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One More Time

Asia Equity and Derivative Strategy 1Q15


January 2015

BNP Paribas Equity and Derivative Strategy (EDS) believes the US dollar strength should
weigh further on emerging currencies and equities, especially Asian. But 2015 might
witness one more round of easing by the BoK, PBoC, BoJ and ECB as the global economic
situation deteriorates and deflation pressure escalates. Given the low crude oil prices, we
believe there is a higher probability of the BoJ effecting additional QQE to achieve its 2%
FY2015 inflation target for Japan. The ensuing currency war should drive up Asian equities
and risky assets one more time in 2015 and this might be the last round of the world
reflation trade. Equity markets with attractive valuations, like Korea and China, should
benefit from this reflation in 2015. This catalyst is likely to be accompanied by reforms in
Asia and an Asia corporate governance improvement theme. Investors bullishness being
excessively high, price actions have been extreme recently; we believe the first quarter of
2015 should offer better entry levels.
The report explores:
The US Dollar Asset Bubble
Chinese Equities in 2015 A Reflation Story
Korean Equities in 2015 The Year of The Catalyst
Japan Reflation vs. Stagflation Risk
Risk Parameters Corner: Systematic Asia Smiles Strategy and Volatility Arbitrage
Please see the important notice on the inside back cover

Winner Lee
Asia Equity and Derivative Strategist
+852 2108 5658
winner.lee@asia.bnpparibas.com
Guillaume Derville
Head, Asia Equity and Derivative Strategy
+852 2108 1055
guillaume.derville@asia.bnpparibas.com
Shun Maruyama
Japan Chief Equity Strategist
+81 3 6377 2252
shun.maruyama@asia.bnpparibas.com
Shuai Chen
Asia Equity and Derivative Analyst
+852 2108 5638
shuai.chen@asia.bnpparibas.com

Find Asia and Japan Equities Derivatives Strategy


Bloomberg: BEDR or online: www.GlobalMarkets.bnpparibas.com

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TABLE OF CONTENTS

I. Asia Equity and Derivative Outlook Summary

II. Key Themes and Strategies


n

Theme 1: Chinese Equities in 2015 A Reflation Story

Vanilla Index Strategies

Single Stocks Soft-Exotic Options

Delta-One Basket Exposure

Conviction Trade: Long/Short Strategies

Short-term Hedging Tools

6
18

Theme 2: Korean Equities 2015, the Year of the catalyst

26

32

Trade Idea 2: Upside Exposure on Kospi2 Index

Conviction Trade 3: Japan vs. Korea Currency War - Call on Dispersion

34

Conviction Trade 4: Korea Corporate Governance Basket

38

Theme 3: Japan Reflation vs. Stagflation Risk

40

50

Trade Idea 1: Chinese Equity Trades That We Like

Trade Idea 5: Capturing a NKY Index Trading Range

Upside exposure

3-month Daily Range Accrual

Short-dated Hedging Tactic

Trade Idea 6: Hedging Against the Failure of Abenomics

52

Theme 4: A US Dollar Asset Bubble?

55

Conviction Trade 7: HSCEI and AS51 Valuation Convergence Play

68

Trade Idea 8: Asia Pacific Equities Hedging Tools

72

Risk Parameters Arbitrage Corner

77

Conviction Trade 9: Systematic Strategy on Skew Spreads

77

Trade Idea: 10: Asian Basket Volatility vs. SPX/AS51 Volatility

80

III. Hidden Assets

83

Appendix 1: Country Performance

92

Contacts

94

Important Notice

97

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

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I. ASIA EQUITY AND DERIVATIVE OUTLOOK SUMMARY


Winner Lee and Guillaume Derville

4Q14 LEGACY
The Bank of Japans additional qualitative and quantitative easing (QQE) on 31 October,
came earlier than expected, giving the market a positive shock. Volatilities spiked along
with panic buying by foreign fast and real money investors; the following week saw
record volumes. The Japanese indices term structure turned downward sloping and we
witnessed volatility arbitragers entering term structure plays (selling short-dated and
buying long-dated volatilities). Investors sold short- to medium-term calls ahead of the
snap election in early December as the NKY Index was trading at around 18,000 (EDS
2014 Index target). As a result of the additional QQE, EDS Asias strong USD and
weak JPY story worked well in 4Q. Since our 4Q14 strategy report The Tipping Point,
published on 9 October, the JPY currency weakened from 107.8 to a seven-year low of
121.5 on 5 December against the USD.

The BoJs additional QQE


drove the NKY index to
18,000 in 2014

In China, the Shanghai-Hong Kong Stock Connect Program (Through Train) has been
the main story since April. Since its launch on 17 November, market volumes have been
disappointing (especially on the Southbound). Getting close to the connection, the A/H
premium almost narrowed to parity; arbitragers who bought A shares and sold H shares
gradually locked profits. As investors expected a quiet year-end, the long-awaited broadbased China easing measures were finally implemented: the PBoC cut lending and
saving deposit rates. As Chinas economic growth remained under pressure, targeted
measures were deemed not effective enough and expectation of further policy stimulus
would be needed, domestic retail investor sentiment reversed and equity purchase
activities started. Shanghai A-shares index, rich in financials, rallied over 30% and was
supported by massive market volumes. The Hang Seng China AH Premium Index
peaked at 132.4 on 7 January 2015.

Shanghai A-shares index,


rich in financials, rallied
over 30%, on massive
volumes.

The US dollar strength was a key market driver in the fourth quarter. Other notable
events were the collapse of oil and commodity prices, caused by a Russian currency
crisis and the ruble plunged by 44% in 2H14. CNY and Asian currencies (ADXY index)
have remained relatively resilient so far.

1Q15 OUTLOOK ONE MORE TIME

EDS Asias strong USD and


weak JPY story worked well
in 4Q.

The HSAHP index surged


to 132.4 on 7 January
2015, implying A shares are
on average trading at
32.4% premium over H
shares.

The US dollar strength was


a key market driver in the
fourth quarter. CNY and
Asian currencies are
resilient.

A US DOLLAR ASSETS BUBBLE?


The US dollar (DXY index) rose 10.8% in the second half of 2014. BNP Paribas Global
FX team remains bullish on the US dollar in the long run and expects the DXY (Dollar
Index) to reach 94 by end-2015. BNP Paribas Equity and Derivative Strategy (EDS)
believes the US dollar strength should weigh further on emerging currencies and equities,
especially Asian. But 2015 might witness one more round of easing by the BoK, PBoC,
BoJ and ECB as the global economic situation deteriorates and deflation pressure
escalates. Given the low crude oil prices, we believe there is a higher probability of the
BoJ effecting additional QQE to achieve its 2% FY2015 inflation target for Japan. The
ensuing currency war should drive up Asian equities and risky assets one more time in
2015 and this might be the last round of the world reflation trade. Equity markets with
attractive valuations, like Korea and China, should benefit from this reflation in 2015.
This catalyst is likely to be accompanied by reforms in Asia and an Asia corporate
governance improvement theme. Investors bullishness being excessively high, price
actions have been extreme recently; we believe the first quarter of 2015 should offer
better entry levels.

We expect one more round


of easing from BoK, PBoC,
BoJ and ECB if the
economic situation
deteriorates.

CHINESE EQUITIES IN 2015 A REFLATION STORY

President Xi Jinping and


policy makers are likely to
focus on growth stimulation.

In 2015, Chinese equities should be driven by the top-down reflation macro story. BNP
Paribas China Chief Economist, Xingdong Chen, expects two more interest rate cuts in
2Q and 3Q 2015 (25bp each for deposits and lending) and 2-3 cuts in RRR (50bp each).
After fighting corruption and consolidating power in the past two years, President Xi
Jinping and policy makers are likely to focus on growth stimulation. In the coming years,

Reflation should benefit


equity markets with
attractive valuations such
as Korea and China in
2015.

EDS Asia remains positive


on A shares and forecasts
SHCOMP Index to reach
3,500, HSCEI 12,600 and
HSI 27,620.

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

banking sector reforms, RMB internationalization and the opening up of Chinas capital
account will be on Xi Jinpings agenda. EDS Asia remains long-term positive on A shares
and forecasts the SHCOMP Index to reach 3,500 in 2015. Besides, we target the HSCEI
to reach 12,600 and the HSI 27,620. Chinese banks and insurers will benefit from the
monetary easing cycle.

KOREAN EQUITIES IN 2015 THE YEAR OF THE CATALYST


The Deputy Prime Minister, Choi Kyung-hwan, has been relatively quiet about the need
for further stimulus after two rate cuts in August and October. Recent falling oil and
commodity prices have eased inflation pressure, providing more room for the BoK to
ease. BNPP Regional Economist, Mark Walton expects two more rate cuts in 1Q and
2Q. Since Abenomics started, the Japanese yen depreciated more than 35% against the
Korean won; a meaningful KRW depreciation might be necessary at some stage to
restore exporters competitiveness. Possible additional options include further FX
intervention and acceleration of overseas investment for the National Pension Service
(NPS). EDS Asia believes Deputy Prime Minister Choi will have to push for aggressive
measures in 2015 to reverse the current negative investor bias toward Korean equities.
We believe political pressure will play a major role in this, while BoK might be pushed to
react aggressively.

Recent falling oil and


commodity prices have
eased inflation pressure,
providing more room for the
BoK to ease.

BNP Paribas EDS Asia reiterates its bullish stance on Korea, as 1) regional and GEM
funds are now massively underweight on Korea, 2) Korean equity valuations remain
comfortably low compared to the Asia ex-Japan universe, 3) the Korean government
encourages corporates to enhance profitability and increase dividends, 4) the NPS
(AUM: KRW458t as of September 2014) intends to increase domestic equity allocation,
and 5) potential large corporate restructuring.

Korean equities constitute


BNP Paribas EDS Asias
preferred market for 2015.

Korean authorities will have


to push for aggressive
measures in 2015 to
reverse the current
negative investor bias
toward Korean equities.

JAPAN REFLATION VS. STAGFLATION RISK


Multiple factors such as 1) corporate earnings growth, 2) greater shareholder returns, 3)
domestic pension portfolio adjustments, and 4) additional QQE offer visible support to
Japanese equities in 2015. Our NKY Index 2015 mid-year and year-end forecasts are
JPY18,000 (JPY120/USD). We would like to see fundamentals improve and corporate
governance attract quality long-term investments; the greater depth this would create
could be then considered as a sustainable support to Japanese equities. Japans QQE
cannot solve its structural problem.

Fundamentals and
corporate governance
improvement are needed to
sustainably push Japanese
equities further.

Given the BoJs potential additional QQE to ensure its 2% FY2015 inflation target, we
estimate the NKY Index might test JPY19,000; this represents a 12.5% upside from
current levels.

NKY Index might test


19,000 on BoJs additional
QQE, but upside remains
limited at this stage.

HIDDEN ASSETS
In the recent collapse of EM currencies and commodities, Asian currencies and equities
remained relatively resilient. Asian skews remain cheap as a result of the extended
demand on structured product activities, while local events drove investor bullishness in
the fourth quarter. HSCEIs extraordinarily low skews have been driven by upside
volatility demand as investors turned bullish on Chinese equities. NKY index volatilities
and skews have been trending higher as investors took profits ahead of the snap
election.
Skew discrepancies between Developed Markets (DM) and Asian indices are reaching
new highs as developed world indices skews remain elevated. Within DMs, DAX and
SX5E indices belong to the high volatility universe, while SPX and AS51 indices are
enjoying relatively low volatility. Risk parameters, especially skew discrepancies, are
offering directional trade opportunities as we believe Asian equity markets should
outperform US equities in 2015

HSCEI skews at lows;


investors aggressively
bought upside volatilities of
the A50 Tracker.

Skew discrepancies are


offering directional trade
opportunities as we believe
Asian equity markets
should outperform US
equities in 2015.

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Top Trade Ideas (with indicative pricing)


Trade Idea 1: Chinese Equity Trades That We Like
Vanilla Index Strategies

Buy Mar-15 103/110% Call Spread on HSCEI at 2.07% and/or Buy Mar-15 105% Call on H-FIN at 3.8%

Single Stocks Soft-Exotic Options

Buy Mar-15 105% Worst-of-Call on Chinese Banks (CCB [939 HK], ICBC [1398 HK] and BOC [3988 HK]) at 2.5% (34.8%
discount to the cheapest individual call on ICBC at 3.84%, implied correlation offer at 93%)

Delta-One Basket Exposure:

Buy High Yield A-shares Basket and/or Buy China Properties Basket

Conviction Trade: Long/Short Strategies

Buy Jun-15 105/115% Outperformance Call Spread on HSCEI ETF (2828 HK) over A50 Tracker (2823 HK) at 3.35%
Buy Jun-15 105% Timer Outperformance Call on HSCEI ETF (2828 HK) over A50 Tracker (2823 HK) at 3.55% [with Vol
budget at 17%]
Buy Chinese Banks & Insurers (or Buy H-FIN) and Short Chinese Brokers

Short-term hedging tools

Sell Mar-15 110% Call and Buy 90% Put on HSCEI receives 0.33%

Trade Idea 2: Upside Exposure on Kospi2 Index

Buy Mar-15 105/115% Call Spread on Kospi2 at 0.65%


Buy Dec 15 105% Down-and-In Call on Kospi2 with 95% KI barrier (daily close observation until Mar-15) at 1.05%
Buy Dec-15 110% Lookback Call on Kospi2 Index (daily close lookback until Mar-15) at 4.3%

Conviction Trade 3: Japan vs. Korea Currency War Call on Dispersion

Buy Jun-16 Call on Dispersion on Japanese and Korean Exporters Basket, 30% strike, at 2.7%

Conviction Trade 4: Korea Corporate Governance Basket

Buy Korea Corporate Governance Basket

Trade Idea 5: Capturing a NKY Index Trading Range


Upside Exposure

Buy Mar-15 17,500-19,000 Call Spread on NKY Index at 366.5 index-point (~2.15%, spot ref: 17,040)

3-month Daily Range Accrual


Short-dated Hedging Tactic

Sell Mar-15 105% Call and buy 95% Put on NKY at 0.17%
Buy Mar-15 95/85% Put Spread on NKY at 1.62%

Trade Idea 6: Hedging Against the Failure of Abenomics


NKY Put Quanto vs Put at Flat Premium (i.e. Zero Cost)

Buy Dec-17 NKY ATM Put Quanto USD, and Sell Dec-17 NKY 96% Put in JPY

Conviction Trade 7: HSCEI and AS51 Valuation Convergence Play

Buy Mar-15 105/120% Outperformance Call HSCEI over AS51 condition on HSCEI return >0 at 2.7% [implied correlation bid at
20%], without condition at 3%
Buy Mar-15 95/85% AS51 Put Spread at 1.15% and sell Mar-15 95/85% HSCEI Put Spread at 2.01%

Trade Idea 8: Asia Pacific Equities Hedging Tools


Short term tail-risk hedge Best of Put on Asian Indices

Buy Mar-15 95% Best-of Put on AS51-TWSE-HSI at 0.53%, AS51-TWSE-NKY at 0.52%, AS51-TWSE-Kospi2 at 0.42%

Buy Protection on Indian Equities

Buy Feb-15 95% Put on Nifty Index at 85bp and/or Buy Feb-15 95/85% Put Spread on Nifty Index at 75bp

Conviction Trade 9: Systematic Strategy on Skew Spreads


Asia Smiles strategy: an Asia over US outperformance play

Buy every month a 3M 100/104 call spread on Asian Index Basket and sell a 3M 100/104 call spread on SPX Index with 0%
floor overall payoff offered at 4.4%

Trade Idea 10: Asian Basket Volatility vs SPX/AS51 Volatility

Buy Basket of Dec-16 80% Put on Asian Indices [NKY, HSCEI and Kospi2] and Sell Basket of Dec-16 80% Put on Global
Indices [SPX, AS51] at 0.04 vol-pt difference

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

II. KEY THEMES AND STRATEGIES


Theme 1: Chinese Equities in 2015 A Reflation Story
Winner Lee and Guillaume Derville

A controlled easing cycle


China finally started broad-based monetary measures: The asymmetric interest rates
cut on 21 November confirmed that previous targeted measures were not effective
enough and economic growth remains under pressure. Market participants expect further
monetary easing sooner rather than later; they speculate that the PBoC will cut the
reserve requirement ratio (RRR) and/or relax the loan-to-deposit ratio (LDR). Monetary
easing in China is not aimed at boosting equities, but at stabilising growth. EDS Asia
believes policy makers will continue to review the effectiveness of measures before
aggressively pumping further liquidity into the financial system.
The PBoC cut interest rates in June and July 2012. It cut savings deposit rates twice by
25bp each, and lending rates first by 25bp and then by 31bp. After that, it did not
intervene on interest rates for more than two years.
Two more interest rate cuts and 2-3 RRR cuts: BNPP China Chief Economist,
Xingdong Chen, expects two more interest rate cuts in 2Q and 3Q 2015 (25bp each for
deposits and lending) and 2-3 cuts in RRR (50bp each).
China Perspective-091214.pdf: http://www.bnppresearch.com?E=dehfjkbgff
Chinas asymmetric lending and deposit rate cuts
(%)
8.0

China Best Lending 1-year Rate


China Household Saving Deposits 1-year Rate

7.0

Potential RRR cuts in 2015


(%)
24.0
20.0

6.0
16.0

5.0
4.0

12.0

3.0
8.0

2.0
1.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sources: Bloomberg, BNP Paribas; data as of 2 January 2015

4.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Sources: Bloomberg, BNP Paribas; data as of 2 January 2015

Reform programmes lead to short-term pain, but long-term gains


According to Xingdong, China experienced more downward pressure on growth in 2014
than initially expected, the official annual GDP growth will likely average 7.3% in 2014.
Xingdong believes China will continue to set a growth target in 2015 as this is the basis
and key guideline for making macroeconomic policy. He expects the target to be lower
than 7%, but this target is likely to be flexible. Chairman Xi Jinpings new strategy aims at
generating growth from services and consumption, while FAI remains the key driver. The
government will likely boost investments in infrastructure, public utilities and social
housing especially when growth is too weak. We believe the property and housing
market will continue its correction, but freefall will not be tolerated. Monetary policy will
be accommodative: we expect more interest rate cuts, with RRR cuts to offset reform
shocks in the money market.
After two years of fighting corruption, correcting official behaviour and consolidating
power, Xis aggressive reforms programme and rule of law will likely be implemented in
2015. These reforms include a negative list management of government power, stateowned enterprises (SOEs), hukou (household registration), land reforms, and financial,
fiscal and RMB internationalisation. However, some reforms programmes will lead to
short-term pain for long-term gains.

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Chinese banks likely to perform in 2015


Since we published our EDS Asia Thematic Strategy: China, The Biggest Known
Unknown on 27 February 2014, Chinese bank share prices have been staying firm (Hshare Chinese banks rebounded by an average of 32.7%). In February 2014, we argued
that investor concerns over asset quality deterioration were priced in. Since then, policy
makers have continued to find ways to strengthen asset quality, such as issuing
preferred shares. BNPP China Financial Analyst, Judy Zhang, has highlighted that the
recent interest rate cuts will result in declining non performing loans (NPL) formation and
speed up interest rate liberalisation. Judy believes bank earnings are far more sensitive
to NPL formation than to NIM (net interest margin) earnings growth usually accelerates
after rate cuts.
China Banks-241114.pdf: http://www.bnppresearch.com?E=defjdkbgff
The PBoC met with banks in Beijing to discuss deposit insurance scheme (DIS), which
might be effectively implemented in January 2015. Chinas DIS will cover deposits of up
to RMB500,000. The DIS is considered a precondition for China to free up deposit rates,
which is the last and most important step to interest rate liberalisation.
China Banks-281114.pdf: http://www.bnppresearch.com?E=degghkbgff
In her sector report 2015 Outlook: five drivers to re-rate Chinese banks (5
December 2014), Judy Zhang provided five reasons why Chinese banks should re-rate:
1.

Chinese banks have transformed themselves from credit asset holders to traders via
the fast development of asset-backed securities (ABS) and diversified risk/leverage
to non-bank financials,

2.

they have lower balance sheet risk after rate cuts, following the introduction of local
government debt regulation and the acceleration of NPL write-offs/disposals,

3.

the risk-free rate has been lowered, given government efforts to gradually remove its
implicit guarantee on trusts and WMPs,

4.

