Soc Gen - Lessons From Japan - January 2009

8/9/2019 Soc Gen - Lessons From Japan - January 2009

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Global

Quantitative Research

06 January 2009

Global Style CounsellingAs the debate shifts from inflation to deflation what are the lessons from Japan?

LondonAndrew Lapthorne(44) 20 7762 [email protected]

Rui Antunes(44) 20 7762 5875

[email protected]

Georgios Oikonomou(44) 20 7762 [email protected]

John Carson(44) 20 7762 [email protected]

New-YorkAndy Kim(1) 212 278 [email protected]

IMPORTANT: PLEASE READ

DISCLOSURES AND DISCLAIMERS

BEGINNING ON PAGE 22

www.sgresearch.socgen.com

With bond yields, interest rates and inflation tumbling investors are increasing looking forguidance from Japans post-bubble experience in the 1990s. We compare and contrast theperformance of a variety of factors pre and post the Japanese equity bubble and come upwith a few surprising conclusions.Although 2008 was an extreme year for equities, investment style performance was typical

of what an investor might expect during a slowdown. Value suffered as a consequence of

increasing earnings uncertainty, growth struggled in the face of a poorly performing equity

market and defensive styles such (EPS stability, dividend yield etc.) outperformed.

With interest rates approaching zero and that debate having moved very quickly from

inflation to deflation, investors are increasingly looking to Japan for guidance on what

happens next. So we compare the pre and post bubble periods of Japans 1980s equity

boom. We discover that in the anaemic growth and increasing deflationary environment that

followed value performance actually improved, especially when the metric used did not

incorporated measures of earnings. Short term mean reversion measures also thrived.

Momentum, never really a particularly powerful strategy anyway in Japan, became price

reversion. Buying the losers and selling the winners became increasingly profitable post the

bust.

Avoiding high leveraged stocks was not a particularly powerful individual factor. Though

when equities were weak and/or credit condition contracted sharply this factor did, not

unsurprisingly do well. Buying stocks with high dividend yields and strong balance sheets

was a far better combinationLast months investment style performance by region (sorted by global performance %)-

Investment Styles Global US Eurozone UK JapanLow versus high P/E ratios 3.4 5.5 3.3 -0.2 -0.9

Low versus high price to book 3.3 5.1 1.7 0.7 1.7

1-month price reversal strategy 2.8 4.7 1.6 2.3 -1.2

Small versus large market capitalisation 2.7 5.3 -0.3 0.0 0.9

High versus low dividend yield 1.6 2.0 1.4 2.3 0.1

High versus low historical EPS growth -0.3 -0.6 1.1 -2.6 -0.2

High versus low long-term EPS growth -0.5 -0.4 -1.3 -0.4 0.2

High versus low EPS momentum -0.6 -2.7 2.4 0.4 0.5

High versus low Year2 EPS growth -0.9 -2.8 -0.7 1.5 3.2

Low versus high dispersion of analysts' forecasts -0.9 -2.6 2.3 -0.6 -0.8

High versus low historical EPS stability -1.0 -0.9 -1.5 -0.3 -1.3

High versus low Year1 EPS growth -1.5 -2.9 -1.3 -1.0 2.0

Low versus high Beta -2.9 -4.4 -1.1 -0.8 -2.1

High versus low relative price momentum (3m mav) -3.9 -6.3 -1.5 -1.6 -1.7

Source: SG Equity Research


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Global Style Counselling

06 January 20092

Quick review of 2008Although 2008 was an extreme year for global equity markets, the behaviour of investment

styles was, by and large, typical of what an investor should expect during an economic

slowdown. Value styles suffered as a consequence of deteriorating profit expectations whilst

growth styles suffered due to their (excessively) high ratings, high betas and greater sensitivity

to equity market disappointment. However, with equity markets collapsing, we would expect

to see defensive styles such as; a low versus high beta, low dispersion of analysts forecasts

high versus low dividend yield and historical EPS stability outperforming, which they all did.

Aside from buying high beta stocks, buying low P/E stocks was the worst performing

investment style during 2008 as collapsing confidence in both historical and forward profit

measures undermined the meaning of most valuation measures. But not all value styles

suffered and, after an initial tricky start to the year, dividend yield - a value style which (as you

already know), we believe is more defensive than other value styles - became increasingly

favoured. This was especially the case during the second half of 2008, once dividends began

to be cut and the resulting high dividend-yielding companies were more representative of

genuine income stocks rather than simply being firms who had seen their share prices

collapse.

Growth factors fared little better than value factors during 2008. Indeed, all our growth-

specific factors performed just as badly as a low P/E strategy, as both forward and historical

growth rates proved to be totally meaningless. So much for 2008 being the year for growth!

