UBP conferenza a Milano di Christel Rendu de Lint (Parte 3)

So now for the micro side, let's move on to those three core segments and look at the fundamentals. You've heard the story. As I mentioned, as a first segment, credits in dollar. The story is a really easy story. See, the yield today is 3%, growth down today is 1%, same as it was over the last five years. So for five years, we've had 3% yield, 4% performance per year on average, and going forward this is exactly what we expect from this asset as well. You sit on 3% yield, 1% growth down, you're going to make 4%. The conditions that we've had over the last five years in terms of growth and inflation have all reasons to be very similar to what we're going to have over the next five years, plus or minus. Sometimes rates will go up maybe 50 basis points; the year that they hit could be more than we thought they would. This is no big deal. Instead of doing 4%, we'll do 2% that year and then you catch up more. But more or less, this is an environment where this asset class will be earning, and the yield has not moved. So again, when we hear all this despair about how to build a portfolio and earn a decent carry, and where do we have to go and go to liquid etc., it's no. This is a core asset: there is no default risk, it's investment grade, it's a four-year average maturity portfolio. We're talking of an 11-10 year and you're looking at the 4% expected return in dollar. We want to do it in euro as well. This is one of the conclusions: exit euro aggregate traditional. This is our conclusion. This is one place where we want to be, in dollar hedge in euro. You basically end up with 3%. This compares to 1% for euro aggregate, 2% on credit if you also add the roll down for the European market, which by the way has been less sustainable than in the US. In the US, systematically when you look at the benchmark, when you look at our fund, systematically you indeed do on average 4%. So you can see the curve is steep, both the interest rate curve and the credit curve, and you can slide down. So 4% is good for a hard part of the portfolio. I'd argue 3% in Europe; I think many clients will sign on the line to get those 3% on average for an investment-grade position. I don't think we need to go much further than that, and that already gives you those 3% to work around with other asset classes and hopefully catch the movements of the market. Around that, second topic is events that we've just mentioned. So there's still valuation very compelling. What you see here is literally the whole capital structure for Société Générale. So we start as a reference point with non-financial spreads which are at 100, and you see for instance for Tier 2 in euro, card spreads time to 200, all star Tier 1 300, additional Tier 1 400. I'm struck in particular by this one I can move, which is the dollar one. So general one year, P one year. So yes, your risk is extension risk, and it's not credit risk. Literally every single step of paper has been called by these banks for a long four years. I think this was one of our strongest views, and it comes to prove for a very simple reason: these papers are disqualified on the Basel so they don't count as capital. You call them because they cost you a lot of money, and now they cost you exactly 5% in dollar for one year paper. So there is value; this pocket you can catch. Yeah, credit investment real fund or an absolute return fund. This is one thing for us where we see a lot of value at the moment, and get this 3-4% here and sitting on a broad market which is yielding at the moment 0.5% on your... Additional Tier 1. This is something we can come back to afterwards. We've time to discuss. There's been a lot going on. I think it's the same thing: they offer value. They're not for all portfolios, so you have to be able to handle the volatility. And as given ourselves, we've got to not become complacent in the formulation. Two years or three years ago, when I started presenting those instruments, saying they offer value, we were saying don't look at them like fixed income instruments; look at them like half equity. And think about them like half equity because that's the volatility they're going to have. It doesn't make sense for you to own a paper which pays 6% and will pay year in year out. That's where the fundamentals of the credit connection come in. 6% year in year out makes sense for half equity? That's the question to answer. I think it may not for all portfolios, but in many cases, with some portfolios, it does make sense. It's mentioned that it pays very decently. Quite interestingly, the best promoter of the valuation has been against his will the CEO of Deutsche Bank, who has had a lot of problem with the communication recently, or the way that the market treated their paper. Because clearly the earnings were disappointing, there was a question about the ability to pay coupons. They came back on in the second stage, and the third stage they came back again saying they would be profitable in 2017. So for all these reasons, it's been sort of leading on the performer in the banking spectrum. And the CEO has come out last week or 10 days ago saying he doesn't like additional Tier 1 at all because they're way too expensive for them to issue. Unless you think he's driving the business over the cliff, so that's the best promotion he can do because he's exactly saying that we have a business with a sound Tier 1 and we're paying 6%? Well, they're paying 9 to 10% to issue. We're paying 9 to 10% to issue. This is way too expensive for us as an instrument. I'm not sure equities are cheaper for them to issue, but basically the reverse argument is to say indeed, unless you think the banks are really going for a systemic crisis, those instruments are for value. Treat them carefully, one by one. They have different regulations, so I would want to stress that enough honestly. The prospectuses are different on each of them. I'm making a top-down call, but this is one area where you have to go line by line, instrument by instrument. But as an asset class, I don't think it should be dismissed just because it has been volatile at the beginning of the year.