LDR relaxation and potential RRR cuts are easing NIM pressure, and

5.

share incentive schemes are improving bank productivity, leading to better ROEs.

Judy thinks Chinese banks current valuations imply NPL for FY15 at 21.2% of Chinas
FY15 GDP. We believe it is overly pessimistic.
China Banks-Dec14.pdf: http://www.bnppresearch.com?E=dehcfkbgff
EDS Asia expects to see further reforms progress for state-owned banks in 2015, and
we believe the recent sector-wide re-rating has removed key roadblocks for the reforms.
Key upcoming reforms for the banking sector include 1) employee equity offerings
programme, 2) introduction of private strategic investors, and 3) asset restructuring.
These measures would help banks source additional funding to strengthen their core
tier-1 capital, align bank employee incentives better, improve overall asset quality, and
ultimately boost operating efficiency.
Chinese banks - consensus valuations and BNP Paribas target prices
Code

Nam e

Mkt Cap
(HKD b)

Chinese Banks
939 HK CCB
1398 HK ICBC
998 HK China Citic Bank
3988 HK BOC
3328 HK BoComm
1988 HK Minsheng Bank
1288 HK ABC
3968 HK CM Bank
Sector Average

1,621
2,173
405
1,464
576
422
1,552
509
8,722

Last PE (x) PE (x)


(HKD) FY14 FY15

6.43
5.71
6.11
4.41
7.03
9.97
4.02
18.86

5.6
5.8
5.5
5.9
6.4
5.8
5.6
6.6
5.8

5.2
5.5
5.2
5.5
6.1
5.5
5.3
6.0
5.5

EPS
Grow th
y-y%
6.2%
4.9%
6.8%
7.9%
4.8%
5.8%
7.4%
10.0%
6.5%

PB (x) DY (%)

1.0
1.1
0.9
0.9
0.9
1.1
1.0
1.2
1.0

6.3
5.9
5.1
5.8
4.6
3.1
6.2
4.3
5.7

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

BNPP
rating

BUY
BUY
BUY
BUY
BUY
BUY
BUY
HOLD

Target Upside
Price
(%)
(HKD)
8.00
7.00
7.10
4.92
8.00
10.80
4.03
18.14

24.4%
22.6%
16.2%
11.6%
13.8%
8.3%
0.2%
-3.8%
14.0%

NOT F or

LDR rules relaxed by treating interbank deposits as normal deposits


China Banks-291214.pdf: http://www.bnppresearch.com?E=deijikbgff
On 27 December, the PBoC released Document No. 387, in which it said that it would
treat interbank deposits as normal deposits but keep their reserve requirement at zero.
The PBoC did not rule out the possibility of charging a reserve on interbank deposits in
the future. Judy expects this to lower listed Chinese bank LDRs by 4-5ppt after interbank
deposits are included in the LDR calculation.
The new measure helps relieve bank LDR constraints as the process should improve the
money multiplier and, in turn, improve their liquidity environment. However, we do not
expect massive credit to be granted, as banks are still subject to loan quota
requirements and they are cautious about granting loans because of increasing asset
quality concerns. We expect the new loan quota in 2015 to be set at around RMB10t
(+12% y-y), similar to next years M2 growth target of 12%. Total new loans rose 8% y-y
to RMB9.08t in January-November 2014.
The relaxation may trigger arbitrage as banks replace deposits with interbank deposits.
Judy Zhang expects banks to practice arbitrage, as they replace bank deposits with
interbank deposits to take advantage of the RRR exemption. However, interbank deposit
rates are fully liberalised and very volatile, which may increase potential liquidity risks for
banks. Also, it may lead smaller banks to aggressively compete on pricing of interbank
deposits, which may increase funding costs and compress net interest margins (NIMs).
However, as the measure is part of the governments efforts to lower funding costs of the
real economy, we believe it will keep relatively ample liquidity, to prevent any unexpected
liquidity risks.
Judy believes there is no urgency for RRR cuts; the market was expecting 100-150bp
RRR cuts to offset the impact of including interbank deposits of RMB7t in the LDR
calculation, which may lead banks to submit reserves of RMB1.4t. Since banks are
exempt from maintaining reserves on interbank deposits, it seems that the urgency to cut
RRR is decreasing.
China new loans

LDR for Chinese banks 3Q14

200
Jan-13

Jul-13

Jan-14

CRCB

400

ABC

600

ICBC

800

CCB

1,000

Minsheng

1,200

3Q14

90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%

CEB

50
40
30
20
10
0
(10)
(20)
(30)
(40)
(50)

Citic

y-y% (RHS)

CMB

1,400

(y-y %)

BOC

China New Loans (LHS)

BoCom

(Rmb b)

Jul-14

Sources: Bloomberg; BNP Paribas; monthly data as of November 2014

Source: Company data

China 10-year bond yield

SHIBOR 1-week was stressed in late December


(%)

(%)
China 10-year Bond Yield
5.0

13.0

4.5

11.0

Shanghai Interbank Offered Rate Fixing - 1 week

9.0

4.0

7.0
3.5

5.0

3.0

3.0

2.5
2007 2008 2009 2010 2011 2012 2013 2014 2015

1.0
2012

Sources: Bloomberg; BNP Paribas; data as of 5 January 2015

2013

2014

Sources: Bloomberg; BNP Paribas; data as of 5 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2015

NOT F or

China Real Estate Dual-speed bifurcation bottoming out


BNPP Head of Regional Property, Wee Liat Lee, published his latest sector report on 2
January 2015. China Real Estate-Jan15.pdf: http://www.bnppresearch.com?E=deijbkbgff
Wee Liat has turned bullish on the China real estate sector in anticipation of a partial
bottoming out in 2015. The start of this structural bottoming out trend will be underpinned
by two factors:
a) Incremental policy support in 2015 should cushion downside risks
The 40bp rate cut in November 2014 has started to materially lower mortgage rates and
improve transaction volumes in tier-1 and some tier-2 cities. Our house view of another
two 25bp symmetric rate cuts in 2015 and three RRR cuts, coupled with further
relaxations of provident fund usage, tax cuts and possibly a partial relaxation of home
purchase restrictions (HPRs) in tier-1 cities, should cushion the downside.
b) Supply imbalance starts to unwind gradually
New land sales (volume terms) declined significantly in 2014, by 16-51% in the top 100
cities. Even in the 43 good cities, with no oversupply, land sales dropped 36%. That
said, oversupply remains acute in most cities and may need two to three years to
unwind. A dual-speed bottoming out should occur as the first batch of cities recovers in
2H15E.
c) 27 cities could see property prices rise in 2H15 & transactions volume rise 1020% in 2015
Nationwide, Wee Liat expects volume growth to improve to 0 to -5% compared to -9% in
2014, but 20-30 cities could see volume growth of 10-20%. As transaction volumes
recover gradually, we forecast moderate property price growth in 27 cities in 2H15.
Construction starts and projects under construction enter a new era of single-digit growth
as developers and cities focus on de-stocking
d) Sector valuations trend higher; mid-cap, low-end P/E, good landbank stocks
should outperform
i) Wee Liat expects two key trends: 1) the valuation should tick moderately higher; and 2)
the range should narrow, with lower-end P/E stocks re-rating and outperforming the
more fully valued stocks.
ii) Mid-size developers with good quality landbanks in cities that we deem good will
outperform on better sales prospects. Our top picks are Shimao, R&F and KWG; we
upgrade Longfor and Country Garden to BUY, and raise target prices for COLI (5%) and
CRL (8%).
% of banks offering mortgage rates at a discount to
the PBoC benchmark for first home buyers

Mortgage rates for first home buyers


(%)

(%)
35

7.20
7.03 7.03
7.00

26

25

6.85

6.82

31

30

6.97

6.99

6.80
6.60

6.75

6.63 6.67

20

6.58
15

13

13

6.40
10

6.20
6.12
6.00
Jan-14

Apr-14

Jul-14

Oct-14

Sources: Rong360.com (based on a study of 86 cities, a sample of 35 cities


and 525 banks); BNP Paribas

7.5
5

7.3

5
0
Feb-14

May-14

Aug-14

Sources: Rong360.com; BNP Paribas

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

Nov-14

NOT F or

Nationwide transaction volume vs. PBoC benchmark rate


(%)

PBoC > 5 yrs lending rate (LHS)

8.5

(y-y %)

Nationwide resid. sales vol. (RHS)

115

Transaction volume bounce


60% y-y in both 2008 and
2012 epsiodes of rate cut

8.0

95
3Q15:
1Q15:
interest rate interest rate
cut by 25 bpts cut by 25 bpts

7.5
7.0

75
55

6.5
6.0
Resid. sales vol.:
From -9% y-y in Nov 2014
to 0% y-y by 4Q15

5.5
5.0
4.5

15
0
(5)
(25)

Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15

4.0

35

Sources: PBoC; NBS; CEIC; BNP Paribas estimates from Jan 15

Potential policy measures to support property market in 2015


Interest rate cut

Two symmetric interest rate cuts of 25bp each in 2Q15 and 3Q15, on both deposit and
lending rates

RRRs cut

Three RRR cuts in 1Q15, 2Q15, 4Q15, 50bp each

Further relaxation in provident fund use

1) shorten the period for approval of provident funds


2) Combine several provident funds - including those of parents for purchase of property.
3) use of provident fund for purchase of second property

Partial relaxation of HPR in Tier 1 cities

1) Relax HPR for high-end properties. 2) relax HPR for non-city centres projects

Exemption of business tax & capital


gain

Business tax
If holding period < 2 years (previously 5 years), then it is 5.5% of the sales amount. If the
holding period >2 years, it would be exempt from business tax.
Capital gains tax
Less than 20% of the capital gain from selling the property (vs. 20% previously)

Source: BNP Paribas

BNP Paribas China Properties Consensus valuations and BNPP target prices
Code

Nam e

Chinese Properties
2777 HK
Guangzhou R&F
1813 HK
KWG Property
813 HK
Shimao Property
688 HK
China Overseas Land
2007 HK
Country Garden
960 HK
Longfor Group
Sector Average

Mkt Cap
(HKD b)

Last
(HKD)

PE (x)
FY15

PB (x)

DY (%)

BNPP
rating

Target
Price (HKD)

Upside (%)

33.4
17.1
67.0
209.7
69.2
65.6

10.28
5.83
18.92
25.25
3.38
11.18

4.3
3.9
5.4
7.9
4.7
6.4
5.4

0.8
0.7
1.2
1.8
1.0
1.2
1.1

6.2
6.5
5.0
2.1
6.7
2.8
4.9

BUY
BUY
BUY
BUY
BUY
BUY

13.9
7.5
22.0
26.7
3.5
11.2

34.8%
28.6%
16.1%
5.5%
3.3%
-0.3%
14.7%

Sources: Bloomberg, BNP Paribas; closing prices as of 5 January 2015

A shares gaining momentum


Supported by a substantial improvement in market turnover, China A-shares momentum
is growing. It reflects the shift in domestic retail investor sentiment as they follow closely
policy stance changes. The average daily turnover on the Shanghai Stock Exchange
surged 40.6% m-m in November to USD39.8b (from USD28.3b in October) and then
rocketed 105% m-m to USD81.7b in December. Shanghai A shares (SHASHR Index),
rich in financial stocks, rallied 34.9% following the rate cuts, while the Shenzhen Ashares Index rose only 7.4%. Compared to historical valuations, Shanghai A shares
remain undemanding. We witnessed investors selling the expensive Shenzhen A shares
to buy the relatively reasonable Shanghai A shares.
Shanghai A is trading at 12.7x P/E, 1.72x P/BV and 2.3% dividend yield in 2015
Shenzhen A is trading at 21.3x P/E, 2.73x P/BV and 0% dividend yield in 2015
10

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Shanghai equities are supported by strong volumes


(USD m)
140000

Shanghai Stock Turnover (LHS)


SHASHR Index (RHS)

(Index)

3200

100000

3000

80000
60000
40000
20000
0
Jan-14

Jul-14

40.0
35.0
30.0
25.0

2600

20.0

2400

15.0

2200

10.0

Oct-14

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

Shenzhen A - PE

HSCEI - PE

45.0

2800

2000
Apr-14

Shanghai A - PE

(x)

3600
3400

120000

Shanghai A-share valuations remain reasonable

5.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

Domestic retail investors turned active on equities


The total number of new accounts opened in Shanghai and Shenzhen Stock Exchanges
jumped to a peak of 891k during the week of 12 December (expanded 4.2x since the
interest rates cut). Thereafter, it collapsed 65% to 310k during the week of 2 January.
For margin trading, the leveraged buying balance of Shanghai Stock Exchange also
rocketed 2.7x to RMB715b on 7 January from RMB263.7b at end-June; this raised
speculative activity concerns and the China Securities Regulatory Commission (CSRC)
warned investors of potential downside risk.
SH+SZ Stock Exchange new account openings
('000 account)
500
450
400
350
300
250
200
150
100
50
0
2012

Shanghai Stock Exchange leveraged buying


(CNY b)

Shanghai New A-shares Account


Shenzhen New A-shares Account

800.0

End of day leveraged buying balance - SSE

700.0
600.0
500.0
400.0
300.0
200.0
2013

2014

Sources: Bloomberg; BNP Paribas; weekly data as of 2 January 2015

100.0
24-Apr-13

24-Oct-13

China A shares (a proxy play FTSE China A50 XIN9I Index) rallied 54.1% and
outperformed the HSCEI by 30.9% since the rate cuts. The Hang Seng China AH
Premium (HSAHP) surged to a peak of 132.4 on 7 January 2015, implying A shares on
average traded at 32.4% premium over their corresponding H shares (a sharp reversal
from its low of 88.97 on 23 July).
Investors accumulated China A-share ETFs:

11

24-Apr-14

Sources: Bloomberg; BNP Paribas; data as of 7 January 2015

A50 Tracker (2823 HK) AUM expanded by HKD32.9b (+58.6%) to HKD88.9b


on 6 January 2015 (from end-June);
ETF underwriters can use the Stock Connect quota to purchase A shares;
Due to a stronger rally of the onshore market, both 2823 HK and 2822 HK are
now trading at discounts to their NAVs;
2823 HK is more liquid and linked to more structured products, options and
warrants activities.

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

24-Oct-14

NOT F or

Foreign investors started to participate in the recent A-shares rally via the FTSE China
A50 Index Futures, listed in Singapore. The December futures contracts had been active
since the rates cut and the average traded volume shot up by 47.6 times (to 323k
contracts between 24 November and 31 December, from 6.8k contracts in the first three
weeks of November).
BNP Paribas is ready to underwrite structured products on Shanghai A shares (via Stock
Connect). We selected 50 very liquid stocks on the Shanghai Stock Exchange to serve
hedging purposes better. In the starting stage, only simple products, such as Certificate
Plus, Fixed Coupon Note and ELN, will be considered. Since short sell is prohibited in
China, traders can only buy delta to hedge, thus, the OTC option activity is likely to be a
one-way flow in the initial stage.
A-shares outperforming; HSAHP surged to 132.8

2823 HK and 2822 HK AUM

(Index)
135
130
125
120
115
110
105
100
95
90
85
2012

2822 HK AUM

90
80
70
60
50
40

2013

2014

2015

Sources: Bloomberg; BNP Paribas; data as of 7 January 2015

A-shares ETF are now trading at discount to NAV

6%

2823 HK AUM

(HKD b)
100

2823 HK NAV premium (discount)


2822 HK NAV premium (discount)

Stock Connect launched

30
17-Jul-14

17-Sep-14

17-Nov-14

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

FTSE China A50 Index Futures (Dec-14 maturity)


(Contract)
600000

Volume (LHS)
Open Interest (RHS)

(' 000 Contract)


600

4%

500000

500

2%

400000

400

300000

300

200000

200

100000

100

0%
-2%
-4%

Stock Connect launched

-6%
-8%
17-Jul-14

17-Sep-14

17-Nov-14

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

0
8-Oct-14

0
17-Nov-14

Sources: Bloomberg; BNP Paribas; data as of 31 December 2014

Potential development of Chinas capital market in the next decade


Under Xi Jinpings leadership in the next eight years, banking sector reform, RMB
internationalisation and opening of Chinas capital account are key components of the
agenda. The Shanghai-Hong Kong Stock Connect is a key milestone which indicates a
crucial start; it will be followed by progressive moves such as i) the Shenzhen-Hong
Kong Stock Connect, ii) increasing foreign participation by gradually expanding foreign
investment quota to the abolishment of quota, iii) moving from B shares to H shares and
merging B shares with A shares, and iv) developing the futures and options markets and
allowing short sell activity.

12

17-Dec-14

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

EDS Asia remains positive on A shares


Initial through-train market volumes were disappointing, especially for the Southbound.
However, its smooth operation was a positive. Northbounds accumulated positions are
RMB86b (28.7% of the quota), while Southbounds are RMB16.4b (6.6%).
Northbound position
(Rmb b)
90
80
70
60
50
40
30
20
10
0
17-Nov-14

Southbound position

Accumulated Northbound positions (LHS) (%)

(Rmb b)

% Used of aggregate quota

18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
17-Nov-14

30%
25%
20%
15%
10%
5%
0%

1-Dec-14

15-Dec-14

29-Dec-14

Sources: Bloomberg; BNP Paribas; data as of 7 January 2015

Accumulated Southbound positions (LHS) (%)


% Used of aggregate quota

6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1-Dec-14

15-Dec-14

29-Dec-14

Sources: Bloomberg; BNP Paribas; data as of 7 January 2015

Foreign participation to increase


Foreign institutional investors are involved in the Northbound as existing qualified foreign
institutional investor (QFII) and Renminbi qualified foreign institutional investor (RQFII)
quotas are not enough for them to invest in domestic A shares over the medium to long
term.
The combined QFII (USD64b), RQFII (RMB300b) and Through Train (RMB300b) quotas
amounted to RMB996b (USD161b) as at end-October, allowing investors access to the
domestic A-shares market. Foreign participation in the domestic A-shares market
remains low, at about 3% of its total market cap. We believe there is room for expansion.
A progressive MSCI A-shares inclusion in the emerging market universe
The A-shares inclusion in MSCI emerging markets universe will be progressive: even if
MSCI welcomes A-shares inclusion in its emerging market universe in June 2015, it will
be effective in May 2016 and an initial 5% cap factor should be applied to A shares.
China A shares are likely to contribute less than 1% to the MSCI EM Index at the
beginning. Although this initial inclusion is regarded as small, it represents a large step
toward A-shares internationalisation. A full inclusion will take time, and requires 1) the
abolition of quota systems, 2) the easing of capital mobility restrictions, and 3) the
alignment of international accessibility standards.
Shenzhen and Hong Kong Stock Exchanges may connect in 2015
A Shenzhen-Hong Kong Stock Connect programme is underway. According to China
Daily Asia, dated 26 August 2014, an application to link the Hong Kong and Shenzhen
bourses has been submitted for approval. Shenzhen will further cooperate with Hong
Kong in the financial industry, talent exchange and mutual fund recognition. However, as
more small-to-mid cap companies are listed on the Shenzhen Stock Exchange,
valuations are more expensive than Shanghai-listed big caps.
On 5 January 2015, Premier Li Keqiang visited Shenzhen and mentioned that the
Shenzhen-Hong Kong Stock Connect should be established.
Chief Economist of Shenzhen Stock Exchange, Ji Mengzeng said during an interview
that the SZ-HK Stock Connect could be launched as early as May 2015, with the initial
quota limit set at the same level as the SH-HK Stock Connect. The daily turnover quota
will be gradually increased and eventually eliminated.
Given the previous experience on SH-HK Stock Connect and Shenzhens geographic
proximity to Hong Kong, we believe Northbound buying will create the major flows in the
SZ-HK Stock Connect.