Amongst everything that happened during 2008, momentum styles also had a rocky year. Byspring - courtesy of a boom in commodity stocks - we were in the midst of a momentum

bubble, which had started a year earlier in April 2007 (see page 12 for a chart). By May, the

relative valuation being paid for the positive versus negative momentum stocks was as

stretched as it had been during the TMT bubble. This reversal was quite sudden - a three-

month price momentum strategy recorded long/short gains of 13% in June, only to lose 20%

in the following two months. Earnings momentum, however, fared better, though with far

greater volatility than in previous years. Performance was particularly strong in the UK where

the strategy of buying those stocks being upgraded (against selling those downgraded)

delivered 14%.

Year to date investment style performance by region (sorted by global performance %)Investment Styles Global US Eurozone UK JapanLow versus high Beta 21.0 19.3 23.7 7.0 33.1

Low versus high dispersion of analysts' forecasts 14.9 16.1 20.3 16.6 -0.9

High versus low relative price momentum (3m mav) 8.5 7.7 11.5 12.9 1.2

High versus low dividend yield 7.2 13.7 1.3 -5.8 2.7

High versus low historical EPS stability 5.9 13.0 3.1 -5.2 -5.6

High versus low EPS momentum 5.1 3.3 4.8 14.2 3.3

Small versus large market capitalisation 3.0 5.7 2.5 -12.3 5.6

Low versus high price to book -2.0 -0.4 -7.1 -18.5 13.5


1-month price reversal strategy -6.5 -9.3 -5.6 -1.9 -1.0

High versus low long-term EPS growth -8.4 -13.8 -4.5 -2.0 0.3

High versus low historical EPS growth -8.6 -9.8 -2.9 -1.8 -17.9


Low versus high P/E ratios -9.3 -1.9 -12.0 -23.3 -20.0



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06 January 2009 3

What can we learn from Japan?As interest rate head to zero is Japan the model to followWith interest rates in the US today at effectively zero and 10-year Treasury yields falling to

historic lows, many are drawing parallels with Japans economy as it entered into deflation in

the early part of the 1990s (following the 1980s stock market and real estate boom). The

Japanese equity market bubble burst in 1989 and in the following eight years, JGB bond

yields fell from 8% to just 1% whilst inflation drifted down from 4% and eventually ended up in

negative territory, where it has remained ever since.

Japans slip into deflation happens nine years after its bust

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Core Japanese CPI (YoY chg %) JGB Yield (rh. Scale) Source: SG Quantitative Strategy Research

As we show in the chart below, post 1989, the Nikkeis performance has been typified by

sharp bull rallies and bear market declines mostly in line with the economic cycle. One must

note, however, that post the initial crash (say from 1992 onwards), the index has lost 50% of

its value.

Since Japans bubble burst, equities have endured vicious bull and bear market phases:Annual change in the Nikkei 225 since 1964

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-40

-20

0

20

40

60

80

100

120

Jan-64

Jan-66

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Jan-08

Source: SG Quantitative Strategy Research

Post the initial crash (say from

1992 onwards), the Nikkei has lost

50% of its value.

The Japanese equity market

bubble burst in 1989 and in the

following eight years, JGB bond

yields fell from 8% to 1%.


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06 January 20094

Similarities with Japan are increasingly acknowledgedParallels today with the economic and market events in the US are often made with Japan

during the 1990s (see Albert Edwards Global Strategy Weekly 3 April 2008 for example).Japans stock market burst at the end of 1989 but it was not until some nine years later that

core inflation entered negative territory. JGB yields did not see a number two in front of them

until as recently as 1996. As we approach the nine year anniversary of the TMT bust, we now

have a two in front of US 10-year treasuries but deflation (and low or no growth) is of more

pressing concern to most central bankers. So, it is hardly surprising that many investors are

looking towards Japan as a template to what might now happen elsewhere? If a period of

anaemic economic growth is on the cards, and deflation is a primary concern, can we learn

anything from the post bubble deflation experience seen in Japan?

Isolating which period to study in Japan is not at all obvious. We have chosen to compare the

pre-bubble period of 1980-to-1986 with the 1992-to-1998 post-bubble period. We wanted (asbest as we could) to exclude the influences of both the late 1980s Japanese equity bubble

and the late 1990 TMT bubble. As such, we decided to exclude the dramatic ramp up in

Japanese equity prices during 1987-89 and the subsequent crash period from 1990 to mid-

1992. We also decided that the TMT bubble was exerting most of its influence from 1999

onwards.

The 1992-1998 period does not capture the deflationary period which began in 1998, but as

the US (and Europe) is only potentially approaching a deflationary period (see chart below)

and not there yet, it still seems appropriate to study 1992-1998.

