). Source: SG Cross Asset Research, Datastream
Correlation with global bonds Correlation with a 50% bonds/50% equities portfolio
Correlation is based on weekly data. Source: SG Cross AssetResearch Correlation is based on one-year weekly data. Portfolio is composed of 50% global equities and
50% global bonds. Source: SG Cross Asset Research
0.5%
1.1%
-1.1%
-3.5%
5.4%
-0.1%
-1.6%
2.8%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
05 06 07 08 09 10 11 12
0%
1%
2%
3%
4%
5%
6%
Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12
.
1
2
3
4
5
6
7
8
1
2
3
4
5
6
7
8
00 02 04 06 08 10 12
Corp. Bond yield
Equity dividend yield
Govt. bond yield
(%)
-50
50
150
250
350
450
-50
50
150
250
350
450
Ins
ura
nc
e
Food &
Bev
.
Tec
hno
logy
Bas
ic R
es
.
Ind
us
trie
s
Healt
h c
are
Auto
mobile
Ba
nk
Media
Energ
ies
Tele
com
Uti
litie
s
Equity dividend yield - Corporate Bond yield (in bp)
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
05 06 07 08 09 10 11 12 13
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
05 06 07 08 09 10 11 12 13
Slightly positive
performance so far this
year
B17118
Multi Asset Portfolio Asset classes under review
Outlook 2013 51
Fixed Income: US Credit Neutral
Annual return (%) Conditional volatility (%)
YTD = up to 16/11/2012. Source: SG Cross Asset Research 12-month forward volatility is based on the EWMA model.
Source: SG Cross Asset Research
US Corporate Bonds IG: somewhat richly valued US High Yield has lagged equity volatility
Corporate bonds = Barclays US corp. Index. Source: Datastream, SG Cross Asset Research US High Yield Credit spread = Barclays US corp. yield – 10Y Bond yield.
Source: Bloomberg, SG Cross Asset Research
Correlation with global bonds Correlation with a 50% bonds/50% equities portfolio
Correlation is based on weekly data. Source: SG Cross Asset Research Correlation is based on one-year weekly data. Portfolio is composed of 50% global equities and
50% global bonds. Source: SG Cross Asset Research
0.2%
1.1%
-2.1%
-4.3%
4.4%
1.4%
0.3%
1.7%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
05 06 07 08 09 10 11 12
0%
1%
2%
3%
4%
5%
6%
7%
8%
Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12
.
0
2
4
6
8
10
0
2
4
6
8
10
00 02 04 06 08 10 12
Corp. Bond y ield
Gov t. bond y ield
Equity div idend y ield
(%)
10
15
20
25
30
35
40
45
50
200
300
400
500
600
700
800
900
1000
10 11 12 13
US Equity VolatilityVIX Index (RHS)
US High Yield Credit spread (LHS)
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
05 06 07 08 09 10 11 12 13
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
05 06 07 08 09 10 11 12 13
Correlation with equities and
bonds sharply increasing
B17118
Multi Asset Portfolio Asset classes under review
Outlook 2013 52
Forex market: Foreign exchange €/$
Annual rate (%) Conditional volatility (%)
YTD = up to 16/11/2012. Source: SG Cross Asset Research 12-month forward volatility is based on the EWMA model.
Source: SG Cross Asset Research
Euro – Trade-weighted index US dollar – real effective exchange rate
Real effective exchange rate, CPI based.
Source: IMF, SG Cross Asset Research
Real effective exchange rate, CPI based.
Source: IMF, SG Cross Asset Research
Hedge fund net positions on €/$ €/$ price and non-commercial positions on total open interest
(contracts of €125,000).
Source: SG Cross Asset Research, CFTC
€/$ price: orange line, rhs
Source: SG Cross Asset Research, CFTC
13%
-2%
-12%
-10%
10%
7%
-4%
-14%
8%
-15%
-6%-5%
18%
20%
8%
-13%
12%11%
-5%
3%
-6%
-3%
0%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
4%
6%
8%
10%
12%
14%
16%
18%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
.