13

7.0%

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

BNP Paribas EDS 2015 index targets


In recent years, US equities have been supported by i) upward earnings revisions, ii)
share buybacks and iii) quantitative easing. At the same time, Chinese equities, under
tight liquidity conditions, suffered valuation contractions, while earnings continue to
improve. Investors have been concerned by potential Chinese bank NPLs.
EDS Asia published a Sniper CHINA EASING STARTED, on 2 December, reiterating
our bullish stance as a result of policy makers change in monetary stance. Early
December, the HSCEI index did follow the correction in US equities; however, we didnt
see any significant liquidity outflows; the HKMA interbank balance has been stable at
HKD239b (level observed since August) and HKD eased to the mid-point of its trading
band.
HSCEI Index vs. EPS
(Index)

HSCEI valuation contraction


(y-y %)

(HKD)
1600
HSCEI Bloomberg Estimated EPS (RHS)

40.0%

1400

35.0%

HSCEI (LHS)

23000
21000
19000
17000
15000
13000
11000
9000
7000
5000
3000

(x)

EPS Growth (LHS)


PE (RHS)

25
20

30.0%
1200

25.0%

1000

20.0%

15

15.0%
800
600
400
05

06

07

08

09

10

11

12

13

14

10

10.0%
5.0%

0.0%
-5.0%

0
05

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

06

07

08

09

10

11

12

13 14E

Sources: Bloomberg; BNP Paribas; data as of 31 December 2014

HSCEI 2015 target at 12,600 and HSIs at 27,620


On 2 December, EDS Asia introduced the 2015 index targets for the HSCEI and HSI. Its
base case target for the HSCEI Index is 12,600 (based on consensus FY15 EPS and a
conservative P/E of 8x) and the HSI index target is 27,620 (12x), corresponding to
potential upsides of 5.1% and 17.6% respectively. Our high case targets are based on
slightly higher P/E assumptions, 8.5x and 12.5x respectively, and we believe the
probability of it occurring is 30%.
Thereafter, the HSCEI rallied about 10% to 12,245 on 2 January which is getting close to
our base case target. Meanwhile, SHCOMP surged 21.3% to a recent peak of 3,351 on
6 January. We agree it is hard to gauge the irrational behaviour of mainland investors,
but a fair value of SHCOMP at the 3,500 level (4.5% upside) seems reasonable. This is
derived from the Gordon Growth Model (the fair level is similar to its peak in 2009 which
is at 13.2x consensus FY15 P/E). Once mainland investors turn more cautious on A
shares, the H-shares rally is likely to decelerate.
HSCEI 2015 Index target
HSCEI
Target

2015 PE (x)

HSCEI
Level

HSI 2015 Index target

Upside /
Probability
dow nside
(%)
(%)

Consensus 2015 EPS = HKD1575.05

HSI Target 2015 PE (x)

HSI Level

Upside /
Probability
dow nside
(%)
(%)

Consensus 2015 EPS = HKD2301.7

Current

7.61

11,991

Current

10.20

23,485

Low

6.00

9,450

-21.2%

10%

Low

9.00

20,715

-11.8%

10%

Base

8.00

12,600

5.1%

60%

Base

12.00

27,620

17.6%

60%

High

8.50

13,388

11.7%

30%

High

12.50

28,771

22.5%

30%

4.4%

100%

Expected return

16.1%

100%

Expected return

Bloom berg consensus bottom -up index target


12,773

6.5%

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

14

Bloom berg consensus bottom -up index target


26,828

14.2%

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

HSCEI high, base and low targets

HSI high, base and low targets

HSCEI - FY15 PE
Low case 6x PE
Base case 8x PE
High case 8.5x PE

(x)
10.0
9.0

HSI FY15 PE
Low case 9x PE
Base case 12x PE
High case 12.5x PE

(x)
14.0
13.0
12.0

8.0

11.0

7.0

10.0
9.0

6.0

8.0

5.0
2011

2012

2013

2014

2015

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

7.0
2011

17000
16000
15000
14000
13000
12000
11000
10000
9000
8000
Jan-10

2013

2014

2015

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

HSCEI Bottom-up Index target


(Index)

2012

Upside to HSCEI Bottom-up Index target

HSCEI
Consensus Bottom-up Index Target

70.0%
60.0%
50.0%
40.0%
30.0%

20.0%

mean

10.0%

0.0%
Jan-11

Jan-12

Jan-13

-10.0%
Jan-10

Jan-14

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

Jan-11

Jan-12

Jan-13

Jan-14

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

Will RMB enter the currency war?


The CNY currency has been the most resilient among Asian and EM currencies. The
devaluation of its trading partners and export competitors currencies is definitely putting
pressure on the CNY: the Chinese currency has already weakened 1.6% from its recent
peak. The 12-month CNY NDF is now trading at 1072bp above spot, indicating an
expectation of 1.7% depreciation against the USD in the next 12 months.
CNY spot weakened 1.6% from its recent high
(USDCNY)

12-mth NDF of CNY is trading at 1072bp above spot


(USDCNY)

USDCNY

6.30

8.5

6.25

8.0

USDCNY

USDCNY - 12M NDF

6.20
7.5
6.15
7.0
6.10
6.5

6.05
6.00
Jan-13

Jul-13

Jan-14

Jul-14

Sources: Bloomberg; BNP Paribas; data as of 7 January 2015

15

Jan-15

6.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sources: Bloomberg; BNP Paribas; data as of 7 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Significant CNY depreciation unlikely


China has the worlds largest foreign reserves and can withstand external shocks.
Chinas foreign direct investments (FDI) were up 22.2% y-y in November from 1.3% y-y
in October and 1.9% y-y in September. Unlike portfolio flows, foreign inflows in the form
of direct investment should be relatively long term. BNPP China Economics team
predicts CNY to reach CNY6.15/USD in 2015, implying a marginal appreciation of 1.2%.
Chinas foreign reserves peaked at USD3.99t in June

FDI jumped to 22.2% y-y in November

(USD b)

(y-y %)

4500

100

4000

80

3500

60

3000
2500

40

2000

20

1500

1000
(20)

500
0

(40)

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Sources: Bloomberg; BNP Paribas; monthly data as of September 2014

04

05

06

07

08

09

10

11

12

13

14

Sources: Bloomberg; BNP Paribas; monthly data as of November 2014

Derivatives dynamics distressed skew


After Chinese authorities cut rates on 21 November, HSCEI 3M realised vol rose 8 vol-pt
to 25 vol-pt during the market rally, while 3M implied vol moved in tandem with realised
vol, minimising the volatility premium. Due to the combined effect of Chinese stocks
surging and commodities sell-off, the implied correlation of HSI has fallen by over 10
correl-pt since October 2014, whereas HSCEI, which is less balanced but rich in
financials, remained largely unchanged in implied correlation.
Meanwhile, HSCEI skews reached new lows; on 5 December, 3M 90-110% skew
plunged to an all-time low of -2.39 vol-pt while spot prices rebounded, with downside
skew crushed more than upside. In the past couple of weeks, we have witnessed
investors accumulating cheap HSCEI skew positions; we believe current levels remain
attractive (despite a marginal rebound).
We believe the extraordinarily low skew has been driven by structured product activities;
Asia retail investors sold more downside volatility to collect the premiums during the bull
market, while institutional investors (hedge funds) bought calls via the OTC market. We
didnt witness any significant movement among the listed option market.
HSCEI implied vol in tandem with realised

HSI and HSCEI implied correlation


HSI

3M Realized Volatility
45%

HSCEI

80%

3M Implied Volatility

75%

40%

70%

35%

65%

30%

60%

25%

55%
50%

20%

45%

15%
10%
Jan 12

40%

Jul 12

Jan 13

Jul 13

Jan 14

Source: BNP Paribas; data as of 6 January 2015

16

Jul 14

Jan 15

35%
Jan-14

Apr-14

Jul-14

Source: BNP Paribas; data as of 6 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

Oct-14

Jan-15

NOT F or

HSCEI skew at low


(vol-point)
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
(2.0)
(4.0)
2008

HSI 3M 90-110% Skew

(contract)

HSCEI 3M 90-110% Skew

40000

Call Volume

Put Volume

35000
30000
25000
20000
15000
10000
5000
2009

2010

2011

2012

Source: BNP Paribas; data as of 6 January 2015

17

HSCEI call and put volume

2013

2014

2015

0
Jul-14

Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Trade Idea 1: Chinese Equity Trades That We Like


The below trades that we like are a combination of our fundamental views, market
dynamics analysis on China indices/sectors, while keeping in mind liquidity constraints
and risk parameter dislocations.
1.

Vanilla Index Strategies

2.

Buy Mar-15 103/110% Call Spread on HSCEI at 2.07% (delta 19.5%)


Buy Mar-15 105% Call on H-FIN at at 3.8% (delta 38.25%)

Single Stocks Soft-Exotic Options

3.

Buy Mar-15 105% Worst-of-Call on Chinese Banks (CCB [939 HK], ICBC
[1398 HK] and BOC [3988 HK]) at 2.5% (34.8% discount to the cheapest
individual call on ICBC at 3.835%, implied correlation offer at 93%)

Delta-One Basket Exposure

4.

Buy High Yield A-shares Basket and/or Buy China Properties Basket

Conviction Trade: Long/Short Strategies

5.

Buy Jun-15 105/115% Outperformance Call Spread on HSCEI ETF (2828


HK) over A50 Tracker (2823 HK) at 3.35%
Buy Jun-15 105% Timer Outperformance Call on HSCEI ETF (2828 HK)
over A50 Tracker (2823 HK) at 3.55% [with Vol budget at 17%]
Sell Mar-15 105% Call on A50 Tracker receives 5.4% and Buy 105% Call on
HSCEI at 3.1%
Buy Chinese Banks & Insurers (or Buy H-FIN) and Short Chinese Brokers

Short-term Hedging Tools

Sell Mar-15 110% Call and Buy 90% Put on HSCEI receives 0.33% (delta
39%)

Rational and key charts


1.

Vanilla Index Strategies

Buy Mar-15 103/110% Call Spread on HSCEI at 2.07% (delta 19.5%)


Buy Mar-15 105% Call on H-FIN at at 3.8% (delta 38.25%)
In the week following the PBoCs rate cuts announcement, short-dated volatilities spiked;
the term structure wasnt as impacted and the back-end of the curve remained upward
sloping. As the A-shares rally gathered momentum, upside volatilities demand
accelerated. Retail investors chased single-stock upside via warrants and structured
product activities; they focused on selling downside volatilities on A-trackers and
Chinese financials.
HSCEI Index upside skews remain at extraordinarily low levels (despite a marginal
rebound from all-time lows). Bullish investors may choose to buy HSCEI Call Spreads;
this implementation monetises the cheap upside skew and helps to reduce premium at
risk. We propose Mar-15 maturity to capture a potential rally in H shares, as volatilities
remain elevated on shorter dated maturities.
Implied volatility term structure HSCEI
Current
Before rate cuts
Before LDR rules relaxed

(vol-pt)

28.0

Upside skews on the HSCEI remain low


(vol-point)

26.0

4.0

24.0

3.0

HSCEI 3M 105-115% Skew

2.0

22.0

1.0

20.0

0.0

18.0

(1.0)

16.0

(2.0)

14.0
1M

2M

3M

6M

9M

12M 18M 24M 36M

Source: BNP Paribas; data as of 6 January 2015

18

HSCEI 3M 103-110% Skew

5.0

(3.0)
2008

2009

2010

2011

2012

Source: BNP Paribas; data as of 6 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2013

2014

2015

NOT F or

2.

Single Stocks Soft-Exotic Options

Buy Mar-15 105% Worst-of-Call on Chinese Banks (CCB [939 HK], ICBC
[1398 HK] and BOC [3988 HK]) at 2.5% (34.8% discount to the cheapest
individual call on ICBC at 3.835%, implied correlation offer at 93%)
Buy Mar-15 105% Call ICBC (1398 HK) at 3.835% (30.6 i.v.), CCB (939 HK) at
4% (31.5 i.v.) and BOC (3988 HK) at 3.89% (30.9 i.v.)

We believe China is at the beginning of a monetary easing cycle; Chinese banks and
insurers should be key beneficiaries. Investors can also consider buying worst-of-call on
the three big Chinese banks (ICBC, CCB and BOC), which offers 34.8% discount to the
cheapest plain-vanilla call. The breakeven of this structure requires the worst performer
to rally by strike+premium, which is 7.5% for this WoC on Chinese Banks. In the latest
China Banks 2015 Outlook report, dated 5 December 2014, Judy has downgraded ABC
(1288 HK) to HOLD but maintained the BUY rating on CCB, ICBC and BOC with higher
target prices at HKD8 (24.4% upside), HKD7 (22.6%) and HKD4.92 (11.6%).
China financial consensus valuations and BNP Paribas target prices
Code

Nam e

Mkt Cap
(HKD b)

Chinese Banks
939 HK CCB
1398 HK ICBC
998 HK China Citic Bank
3988 HK BOC
3328 HK BoComm
1988 HK Minsheng Bank
1288 HK ABC
3968 HK CM Bank
Sector Average
Chinese Insurers
2628 HK China Life
2318 HK Ping An
2601 HK China Pacific Insurance
1336 HK New China Life Insurance
Sector Average

Last PE (x) PE (x)


(HKD) FY14 FY15

EPS
Grow th
y-y%

PB (x) DY (%)

BNPP
rating

Target Upside
(%)
Price
(HKD)

1,621
2,173
405
1,464
576
422
1,552
509
8,722

6.43
5.71
6.11
4.41
7.03
9.97
4.02
18.86

5.6
5.8
5.5
5.9
6.4
5.8
5.6
6.6
5.8

5.2
5.5
5.2
5.5
6.1
5.5
5.3
6.0
5.5

6.2%
4.9%
6.8%
7.9%
4.8%
5.8%
7.4%
10.0%
6.5%

1.0
1.1
0.9
0.9
0.9
1.1
1.0
1.2
1.0

6.3
5.9
5.1
5.8
4.6
3.1
6.2
4.3
5.7

BUY
BUY
BUY
BUY
BUY
BUY
BUY
HOLD

8.00
7.00
7.10
4.92
8.00
10.80
4.03
18.14

24.4%
22.6%
16.2%
11.6%
13.8%
8.3%
0.2%
-3.8%
14.0%

1,073
740
352
167
2,332

29.7
80.1
37.85
40.7

20.0
13.8
23.1
14.3
18.1

17.1
12.6
19.2
12.9
15.7

17.1%
9.1%
20.6%
11.0%
14.7%

2.6
2.2
2.5
2.2
2.4

1.5
1.1
1.4
0.8
1.3

BUY
BUY
BUY
BUY

34.09
105.68
46.88
46.92

14.8%
31.9%
23.9%
15.3%
21.6%

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

China banks performance

China insurers performance


(Index, Jan-14=100)

(Index, Jan-14=100)

China Life
Ping An
China Pacific Insurance

140

130
ICBC

CCB

BOC

120

130
120

110

110
100

100

90
80
Jan-14

90
Apr-14

Jul-14

Oct-14

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

19

Jan-15

80
Jan-14

Apr-14

Jul-14

Source: BNP Paribas; data as of 2 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

Oct-14

Jan-15

NOT F or

3.

Delta-One Basket Exposure

High Yield A-shares Basket

Buy High Yield A-shares Basket

While the hunt for yield has been a well-known process in the western world, we believe
it just started in the domestic A-shares universe. Chinese high yielding stocks used to
underperform in a domestic market driven by retail investors. Considering that yield
hunting has been a major investment theme in the developed world and international
equity markets over the past couple of years, foreign investors should focus on domestic
Chinese stocks offering attractive yields and depressed valuations. The basket rallied
37.6% since the interest rates cut and outperformed the SHCOMP Index by 2.5%.
Additional returns will be generated from the yield, which is quite high at 3.9% in FY14
and 4.1% in FY15. The basket offers decent liquidity at USD60m per day.
The saving deposit rate has more potential to decline; BNPP China Chief Economist,
Xingdong Chen, expects two more interest rate cuts in 2Q and 3Q: the 1-year household
saving deposit rate has the potential to reach 2.25% from the current 2.75%. High Yield
A-shares make sense given the basket is still trading at very undemanding valuations.
High yield A-shares basket
Code

Nam e

Sector

High Yield A-shares Basket


601006 CH Daqin Railw ay "A"
600104 CH SAIC Motor Corp "A"
600011 CH Huaneng Pow er "A"
600900 CH China Yangtze Pow er "A"
601088 CH China Shenhua Energy "A"
600019 CH Baoshan Iron & Steel "A"
600028 CH Sinopec "A"
601857 CH PetroChina "A"
601939 CH CCB "A"
601398 CH ICBC "A"
Weighted average
2823 HK A50 Tracker

Industrial Transportation
Auto & Parts
Electricity
Electricity
Mining
Metals & Mining
Oil & Gas
Oil & Gas
Banks
Banks

(CNY)

Mkt Cap Est T/O P/BV


USD m (USD m ) (x)

12.18
24.67
9.09
10.87
22.86
7.17
7
11.69
6.82
5.1

28,161
43,173
20,334
29,182
70,354
18,784
123,070
326,758
209,445
281,725

Price

340.6
243.8
150.7
177.7
381.7
214.6
696.9
450.8
572.4
591.2

PE (x)
FY14

2.2
1.9
1.9
2.2
1.6
1.0
1.4
1.8
1.4
1.2
1.7
1.9

12.1
9.7
10.5
17.1
11.9
17.5
11.8
16.5
7.4
6.4
12.1
9.9

PE (x)
FY15

DY (%)
FY14

10.6
8.5
10.1
16.5
11.6
14.8
12.1
16.7
7.0
6.1
11.4
7.1

4.2
4.8
4.9
3.0
3.5
2.6
3.3
2.6
4.6
5.3
3.9
2.8

DY (%) Weight
FY15
4.8
5.5
5.3
3.1
3.6
3.1
2.9
2.3
4.9
5.6
4.1
4.0

10.5%
9.2%
9.9%
9.8%
10.1%
11.0%
8.5%
10.0%
11.4%
9.8%
100.0%

% YTD

10.3
13.2
1.0
2.9
11.6
1.0
6.0
7.8
0.1
3.9
5.6
2.3

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

High yield A-shares basket (since 2012)


(Index, Jan-12=100)
170.0
160.0
150.0
140.0
130.0
120.0
110.0
100.0
90.0
80.0
Jan-12

(Index, Jan-14=100)

High Yield A-shares


A50 Tracker (2823 HK)

Jan-13

Jan-14

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

20

High yield A-shares basket (since 2014)

Jan-15

175.0
165.0
155.0
145.0
135.0
125.0
115.0
105.0
95.0
85.0
Jan-14

Apr-14

High Yield A-shares


A50 Tracker (2823 HK)

Jul-14

Oct-14

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

Jan-15

NOT F or

China Properties Basket


Buy China Properties Basket
As discussed in Theme 1: Chinese Equities in 2015 A Reflation Story, Wee Liat,
BNPP Head of Regional Property, believes the property sector is going to be re-rated.
We suggest investors purchase BUY rating names in our China Properties coverage.
Partnering with BNP Paribas Forward Trading desk, we have constructed an equalweighted China Properties Basket. Investors could enter a swap with BNP Paribas and
receive positive total returns on the basket. Forward Trading provides the below
indicative pricing and terms on the swap for USD50m notional:
BNP pays positive performance + net dividends
BNP receives Hibor 3M + 50bp
Commissions: 15bp In & 15bp Out + stamp duty
Order Execution: Best effort
Breakable: Anytime

Historically, rate-cut policies have prompted industry wide re-rating for the properties sector
Frwd P/E (x)

Max

35

Min

2008: Interest rate cut by 189 bpts


28.6

30
25
20

Max frwd PE expanded from


8.1 to 12.9x in 2012
Min. frwd PE expanded from
1.9 to 4.7x in 2009
12.9

14.2

10

8.1

Jan-15

Nov-14

Sep-14

Jul-14

May-14

Jan-14

Mar-14

Nov-13

Jul-13

Sep-13

May-13

Jan-13

Nov-12

Jul-12

May-12

Jan-12

Nov-11

Mar-12

Jul-11

Sep-11

May-11

Jan-11

Mar-11

Nov-10

Sep-10

Jul-10

Mar-10

May-10

Jan-10

Nov-09

Jul-09

Sep-09

May-09

Jan-09

Mar-09

Sep-12

1.9

2.1

Nov 14: Interest


rate cut by 40 bpts

4.7

7.6

Mar-13

15

Jun-July 12: Interest


rate cut by 50 bpts

Max frwd PE expanded from


14.2 to 28.6x in 2009
Min. frwd PE expanded from
2.1 to 7.6x in 2009

Sources: BNP Paribas.