The inevitable march towards deflation? US core inflation and 10 year bond yields

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US core inflation (% YoY change) US 10yr bond yield (%. r.h.scale)


Can we learn anything from the

post bubble deflation experienceseen in Japan?

?


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06 January 2009 5

Lessons from Japan factor performance pre and post-bubbleAndy Kim is in the process of developing a new Japanese WISE model to complement our US

and European WISE stock selection models. He has provided me with some of the data to

help with our analysis. From this starting point we should be able to consider out which single

factors worked well before - and after - the bubble burst and whether there were any

significant changes in behaviour. The universe we use is the Nikkei 225 and factor

performance was based on inter-quintile spreads.

Anxiety kills off momentum or what goes up must come downPrice momentum was never a particularly strong characteristic in Japan (even before the

bubble burst some 30 years ago), with researchers often noting an absence of positive returns

to momentum trading in Japan and a tendency for price reversal strategies to work instead.

We find similar effects, shown in the table below, but note that the dominance of short term

price reversal effects intensified during the 1990s.

Price momentum performance pre and post bubble in Japan Reversal effects dominated1980-1986 1992-1998

1 month0.4% -23.4%

6 month-5.6% -22.7%

12 month-2.4% -15.7%


For example, a one-month price momentum strategy (which entails buying last month s

winners and selling the losers), delivered an annualised return of just 0.4% (before trading

costs) between 1980 and 1986. However, in the post-bubble period of 1992-to-1998, itproduced a negative annualised return of 23%. Although most equity markets experience the

same phenomena, i.e. stocks experience reversals in the short term, this dominance of this

reversal effect means that price momentum strategies that usually work elsewhere - such as

six-month and 12-month price momentum - fail to work in Japan.

Short-term reversal strategies became profitable after 1989:Cumulative returns before trading costs to a one-month price reversal strategy

-200%

0%

200%

400%

600%

800%

1000%

1200%1400%

1600%

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Nov-79

Nov-81

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Nov-85

Nov-87

Nov-89

Nov-91

Nov-93

Nov-95

Nov-97

Nov-99

Nov-01

Nov-03

Nov-05

Nov-07


A consistent and strong reversal

effect is fairly unique to Japan

price momentum strategies fail to

work in Japan.

Reversal effects increased in

important post 1989


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06 January 20096

Are reversal strategies in Japan cultural or economic?The reason why reversion, rather than momentum, dominates in Japan (whilst momentum is

the norm in most other areas) remains an area of debate. Those with a behavioural finance tilt

cite work by Kitayama, Takagi & Matsumoto (1995) which suggests the Japanese lack self-

attribution biases and overconfidence that is typically associated with momentum trading.

Others take the economic route, arguing that with anaemic economic growth and with an

inability sustain profit margins in the face of price deflation, any company that was bid up

would inevitably disappoint. This weak-growth argument is backed up by our evidence that,

prior to 1989, a one-month reversal strategy was not profitable.

Closer examination of reversal returns shows that both shorting the winners and buying the

losers were profitable strategies post 1989, though buying the losers provided the greater

contribution.

Relative returns from selling the winners and buying the losers in Japan

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400%

500%

600%

Dec-89

Dec-90

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Relative returns from buying losers Relative returns from selling winners


Indeed, whilst buying the Nikkei from 1989 onwards would have lost almost 80% of your

money, buying only the loser portfolio instead, the return would have actually been positive

(though admittedly before some considerable trading costs associated with the high turnover

of such a strategy).

It would appear on this evidence that, in a deflationary world, the propensity to sell now in the

hope of buying back cheaper later applies to stocks just as it applies to goods in the wider

economy. This leads us nicely onto our next conclusion

Value styles provide protection from directionless growthBuying the cheapest assets makes the most senseThe poor performance of value styles during the last couple of years has scared many

investors away from the value approach. This has led many to believe that a value-based

strategy would struggle during a period of sluggish growth and deflation. However, the

evidence from Japan is that value measures not only continued to outperform but those we

tested performed better in the post-bubble period.

The reason why reversion, rather

than momentum, dominates in

Japan remains an area of debate.

Whilst buying the Nikkei from

1989 onwards would have lost

almost 80%, but buying only the

loser portfolio, the return would

have been positive.

Counter to conventional wisdom

value strategies perform well

during a period a weak economic

growth


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06 January 2009 7

The biggest improvements were in those measures that relied less on current profits as a

measure of value. Dividend yield, price to book and the Graham & Dodd cyclically-adjusted

P/E all did well. There was also a marked improvement in measures that drew comparisons

with history. In particular, picking stocks with a low price-to-book versus their history proved

to be a winning strategy.