70.0
75.0
80.0
85.0
90.0
95.0
100.0
105.0
110.0
70
75
80
85
90
95
100
105
110
91 93 95 97 99 01 03 05 07 09 11 13
av erage plus 1 standard dev iation
av erage minus 1 st dev
av erage
Euro expensive
Euro cheap
70
80
90
100
110
120
130
70
80
90
100
110
120
130
91 93 95 97 99 01 03 05 07 09 11 13
average+1SD
average -1SD
average
US dollar expensive
US dollar cheap
-240
-160
-80
80
-240
-160
-80
80
Nov Jan Mar May Jul Sep Nov
x 1000 Seller of $ against Euro
Buyer of $ against Euro1.20
1.25
1.30
1.35
1.40
18%
24%
30%
36%
42%
Nov Jan Mar May Jul Sep Nov
EUR strengthens (rhs)
EUR w eakens (rhs)
US Dollar looks more
expensive than previous
quarter
B17118
Multi Asset Portfolio Asset classes under review
Outlook 2013 53
Forex market: Foreign exchange €/£
Annual rate (%) Conditional volatility (%)
YTD = up to 16/11/2012. Source: SG Cross Asset Research 12-month forward volatility is based on the EWMA model.
Source: SG Cross Asset Research
Livre Sterling– Trade-weighted index USD/GBP and rate differential
Real effective exchange rate, CPI based.
Source: IMF, SG Cross Asset Research
Source: SG Cross Asset Research, Datastream, MSCI
Hedge fund net positions on $/£ $/£ price and non-commercial positions on total open interest
(contracts of €125,000).
Source: SG Cross Asset Research, CFTC
€/$ price: black line, rhs
Source: SG Cross Asset Research, CFTC
5%
-1%
-10%
6%
-4%-5%
13%
9%
-5%
13%
-1%
3%
-6% -7%
0%
3%2%
-8%
-24%
9%
4%3%3%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
70
75
80
85
90
95
100
105
110
70
75
80
85
90
95
100
105
110
91 93 95 97 99 01 03 05 07 09 11 13
average+1SD
average -1SD
average
UK Sterling expensive
UK Sterling cheap -4
-3
-2
-1
0
1
2
0.4
0.45
0.5
0.55
0.6
0.65
0.7
0.75
05 06 07 08 09 10 11 12 13
Rate dif f erential USD 3M- GBP 3M
USD/GBP
-60
-40
-20
20
40
-60
-40
-20
20
40
Nov Jan Mar May Jul Sep Nov
x 1000 Seller of $ against £
Buyer of $ against £1.50
1.60
1.70
16%
20%
24%
28%
32%
36%
Nov Jan Mar May Jul Sep Nov
GBP strengthens (rhs)
GBP w eakens (rhs)
B17118
Multi Asset Portfolio Asset classes under review
Outlook 2013 54
Forex market: Foreign exchange €/¥
Annual rate (%) Conditional volatility (%)
YTD = up to 16/11/2012. Source: SG Cross Asset Research 12-month forward volatility is based on the EWMA model. Source: SG Cross Asset Research
Japanese yen – real effective exchange rate USD/JPY and rate differential
Real effective exchange rate, CPI based.
Source: IMF, SG Cross Asset Research
Source: SG Cross Asset Research, Datastream, MSCI
Hedge fund net positions on ¥/$ Yen/$ price and non-commercial positions on total open
interest (OI)
Source: CFTC (Contracts of Y 12,500,000), SG Cross Asset Research. Source: CFTC, Hedge Fund Watch, SG Cross Asset Research
-23%
5%
9%
7%9%
3%
0%
13%
4%
-23%
6%
-21%
-8%
5%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
99 00 01 02 03 04 05 06 07 08 09 10 11 12
0%
5%
10%
15%
20%
25%
30%
02 03 04 05 06 07 08 09 10 11 12 13
.