BNP Paribas China Properties Basket consensus valuations and BNP Paribas target prices
Code

%
Price Mkt Cap Est T/O P/BV PE (x) PE (x) DY (%) DY (%) Weight BNPP BNPP TP
USD
m
(USD
m
)
(x)
Cur
Yr
Nxt
Yr
Cur
Yr
Nxt
Yr
Upside
Rating
(HKD)
HKD

Nam e

China Property Basket


2777 HK Guangzhou R&F Properties
1813 HK KWG Property Holding
813 HK Shimao Property Holdings
688 HK China Overseas Land
2007 HK Country Garden Holdings
960 HK Longfor Properties
Weighted average

10.28
5.83
18.92
25.25
3.38
11.18

4,246
2,196
8,499
26,192
8,896
8,389

17.2
8.6
30.2
99.1
18.3
5.6

0.8
0.7
1.2
1.7
1.0
1.2
1.1

5.0
4.7
6.0
9.0
5.1
7.0
6.1

4.3
4.0
5.3
7.8
4.6
6.3
5.4

6.3
6.5
5.1
2.2
6.8
2.8
4.9

7.1
7.6
5.8
2.5
7.5
3.2
5.6

16.8%
17.0%
16.5%
16.4%
16.6%
16.7%
100.0%

BUY
BUY
BUY
BUY
BUY
BUY

13.9
7.5
22.0
26.7
3.5
11.2

34.8%
28.6%
16.1%
5.5%
3.3%
-0.3%
14.8%

Sources: Bloomberg, BNP Paribas; closing prices as of 5 January 2015

2015 PE comparison for China property developers

China property developers performance

(x)
14.0

(Index, Jan-2012=100)

Shui On Land

12.4

12.0
CRL

10.0

8.7

8.0
6.0
Cogard

4.0

COLIVanke
Longfor 6.5 7.0
Sino Ocean
6.2
Poly
5.4
Fantasia
4.8
COGO
Franshion
Agile
3.8 4.7
4.0
Shimao 3.2

3.1 2.9 2.7

2.0

Kaisa

RF

KW

3.4

3.5

3.4

Greentown

Sunac

1.5

0.0
0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

230.0
210.0
190.0
170.0
150.0
130.0
110.0
90.0
70.0
Jan-12

China Property Basket


HSCEI Index

Jan-13

Jan-14

% of land bank which has rising ASP, good margins & sales volume

Sources: Bloomberg, BNP Paribas; data as of 5 January 2015

21

Sources: Bloomberg, BNP Paribas; data as of 5 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

Jan-15

NOT F or

4.

Conviction Trade: Long/Short Strategies

H-shares to outperform A-shares

Buy Jun-15 105/115% Outperformance Call Spread on HSCEI ETF (2828


HK) over A50 Tracker (2823 HK) at 3.35%
Buy Jun-15 105% Timer Outperformance Call on HSCEI ETF (2828 HK)
over A50 Tracker (2823 HK) at 3.55% [with Vol budget at 17%]
Sell Mar-15 105% Call on A50 Tracker receives 5.4% and Buy 105% Call on
HSCEI at 3.1%

Chinese Banks & Insurers to outperform Chinese Brokers

Buy Chinese Banks & Insurers (or Buy H-FIN) and Short Chinese Brokers

Buy H shares and Sell A shares


China A shares, supported by a domestic retail turnover improvement, had a stronger
momentum than H shares driven by foreign investors. A domestic retail investors
sentiment shift followed the changes in policy stance.
It is worth noting that the HSAHP index traded at the 132.4 level on 7 January 2015; the
A50 Tracker (2823 HK) borrow cost rose from 0.5% in early December to over 4% in late
December when the A/H premium was at about 20%. Recently, the borrow cost fell to
2% as speculators probably covered their positions after the A/H premium spiked further.
In previous A-share rallies, the A/H premium index hit 140 in October 2011 and over 200
in early 2008.
A50 Tracker (2823 HK) short-dated volatilities are substantially higher than those on
HSCEI (from 11.0 vol-pt on 6M maturity to 18 vol-pt on 1M maturity). Investors interested
in arbitraging volatility discrepancies may consider shorting volatility on A50 Tracker and
buying volatility on HSCEI to receive premium. The near-term upside on A-shares vs. H
outperformance could be limited; one might consider that H shares should catch up and
sell OTM A50 Tracker Calls to finance buying OTM HSCEI Calls.
Shorting call on A-shares might be at risk as we cannot rule out the irrational behaviour
of mainland investors to derive the onshore market to much higher level. We propose
using the Outperformance Call Spread to capture the potential outperformance of Hshares over A-shares in which the downside will be capped at the premium.
An alternative strategy will be using Timer Outperformance Call that takes advantage of
a much lower implied volatility budget at 17%. On a daily basis, we compute the daily
relative outperformance of 2828 HK over 2823 HK as R(t):

Then also on a daily basis, we observe the cumulated realised variance of R(t) as V(t):

On the day V(t) is above the square of the budget (17% x 17%), investor receives the
payout of the call on that date. If the V(t) has never reached the square of the budget,
investor receives the payout on maturity date.

22

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

HSAHP reached a peak of 132.4 on 7 January 2015


(Index)

Implied volatility term structure


(vol-point)

135
130
125
120
115
110
105
100
95
90
85
2012

HSCEI

50

A50 Tracker

46
42
38
34
30
26
22
18
2013

2014

1M

2015

Sources: Bloomberg; BNP Paribas; data as of 7 January 2015

2M

3M

6M

9M

12M

18M

24M

36M

Source: BNP Paribas; data as of 6 January 2015

Sliding 6M volatility of the strategy

Backtest results

50%

25%

40%

20%

30%

15%

20%

10%

105-115% Outperformance Call Spread


105% Timer Outperformance Call

10%

5%
Sliding 6-month volatilityY

0%
2006 2007 2008 2009 2010 2011 2012 2013 2014
Sources: BNP Paribas

0%
2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: BNP Paribas

The domestic A-shares rally has been running ahead of the fundamentals and
overshooting the consensus bottom-up index target by 13%. A-shares earnings are likely
to benefit from upward earnings revision especially for companies with cross holding. We
agree it is hard to gauge the irrational behaviour of domestic investors, but a fair value of
SHCOMP at 3500 level (4.5% upside) seems reasonable. As the rally was pretty strong
over the past months, a short-term consolidation or pullback might be possible. Whereas
the HSCEI may have a bit more to go, with upside at about 6.5% to the consensus
bottom-up index target, 5.1% to our base case scenario and 11.7% to our high case
scenario.
HSCEI Consensus Bottom-up Index target
(Index)
17000
16000
15000
14000
13000
12000
11000
10000
9000
8000
Jan-10

HSCEI
Consensus Bottom-up Index Target

(Index)
4300

SHCOMP
Consensus Bottom-up Index Target

3800
SHCOMP overshot
consensus index
target by 13%

3300
2800
2300

Jan-11

Jan-12

Jan-13

Jan-14

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

23

SHCOMP Consensus Bottom-up Index target

1800
Jan-10

Jan-11

Jan-12

Jan-13

Source: BNP Paribas; data as of 6 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

Jan-14

NOT F or

Buy Chinese Banks and Insurers (or Buy H-FIN) and Short Chinese Brokers
According to BNP Paribas Chinese financials analyst, Judy Zhangs latest sector report
on Chinese Brokers 2015 Outlook: Is this leverage-driven rally sustainable? (18
December 2014), the leverage-driven A-share rally increases the cost of funding for
China; it may persuade the government to launch measures to control leverage. When
the A-share market momentum turns, we expect forced liquidations and panic selling.
Loan-related business contributed over 40% of H-share listed broker earnings in 1H14.
In light of the accelerating integration of financial segments, banks may be allowed to
enter the underwriting business dominated by brokers; the brokers investment banking
business could be marginalised.
Brokers and banks are both benefiting by entering each others businesses. A-share
brokers are trading at 3.68x FY15E P/BV, while H-share brokers trade at 2.4x. Broker
valuations look high compared to banks trading at 1.1x FY15E P/BV; discrepancies are
hard to justify especially as brokers have shifted to more capital-intensive business
models with higher balance sheet risks. We think the risk/reward profile of Chinese
brokers is unattractive.
We suggest investors consider buying Chinese Banks and Insurers (or using H-FIN)
while selling Chinese brokers as the funding leg. Borrow costs for Citic Securities (6030
HK), Haitong Securities (6837 HK) and China Galaxy Securities (6881 HK) are all at
40bp.
China Diversified Financials-Dec14.pdf: http://www.bnppresearch.com?E=deifhkbgff
China broker valuations
Code

Nam e

Mkt Cap
(HKD b)

Chinese brokers
6030 HK Citic Securities
6837 HK Haitong Securities
6881 HK China Galaxy Securities
Sector Average

476
277
79
833

Last PE (x) PE (x)


(HKD) FY14 FY15

29.1
19.44
10.14

31.1
23.7
19.9
24.9

25.2
18.6
16.1
20.0

EPS
Grow th
y-y%
23.7%
27.6%
23.4%
24.9%

PB (x) DY (%)

2.8
2.3
2.3
2.5

1.1
1.3
1.4
1.2

BNPP
rating

REDUCE
HOLD
REDUCE

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

5.

Short-term Hedging Tools

Sell Mar-15 110% Call and Buy 90% Put on HSCEI receives 0.33% (delta
39%)

Investors kept chasing upside on A and H shares since the rate cuts and sent the HSCEI
and A50 Tracker skews to extremely low levels. The extraordinarily low skews probably
reflect a lot of bullishness has been priced in. Also, EDS Asia believes Chinas policy
makers do not feel there is an urgent need to pump liquidity into the financial system and
the next two rate cuts may be implemented in 2Q and 3Q. With the recent strong
momentum, A and H shares are likely to test their peaks in January or even in February
(likely around the Chinese New Year when the financial system will be flooded with
liquidity). Then, the market has the chance to enter a consolidation phase.
EDS Asia is rather bullish on China in 2015 overall but cannot rule out a short-term
pullback, we will continue to monitor the market condition. Cautious investors can
monetise the extremely low skew environment to consider selling calls to fund buying
puts as a way to hedge. Both of their 3M and 6M 90-110% skews are at extraordinarily
low levels, making the strategy to receive premium.

24

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

Target Upside
Price
(%)
(HKD)
23.50
16.80
8.40

-19.2%
-13.6%
-17.2%
-16.7%

NOT F or

HSCEI skews at lows


(vol-point)
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
(2.0)
(4.0)
2008

(vol-point)

HSCEI 6M 90-110% Skew

A50 Tracker 6M 90-110% Skew

11.0

HSCEI 3M 90-110% Skew

A50 Tracker 3M 90-110% Skew

9.0
7.0
5.0
3.0
1.0
(1.0)
2009

2010

2011

2012

Source: BNP Paribas; data as of 6 January 2015

25

A50 Tracker skews dipped to negative zone

2013

2014

2015

(3.0)
2008

2009

2010

2011

2012

Source: BNP Paribas; data as of 6 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2013

2014

2015

NOT F or

Theme 2: Korean Equities 2015, the year of the catalyst


Winner Lee and Guillaume Derville
Choinomics, monetary and corporate governance pressure as catalysts in 2015
Last year Korean equities showed the worst performance in the Asia-Pacific region, with
the Kospi2 Index declining by 5.3% in 2014. While Japanese equities have been boosted
by additional qualitative and quantitative easing (QQE), Chinese equities (especially in
the onshore market) reacted positively to the long-awaited interest rates cut.
The BoK (Bank of Korea) cut its benchmark rate twice (25bp each time) in August and
October 2014 to 2%. Since then, the new Deputy Prime Minister and Minister of Finance,
Choi Kyung-hwan, has been relatively quiet about the need for further stimulus. Recent
falling oil and commodity prices have eased the inflation pressure, providing more room
for the BoK to implement easing. The latest headline CPI eased a further 0.8% y-y in
December (from 1% y-y in November) below the BoKs 2.5-3.5% y-y target band.
BNPP Regional Economist, Mark Walton, expects headline inflation figures to drop to
below 1% by year-end: this should prompt the BoK to cut the policy rate by 25bp in the
first quarter of 2015. Overall, Mark expects one more 25bp rate cut in 2Q to 1.5%.
South Koreas CPI vs. Commodity Prices

South Korea's Target Overnight Call Rate


(%)

(%)
6.0
5.0
4.0

CPI (LHS)

CRB Commodity Index

(Index)

7.0

500

6.0

450

5.0

400
350

4.0

300
3.0

3.0
2.0
1.0

250

2.0

200

1.0

150

0.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Sources: Bloomberg, BNP Paribas; data as of 2 January 2015

100
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Sources: Bloomberg, BNP Paribas; monthly data as of December 2014

Abenomics more or less priced in


The BoJs QQE drove the USDJPY currency above the 120 level. On 31 October, an
earlier-than-expected BoJ move surprised the market the QQE programme was
increased to JPY80t per annum from JPY60t-70t. The announcement had been
coordinated with a Government Pension Investment Fund (AUM of JPY127.3t) portfolio
reallocation, and the domestic equity weighting target was raised to 25% (from 12%),
while foreign currency-denominated assets were increased to 40% (from 25%). Also,
Japans Prime Minister Shinzo Abe managed to postpone the consumption tax increase
(10% from 8%). Abes political party Liberal Democratic Party (LDP) and its coalition
party Komeito maintained 326 seats in the snap election held on 14 December. This
means that the ruling parties have retained their power. All these factors are likely to
allow Abenomics more time to deliver its promises.
Since July, the 15.4% JPY currency depreciation against the US dollar has been a
strong dollar story on the back of potential Fed tightening in coming years and a weak
JPY currency story to fight deflationary pressures. We believe the recent JPY currency
depreciation has put downward pressure on Asian currencies and a new round of
currency wars has now taken place.
Since Abenomics began in 2012, the yen has depreciated more than 35% against the
Korean won. The JPYKRW cross rate has broken the key support of KRW10 and
reached a low of KRW9.099/JPY on 29 December. The cross currency rate almost
returned to pre-Lehman lows. The KRW strengthening against the JPY reduced Korean
exporters competitiveness and is putting pressure on Korean corporate margins. We
believe a meaningful KRW depreciation might be necessary at some stage to restore its
exports competitiveness.

26

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

JPY/KRW broke the key support of 10

Kospi2 suffered from downward earnings revision


(KRW)

(JPYKRW)
18
16
14

35

Kospi2 Bloomberg Estimated EPS (LHS) (Index)


350
Kospi2 (LHS)

30

300

25

250

20

200

15

150

10
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

100

12
10
8
6
2008

2009

2010

2011

2012

2013

2014

2015

Sources: Bloomberg, BNP Paribas; data as of 2 January 2015

Sources: Bloomberg, BNP Paribas; data as of 31 December 2014

Dollar strengthening against key global currencies


13.2%

15.0%
% Change since end-June
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-20.0%

-15.4%
JPY

-13.3%
AUD

-8.9%

-8.2%

GBP

CAD

-11.6%

EUR

Sources: Bloomberg; BNP Paribas; data as of 31 December 2014

DXY

KRW depreciated 7.3% in 2H14


0.0%
-5.0%
-10.0%
-15.0%
-20.0%
-25.0%
-30.0%
-35.0%
-40.0%
-45.0%
-50.0%

-4.5% -2.9%
-7.3% -5.6%
-16.7%

% Change since end-June

-44.0%
RUB

BRL

KRW

TWD

INR

ADXY

Sources: Bloomberg; BNP Paribas; data as of 31 December 2014

Korea about to intensify the currency war


According to BNPP Chief Asia Economist, Richard Iley, in his latest report Asia:
Currency wars, published on 7 November 2014, the BoJs recent aggressive monetaryeasing campaign is going to impact Korea and to fight back Korea needs to make a case
for an additional BoK rate cut in early 2015. Richard highlighted that Korea is one of the
regional markets most affected by the Japanese yen weakness as: i) the JPY has a
relatively high weighting in the KRW REER (real effective exchange rate), and ii) Korean
exporters are in direct competition with Japanese rivals, as they share identical export
product baskets.
Asian Desknote-071114.pdf: http://www.bnppresearch.com?E=dedbakbgff3
BNPP Regional IR and FX Strategist, Mirza Baig, expects a response from Korea. Rate
cuts, further FX intervention and acceleration of overseas investment for the NPS
(National Pension Service) constitute potential options. Mirza forecast the KRW currency
to depreciate further to 1150 against the US dollar in 1Q15; this would be about 4.6%
KRW devaluation.

27

0.0%

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

CNY

NOT F or

JPY weightings in regional currency baskets

National Pension Service asset allocation


Cash
Alternatives
equivalent
9.3%
Domestic
0.5%
Overseas
equities
fixed
19.1%
income
4.2%

(%) BIS broad EER weight of JPY (based on 2008-2010 trade)


25
20.5
18.7 17.9

20

16.3 15.9 15.7


13.1

15

11.8

11

Overseas
equities,
11.3%

10
Domestic
fixed
income
55.1%

5.3
5
0
TH

TW

PH

KO

CH

ID

MY

HK

SP

IN

Sources: Reuters Ecowin Pro, BIS, BNP Paribas

Source: Bloomberg; data as of September 2014

Korean corporates downward earnings revision


The Kospi2 Index performance has been dragged by substantial downward earnings
revisions. The current years Kospi2 Index EPS has been lowered by 30.5% to
KRW19.93, from KRW28.68, as of 31 December 2014. Samsung Electronics (20% to the
Kospi2 Index) suffered from smartphone sales slowdown and margins have been under
pressure.
BNPP Korean Technology Analyst, Peter Yu, is turning upbeat on Samsung, although he
agrees mobile business operating profits should stay low until 1Q15. He believes the
most dramatic downward revision on Samsungs overall operating profits have been
done in 3Q14; semiconductor, display and consumer electronics earnings improvement
from 4Q14 should lead to operating profits growing 16.6% q-q to KRW4.74t. He expects
semiconductor and display growth to drive 2015 operating profit growth. He raised his
Samsung Electronics target price to KRW1,550,000 (16.5% upside potential).
Samsung Electronics shareholder friendly move
On 19 December, Samsung announced its plan to raise its annual dividend payment in
2014 by 30-50% and bought back USD2b worth of stocks.
Samsung Electronics- 151214.pdf: http://www.bnppresearch.com?E=deiedkbgff
Kospi2 suffered downward earnings revision
(KRW)

Samsung Electronics vs. Kospi2

35

Kospi2 Bloomberg Estimated EPS (LHS) (Index)


350
Kospi2 (LHS)

30

300

25

250

20

200

(Index, Jan-10=100)
Kospi2

200

Samsung Electronics

180
160
140
120

15

150

10
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

100

Sources: Bloomberg, BNP Paribas; data as of 31 December 2014

28

100
80
2010

2011

2012

2013

2014

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2015

NOT F or

Foreign investors negative confidence vote


Foreign investors were net buyers of Korean equities worth USD5.6b in the second
quarter and USD5.2b in the third. In the fourth quarter, they were net sellers (USD2.6b).
Since 10 December, the selling has intensified (USD2.76b in 10 consecutive trading
days). Foreign investors loss of faith in Korean equities has been driven by the lack of
catalysts combined with a global risk-off. In the fourth quarter of 2014, the KRW
weakening hasnt been meaningful compared to the substantial JPY devaluation.
EDS Asia believes mid-to-late December flows were related to substantial portfolio
reallocation. Deputy Prime Minister Choi will have to implement aggressive measures in
1Q15 to reverse the current negative bias on Korean equities. We believe political
pressure is going to play a major role, while BoK might be pushed to react aggressively.
Worth mentioning, Korean bond inflows amounted to USD35b in 2014; inflows offset
equity outflows. We believe the KRW weakness has so far not been flows driven but
more linked to monetary policy changes.
Foreign investors sold USD2.76b in December
Accumulated foreign fund flow into
Korean equities (LHS)
Kospi2 (RHS)

(USD b)
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
(10.0)
2009

2010

2011

2012

2013

2014

Sources: Bloomberg, BNP Paribas; data as of 2 January 2015

(Index)
300
280
260
240
220
200
180
160
140
120
2015

Korea bond vs. equity flows


(USD b)
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
(5.0)
(10.0)
Jan-14

Accumulated Bond Inflow/Outflow YTD


Accumulated Equities Inflow/Outflow YTD

Apr-14

Jul-14

Sources: Bloomberg, BNP Paribas; data as of 30 December 2014

BNPP Regional Equity Strategist, Manishi Raychaudhuri published his latest Asia
Strategy report, 2015 Outlook: Choose your boat carefully, on 13 December. He
identifies the investment drivers for 2015 as USD appreciation, commodity price
moderation, policy divergence and reforms and restructuring across Asia. He believes
the main beneficiaries are likely to be North Asia, India and Thailand. He is
OVERWEIGHT on Korea due to its cheap valuations and strong basic balance surplus.
Asia Strategy-Dec14.pdf: http://www.bnppresearch.com?E=deibekbgff
On 25 September, Manishi upgraded Korean equities (to OVERWEIGHT from
Underweight). His positive stance on Korea is based on his belief that:

29

Oct-14

Impending rate hikes in the US are clearly associated with growth optimism in
the country. Historically, US growth has been a strong determinant of Korean
export growth, and export growth has historically percolated to domestic growth.
The US ISM (new orders sub index) has been a good lead indicator of Korean
export growth; that index is almost at a decade high in recent surveys.