Before and after performance of a selection of value styles in Japan

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Sector

relative

PE

Sector

relative

PC

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relative

PB

Sector

relative

DY

PE vs

history

(sector

rel.)

PC vs

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(sector

rel.)

PB vs

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(sector

rel.)

PE vs

history

PC

versus

history

PB

versus

history

G&D PE

1980-1986 1992-1998


We show that the dominance of such value factors in Japan has been sustained (our Style

Counselling data goes back to 1992), showing success rates and risk-adjusted returns to

value strategies much better in Japan than anywhere else. As we show below, a simple lowversus high low price-to-book strategy has been a consistent performer in Japan.

Japan has seen consistent returns on a low price to book strategy:The performance of a low versus high price to book strategy by region (indexed to 100 in 1993)

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Japan UK Eurozone US


Again, this confirms a similar picture seen with the momentum data. Deflation implies that

assets become cheaper, therefore buying the cheapest asset offers a certain amount of

protection from further price falls, as does buying stocks that have already suffered a bout ofpoor performance.

The biggest improvements were

in those measures that relied less

on current profits as a measure of

value.

A simple low versus high price-to-

book strategy has been a

consistent performer in Japan.


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06 January 20098

The performance of leverage is ambiguousIn a deflationary world, debt is a killerWith no inflation to inflate debt away notwithstanding struggling profitability and cash flows,

debt is wholly expected to become a heavy burden in a deflationary world. However from our

data it is difficult to isolate leverage (either debt to equity or debt to total assets) as a

particularly strong factor. As we show below there is a beta element to a high versus low

leverage strategy, where typically high leverage companies outperformed when the Nikkei is

rising but the average annual return of this strategy is close to zero. Certainly once credit

condition contract as they did severely in 1998 to 1999 an aversion to leverage in advisable

just as it has been globally during the last 18 months however as a stand alone market neutral

factor is does not stand out.

The performance of low versus high leverage in Japan pre and post bubble (% annualised)

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YoY chg in Nikkei 225 YoY chg in a high vs low leverage strategy (r.h. scale)


That said, leverage combined with other factors does work. Indeed, one of the better

performing factors during the post bubble period was a combination of high dividend yield

and low leverage, which is similar to performance and design to our combination of dividend

yield and the Merton model. As we show below buying higher yielding stocks supported by

strong balance sheet has worked in Japan.

Performance of buying stocks in Japan with a high relative dividend yield and low leverage

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During the Japanese bubble, itwas equity which was inflated and

not debt.

Combining leverage with other

factors such as high dividend

yield has worked in Japan


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06 January 2009 9

ConclusionThey are sufficient similarities between the current economic situation and post-bubble Japan

to make an analysis of Japan during that period a worthwhile exercise. From our analysis it is

clearly the investors became increasingly cautious in the post bubble 1990. The performance

of price momentum perhaps typifies what we might see going forward with a complete lack

of confidence in forward profit expectation, once a stock rises, the over-riding urge is to sell it.

The performance of value strategies is also perhaps surprising. Typically value strategies

suffer during economic downswings. However what happens after the initial slump, in the

period of sub-trend growth that follows? Tradition would say that you should pay up for

growth when it is scarce, as such higher P/E stocks should do well. But what happens when

growth is so scarce that these growth stocks are simply not in sufficient supply? The

evidence from Japan suggests that as most growths play will eventually disappoint anyway

the better protection against anaemic growth and ensuing deflation is to buy the cheap stuff.

The performance of leverage was also a little surprising. Its sensitivity to credit conditions and

the equity market was observed, leverage (high or low) was not a particularly powerful factors

post the bubble burst. However when used in conjunction with other factors such as dividend

yield it did produce solid return.

For completeness sake we did test a variety of other factors such as size, profits margins,

ROE and so on, but the results were inconclusive. As our universe was the Nikkei 225 perhaps

we did not go sufficiently down the market capitalisation scale to pick up a significant size

effect. Return on Equity, whether we used the latest ratio or a multi-year moving average wasnot a particularly significant factor pre or post bubble.

So to conclude a value strategy especially those based on not profit related measures such as

price to book or dividend yield, or where profits are cyclically adjusted such as the Graham &

Dodd PE makes sense. Reversion strategies also make sense whether based on selling the

winners or buying the losers and buying stocks which have been sharply de-rated versus their

history also works. Finally dividend yield coupled with balance sheet strength, a strategy that

we continue to recommend, also outperformed


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06 January 200910

Investment style performanceLastmonth Last 3months Last 12months 5 years Year todate