90
110
130
150
170
190
90
110
130
150
170
190
91 93 95 97 99 01 03 05 07 09 11 13
average+1SD
average -1SD
average
Japanese yen expensive
Japanese yen cheap
-1
0
1
2
3
4
5
6
70
80
90
100
110
120
05 06 07 08 09 10 11 12
USD/JPY, lhs
Rate differential USD 3M-YEN 3M
-70
-50
-30
-10
10
30
50
70
-70
-50
-30
-10
10
30
50
70
Nov Jan Mar May Jul Sep Nov
Seller of $ against JPY
Buyer of $ against JPY
x 1000
75
80
85
15%
20%
25%
30%
35%
Nov Jan Mar May Jul Sep Nov
JPY w eakens (rhs)
JPY strengthens (rhs)
Stable conditional
volatility
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Multi Asset Portfolio Asset classes under review
Outlook 2013 55
Other: Commodities Neutral
Annual rate (%) Conditional volatility (%)
YTD = up to 16/11/2012. Source: SG Cross Asset Research 12-month forward volatility is based on the EWMA model.
Source: SG Cross Asset Research
Hedge Fund net position on Crude Oil SG forecast table ($)
Current Level 2013 2014
Aluminium ($/t) 1911 2185 2300
Copper ($/t) 7676 7975 7500
Nickel ($/t) 16640 18250 20000
Zinc ($/t) 1893 2080 2300
Gold ($/oz) 1729 1800 1700
WTI Nymex ($/b) 87 96.8 102.5
(contracts of 1,000 barrels). Source: SG Cross Asset Research, CFTC Current price on 21/11/2012. Price forecasts are annual averages. Source: SG Cross Asset
Research
Gold & USD/EUR Correlation with a 50% bonds/50% equities portfolio
Source: SG Cross Asset Research, Datastream. Correlation is based on one-year weekly data. Portfolio is composed of 50% global equities and
50% global bonds. Source: SG Cross Asset Research
11%
30%
-7%
-31%
26%24%
-24%
31%
23%
17%19%
-7%
17%
-36%
23%
13%
-8%-5%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
5%
10%
15%
20%
25%
30%
35%
40%
45%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
-40
0
40
80
120
160
200
240
280
-40
0
40
80
120
160
200
240
280
Nov Jan Mar May Jul Sep Nov
x 1000
Seller of Crude Oil
Buyer of Crude Oil
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
2.2
-100
100
300
500
700
900
1100
1300
1500
1700
1900
73 78 83 88 93 98 03 08 13
Gold
US$/EUR (RHS)
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
02 03 04 05 06 07 08 09 10 11 12 13
Oil price to average $96.8/b
next year
Negative performance
YTD
Hedge funds are long
positioned on crude oil
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Multi Asset Portfolio
Outlook 2013 56
APPENDIX
ANALYST CERTIFICATION
Each author of this research report listed on the cover hereby certifies that the views expressed in the research report accurately reflect his or
her personal views, including views about subject securities or issuers mentioned in the report, if any. No part of his or her compensation was,
is or will be related, directly or indirectly, to the specific recommendations or views expressed in this report. t
The analyst(s) who author research are employed by SG and its affiliates in locations, including but not limited to, Paris, London, New York,
Hong Kong, Tokyo, Bangalore, Madrid, Milan, Warsaw and Moscow.
SG EQUITY RESEARCH RATINGS on a 12 months period (in effect
as of March 14, 2012)
BUY: absolute total shareholder return forecast of 15% or more
over a 12 month period.
HOLD: absolute total shareholder return forecast between 0%
and +15% over a 12 month period.
SELL: absolute total shareholder return forecast below 0% over a
12 month period.
Total shareholder return means forecast share price appreciation
plus all forecast cash dividend income, including income from
special dividends, paid during the 12 month period. Ratings are
determined by the ranges described above at the time of the
initiation of coverage or a change in rating (subject to limited
management discretion). At other times, ratings may fall outside of
these ranges because of market price movements and/or other
short term volatility or trading patterns. Such interim deviations
from specified ranges will be permitted but will become subject to
review by research management.