Domestic growth also seems to be taking off with the recent recovery in capex
and private consumption. Inflation remains low well below the BoKs reference
rate but is gradually increasing (particularly core inflation) and that should
support domestic consumption further. The recovery in housing prices
(particularly in Seoul) is also likely to support bank lending and consumption, as
BNPs Anderson Cha argues in his recent report, Where do we stand now?
http://www.bnppresearch.com?E=ddejhkbfjga

The Korean government is trying to boost consumption and improve the


investment climate by simplifying the shareholding structure of Korean chaebols
and inducing corporates to pay more dividends.

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

The current account and fiscal surplus make Korea attractive in a stronger US
dollar and tighter US monetary policy environment.
US ISM vs. Korean exports

(y-y%)
50.0
40.0

Korea export growth y-y% (LHS)


ISM New Orders PMI (RHS)

Korea trade balance at huge surplus


(Index)

30.0
20.0

80

(USD b)
8.0

70

6.0

60

4.0
2.0

10.0
0.0

50
0.0

(10.0)
(20.0)
(30.0)

40

(40.0)
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Sources: Bloomberg; BNP Paribas; monthly data as of November 2014

(2.0)

30

(4.0)

20

(6.0)
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Sources: Bloomberg; BNP Paribas; monthly data as of November 2014

BNP Paribas EDS reiterated its bullish stance on Korea based on:
1.
2.
3.
4.
5.

Koreas massive underweighting by regional and global emerging market (GEM)


funds,
Korean equity valuations remain comfortably low compared to the Asia exJapan universe,
The Korean government encourages corporates to enhance profitability and
increase dividends,
The National Pension Service (AUM: KRW458t as of September 2014) intends
to increase domestic equity allocation,
Potential restructuring of Samsung Electronics.

Corporate governance improvement, equity valuations and potential re-rating


During its third quarter conference debrief, Samsung Electronics mentioned it would
announce its (long expected) shareholder returns policy by 4Q results (4Q operating
data are usually released in early January/consolidated data and dividend in March).
This is to explain its large cash pile situation (which increased again in 3Q as net cash
reached KRW53t). During the 2Q results, the company made a similar guidance
regarding shareholder policy, but did not announce anything in July 2014. At that time
investors reacted to the lack of guidance negatively, and the stock was hammered
correcting more than 22% from August to September.
In the fourth quarter, Hyundai Motor and Kia announced share buybacks; we are moving
one step further in our Asia corporate governance improvement theme.
HMC announced the buyback of 2.2m common shares and Kia Motor 4.05m
common shares (representing 1% of its total outstanding shares). Both companies
also announced buybacks of their preferred shares, representing cash outflows of
around USD410m for HMC and USD205m for Kia (largely manageable given their
net cash positions).
The above mentioned amounts are not huge but are definitively a positive sign in
terms of shareholder returns; it is the first concrete move for investors especially
after the large disappointment seen in 2014 (Hyundai bought a USD10b
headquarter in Seoul) .

30

The share buybacks announcement combined with Samsung management


comments last month on an expected big increase in payout had a positive impact
on stock price actions. We expect more shareholder friendly initiatives to be
announced.

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Attractive valuations
Korean equity valuations are attractive on an absolute basis and relative to Asia exJapan markets. It is worth noting that South Korean and Chinese equities were major
beneficiaries of valuation convergence and/or the switch from growth to value style
during 3Q14.
Over the third quarter Samsung Electronics (about 20% of Kospi2) substantial
downward earnings revision offset Kospi2 constituents performance improvement;
Kospi2s valuation (9.1x P/E, 0.9x P/BV and 1.7% DY in 2015) is less attractive but
remains cheaper than the Asia ex-Japan universe average (MXASJ 10.6x P/E, 1.3x
P/B and 3.1% DY).
EM valuation comparison 2015 consensus P/E
PE (x)
20.0
17.8
16.9
18.0
14.8
16.0
12.8 13.3 13.6 13.7
14.0
10.6 10.6
12.0
9.1
10.0
7.3
8.0
6.0
4.0
2.0
-

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

EM valuation comparison 2015 consensus P/BV


PB (x)
3.0

2.6
2.3 2.3

2.5
2.0
1.5
1.0

0.9

1.3
1.0 1.2

1.7
1.4 1.6

1.9

0.5
-

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

BNP Paribas EDS Kospi2 target


EDS Asia assigns a 50% probability to a base case scenario in which the Kospi2 Index
target is 275 (based on 11.5x FY15 consensus P/E); this target is in line with Kospi2
Index peaks over the past three years. Along with a US recovery, we assign a 30%
probability to a higher case scenario, based on a slightly more aggressive P/E of 12x.
There is 19.4% upside to our high case target of 287, in line with its peak level in 2011.
Both of our high and low case targets are well below the consensus bottom-up index
target.
Kospi2 2015 Index Target
Kospi2
Target

PE (x)

Kospi2
Level

Kospi2 High, Base and Low Targets

Upside /
Probability
dow nside
(%)
(%)

Consensus 2014 EPS = KRW23.88


Current

10.05

240

(Index)
360

Low Case
Base case
High Case
Consensus Bottom-Up Index Target

320

Low

9.70

232

-3.5%

20%

Base

11.50

275

14.5%

50%

High

12.00

287

19.4%

30%

280
240
200

Expected return

12.4%

Bloom berg consensus bottom -up index target


309

28.6%

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

31

100%

160
120
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Trade Idea 2: Upside Exposure on Kospi2 Index


Winner Lee and Shuai Chen
Plain-vanilla Calls

Buy Mar-15 105/115% Call Spread on Kospi2 at 0.65% (delta 18.5%)

Exotic Options: Down-and-In Call and Lookback Call

Buy Dec-15 105% Down-and-In Call on Kospi2 with 95% KI barrier (daily
close observation until Mar-15) at 1.05%
76.4% discount to plain vanilla Dec-15 105% Call at 4.45%
Buy Dec-15 110% Lookback Call on Kospi2 Index (daily close lookback
until Mar-15) at 4.3%
50.9% premium to plain vanilla Dec-15 110% Call at 2.85%

Kospi2s implied volatilities and skews are dislocated


Kospi2 implied volatilities continue to be under pressure. BNP Paribas index flow desk
has seen increasing systematic volatility selling activities in 2014 there are at least 6
systematic sellers who sell over 2 million USD vega per month, primarily via short-dated
(1M) capped and uncapped variance swaps, pushing Kospi2 short-term volatilities lower.
Retail investors in Korea are entering structured products and keep selling long-dated
puts to receive coupons. With depressed volatilities reaching new lows, coupons are
becoming less attractive; Korea retail investors are already diversifying their underlying
into the higher-volatility global indices space.
th

VKOSPI is trading at 6 %-tile since 2007

3M skew on Kospi2 is at historical low

(vol-point)

(vol-point)
14

100.0
90.0

3M 90-110% Skew

12

80.0

10

70.0
8

60.0
50.0

40.0

30.0

20.0
10.0
2007 2008 2009 2010 2011 2012 2013 2014 2015
Sources: Bloomberg, BNP Paribas; data as of 6 January 2015

0
2007

2008

12M Implied-Vol

40
35

50

2012

2013

2014

2015

33.5

12M Implied-Vol

24M Implied-Vol

35.0

30

45

26.3

27.3

25.0

25

40

20.1

20

35
30

15

25

10

20

18.2

0
2009

2010

2011

2012

Source: BNP Paribas; data as of 6 January 2015

32

2011

Yearly average IV on Kospi2


(USD b)

24M Implied-Vol

55

15
2008

2010

Source: BNP Paribas; data as of 6 January 2015

Long-dated IV on Kospi2 keep trending lower


(vol-pt)
60

2009

2013

2014

2015

2008

2009

2010

2011

2012

Source: BNP Paribas; data as of 31 December 2014

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2013

2014

NOT F or

Investors can monetize the flat upside skew by buying call spreads
The implied volatility term structure on Kospi2 continues to be upward sloping with shortto-medium volatilities remaining under pressure. The short- to medium-term upside
skews are also staying at extraordinarily flat levels, thus offering investors attractive
upside exposure using the Call spread.
EDS Asia targets 14.5% to 19.4% upside potential based on our base and high case
scenarios, thus, we advise investors to consider buying 3M to 6M 105-115% call spread
to lower the premium.
Risk exposure: investors who bought call spread will have limited downside risk at the
premium paid.
Kospi2 Implied volatility term structure
(vol-pt)

Current

17.0

1-wk ago

1-mth ago

16.0
15.0
14.0
13.0
12.0
11.0
1M

2M

3M

6M

9M

12M 18M 24M 36M

Source: BNP Paribas; data as of 6 January 2015

Upside skews on Kospi2 are extremely flat


(vol-point)
7
6
5
4
3
2
1
0
(1)
(2)
(3)
2008
2009

3M 105-120% Skew
6M 105-120% Skew

2010

2011

2012

Source: BNP Paribas; data as of 6 January 2015

Short-term pain medium-term gain

Buy Dec-15 105% Down-and-In Call on Kospi2 with 95% KI barrier (daily
close observation until Mar 15) at 1.05%
76.4% discount to plain vanilla Dec-15 105% Call at 4.45%
Buy Dec-15 110% Lookback Call on Kospi2 Index (daily close lookback
until Mar 15) at 4.3%
50.9% premium to plain vanilla Dec-15 110% Call at 2.85%

We propose the Down-and-In Call and Lookback Call for investors who expect a shortterm correction before a more sustainable rally on Kospi2 Index.
The Down-and-In Call (or Knock-In Call) allows investors to pay a cheaper premium in
order to buy upside, but the call option will be activated when knock-in barrier is reached.
A Down-and-In Call is taking advantage of the current cheap implied volatility.
An alternative strategy would be to consider a Lookback Call. Investors will strike the call
at the lowest closing spot within the lookback period. This strategy is more expensive
than the plain-vanilla call, but investors secure holding the call positon and maximize the
entry point.

33

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2013

2014

2015

NOT F or

Conviction Trade 3: Japan vs. Korea Currency War Call


on Dispersion
Shuai Chen, Winner Lee and Pierre Carubia
The JPY currency depreciation against the KRW currency benefited Japanese exporters,
while hurting Korean exporters. As mentioned in our Theme 2: Korean Equities 2015,
the year of the catalyst, BNP Paribas expects Korea to intensify the currency war in
2015. Our corporate governance improvement theme will have a direct bearing on key
Korean exporter price actions.

Buy Jun-16 Call on Dispersion on Japanese and Korean Exporters Basket,


30% strike, at 2.7%

A Talisman (Call on Dispersion) is a safe and cheap way to implement long/short


directional trades while being long volatility and short correlation.
The Japanese yen depreciated significantly against the Korean won
As discussed in the theme section, the JPYKRW cross rate broke the KRW10 key
support and reached a recent low of KRW9.099/JPY on 29 December. We believe a
meaningful KRW depreciation might be necessary to restore its competitiveness.
Potential BoK measures include cutting interest rates and FX intervention (by selling
KRW and buying USD).
Divergent stock price performance between Japanese
and Korean exporters

JPY/KRW broke the key support of 10


(JPYKRW)

Japan Exporter Basket (LHS)

17

Korea Exporter Basket (LHS)

16

250%

16

JPYKRW Curncy (RHS)

15

15
200%

14
13

14
13

150%

12
11

100%

11

10

10

50%

9
8
2008

108%

12

2009

2010

2011

2012

2013

2014

2015

Sources: Bloomberg, BNP Paribas; data as of 6 January 2015

0%
May 12

8
Nov 12

May 13

Nov 13

May 14

Nov 14

Sources: Bloomberg, BNP Paribas; data as of 6 January 2015

Market dynamics, flows and recent price action


Between 31 October and late December, Japan equities absorbed USD17.5b of inflows
but Korea suffered from net outflows in mid to late December. NKY gained 6.3% since
the BoJ shock and the Kospi2 fell 2.6% by then.
Japan and Korea indices vs. regional FX
performances since the BoJ shock
10.0%

Foreign fund flows since the BoJ shock Japan vs.


Korea
Total flows since 31 Oct 2014

% Change since BoJ Shock


6.3%

5.5%

5.0%
0.0%
-2.6% -2.8% -3.2%
-4.0%

-5.0%

-6.0%

-10.0%
-15.0%
NKY

TPX Kospi2 KRW

INR

TWD

Sources: Bloomberg; BNP Paribas; data as of 31 December 2014

34

JPY

USD m

Japan

Korea

10/31/2014

4,775

206

11/7/2014

6,712

(306)

11/14/2014

4,029

11/21/2014

1,119

926

11/28/2014

(933)

762

12/5/2014

3,171

382

12/12/2014

1,344

(685)

12/19/2014

(3,037)

(1,577)

12/26/2014
Total

303
17,481

(49)
(334)

Sources: Bloomberg; BNP Paribas; as of 26 December 2014

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

JPY consensus and implied forward curve


USDJPY

KRW consensus and implied forward curve


USDKRW

Consensus Forecast

130

1160
1150
1140
1130
1120
1110
1100
1090
1080
1070

Implied Forward

125
120
115
110
105
100
1Q15

2Q15

3Q15

2015

2016

Consensus Forecast
Implied Forward

2017

2018

Source: Bloomberg; data as of 2 January 2015

1Q15

2Q15

3Q15

2015

2016

2017

2018

Source: Bloomberg; data as of 2 January 2015

Two possible scenarios:


1.

KRW depreciates against the JPY; given Japanese corporates might suffer
under further JPY weakening (Tipping point around 125-130), the USDJPY
might has peaked over the short run (unless BoJ further expands QQE [low
probability in the short term]).

2.

JPYKRW depreciate: a persistent JPY depreciation might cause the positive


correlation between the index performance and the USDJPY currency to
decline and, ultimately break down. BNP Paribas EDS Asia believes further
JPY weakness is going to weigh on Japanese corporate earnings. BNP Paribas
Global FX Team forecasts USDJPY to reach 118 by 1Q, 122 by 2Q and 128 by
end-2015.

At the beginning of the 2000s, the JPY currency weakened from JPY115.55/USD in
January 2001 to JPY134.71/USD in February 2002 (14% depreciation); at the same time
the NKY plunged by 29% (to 9,686 from 13,691). Meanwhile, the 3M realised correlation
of NKY Index and USDJPY reversed to -60% from 60%. If USDJPY currency breaks the
JPY125130/USD tipping point, equities vs. currency correlation might collapse from the
recent, relatively high correlation level (average 3M realised correlation at 68% in 2013
and 77% in 2014).
During the above mentioned period (JPY weakening scenario during 2001-02),
exporters overall performance was flattish till end-2002. However, the Japanese
Exporters Basket enjoyed higher volatility than the NKY Index. The 1Y realised
correlation Japanese exporters vs. USDJPY enjoyed a large swing from -50% in July
2001 to +50% in July 2002 (no significant correlation to the NKY Index vs. USDJPY).
NKY vs. USDJPY (2000-02)
(Index)

NKY vs. USDJPY 1Y and 3M realised correlation

22000

(USDJPY)
140

80%

20000

135

60%

18000

130

40%

16000

125

20%

14000

120

0%

12000

115

-20%

10000

110

-40%

8000

105

-60%

6000

100

-80%
Jan-01

00

NKY (LHS)

01

JPY (RHS)

02

Sources: Bloomberg; BNP Paribas; data between 2000-2002

35

1Y realized correlation
3M realized correlation

Jul-01

Jan-02

Jul-02

Source: BNP Paribas; correlation data between 2001-2002

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Japanese Exporter Basket vs. NKY (2000-02)


(Index)
22000

(Index)

NKY (LHS)
Basket Performance (RHS)

20000

3M realised vol - NKY and Japan Exporters Basket


(vol-pt)

120

50

110

45

18000

100

16000

90

14000

80

12000

70

10000

60

25

8000

50

20

40

15
Jan 01

6000
00

01

02

Sources: Bloomberg; BNP Paribas; January 2001 to December 2002.

NKY

Japanese Exporters Basket

40
35
30

Jul 01

Jan 02

Source: BNP Paribas; correlation data - January 2001 to December 2002.

Japanese Exporters vs. USDJPY


3M realized correlation
100%

1Y realized correlation

50%
0%
-50%
-100%
Jan 01

Jul 01

Jan 02

Jul 02

Sources: Bloomberg; BNP Paribas; data between January 2001 and


December 2002.

A Call on Dispersion (Talisman) is a safe and cheap way


1.

To position for a possible KRW vs. JPY currency war

The Japanese Exporters Basket outperformed the Korean Exporters Basket by


110% since October 2012 along with JPY/KRW depreciation. If the JPY/KRW
currency trend reverses, the relative performance should also reverse.
Investors cap the downside at the premium paid; early unwinding could be
considered if volatility spikes significantly. Our proposed maturity Jun-16 should be
long enough to capture a potential reversal of the existing outperformance.
According to BNPP Fundamental Analysts, Japanese and Korean exporters have
positive earnings impact on their corresponding currency deprecation: Japanese
exporters are likely to have 1% positive EPS impact per 1% weakening in JPY,
while Korean exporters are likely to have 3.34% per 1% weakening in KRW.

2.

36

Jul 02

To implement long/short directional trades, while being long volatility and


short correlation.

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Payoff formula of Call on Dispersion

Source: BNP Paribas

The payoff of the Call on Dispersion trade is a call on the average absolute distance
between individual stocks performance and the basket performance. It will be most
profitable when some stocks in the basket move in one extreme direction while the rest
stocks move in the other extreme direction.
Japanese and Korean Exporters Basket [Up to USD50m notional]
Stocks

Code

Sector

Weight (%)

Toyota Motor

7203 JT

Autos

7.1%

% EPS impact on
every 1%
depreciation in JPY
or KRW
+1.3%

Honda Motor

7267 JT

Autos

7.1%

+1.1%

Canon Inc

7751 JT

Electronics/Office Equip

7.1%

n.a.

Panasonic Corp

6752 JT

Electronics/Office Equip

7.1%

+0.3%-0.5%

Sony Corp

6758 JT

Electronics & Electricals

7.1%

n.a.
+1.2%

Nissan Motor

7201 JT

Autos

7.1%

Bridgestone Corp

5108 JT

Auto Components

7.1%

n.a.

Samsung Electronics

005930 KS

Electronics & Electricals

7.1%

+0.2%

Hyundai Motor

005380 KS

Autos

7.1%

+1.8%

SK Hynix

000660 KS

Electronics & Electricals

7.1%

+1.7%

POSCO

005490 KS

Materials

7.1%

+3%

KIA Motors Corp

000270 KS

Autos

7.1%

+3.7%

LG Display

034220 KS

Electronics & Electricals

7.1%

+7%

LG Electronics

066570 KS

Electronics & Electricals

7.1%

+6%

Source: Bloomberg, BNP Paribas

Backtest on Call on Dispersion [Japanese and Korean


Exporters] with strike 30%

Call on Dispersion trade details


Maximum Size

Backtest

Quanto

80%
70%
60%
50%
40%
30%
20%
10%
0%
Nov-09

Nov-10

Source: BNP Paribas

37

Nov-11

USD 50m

Premium

Nov-12

Nov-13

USD

Strike Date

07-Jan-15

End Date

03-Jun-16

Strike

30%

Premium

2.7%

Correlation Bid

30%

Implied Volatility

30%

Source: BNP Paribas

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Conviction Trade 4: Korea Corporate Governance Basket


Romain Bae and Guillaume Derville
We picked stocks with upside in shareholder returns to construct a Korea
Corporate Governance Basket
We worked with BNPs Forward Trading Fundamental Analyst Romain Bae to construct
a Korea Corporate Governance Basket, which includes stocks that we believe have
shareholder returns upside in the ongoing corporate governance reforms process.
Our criteria include:

Companies that announced favourable guidance on dividend and buyback


policies.