Global StylesLow versus high P/E ratios 3.4 -3.7 -9.3 -0.4 -9.3

Low versus high price to book 3.3 -1.6 -2.0 -1.2 -2.0

1-month price reversal strategy 2.8 -5.7 -6.5 -17.4 -6.5

Small versus large market capitalisation 2.7 0.7 3.0 13.4 3.0


High versus low historical EPS growth -0.3 -3.7 -8.6 1.4 -8.6

High versus low long-term EPS growth -0.5 -3.3 -8.4 -3.9 -8.4

High versus low EPS momentum -0.6 3.8 5.1 28.0 5.1

High versus low Year2 EPS growth -0.9 -3.4 -9.0 -8.6 -9.0

Low versus high dispersion of analysts' forecasts -0.9 7.3 14.9 11.5 14.9

High versus low historical EPS stability -1.0 2.4 5.9 -5.8 5.9

High versus low Year1 EPS growth -1.5 -1.5 -5.7 6.1 -5.7

Low versus high Beta -2.9 9.5 21.0 26.8 21.0

High versus low relative price momentum (3m) -3.9 6.8 8.5 32.8 8.5

US StylesLow versus high P/E ratios 5.5 0.6 -1.9 2.1 -1.9


Low versus high price to book 5.1 1.4 -0.4 -6.3 -0.4





High versus low historical EPS stability -0.9 6.1 13.0 -4.3 13.0


High versus low EPS momentum -2.7 3.6 3.3 21.7 3.3





Europe StylesHigh versus low Year1 EPS growth 1.5 0.5 -0.7 9.1 -0.7

Low versus high dispersion of analysts' forecasts 1.2 8.4 18.0 15.6 18.0

High versus low dividend yield 1.1 -1.0 -1.1 -9.6 -1.1Small versus large market capitalisation 1.0 -6.0 -7.6 -4.8 -7.6


Low versus high Beta 0.4 16.9 21.2 36.3 21.2

High versus low historical EPS stability 0.1 2.9 5.6 1.3 5.6






Low versus high price to book -1.3 -11.4 -15.3 -13.2 -15.3




11/24


06 January 2009 11

Investment style performance (contd)Lastmonth Last 3months Last 12months 5 years Year todate

Eurozone StylesLow versus high P/E ratios 3.3 -7.2 -12.0 -0.2 -12.0


Low versus high dispersion of analysts' forecasts 2.3 7.6 20.3 25.2 20.3



High versus low dividend yield 1.4 -2.5 1.3 -6.6 1.3

High versus low historical EPS growth 1.1 0.5 -2.9 -2.7 -2.9

Small versus large market capitalisation -0.3 -0.3 2.5 21.7 2.5





High versus low historical EPS stability -1.5 -0.3 3.1 -4.6 3.1


UK StylesHigh versus low dividend yield 2.3 0.7 -5.8 -15.0 -5.8


High versus low Year2 EPS growth 1.5 -1.6 0.4 -13.2 0.4



Small versus large market capitalisation 0.0 -11.1 -12.3 -27.0 -12.3


High versus low historical EPS stability -0.3 0.1 -5.2 -11.8 -5.2

High versus low long-term EPS growth -0.4 -0.3 -2.0 6.5 -2.0



High versus low Year1 EPS growth -1.0 -1.0 2.7 13.7 2.7



Japan StylesHigh versus low Year2 EPS growth 3.2 1.9 1.9 -1.9 1.9

High versus low Year1 EPS growth 2.0 5.2 0.8 -6.0 0.8

Low versus high price to book 1.7 1.6 13.5 48.6 13.5


High versus low EPS momentum 0.5 6.1 3.3 19.0 3.3High versus low long-term EPS growth 0.2 4.2 0.3 5.4 0.3