Sector Weighting Definition on a 12 months period:
The sector weightings are assigned by the SG Equity Research
Strategist and are distinct and separate from SG research analyst
ratings. They are based on the relevant MSCI.
OVERWEIGHT: sector expected to outperform the relevant broad
market benchmark over the next 12 months.
NEUTRAL: sector expected to perform in-line with the relevant
broad market benchmark over the next 12 months.
UNDERWEIGHT: sector expected to underperform the relevant
broad market benchmark over the next 12 months
SG EQUITY RESEARCH RATINGS on a 12 months period (in effect
through March 13, 2012)
BUY: expected upside of 10% or more over a 12 month period.
HOLD: expected return between -10% and +10% over a 12 month
period.
SELL: expected downside of -10% or worse over a 12 month
period.
Equity rating and dispersion relationship
Source: SG Cross Asset Research
45%
38%
16%
53%
42%
33%
0
50
100
150
200
250
Buy Hold Sell
Updated on 05/11/12
Companies Covered Cos. w/ Banking Relationship
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Multi Asset Portfolio
Outlook 2013 57
Sector Weighting Definition on a 12 months period:
The sector weightings are assigned by the SG Equity Research
Strategist and are distinct and separate from SG research analyst
ratings. They are based on the relevant MSCI.
OVERWEIGHT: sector expected to outperform the relevant broad
market benchmark over the next 12 months.
NEUTRAL: sector expected to perform in-line with the relevant
broad market benchmark over the next 12 months.
UNDERWEIGHT: sector expected to underperform the relevant
broad market benchmark over the next 12 months.
Ratings and/or price targets are determined by the ranges
described above at the time of the initiation of coverage or a
change in rating or price target (subject to limited management
discretion). At other times, the price targets may fall outside of
these ranges because of market price movements and/or other
short term volatility or trading patterns. Such interim deviations
from specified ranges will be permitted but will become subject to
review by research management.
MSCI DISCLAIMER: The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without
prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or
used to create any financial products, including any indices. This information is provided on an “as is” basis. The user assumes the entire
risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the
information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular
purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any
third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan
Stanley Capital International and the MSCI indexes are service marks of MSCI and its affiliates or such similar language as may be
provided by or approved in advance by MSCI.
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SGAS had a non-investment banking securities-related services client relationship during the past 12 months with Apple.
SGAS received compensation for products and services other than investment banking services in the past 12 months from Apple.
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WEBSITE AT http://www.sgresearch.com/compliance.rha or call +1 (212).278.6000 in the U.S.
The analyst(s) responsible for preparing this report receive compensation that is based on various factors including SG’s total revenues, a
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Non-U.S. Analyst Disclosure: The name(s) of any non-U.S. analysts who contributed to this report and their SG legal entity are listed below.
U.S. analysts are employed by SG Americas Securities LLC. The non-U.S. analysts are not registered/qualified with FINRA, may not be
associated persons of SGAS and may not be subject to the FINRA restrictions on communications with a subject company, public
appearances and trading securities held in the research analyst(s)’ account(s): Alan Bokobza Société Générale Paris, Roland Kaloyan Société
Générale Paris, Philippe Ferreira Société Générale Paris, Arthur van Slooten Société Générale Paris, Praveen Singh Société Générale
Bangalore
B17118
Multi Asset Portfolio
Outlook 2013 58
IMPORTANT DISCLAIMER: The information herein is not intended to be an offer to buy or sell, or a solicitation of an offer to buy or sell, any
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B17118
B17118
SG Macro Strategy GroupPatrick Legland
Global Head of Cross Asset Research
Paris
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Vincent ChaigneauHead of Rates Strategy
London
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Rates
Credit
Fix
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Inc
om
e, F
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x&
Cre
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Julien TurcHead of Cross Asset Quant Research
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Cross Asset Quantitative
Research & Modelling
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Alain BokobzaHead of Global Asset Allocation Strategy
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Albert EdwardsHead of Global Strategy
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Michala MarcussenHead of Global Economics
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Alain BokobzaHead of GAA
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