Companies with large cash piles or improving free cash flows, which creates
room for dividend increases; these companies will potentially be taxed for their
large cash balances in the upcoming reforms should they decide not to invest or
pay back the cash.

State-owned enterprises that would potentially receive more pressure from the
government and NPS to increase dividends.

Subsidiaries of a bigger group that announced a shareholder return increase.

Basket weighting allocation and past performance

All basket constituents are represented in the Kospi2 Index (most notably
Samsung Electronics [005930 KS] which takes up 22% of Kospi2). The baskets
constituents represent 55% of the index, which is in line with our view that the
corporate governance reforms will significantly affect the index heavyweights.

The basket is using a cap-weighted approach to reflect the stocks weights in


Kospi2 (thus making our basket a comparable long-short target against the
Kospi2).

According to our back test, the basket started to outperform the index as
Choinomics pressure kicked off in 1H13, and has outperformed the index by
5.7% in 2014. However, the basket pulled back 5% against the index, driven by
Samsung Electronics 2Q announcement on 31 July 2014. Samsung did not
announce an improvement in dividend yield or a share buyback scheme. The
market had expected a more favourable stance on shareholder returns and, as
a result, Samsungs share price plunged.

The Basket upside is not priced in as additional follow-ups are expected. In


particular, we recently witnessed a round of positive developments in the 4Q
announcements of Kospi members:

On 15 December 2014, NC Soft (036570 KS) made the first dividend


announcement among Kospi 200 constituents. The company announced a
dividend of W3,430, a 571% increase vs. 2013. The dividend payout rose to
around 33% this year from 7% last year (yield moves from 0.3% to 1.9%), even
exceeding our dividend analysts upside estimate of 20%.

On 19 December, Samsung Electronics announced that it was considering


raising 2014 full-year dividend by 30-50%, in line with our dividend analysts
projection of a 40% increase.

On 24 December, Hyundai Motor announced its decision to increase the


dividend payout, and disclosed that Hyundai Motor and Kia Motors have been
buying back shares worth a combined KRW670b since November 2014.

Romain believes these announcements could be a prelude to another round of Kospi


member dividend increases and boost market expectations of shareholder return reforms.

38

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Korea Corporate Governance Basket performance


relative to Kospi2 Index

Basket constituents weighting in the Kospi2 Index

25%

Weight in Kospi2 (%)

(Index, Jan 13=100)

Total weight in KOSPI2: 55%

116
114
112
110
108
106
104
102
100
98
96
Jan-13

20%
15%
10%

Industrial Bank

Amorepacific

LG Electronics

KT&G Corp

Samsung Life Ins

Samsung Fire & M

Korea Elec Power

KB Financial Group

KIA Motors

SK Telecom

Hyundai Mobis

Shinhan Financials

Naver Corp

Sk Hynix Inc

Samsung Electronics

0%

Hyundai Motor

5%

Sources: Bloomberg, BNP Paribas; data as of 6 January 2015

Korea Corporate Governance Upside Basket


relative to KOSPI2
Samsung Dividend Miss

YTD: 5.7%

Choi appointed as
finance minister

Jul-13

Jan-14

Jul-14

Jan-15

Sources: Bloomberg, BNP Paribas; data as of 6 January 2015

BNP Paribas Korea Corporate Governance Basket


Price
KRW

Mkt Cap
USD m

30d
ADVT
USD m

Weight
in
basket

Weight
in
Kospi2

DPS
2013

DPS
2014

DPS
Upside
(BNPe)

1,295,000

173,625

308.0

38.6%

22.5%

13800

19520

20950

164,500

32,982

94.2

7.4%

4.0%

1950

2118

4500

47,500

31,475

68.2

7.1%

4.3%

035420 KP NAVER Corp


055550 KP Shinhan Financial Group Co Ltd
012330 KP Hyundai Mobis Co Ltd

743,000
43,550
229,000

22,292
18,797
20,290

47.9
30.5
35.5

4.9%
4.2%
4.5%

3.5%
2.9%
2.5%

734
650
1950

850
918
2000

017670 KP SK Telecom Co Ltd

274,500

20,174

33.4

4.5%

2.4%

8400

8400

000270 KP Kia Motors Corp

51,200

18,891

32.4

4.2%

2.1%

700

750

1300

105560 KP KB Financial Group Inc


015760 KP Korea Electric Pow er Corp

35,300
41,850

12,414
24,454

22.6
73.5

2.8%
5.5%

2.0%
2.1%

500
90

800
900

1200
1100

115,500
290,500
78,200

21,026
12,527
9,772

29.3
21.2
31.0

4.7%
2.7%
2.2%

1.8%
1.6%
1.4%

850
3750
3200

2630
4688
3500

3000
5500
3400

2,239,000

11,914

33.0

3.2%

1.1%

6500

7500

8500

60,100
13,600

8,952
6,848

30.7
26.7

2.0%
1.5%

1.0%
0.4%

200
330

300
424

500
700

194,000

3,872

40.9

0.8%

0.5%

600

3430

3430

036460 KP Korea Gas Corp

48,000

4,033

9.5

0.9%

0.3%

1200

1500

029780 KP Samsung Card Co Ltd


021240 KP Cow ay Co Ltd

40,150
82,500

4,234
5,791

4.6
10.9

0.9%
1.3%

0.2%
0.7%

700
1660

900
1900

1500
2100

100.0%

55.7%

Code
Nam e
Korea Corporate Governance Basket
005930 KP Samsung Electronics Co Ltd
005380 KP Hyundai Motor Co
000660 KP SK Hynix Inc

032830 KP Samsung Life Insurance Co Ltd


000810 KP Samsung Fire & Marine Insuranc
033780 KP KT&G Corp
090430 KP Amorepacific Corp
066570 KP LG Electronics Inc
024110 KP Industrial Bank of Korea
036570 KP NCSoft Corp

Weighted average

1000
1360
5549

Recent shareholders' return new s or com m ents


Samsung management confirmed dividend 2014 should increase
by 30% to 50%
Management confirmed dividend payout increase, and disclosed
that the company has conducted share buybacks since Nov 2014
No dividend in 2014 but it should resum e in 2015, w hen free
cash flow turns positive
No dividend increase but large cash returns via buy-back
Strong capital should enable to improve cash returns
Low payout and net cash, part of Hyundai group's companies that
could increase dividends
Dividend yield is safe, could increase w hen Hynix starts to pay
(they ow n large stake)
Management mentioned dividend payout increase for this year (in
Q3-2014), and has conducted share buyback since Nov 2014
Strong capital should enable to improve cash returns
State ow ned. Pressure from government and NPS for higher
dividends
Part of the Samsung group companies that could increase returns
Part of the Samsung group companies that could increase returns
Company is considering raising its dividend , it could be as soon as
this year
Low payout and net cash, part of the companies w ith higher
dividend potential
Earnings recovery should enable to improve returns
State ow ned. Pressure from government and NPS for higher
dividends
Large dividend increase (announced) in 2014. Payout increases to
30%.
State ow ned. Pressure from government and NPS for higher
dividends
Large cash holding that could lead to improvement in dividends
Company has mentioned it consider raising payout

Sources: Bloomberg, BNP Paribas; data as of 6 January 2015

39

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Theme 3: Japan Reflation vs. Stagflation Risk


Shun Maruyama, Winner Lee and Guillaume Derville
NKY Index in a 16,000-18,000 trading range in 2015
Multiple factors such as 1) corporate earnings growth, 2) greater shareholder returns, 3)
domestic pension portfolio adjustments, and 4) additional QQE offer visible support to
Japanese equities in 2015. Our NKY Index downside risk target for 2015 is 16,000, while
our mid-year and year-end forecasts are 18,000 (JPY120/USD). We forecast NKY225
index FY3/2016 earnings per share (EPS) to reach JPY1,000 per share (double-digit
growth from FY3/2015), which indicates a price to earnings (P/E) ratio of about 18x. We
would like to see fundamentals improve and corporate governance attract quality longterm investments, which could be sustainable supports to Japanese equities.
BoJs additional QQE could see NKY Index test 19,000 level
Given the consumer price downside risk (low crude prices), the probability of additional
QQE from the BoJ to ensure its 2% within FY2015 inflation target is elevated in our
opinion. Under such a scenario, we expect the NKY Index to test the 19,000 level, which
represents 12.5% upside from current levels.
Macro challenges
Multiple political and policy events were unleashed in Japan toward end-2014. These
included a Government Pension Investment Fund (GPIF) asset allocation review, BoJ
central bank additional quantitative and qualitative easing (QQE), the governments
decision to delay the consumption-tax increase, a snap election, economic stimulus
measures and a supplementary budget. All the above triggered further JPY depreciation
and a stock market rally. We believe the positive market impact from these events in
2014 is going to fade sooner than later. The question therefore is whether consumption
and investment will return to a virtuous cycle in 2015 and Abenomics can prove to be a
success. An identical question can also be asked of the BoJ Governor Haruhiko Kuroda.
He is confident that Japan will achieve a 2% price stability target (core CPI excluding
consumption tax) by FY2015; we believe there is a long way to go.
In recent general elections, the Liberal Democratic Party (LDP) won 291 seats, falling
short of the 295 won in the previous election. The majority of the electorate still supports
Abenomics. But if the economy fails to recover soon, it would increase prospects of
sliding back into deflation. The resulting potential financial repression might trigger an
acceleration of JPY depreciation and ultimately lead to hyperinflation.
Japans challenge (1) : It is technically in recession
after two quarters of negative GDP growth

Japans challenge (2) : CPI plunges into low inflation

8.0

4.0

0.0

(4.0)

(8.0)

(12.0)

(2)

(16.0)

CPI all items less fresh food (Core)


Fuel, light and water charges

Inflation stability target

Source: Cabinet of Office, BNP Paribas

Source: Ministry of Internal Affairs and Communication, BNP Paribas

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2015

2014

2013

2012

2011

2010

2009

2008

14

2007

13

2006

12

2005

11

2004

10

2003

09

2002

08

2001

07

2000

06

1999

(4)

05

40

CPI all items

(y-y%)
10

(y-y %)
12.0

NOT F or

Japans economic recovery is the only road to success


In 2014, the Japanese economy suffered from an unexpected slump due to the
consumption tax hike. In 2015, we expect the economy to improve; personal
consumption should improve backed by
1.

a delay of the consumption tax hike until April 2017,

2.

wage growth on the back of winter bonus increases and wage hikes in spring,

3.

a fall in energy prices (due to a slide in oil prices),

4.

an increase in domestic travel and overseas visitors thanks to JPY depreciation,

5.

a wealth and asset effect from elevated stock prices,

6.

higher corporate dividends (efforts to strengthen shareholder returns),

7.

economic measures such as a supplementary budget (around JPY3t), an ecopoint system and distribution of regional merchandise coupons. Moreover, we
expect the government to
a.

undertake initiatives to boost regional regeneration as production


activity picks up and

b.

implement economic measures aimed at consumers.

These initiatives are likely to be linked to the shoring up of regional economies, which
suffered in the wake of 2014s consumption tax hike.
The domestic economy weakness, following the consumption tax hike in 2014, damped
the appetite of corporations for capital expenditure. But, we think companies, especially
manufacturers, will sharply raise capex plans in FY3/16, encouraged by the JPY
currency depreciation, cash flow improvements and delay in the consumption tax hike.
Our BNP Paribas Japan macroeconomic team forecasts GDP growth will recover to
+1.0% in FY3/16 after slumping to -0.8% in FY3/15.
Wage growth : Real term wage growth is expected to
recover in 2015
(y-y%)

(y-y%)
50

Cash earnings

Inflation (CPI)

Capex ex software
Corporate cash flow

40

Real term cash earnings

Corporate cash flow and capex : Improved cash flows


to support capex in 2015

30

20

10

(2)

(10)

(4)

(20)

(30)

(6)

(40)

Source: MHLW, BNP Paribas

41

Source: MoF, BNP Paribas

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

(50)

1997

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

(8)

NOT F or

Upward earnings revision is slowing


(Index)

NKY (LHS)

20000

NKY Bloomberg Estimated EPS (RHS)

ROE has improved


(Index)

(JPY)
1250

20000

1050

18000

18000
16000

NKY (LHS)
NKY Bloomberg Estimated ROE (RHS)

10

16000

850

14000

(%)
12

14000

650

12000

12000

450

10000
8000
6000
05

06

07

08

09

10

11

12

13

10000

250

8000

50

6000

14

2
0
05

Sources: Bloomberg, BNP Paribas; data as of 31 December 2014

06

07

08

09

10

11

12

13

14

Sources: Bloomberg, BNP Paribas; data as of 31 December 2014

Micro shakeup
From a micro perspective, besides the improvement in corporate earnings, we anticipate
a significant improvement in corporate shareholder returns driven by increased political
pressure. These improvements include
1. a broader adoption by institutional investors such as pension funds of the JPYNKY 400 Index, which focus on efficient use of capital (ROE),
2. Financial Services Agency (FSA) guidelines for institutional investors (Principles
for Responsible Institutional Investors, Japans Stewardship Code) announced
in February 2014,
3. Companies Act revisions to reform the external director system,
4. Corporate governance strengthening through the expected establishment of a
corporate governance code ahead of the shareholder-meeting season in June
2015. In fact, dividends and share buybacks of listed companies have eclipsed
their 2008 peak.
Shareholder returns (1) : Dividend
8

Shareholder returns (2) : Share buyback

JPY trillion

3.00%

2.50%

3.0%

2.5%

6
2.00%

5
4

1.50%

1.00%

2.0%

6
5

1.5%

4
3

1.0%

2
0.50%

1
0

0.00%
2000

2002

2004

2006

2008

Total amount of dividend (LHS)


Source: Quick, BNP Paribas

42

JPY trillion
9

2010

2012

2014

Dividend yield (RHS)

0.5%

0.0%

0
2003

2005
2007
2009
2011
2013
Total amout of share buyback (LHS)
Percentage share against market cap (RHS)

Source: Quick, BNP Paribas

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

ROE revolution : ROE will hit a record high in FY15

Breakdown of ROE (1) : Net income margin

12%

5.0%

10%

4.0%

8%

3.0%

6%

2.0%
4%

1.0%

2%

0.0%

-2%

-1.0%

1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

0%

Source: Quick, BNP Paribas

Source: Quick, BNP Paribas

Breakdown of ROE (3) : Financial leverage


(Total asset / common equity)

Breakdown of ROE (2) : Asset turnover


x

x
1.20

8.00
7.00

1.00

6.00
0.80

5.00

0.60

4.00
3.00

0.40

2.00
0.20

1.00

0.00

Source: Quick, BNP Paribas

1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

0.00

Source: Quick, BNP Paribas

Impact from central bank ETF/J-REIT purchases


We expect Japanese equities to prove resilient thanks to
1. pension funds, such as GPIF, shifting asset allocations from bonds to stocks,
2. ETF purchases from the BoJ.
As of end-November 2014, the central bank ETF holdings amounted to JPY3.5t. At the
end of October, the BoJ announced that it would triple ETF annual purchases from
JPY1t to JPY3t as part of its additional QQE. ETFs eligible for BoJ purchases are the
ones tracking the NKY, the Topix indices, as well as the new benchmark, the JPX-NKY
400 Index. The market capitalization of these ETFs amounts JPY8.7t.
BoJ ETF purchases have significant impacts on underlying stock prices. The launch of
an ETF does not entail cash contributions (unlike the setting up of an investment trust). If
ETF market prices rise due to central bank ETF purchases and ETF prices trade at
premium to net asset value (NAV), it will create arbitrage opportunities between the ETF
price and underlying equity prices, and the underlying cash stock price should adjust.

43

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Total market cap of NKY ETFs and TPX ETFs : BoJ


ETFs (JPY3.5t) account for about 40%
(JPY100million)

NKY ETFs

GPIF latest portfolio weights : Weights on domestic


equity still below new base target of 25%

TOPIX ETFs

2.62%

60,000

Domestic bond
50,000

16.98%

40,000
30,000

12.14%

20,000

Domestic equity
48.39%

Foreign equity

10,000

17.79%

Source: Quick, BNP Paribas

2012/05/25
2012/09/28
2013/02/12
2013/06/20
2013/10/28
2014/03/11
2014/07/17
2014/11/26

2009/07/09
2009/11/18
2010/03/31
2010/08/09
2010/12/16
2011/04/27
2011/09/05
2012/01/18

2007/01/04
2007/05/16
2007/09/19
2008/02/01
2008/06/11
2008/10/17
2009/03/02

Source: GPIF, BNP Paribas

True value of BoJs surprise easing


Despite a zero-interest rates policy, the Japanese economy faced sluggish bank lending.
Following the governments decision to delay the next consumption tax increase, the
BoJs decision to boost monetary easing through long-term bond purchases might have
a significant impact; it corresponds virtually to fiscal expansion.
Additional QQE and a delayed tax hike could raise household inflationary expectations.
On the other hand, the crude prices slide should not only lead to downward consumer
price pressure (gasoline, electricity and gas lower prices), but also reduce inflationary
expectations. We think consumer prices are likely to gently rise in 1H15; we believe the
upward pressure on prices from JPY depreciation and a shrinking supply/demand gap
due to an incremental economic recovery will exceed the downward pressure from
cheap crude prices.
The longer oil prices remain low, the more difficult it will be for BoJ Governor Kuroda to
achieve his 2% price target. Upward pressure on prices thanks to the JPY currency
weakness diminishes on a y-y basis.
It is becoming increasingly difficult for Kuroda to achieve his price target. Measures to
trigger strong JPY depreciation, for a limited period, might be necessary. Irrespective of
whether such a measure creates good or bad inflation, we believe there is a probability
of a scenario whereby the central bank implements additional QQE in 1H15 (around April
at earliest) in direct response to low oil prices. It could surprise the market again as did
the easing implemented at end-October 2014. Our 2015 base case NKY index target is
18,000 (assuming JPY120/USD); but if the BoJ implements further QQE, we believe the
19,000 level will be tested (assuming JPY130/USD).

44

Foreign bond

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

Short-term assets and


other assets

NOT F or

BOJ inflation stability target and its response determine NKY225 index target toward 2016

Exit earlier (taper)

Mar-2016 NKY target


14,000

(30%)

(JPYUSD100)

Success (30%)
Continue QQE

Mar-2016 NKY target


above 20,000

(70%)
Inflation stability
target of core CPI 2%
within FY2015

Failure (70%)

(IPYUSD140)

Implement an
additional QQE

Mar-2016 NKY target


18,000

(70%)

(JPYUSD130)

Change the target

Mar-2016 NKY target


16,000

(=maintain
commitment) (20%)
Status quo
(=abandon
commitment) (10%)

(JPYUSD110)
Mar-2016 NKY target
14,000
(JPYUSD100)

Source: BNP Paribas

Probability analysis on BOJ inflation stability target and its response


Scenario

Inflation target

BOJ`s response

Probability

NKY target (EndFY2015)

USDJPY target
(End-FY2015)

Scenario 1

Success (30%)

Exit earlier (30%)

9%

14,000

100

Scenario 2

Success (30%)

Continue QQE (70%)

21%

Above 20,000

140

Scenario 3

Failure (70%)

Implement addititional QQE (70%)

49%

18,000

130

Scenario 4

Failure (70%)

Change the target (20%)

14%

16,000

110

Scenario 5

Failure (70%)

Status quo (10%)

7%

14,000

100

Average

100%

17,500

125

Source: BNP Paribas

Limits to monetary policy and JPY depreciation


The supply/demand gap and wages are the main drivers of price growth. Given the twoyear limit set by the central bank to achieve its inflation target, we think the central bank
will become increasingly dependent on the direct route of currency, rates and crude
prices to achieve its target.
At the end of September 2014, the BoJ commanded 20% of the JGB market share; if its
JGB purchases continue at the current pace, we estimate its share will rise to 30%-plus
by end-2015 and 40% by end-2016. The BoJ is the only major player in the JGB market;
we believe long-term yields can be kept at artificially low levels. The central bank will find
it difficult to control the equity or currency markets in the same way. The BoJ monetary
easing policy, keeping long-term rates low (financial repression), is likely to cause
additional JPY depreciation and eventually an equity-market bubble.