High versus low dividend yield 0.1 -1.6 2.7 27.9 2.7


Low versus high dispersion of analysts' forecasts -0.8 5.1 -0.9 -1.0 -0.9

Low versus high P/E ratios -0.9 -8.2 -20.0 6.1 -20.0


High versus low historical EPS stability -1.3 -4.0 -5.6 -10.2 -5.6





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06 January 200912

Value stylesGlobal value statistics Global value stylesStyle PB PE DY

Last 5 years Annualised returns -0.3 0.1 -0.7

Annualised volatility 17.5 23.7 22.5

Risk-adj returns 0.0 0.0 0.0

% positive months 52 63 43

Beta t-stat 0.5 5.1 -3.5

Alpha t-stat -0.1 0.0 -0.1

Last 10 years Annualised returns 8.9 8.4 2.5




Beta t-stat -2.1 -2.6 -6.2

Alpha t-stat 1.7 1.2 0.5

85

90

95

100

105

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115

120

125

Dec-0

3

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4

Dec-0

4

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5

Aug-0

5

Dec-0

5

Apr-0

6

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6

Dec-0

6

Apr-0

7

Aug-0

7

Dec-0

7

Apr-0

8

Aug-0

8

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8

Low vs. high price to book High vs. low dividend yield Low vs. high P/E ratio

Source: SG Equity Research Source: SG Equity Research

European value statistics European value stylesStyle PB PE DY

Last 5 years Annualised returns -5.3 -8.1 -3.7


Risk-adj returns -0.4 -0.4 -0.2


Beta t-stat 3.9 7.5 -1.4

Alpha t-stat -1.2 -1.9 -0.8





Beta t-stat -0.7 1.1 -3.8


80

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115

Dec-03

Apr-04

Aug-04

Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08



UK value statistics UK value stylesStyle PB PE DY





Beta t-stat 2.0 6.2 0.0

Alpha t-stat -1.6 -1.7 -1.0





Beta t-stat -1.2 -0.7 -1.6


75

80

85

90

95

100

105

110

115

120

Dec-03

Ap

r-04

Aug-04

Dec-04

Ap

r-05

Aug-05

Dec-05

Ap

r-06

Aug-06

Dec-06

Ap

r-07

Aug-07

Dec-07

Ap

r-08

Aug-08

Dec-08




13/24


06 January 2009 13

US value statistics US value stylesStyle PB PE DY



Risk-adj returns -0.1 0.0 -0.1


Beta t-stat 0.7 2.3 -4.0

Alpha t-stat -0.4 0.4 -0.6

Last 10 years Annualised returns 6.5 4.1 -3.4


Risk-adj returns 0.3 0.1 -0.1


Beta t-stat -1.0 -3.5 -6.8

Alpha t-stat 0.9 0.3 -0.6

75

80

85

90

95

100

105

110

115

120

Dec-03

Apr-04

Aug-04

Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08



Eurozone value statistics Eurozone value stylesStyle PB PE DY





Beta t-stat 3.3 5.5 -0.3

Alpha t-stat -1.0 -0.2 -0.7





Beta t-stat -1.7 -0.9 -3.3


90

95

100

105

110

115

120

125

130

Dec-03

Apr-04

Aug-04

Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08



Japan value statistics Japan value stylesStyle PB PE DY





Beta t-stat -2.4 5.6 -1.2






Beta t-stat -4.8 0.8 -5.6


90

100

110

120

130

140

150

160

Dec-03

Apr-04

Au

g-04

Dec-04

Apr-05

Au

g-05

Dec-05

Apr-06

Au

g-06

Dec-06

Apr-07

Au

g-07

Dec-07

Apr-08

Au

g-08

Dec-08




14/24


06 January 200914

Growth stylesGlobal growth statistics Global EPS growth stylesStyle

EPSYr1

EPSYr2

EPSHist.

Last 5 years Annualised returns 2.6 -3.4 0.8


Risk-adj returns 0.2 -0.2 0.1


Beta t-stat 3.5 6.2 4.8

Alpha t-stat 0.6 -1.3 0.2

Last 10 years Annualised returns 1.0 -0.2 -2.1


Risk-adj returns 0.1 0.0 -0.2


Beta t-stat 3.0 9.1 8.1

Alpha t-stat 0.2 -0.2 -0.9

90

95

100

105

110

115

120

Dec

-03

Apr-04

Aug

-04

Dec

-04

Apr-05

Aug

-05

Dec

-05

Apr-06

Aug

-06

Dec

-06

Apr-07

Aug

-07

Dec

-07

Apr-08

Aug

-08

Dec

-08

High vs low Year 1 forecast EPS growth High vs low Year 2 forecast EPS growthHigh vs low long-term forecast EPS growth High vs. low historical EPS growth


European growth statistics European EPS growth stylesStyle

EPSYr1

EPSYr2

EPSHist.



Risk-adj returns 0.4 -0.4 -0.3


Beta t-stat 1.6 3.7 3.2

Alpha t-stat 1.0 -1.7 -0.9





Beta t-stat -2.3 8.6 6.0

Alpha t-stat -0.4 -2.9 -2.1

80

85

90

95

100

105

110

115

120

Dec-03

Apr-04

Aug-04

Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08

High vs low Year 1 forecast EPS growth High vs low Year 2 forecast EPS growth

High vs low long-term forecast EPS growth High vs. low historical EPS growth


UK growth statistics UK EPS growth stylesStyle

EPS

Yr1

EPS

Yr2

EPS

Hist.





Beta t-stat 1.4 0.3 0.6






Beta t-stat 1.5 4.4 2.3

Alpha t-stat 1.1 -2.0 -1.1

80

85

90

95

100

105

110

115

120125

Dec-03

Apr-04

Aug-04

Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08





15/24


06 January 2009 15

US growth statistics US EPS growth stylesStyle

EPSYr1

EPSYr2

EPSHist.





Beta t-stat 2.2 5.5 3.0






Beta t-stat 2.4 8.4 7.3


90

95

100

105

110

115

120

125

130

Dec-03

A

pr-04

Aug-04

Dec-04

A

pr-05

Aug-05

Dec-05

A

pr-06

Aug-06

Dec-06

A

pr-07

Aug-07

Dec-07

A

pr-08

Aug-08

Dec-08




Eurozone growth statistics Eurozone EPS growth stylesStyle

EPSYr1

EPSYr2

EPSHist.





Beta t-stat 1.4 4.0 1.5

Alpha t-stat 2.0 -0.8 -0.5





Beta t-stat 0.0 8.9 4.8

Alpha t-stat 1.0 -2.3 -2.7

90

95

100

105

110

115

120

125

Dec-03

Apr-04

Aug-04

Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08




Japan growth statistics Japan EPS growth stylesStyle

EPS

Yr1

EPS

Yr2

EPS

Hist.





Beta t-stat 1.6 0.8 5.9

Alpha t-stat -0.5 -0.1 -1.5





Beta t-stat 3.2 5.2 5.8

Alpha t-stat -0.4 2.2 -1.4

85

90

95

100

105

110

115

Dec-03

Apr-04

Aug-04

Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08





16/24


06 January 200916

Risk stylesGlobal risk statistics Global risk aversion stylesStyle

HighBeta

Dispersion

EPSvol





Beta t-stat 12.0 -7.9 -7.7

Alpha t-stat -2.8 1.6 -0.9





Beta t-stat 12.9 -10.5 -8.7

Alpha t-stat -1.5 0.2 -1.5

80

85

90

95

100

105

110

115

120

125

130

Dec-03

Ap

r-04

Aug-04

Dec-04

Ap

r-05

Aug-05

Dec-05

Ap

r-06

Aug-06

Dec-06

Ap

r-07

Aug-07

Dec-07

Ap

r-08

Aug-08

Dec-08

Low vs high dispersion of analysts' forecasts High vs low historical EPS growth stability

Low versus high BETA


European risk statistics European risk aversion stylesStyle

HighBeta

Dispersion

EPSvol

Last 5 years Annualised returns -13.1 6.1 0.7


Risk-adj returns -0.4 0.3 0.1


Beta t-stat 9.4 -8.0 -5.3

Alpha t-stat -2.7 1.9 0.2





Beta t-stat 13.8 -9.7 -7.0

Alpha t-stat -2.9 0.6 -0.6

90

95

100

105110

115

120

125

130

135

140

Dec-03

Apr-04

Aug-04

Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08


Low versus high BETA (r.h.scale)


UK risk statistics UK risk aversion stylesStyle

High

Beta

Disper

sion

EPS

vol





Beta t-stat 6.1 -4.6 -0.6

Alpha t-stat -0.9 1.7 -1.3





Beta t-stat 11.0 -7.5 -4.4

Alpha t-stat -1.9 1.1 -0.8

85

90

95

100

105

110

115

120

Dec-03

Apr-04

Aug-04

Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08





17/24


06 January 2009 17

US risk statistics US risk aversion stylesStyle

HighBeta

Dispersion

EPSvol





Beta t-stat 8.8 -5.8 -5.8

Alpha t-stat -1.0 0.4 -0.7





Beta t-stat 11.9 -9.3 -6.5

Alpha t-stat 0.2 -1.0 -1.4

75

80

85

90

95

100

105

110

115

120

125

Dec

-03

Apr

-04

Aug

-04

Dec

-04

Apr

-05

Aug

-05

Dec

-05

Apr

-06

Aug

-06

Dec

-06

Apr

-07

Aug

-07

Dec

-07

Apr

-08

Aug

-08

Dec

-08


Low versus high BETA


Eurozone risk statistics Eurozone risk aversion stylesStyle

HighBeta

Dispersion

EPSvol





Beta t-stat 9.7 -5.0 -6.6

Alpha t-stat -3.4 2.9 -0.6





Beta t-stat 12.2 -7.2 -3.8

Alpha t-stat -4.0 2.6 -1.1

90

100

110

120

130

140

150

Dec-03

Apr-04

Aug-04

Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08

Low vs high dispersion of analysts' forecasts High vs low historical EPS growth stabilityLow versus high BETA (r.h.scale)


Japan risk statistics Japan risk aversion stylesStyle

High

Beta

Disper

sion

EPS

vol





Beta t-stat 7.93 -4.61 0.69

Alpha t-stat -0.28 -0.49 0.02

Last 10 years Annualised returns -0.7 0.6 0.0


Risk-adj returns -0.03 0.04 0.00


Beta t-stat 12.28 -7.47 3.18

Alpha t-stat -1.03 0.71 -0.25

85

95

105

115

125

135

145

Dec-03

Apr-04

Aug-04

Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08





18/24


06 January 200918

Momentum stylesMomentum statistics 3-month price momentum strategy - Global, US and JapanStyle Global US Japan