45

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

BoJs JGB holdings

Equity yields remain more attractive than bond yields

Japan government bonds and T-Bills


holdings in Central Bank (LHS)
10 year JGB yield (RHS)

(JPY tr)
250.0

(%)

(%)

2.50

3.5

NKY Dividend Yield

JGB 10-year Yield

3.0
200.0

2.00

150.0

1.50

2.0

100.0

1.00

1.5

50.0

0.50

0.0

0.00

2.5

1.0
0.5

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

0.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Sources: Bloomberg, BNP Paribas; quarterly data as of September 2014

Sources: Bloomberg, BNP Paribas; data as of 31 December 2014

Over the years, the JPY depreciation impact on the Japanese economy has diminished
due to
1. weak global growth,
2. Japans declining global competitiveness as a result of its manufacturing base
moving offshore, and
3. increased fossil fuel imports due to the shutdown of its nuclear reactors.
The sharp spike in prices, accompanying the JPY depreciation, is hurting the Japanese
economy; we believe the economy is reaching a critical point. In fact, rising costs caused
small non-manufacturer business sentiments to deteriorate, especially when the
currency depreciated beyond JPY110/USD. According to the latest Tankan business
condition figures, small enterprises (manufacturing and non-manufacturing) are
struggling to recover.
Today, companies earnings structures are more resilient than in 2007 (when the JPY
currency was at a similar level). Also low crude prices have made it easier for corporates
to cope with a weaker yen.
By trying to achieve its target in two years, we believe the risk of the BoJ making a
monetary policy mistake is high. Indeed, sharp JPY depreciation, rather than interest rate
hikes, may hamper BoJ monetary policy.
Japan consumer confidence weakened to 37.7 in
November
(Index)
60.0

Japan Consumer Confidence Households

55.0

Japan Tankan business conditions


(% Balance/Diffusion Index)
60.0
40.0

Large Manufacturers
Small Manufacturers

50.0
20.0

45.0
40.0

0.0

35.0

(20.0)

30.0
(40.0)

25.0

(60.0)

20.0
05

06

07

08

09

10

11

12

13

14

Sources: Bloomberg, BNP Paribas; monthly data as of November 2014

46

84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Sources: Bloomberg, BNP Paribas; monthly data as of November 2014

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Sinking oil prices partially offset the negative impact of the weakening JPY
In 4Q14, the oil price collapse (Brent corrected 39.7% and WTI 40.2% in JPY terms)
offset the negative impact of the weakening JPY; the latest available trade deficit
narrowed to JPY893.5b, representing a significant improvement from its JPY2.8t all-time
high deficit in January 2014. The 3Q current account deficit improved to 0.05% of GDP
from 0.11% in 2Q.
Plunging oil prices

Japan trade deficit at JPY893b in November

ICE Brent Futures


Crude oil WTI Futures

(JPY/barrel)
17000

(JPY b)
3000

15000

Japan Trade Statistics Balance

2000

13000

1000

11000
9000

7000

(1000)

5000

(2000)

3000

(3000)

1000
06

07

08

09

10

11

12

13

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

14

Sources: Bloomberg, BNP Paribas; data as of 31 December 2014

Sources: Bloomberg, BNP Paribas; monthly data as of November 2014

Japan current account balance


(% GDP)

Japan Current Account Balance (% GDP)

Japan budget balance at -8.3% of GDP in 2014


(% GDP)

(2)

(4)

3
(6)
2
(8)

(10)

0
(1)

Japan Budget Balance (% GDP)

(12)
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Sources: Bloomberg; BNP Paribas; quarterly data as of September 2014

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Sources: Bloomberg, BNP Paribas; yearly data as of 2014

The Japan Core CPI declined to 2.4% y-y in November from its peak of 3.7% y-y in May;
the decline was due to a collapse in Electricity CPI (softened from its peak of 11.4% y-y
to 6% y-y during the same period).
BNPP Chief Economist, Ryutaro Kono, believes the core CPI (excluding tax effect)
should plunge into negative territory in 1H-2015. He believes the core CPI is greatly
dependent on oil prices and JPY fluctuations: a 10% shift in the crude oil market or in the
exchange rate can move core CPI by 0.2-0.3 points.
Kono San also highlighted that falling oil prices transfers income from producer nations
back to Japan; it corresponds to a perpetual tax cut for households: the resulting
improvement in real purchasing power should boost domestic demand. Japans jobless
rate was down to 3.5% in October and November; it will only be a matter of time before
full employment and inflationary pressures start to rise. Once full employment takes root
and companies find it chronically hard to secure needed manpower, Japanese
corporates will realize they cannot continue to cut payroll costs.

47

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Falling oil prices is easing Japan inflationary pressure


Japan CPI Nationwide
Japan CPI Nationwide ex Food & Energy
Japan CPI Nationwide Electricity

(y-y %)
15.0

Jobless rate dropped to 3.5% in October


(%)
Japan unemployment rate

6.0

10.0

5.0

5.0

4.0

0.0

3.0

(5.0)

2.0

(10.0)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Sources: Bloomberg, BNP Paribas; monthly data as of November 2014

1.0
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Sources: Bloomberg, BNP Paribas; monthly data as of November 2014

Foreign inflows vs. domestic flows: Post the second leg of the BoJs QQE, foreign
investors became net buyers. In 4Q14 the total net purchases by foreigners was
USD8.7b. Domestic flows were mixed; institutional investors bought about USD12.3b but
retail investors were net sellers at USD14.8b.
Net foreign buying of USD8.7b in 4Q
(USD b)

Accumulated Foreign Inflows (LHS)

200

NKY (RHS)

160

Mixed domestic flow in 4Q


(Index)

Total USD180b foreign


inflows between
Oct-12 to end-2013;

120
Net equity outflow of
USD17.5b in 1Q14;
Net equity inflow of
USD8.8b in 2Q ,
USD6.5b in 3Q,
USD8.7b in 4Q.

80
40

0
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14

19000
18000
17000
16000
15000
14000
13000
12000
11000
10000
9000

Sources: Bloomberg, BNP Paribas; weekly data as of 19 December 2014

Accumulated domestic institutional flow

(USD b)

Accumulated domestic individual flow


20
0
(20)
(40)
(60)
(80)
(100)
Mixed domestic flows in 4Q:
(120)
institutional flow +USD12.3bb
(140)
individual flow -USD14.8b
(160)
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14
Sources: Bloomberg, BNP Paribas; weekly data as of 19 December 2014

Derivatives dynamics
The NKY Index implied volatility term structure drifted lower since Abes snap election
victory, as it helped to remove short-term political risks. Skews plunged afterwards due
to a downside volatility demand squeeze.
The IV term structure is drifting downward
Current
Post-BOJ Shock
Pre-BoJ Shock
Before Snap Election

(vol-pt)

28.0
26.0

90-110% skews are collapsing


(vol-point)

NKY 3M 90-110% Skew

14.0

NKY 6M 90-110% Skew

12.0
10.0

24.0

8.0

22.0

6.0
4.0

20.0

2.0

18.0
1M

2M

3M

6M

9M

12M 18M 24M 36M

Source: BNP Paribas; data as of 6 January 2015

48

0.0
2008

2009

2010

2011

2012

Source: BNP Paribas; data as of 6 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2013

2014

2015

NOT F or

More put demand ahead of the snap election


(No of contract)
180000
160000
140000
120000
100000
80000
60000
40000
20000
0
Jan-14

Call Volume

Put Volume

(Index)
1.15
1.10

Put/Call (OI) Ratio on NKY (LHS)


(Index)
NKY (RHS)
20000
Put/Call Ratio - 20-day moving average
18000

1.05

16000

1.00
14000
0.95
0.90

Apr-14

Jul-14

Oct-14

Sources: Bloomberg, BNP Paribas; data as of 31 December 2014

49

Put/Call Ratio (open interest)

12000

0.85

10000

0.80
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14

8000

Sources:Bloomberg, BNP Paribas; data as of 31 December 2014

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Trade Idea 5: Capturing a NKY Index Trading Range


Winner Lee, Pierre Carubia and Guillaume Derville
NKY Index in a 16,000-18,000 trading range in 2015
As discussed in the theme section Japan Reflation vs. Stagflation Risk, BNP Paribas
Japan Chief Strategist, Shun Maruyama, believes that there is a high probability that the
NKY Index will trade in the 16,000-18,000 range for much of 2015. As we expect the BoJ
to implement the QQE on a large scale, the NKY index could surge to 19,000
temporarily. A global risk-off in developed markets should drive the NKY index below
16,000; again we believe the drawdown will be fast and probably unsustainable.
Investors can consider buying upside via call spreads or call ratios (monetising flat
upside skews) when the NKY index trades below 16,000. However, investors should
consider shorting calls and buying puts when the NKY touches or crosses the 19,000
level.
1)

Upside exposure

Buy Mar-15 17,500-19,000 Call Spread on NKY Index at 366.5 index-point


(~2.15%, delta 30% Spot ref: 17,040)

Short-dated implied volatilities on NKY Index are elevated: Investors who want to
buy Japanese equities upside when the NKY index drops below 16,000 can consider
buying call spreads; these strategies monetise the flat upside skew.
NKY implied volatility term structure
Current
Post-BOJ Shock
Pre-BoJ Shock
Before Snap Election

(vol-pt)

28.0
26.0

NKY Index upside skews are flat


(vol-point)

NKY 3M 103-110% Skew

5.0

NKY 6M 103-110% Skew

4.0
3.0

24.0

2.0

22.0
1.0

20.0

0.0

18.0
1M

2M

3M

6M

9M

12M 18M 24M 36M

Source: BNP Paribas; data as of 6 January 2015

50

(1.0)
2008

2009

2010

2011

2012

Source: BNP Paribas; data as of 6 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2013

2014

2015

NOT F or

2)

3-month Daily Range Accrual

When the NKY index trades in the middle of our expected trading range, potential upside
and downside risks are somehow limited on a sustainable basis. Instead of taking any
directional bet, investors might consider a daily range accrual strategy, which will capture
the potential NKY Index range trading behaviour and sell elevated short-dated implied
volatilities.
Investors will accumulate coupon when NKY Index trades within the upper and lower
barriers. For USD100m notional, if up to maturity, NKY trades in the range for 45 days
and outside the range for 21 days then the investor will pay USD27m. If NKY trades in
the range for 55 days and outside the range for 11 days then the investor will receive
USD33m. The trade breaks even when NKY trades in the range for 49.5 days.
Payoff features

Payoff diagram (assume N=66 days)

Ref NKY spot: 16,890


Maturity: 3-month
Lower barrier: 16,000 (95% of initial spot)
Upper barrier: 18,750 (110% of initial spot)
Ratio = 3; Offer at 0%

Payout: On a daily basis, if NKY trades within the range then


accrues +1 day, if NKY trades outside the range then accrues
Ratio days.

Final Payout = 100% x [n (N-n) x Ratio] / N

Payoff

Source: BNP Paribas

3)

150%
100%
50%
0%
-50%
-100%
-150%
-200%
-250%
-300%
-350%
10

20
30
40
50
60
n (number of day within barriers)

70

Source: BNP Paribas

Short-dated Hedging Tactic

Sell Mar-15 105% Call and buy 95% Put on NKY at 0.17% (-60% delta)
Buy Mar-15 95/85% Put Spread on NKY at 1.62% (-19.5% delta)

Investors who believe further upside is limited can take advantage of the flat skew to sell
calls and buy put at almost zero cost. The downside skew is not steep, but buying put
spread can still help to cheapen marginally the premium, especially if investors expect a
mild correction to happen.
NKY downside skews are trending up

NKY skews remain flat


(vol-point)

NKY 3M 90-110% Skew

(vol-point)

14.0

NKY 6M 90-110% Skew

9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2008

12.0
10.0
8.0
6.0
4.0
2.0
0.0
2008

2009

2010

2011

2012

Source: BNP Paribas; data as of 6 January 2015

51

2013

2014

2015

NKY 3M 85-95% Skew


NKY 6M 85-95% Skew

2009

2010

2011

2012

Source: BNP Paribas; data as of 6 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2013

2014

2015

NOT F or

Trade Idea 6: Hedging Against the Failure of Abenomics


Winner Lee, Pierre Carubia and Guillaume Derville
NKY Put Quanto vs. Put at flat premium (i.e. Zero Cost)
Buy Dec-17 NKY ATM Put Quanto USD, and Sell Dec-17 NKY 96% Put in JPY
In early December, the JPY currency reached 120, as BNP Paribas expected. In the
short run, the JPY depreciation pace should slow down, unless the BoJ enlarges its
scale of QE and surprises the market again. The BNPP Global FX team expects the
DXY to reach 90 by 1Q and 94 by end-2015. It expects the Japanese yen to be 118 by
1Q, 122 by 2Q and 128 by year-end 2015. The successful snap election has given Prime
Minister Abe Shinzo more time to implement Abenomics.
EDS Asia believes Abenomics success should be challenged. The consumption tax hike
has been delayed until April 2017. As BNP Paribas Japan Equity Strategist, Shun
Maruyama, pointed out in the theme section, if the economy fails to recover soon, this
would increase prospects of sliding back into deflation. The resulting potential financial
repression might trigger an acceleration of the JPY depreciation.
JPY depreciation tipping point
EDS Asia has argued in the past that the weakening JPY will weigh on earnings at some
stage and we believe small enterprises will be impacted when JPY trades above 110.
The recent Tankan Business Condition figures (released in December) indicated that
small enterprises (manufacturing and non-manufacturing) are struggling to recover, while
large enterprises are relatively healthy.
We believe the recent oil prices collapse will provide relief to Japans poor economic
situation as seen by the degradation of macro figures in 4Q14.
Japan Tankan Business Condition Manufacturing

Japan Tankan Business Condition Non Manufacturing

(% Balance/Diffusion Index)
Large Enterprises Manufacturing
60.0
Small Enterprises Manufacturing
40.0

(% Balance/Diffusion Index)
60.0
Large Enterprises Non Manufacturing

20.0

20.0

0.0

0.0

(20.0)

(20.0)

(40.0)

(40.0)

(60.0)

Small Enterprises Non Manufacturing

40.0

(60.0)
84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Sources: Bloomberg; BNP Paribas; monthly data as of December 2014

84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Sources: Bloomberg; BNP Paribas; monthly data as of December 2014

The positive correlation between NKY and USDJPY might break at some stage
If the JPY continues to depreciate and accelerates faster than the market expects and
the Japanese authorities hope, it might test investor confidence over Japanese equities.
The positive correlation between the NKY index and the USDJPY currency is likely to
weaken and reverse from positive to negative. EDS Asia suggests investors take
advantage of the current positive correlation level to consider hedging against the failure
of Abenomics.
In 2001, the USDJPY depreciated to JPY134.71/USD in February 2002 (depreciated
14.2% against the USD) from JPY115.55/USD in January. At the same time the NKY
index plunged by 29% (to 9,686 from 13,691); and the 3M realised correlation of NKY
Index and USDJPY reversed from 60% to -60%. EDS Asia expects history to repeat
itself, especially if USDJPY crosses JPY125-130/USD, which we consider a tipping
point. In the event of a JPY collapse, the recent relatively high correlation level (average
3M realised correlation at 68% in 2013 and 77% in 2014) can potentially reverse.

52

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

NKY vs. USDJPY (2000-03)


(Index)

NKY vs. USDJPY 1M and 3M realised correlation

22000

(USDJPY)
140

80%

20000

135

60%

18000

130

40%

16000

125

20%

14000

120

0%

12000

115

-20%

10000

110

-40%

8000

105

-60%

100

-80%
Jan-01

NKY (LHS)

JPY (RHS)

6000
00

01

02

Sources: Bloomberg; BNP Paribas; data as of 2000-2002

NKY vs. USDJPY

1Y realized correlation
3M realized correlation

Jul-01

(USDJPY)
125
120
18000 JPY weakened from 76 in Oct-2012
115
to 105 in end-2013 (depreciated 27.6%);
110
16000 NKY rallied 85%.
105
14000
100
JPY weakened from
95
12000
101 in Jul-2014 to
90
121-level in Dec-2014;
85
(depreciated by 16.5%);
10000
80
NKY only gained 18.3%
8000
75
2012
2013
2014
2015
NKY (LHS)

NKY vs. USDJPY 1Y and 3M realised correlation


1Y realized correlation

JPY (RHS)

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

100%

3M realized correlation

80%
60%
40%
20%
0%
-20%
08

09

10

11

12

13

Source: BNP Paribas, correlation data as of 6 January 2015

NKY Put Quanto vs. Put at flat premium (i.e. Zero Cost)
Buy Dec-17 NKY ATM Put Quanto USD, and Sell Dec-17 NKY 96% Put in JPY
We believe this trade hedges against the failure of Abenomics, and has such advantages
as:
1) no premium (swap flat premium); and
2) no loss if financial repression drives the NKY index higher.
See the table below for the payout sensitivity at maturity as functions of NKY spot and
USDJPY spot:
This structure is designed by GSG Asia (BNPP Global Structuring Group Asia) by taking
EDS Asias view that the weaker JPY will not favour NKY equities performance. The
structure aims to sell the high correlation between NKY and USDJPY, on the expectation
that this correlation will break once the JPY reaches its tipping point of 125-130.
Weaker JPY vs. NKY correction de-correlation to happen
Investors will make more money when the JPY weakens and NKY corrects massively
(dark blue portion).
Stronger JPY vs. NKY correction positive correlation to persist
Investors will lose money when the JPY strengthens and NKY corrects significantly (dark
red portion).

53

Jul-02

Sources: Bloomberg; BNP Paribas; data as of 2000-2002

(Index)

20000

Jan-02

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

14

15

NOT F or

Payoff sensitivity: NKY initial spot at 17,400 and USDJPY at 120

Sources: Bloomberg; BNP Paribas

54

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Theme 4: A US Dollar Assets Bubble?


Winner Lee and Guillaume Derville
The US Dollar (DXY index) strengthened 13.2% in the second half of 2014. BNP
Paribas is bullish on the US dollar in the long run.
EDS Asia discussed the theme USD strength vs. JPY weakness and carry-trades
unwind in our 4Q14 strategy The Tipping Point (dated 9 October 2014). We highlighted
the JPY break down was more than a strong dollar case on the back of potential US
Federal Reserve tightening, but a weak JPY and EUR story. Since our fourth quarter
publication, the Japanese yen depreciated more than 10% against the USD; this
acceleration has been driven by additional BoJ QQE, higher-than-expected GPIF
domestic equities allocation and overseas asset allocation as well as the snap election
confidence vote in Japan. The USD appreciation accelerated in the second half of 2014
and the US dollar (DXY index) ended 2014 above 90 (a multi-year peak). BNP Paribas
Global FX team forecasts the DXY to reach 90.4 by 1Q and 93.7 by end-2015, in line
with consensus median targets of 91 and 94.
BNP Paribas EDS Asia is now reviewing how much of this view has been priced in
in the short term and its impact on Asian equities and risky assets. We believe the
recent US dollar strength should weigh further on emerging equities. But Chinese,
Korean and European central banks have the potential (especially if forced) to take
the relay and ease in 2015. BNP Paribas EDS Asia believes 2015 might witness the
last round of reflation by central bankers.
Federal Reserve balance sheet Since the 2008 Lehman Crisis, successive waves of
quantitative easing drove a US dollar debasement as the Federal Reserve expanded its
balance sheet by five times (from less than USD1t to USD4.5t); the DXY index should
struggle to return to its 100-120 historical range (in the early 2000s) as i) the Federal
Reserve printed so much money and ii) the Federal Fund Target Rate was at 3-6.5% at
the beginning of the 2000s.
Strong USD has been partly priced in;
about 2% to reach BNPP year-end target of 94
(Index)
130

DXY (LHS)
Federal Funds Target Rate (RHS)

Federal Reserve balance sheet has expanded


by 5 times

(%)
7
6

120

110

4
100

90

80

70

0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Sources: Bloomberg; BNP Paribas; data as of 2 January 2014

55

(Index)

(USD tr)
Federal Reserve Balance Sheet (LHS)

5.0
4.5
SPX (RHS)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
2007 2008 2009 2010 2011 2012 2013 2014
Sources: Bloomberg; BNP Paribas; data as of 31 December 2014

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2400
2200
2000
1800
1600
1400
1200
1000
800
600

NOT F or

DXY Consensus vs. BNP Paribas forecasts

How much can JPY go weaker?