Beta t-stat -4.1 -4.0 -3.1






Beta t-stat -4.6 -5.4 0.2


90

95

100

105

110

115

120

125

130

135

Nov-03

Mar-0

4

Jul-0

4

Nov-04

Mar-0

5

Jul-0

5

Nov-05

Mar-0

6

Jul-0

6

Nov-06

Mar-0

7

Jul-0

7

Nov-07

Mar-0

8

Jul-0

8

Nov-08

Global US Japan


Momentum statistics 3-month price momentum strategy in EuropeStyle Europe UK

Eurozone





Beta t-stat -5.0 -4.2 -4.4






Beta t-stat -6.7 -4.4 -6.1


90

100

110

120

130

140

150

Nov-03

Mar-04

Jul-04

Nov-04

Mar-05

Jul-05

Nov-05

Mar-06

Jul-06

Nov-06

Mar-07

Jul-07

Nov-07

Mar-08

Jul-08

Nov-08

Eurozone UK Europe



19/24


06 January 2009 19

Reversal statistics 1-month price reserval strategy in EuropeStyle Europe UK

Eurozone





Beta t-stat 4.7 2.6 3.6

Alpha t-stat -1.7 -0.1 -2.2





Beta t-stat 2.4 3.1 1.8

Alpha t-stat -0.6 0.4 -0.8

80

85

90

95

100

105

110

Dec-0

3

Apr-0

4

Aug-0

4

Dec-0

4

Apr-0

5

Aug-0

5

Dec-0

5

Apr-0

6

Aug-0

6

Dec-0

6

Apr-0

7

Aug-0

7

Dec-0

7

Apr-0

8

Aug-0

8

Dec-0

8

Eurozone UK Europe


Reversal statistics 1-month price reserval strategy - Global, US and JapanStyle Global US Japan





Beta t-stat 4.7 4.1 2.9

Alpha t-stat -1.9 -1.5 -0.3

Last 10 years Annualised returns -0.4 -0.8 2.6




Beta t-stat 3.5 4.0 1.1

Alpha t-stat -0.1 0.0 0.5

70

75

80

85

90

95

100

105

Dec-03

Mar-04

Jun-04

Sep-04

Dec-04

Mar-05

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Global US Japan



20/24


06 January 200920

EPS stylesEarnings revision statistics Earnings revisions in the UK, Eurozone and JapanStyle Japan UK

Eurozone





Beta t-stat 0.5 -1.5 2.3






Beta t-stat 0.5 -5.4 -1.3


90

100

110

120

130

140

150

Dec-0

3

Apr-0

4

Aug-0

4

Dec-0

4

Apr-0

5

Aug-0

5

Dec-0

5

Apr-0

6

Aug-0

6

Dec-0

6

Apr-0

7

Aug-0

7

Dec-0

7

Apr-0

8

Aug-0

8

Dec-0

8

Japan Eurozone UK


Earnings revision statistics Earnings revisions in US, Europe and GlobalStyle Global US Europe





Beta t-stat 0.2 -1.3 0.0






Beta t-stat -2.9 -3.7 -3.8


95

100

105

110

115

120

125

130

135

Dec-03

Apr-04

Aug-04

Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08

Global US Europe



21/24


06 January 2009 21

Size stylesSize statistics Small cap versus large cap in EuropeStyle Europe UK

Eurozone

Last 5 years Annualised returns -1.7 -12.1 8.0


Risk-adj returns -0.1 -0.9 0.8


Beta t-stat 3.8 0.9 -1.6

Alpha t-stat -0.4 -2.1 2.3





Beta t-stat 1.3 0.7 -3.3


70

80

90

100

110

120

Dec-0

3

Apr-0

4

Aug-0

4

Dec-0

4

Apr-0

5

Aug-0

5

Dec-0

5

Apr-0

6

Aug-0

6

Dec-0

6

Apr-0

7

Aug-0

7

Dec-0

7

Apr-0

8

Aug-0

8

Dec-0

8

UK Eurozone Europe


Size statistics Small cap versus large cap in US, Japan and GlobalStyle Global US Japan





Beta t-stat 0.8 2.9 -1.6






Beta t-stat -0.4 1.1 -3.5


90

95

100

105

110

115

120

125

Dec-03

Apr-04

Aug-04

Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08

Japan US Global



22/24


06 January 200922


23/24


06 January 2009 23


24/24


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Soc Gen - Lessons From Japan - January 2009