(USDJPY, reverse scale)

DXY

Consensus Median Forecast

98

BNP Paribas

96
94
92

DXY spot level

90
88
86
1Q15

2Q15

3Q15

2015

2016

2017

Sources: Bloomberg- FXFC; BNP Paribas; data as of 2 January 2015

70
80
90
100
110
120
130
140
150
160
170

weaker JPY

87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

US recovery and interest rates


The US economy has grown at its fastest annualised pace (5% q-q in 3Q14) since 4Q03,
beating consensuss forecasts. The ISM Manufacturing PMI is in green territory (55.5 in
December and 58.7 in November) and US unemployment dipped below 6% to 5.8% in
November. The consumption-led economy has been supported by improving consumer
confidence. The strong US dollar has somehow been backed by US recovery. Since the
rhetoric over tapering began in mid-2013, EDS Asia has argued that waves of US dollar
repatriation and carry trades unwinding will weigh on emerging market assets (equities,
currencies and bonds).
US equities have been supported by i) the Feds quantitative easing, ii) upward earnings
revision along with ROE and margin improvements and iii) share buybacks. The ongoing
upward earnings revision now has to rely on turnover growth (generated from economic
recovery) given ROE and margin improvements have stabilised and a strong US dollar
might somehow reduce the competitiveness of corporates. The 10-year treasury bond
yield eased from its 3% peak (early 2014) to 2.12% currently. The potential increase in
treasury yield will increase the cost of equity (equity risk premium + risk-free rate). To
maintain high valuations, nominal growth has to offset the potential rise in interest rates,
which is possible under an economic recovery scenario. [Fair value P/BV = (ROE - g) /
(COE - g)]
US GDP annualised q-q% rebounded to 5% in 3Q14
(SAAR, QoQ%)
12
10
8
6
4
2
0
(2)
(4)
(6)
(8)
(10)
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Sources: Bloomberg; BNP Paribas; quarterly data as of September 2014

SPX rally is supported by upward earnings revision


(Index)

SPX (LHS)

2200
2000

120
Bloomberg Estimated EPS (RHS)

110

1800

100

1600

90

1400

80

1200

70

1000

60

800

50

600
40
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

The current SPX FY15 EPS consensus growth forecast is about 9.77% to USD124.06 as
of 2 January 2015; SPX is trading at 16.59x P/E 2014 and 16.3x P/E 2015. US equity
valuations are approaching multi-year peaks (18.2x P/E, about 9.7% to go). BNP Paribas
EDS Global remains bullish on US equities as the US economy continues its
outperformance. The first order effects were felt in late 2014: the USD strength caused
low inflation and weak commodity prices, while global flows toward US assets escalated.
56

(USD)

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Second order effects are currently being experienced: such as persistent low US bond
yields, improvement in US consumption, but tightening emerging market financial
conditions. We believe that in 2015, third order effects will include the continuation of the
outperformance of US equities over emerging market equities.
SPX forward P/E is approaching multi-year peak

US 10-year bond yield vs. S&P 500 dividend yield

(x)

(%)

S&P 500 Dividend Yield

28.0

7.0

US 10-year Bond Yield

26.0

6.0

24.0
+2

5.0

4.0

16.0

mean

3.0

14.0

2.0

-2

1.0

22.0
20.0
18.0

12.0
10.0
00

02

04

06

08

10

12

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

14

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

Russian Currency Crisis


Emerging market (EM) currencies suffered under a very strong US dollar; the ADXY
index declined 2.9% in 2H14, and broke multi-year lows (114) to reach 112.8. EM
currencies have been dragged by commodity and oil players: the Russian ruble and
Brazilian real corrected sharply in 2H14 and broke Lehman Crisis lows, which dragged
EM (emerging markets), excluding Asian Equities (MXEFZ index), and broke critical
supports. Asian ex-Japan equities (MXASJ Index) are for now holding up relatively well.
ADXY vs. MSCI Asia ex Japan
(Index)

MSCI Asia ex Japan (LHS)

650
600
550
500
450
400
350
300
250
200
2008

ADXY (RHS)

JPMorgan EM Currency Index vs. MSCI EM


(Index)
125
120
115

MSCI EM (LHS)

120.0

MSCI EM ex Asia (LHS)

115

100.0

JPMorgan Emerging Markets Currency


Index (RHS)

110
105

80.0

100
95

60.0
110
105

2009

2010

2011

2012

2013

2014

100
2015

40.0

(USDRUB)

90
85

Lehman Crisis low

20.0
0.0
2008

Russian Ruble plunged 44% in 2H14

2009

2010

2011

2012

2013

2014

80
75
2015

Russias foreign international reserves


(USDb)

80
70

(Index)

(Index)

650

RUB depreciated 44%


against the USD in 2H14

60

Russia has burnt USD90b to


fight against its currency
devaluation

600
550

50

500

40

450

30
20

400

10

350

300

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

08

09

10

11

12

13

14

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015


Note: the JPMorgan EMCI index is a tradable benchmark for Emerging Markets currency markets. The index comprises of 10 liquid currencies across three
equally weighted regions, Latin America, Asia and CEEMEA vs. USD. LATAM: CLP, BRL, MXN; CEEMEA: HUF, ZAR, RUB, TRY; Asia: SGD, CNY and INR.

57

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

The ruble plunged 44% in 2H14 and reached a RUB79.16/USD intra-day low on 16
December 2014. After spending USD90b to defend its currency, the Russian central
bank announced, on 16 December, a benchmark rate rise to 17% from 10.5%.
Thereafter, the RUB recovered 30% and ended 2014 trading at RUB60.7/USD. The
Russian economy has already been hurt by US and European Union sanctions and
sinking oil prices. A high interest rates environment is likely to drag the Russian economy
into recession.
Oil and commodity exporting countries Russias ruble and Brazils real collapsed the most in 2H14
% Change since end-June
0.0%
-10.0%
-16.7% -15.4%

-20.0%

-13.5% -12.1%

-9.3%

-8.8%

-8.1%

-7.3%

-6.0%

TRY

CLP

ZAR

KRW

SGD

-4.1%

-2.9%

0.0%

-4.5%

-1.4%

-5.6%

TWD

INR

IDR

ADXY

THB

CNY

-30.0%
-40.0%
-50.0%

-44.0%

-60.0%
RUB

BRL

JPY

HUF

EM

RUB = Russia Ruble, BRL = Brazilian Real, CLP = Chilean Peso, TRY = Turkish Lira, ZAR = South African Rand, HUF = Hungarian Forint, IDR = Indonesia
Rupiah, INR = Indian Rupee, THB = Thai Baht, TWD = Taiwan dollar, SGD = Singapore dollar; JPY = Japanese Yen, EM = JPMorgan EM currency index.
Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

Oil Shock severe risk-off among the commodities universe


The crude oil WTI plunged over 50% since end June 2014 to reach a five-year low of
USD47.93/bbl on 6 January. Investors might have been originally concerned by the
global growth slowdown. The correction accelerated as OPEC refused to cut existing
production (30m barrels per day). Big OPEC players, Saudi Arabia and Kuwait, can bear
a price decline below USD60/bbl and even lower, while Nigeria, Venezuela and Iran are
suffering tremendously from plunging oil prices. OPEC wanted to maintain market shares
(generating about a third of oil production) by crowding out higher production cost
players. By cutting production, large players may lose market share to Russia and the
US. The US shale gas production increase played a role in declining oil prices and may
be at a critical point as shale extraction costs are about USD60/bbl.
BNP Paribas Oil Strategist, Harry Tchilinguirian forecasts Brent averaging USD77/bbl in
2015 and WTI averaging USD70/bbl. Since October, a stronger WTI puts vs. calls
demand reflects a lot of bearishness has been priced in.
WTI has been oversold
(USD/bbl)

Crude Oil WTI (LHS)


14-day RSI (RHS)

120

More buying on WTI puts than calls


(RSI)
85

110

75

100

65

90

55

80

45

70
60

35

50

25

40
Jan-14

15
Apr-14

Jul-14

Oct-14

Sources: Bloomberg; BNP Paribas; data as of 7 January 2015

58

('k contract)

Aggregate Put Volume


Aggregate Call Volume

250.0
200.0
150.0
100.0
50.0
0.0
Jan-14

Apr-14

Jul-14

Oct-14

Sources: Bloomberg; BNP Paribas; data as of 7 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

Jan-15

NOT F or

Brent has been oversold


Crude Oil Brent (LHS)
14-day RSI (RHS)

(USD/bbl)
120

More buying on Brent puts than calls


(RSI)
80

110

70

100

60

90

50

80

40

70
60

30

50

20

40
Jan-14

10
Apr-14

Jul-14

Oct-14

Sources: Bloomberg; BNP Paribas; data as of 7 January 2015

('k contract)

Aggregate Put Volume


Aggregate Call Volume

100.0
80.0
60.0
40.0
20.0
0.0
Jan-14

Apr-14

Jul-14

Oct-14

Jan-15

Sources: Bloomberg; BNP Paribas; data as of 7 January 2015

According to Harry, OPEC is effectively forfeiting its swing supplier role, no longer
adjusting its supply to balance the market. Instead, it has relinquished this role to the
proverbial invisible hand, letting the market bring about supply and demand
adjustments through price change. The cartels motivation, be it guarding market shares
by engaging in a price war, is to crowd out the marginal higher cost producers.
World oil supply and demand assumptions (m barrel / day) on 15 October 2014

1) The residual (the difference between global oil demand and supply plus OECD stock changes) is a statistical balancing item that reflects unaccounted supply,
demand and inventory changes
2) The amount of crude oil required from OPEC to balance supply and demand in the absence of a change in inventory or price.
*Latest forecast available at the time of publication of assumptions
Sources: IEA, US EIA and BNP Paribas. Certain aggregates may not add up due to rounding.

59

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

BNP Paribas vs. consensus WTI forecasts


(USD/bbl)

80

(USD/bbl)

Bloomberg Consensus
BNP Paribas

120
100

BNP Paribas vs. consensus Brent forecasts

87

86

84
76

68

88

75

70

65

120
9694

92

90

Bloomberg Consensus
BNP Paribas

70

100

60

40

40

20

20

92
75

73

75

4Q14

1Q15

2Q15

3Q15

80

60

95

89
79

92

103
100

96
83

93
77

0
4Q14

1Q15

2Q15

3Q15

4Q15

14

15

Sources: Bloomberg; BNP Paribas; data as of 31 December 2014

4Q15

14

15

Sources: Bloomberg; BNP Paribas; data as of 31 December 2014

Commodity prices correction


The US dollar (DXY index) is at a multi-year peak (above 90), while commodities are
14% above Lehman Crisis lows and oil prices 55.6%. In the recent commodity
correction, the CRB commodity index declined 26%. Lower commodity prices should
benefit Asian economies by easing inflation pressure and therefore providing more room
for monetary easing. BNPP Regional Economic Team expects rate cuts in South Korea
and India early next year. And our China Chief Economist, Xingdong Chen, expects two
rate cuts in 2Q and 3Q 2015 and 2-3 RRR cuts.
BNP Paribas Regional Strategist, Manishi Raychaudhuri, is OVERWEIGHT on North
Asian equity markets (Korea, Taiwan and China), which have attractive valuations and
solid balance surpluses. He is also OVERWEIGHT on countries that benefit from low
commodity prices or policy transition; India and Thailands ROEs are also improving.
Asia Strategy-Dec14.pdf: http://www.bnppresearch.com?E=deibekbgff
Commodity prices vs. strong USD
(Index)

DXY (LHS)

Oil prices vs. strong USD

(Index, reverse scale)

CRB Commodity Index (RHS)

95

100
150

90

DXY (LHS)

(Index)

(USD/bbl, reverse scale)

Crude Oil WTI (RHS)

100

40

95

200
250

85

300
80

350

60

90

80

85

100

80

120

400

75

450
70

500
05

06

07

08

09

10

11

12

13

14

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

15

75

140

70

160
05

06

07

08

09

10

11

12

13

14

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

Under a strong USD scenario, North Asian equities should outperform South East Asian
equity markets. South Korea enjoys fiscal and current account surpluses and has healthy
foreign reserves; its economy is in a good shape to withstand any external shock.
However, the Fragile Five (India, Indonesia, Turkey, Brazil and South Africa), are
suffering from fiscal and current account deficits; they are more vulnerable to foreign
outflows. In India, the oil price correction should help to contain a difficult current account
deficit situation; in the recent emerging markets currencies correction, the Indian rupee
depreciated by 4.5% only, and has outperformed regional and global emerging
currencies. Indias trade balance deteriorated to USD16.9b in November (from
USD13.4b in October), but its current account deficit improved from its low of 5.38% of
GDP at end-2012 to 1.3% at end-September 2014.

60

20

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

15

NOT F or

Countries that suffered significant currency depreciation could see their central banks
liquidating US treasuries to support their own currencies. Russias central bank used its
foreign reserves to fight its currencys depreciation.
Foreign reserves

Fiscal balance as % of GDP

(USD b)
4500

Fiscal balance vs. current account balance (2015E)

4000
3500
3000
2500
2000
1500
1000
500

4
Russia
3
S Korea
2
1
Germany
0
Taiwan
Australia
(1)
Indonesia
(2)
China
US
(3) Turkey
Brazil
(4) S Africa
India
(5)
(6)
Japan
(7)
(8) (6) (4) (2) 0
2
4
6
8 10 12 14

Current Account Balance as % of GDP

CH JP TW RU BR KO HK IN SP TH MY ID PH
Source: Bloomberg - WIRA; monthly data November/December 2014

Source: BNP Paribas Global Outlook Balance sheet wars as of November


2014

Indias latest current account deficit is 1.3% of GDP


in 3Q
(% GDP)
4.0
3.0
2.0
1.0
0.0
(1.0)
(2.0)
(3.0)
(4.0)
(5.0)
(6.0)
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Sources: Bloomberg; BNP Paribas; quarterly data as of September 2014

61

Brent crude price in INR terms is collapsing


(INR/barrel)
9000
8000
7000
6000
5000
4000
3000
2000
1000
06

07

08

09

10

11

12

13

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

14

15

NOT F or

Now

Dec-14

Mar-15

Jun-15

Sep-15

Dec-15

Mar 15 QoQ

Jun 15 QoQ

Sep 15 QoQ

Dec 15 QoQ

Now to Dec-14

Now to Mar-15

Now to Jun-15

Now to Sep-15

Now to Dec-15

Equities

2003
3008
16876
37.92

2050
3250
18000
41.00

2075
3400
17000
42.00

2100
3500
16000
41.00

2175
3400
17000
42.00

2250
3500
18000
43.00

1.2%
4.6%
-5.6%
2.4%

1.2%
2.9%
-5.9%
-2.4%

3.6%
-2.9%
6.3%
2.4%

3.4%
2.9%
5.9%
2.4%

2.4%
8.0%
6.7%
8.1%

3.6%
13.0%
0.7%
10.8%

4.9%
16.4%
-5.2%
8.1%

8.6%
13.0%
0.7%
10.8%

12.4%
16.4%
6.7%
13.4%

FX

EURUSD
EURJPY
EURGBP
USDJPY
GBPUSD
USDRMB

1.19
141
0.78
119
1.51
6.21

1.22
142
0.77
116
1.58
6.10

1.20
142
0.75
118
1.60
6.08

1.18
144
0.74
122
1.59
6.12

1.16
145
0.73
125
1.59
6.10

1.15
147
0.72
128
1.60
6.05

-1.6%
0.0%
-2.6%
1.7%
1.3%
-0.3%

-1.7%
1.4%
-1.3%
3.4%
-0.6%
0.7%

-1.7%
0.7%
-1.4%
2.5%
0.0%
-0.3%

-0.9%
1.4%
-1.4%
2.4%
0.6%
-0.8%

2.7%
0.6%
-1.8%
-2.4%
4.3%
-1.8%

1.0%
0.6%
-4.4%
-0.7%
5.7%
-2.1%

-0.7%
2.0%
-5.7%
2.6%
5.0%
-1.4%

-2.3%
2.7%
-6.9%
5.1%
5.0%
-1.8%

-3.2%
4.1%
-8.2%
7.7%
5.7%
-2.6%

Fed Funds
UST 2Y
UST 10Y
2s10s

0.25
0.63
1.94
1.32

0-0.25
0.60
2.35
1.75

0
30
15
-15

25
40
15
-25

25
25
5
-20

25
20
5
-15

0
-3
41
43

0
27
56
28

25
67
71
3

50
92
76
-17

75
112
81
-32

0.05
(0.11)
0.44

0.05
(0.10)
0.85

0.05
(0.10)
1.20

0.05
(0.05)
1.20

0.05
(0.05)
1.10

0.05
(0.05)
1.00

0
0
35

0
5
0

0
0
-10

0
0
-10

0
1
41

0
1
76

0
6
76

0
6
66

0
6
56

48
51
6145
1217

54
59
6,735
1,195

68
75
6,600
1,135

65
73
6,450
1,025

70
75
6,300
1,000

75
83
6,500
960

25.9%
27.1%
-2.0%
-5.0%

-4.4%
-2.7%
-2.3%
-9.7%

7.7%
2.7%
-2.3%
-2.4%

7.1%
10.7%
3.2%
-4.0%

-0.6%
-0.5%
5.2%
-0.4%

41.8%
47.2%
7.4%
-6.7%

35.5%
43.3%
5.0%
-15.8%

46.0%
47.2%
2.5%
-17.8%

56.4%
62.9%
5.8%
-21.1%

Commo

Eurozone

SPX
SX5E
NKY
EEM

US

BNPP Global Cross Asset Forecasts

Refi
2Y
10Y
WTI
Brent
Copper
Gold

0-0.25 0.25-0.50 0.50-0.75 0.75-1.00


0.90
1.30
1.55
1.75
2.50
2.65
2.70
2.75
1.60
1.35
1.15
1.00

CPI

GDP

US
2.3
2.1
3.3
2.9
Eurozone
0.8
0.6
0.4
0.6
Japan
-1.2
-0.2
-1.6
0.4
US
1.8
1.4
0.9
0.6
Eurozone
0.4
0.4
0.4
0.4
Japan
3.3
2.8
2.6
0.8
Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

2.7
0.9
1.1
1.4
0.5
0.9

2.8
1.2
0.7
2.6
0.8
1.4

Flows matter
According to Investment Company Institute (www.ici.org), US equities suffered net
outflows (USD18b) over the past two months. US equities experienced USD52.2b in total
outflows YTD, while the world ex-US equities enjoyed UDS88.6b worth of inflows.
Overall, world equities absorbed a total of USD42.9b YTD, while world bonds gained
USD36.4b and hybrid funds USD26b.

World ex US equities continue to receive fund flows


(USD b)
20
15

US equities

World ex US equities

10
5
0
(5)
(10)
(15)
(20)
Jan-14

Apr-14

Jul-14

Oct-14

Source: ICI.org; latest weekly data as of 17 December 2014

62

YTD: bond inflow = USD42.9b, equity inflow =


USD36.4b, hybrid inflow = USD26b
(USD b)
30
25
20
15
10
5
0
(5)
(10)
(15)
(20)
(25)
Jan-14

Equity

Apr-14

Hybrid

Jul-14

Bond

Oct-14

Source: ICI.org; latest weekly data as of 17 December 2014

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

In the fourth quarter, Japan received significant foreign inflows (USD8.7b), mainly due to
the positive BoJ QQE sentiment. In the fourth quarter, India continued to absorb net
inflows (USD2.3b), enlarging its YTD inflows to USD16.1b; the country enjoyed the
highest inflows among the Asia ex-Japan universe. Korean equities weakness in 4Q was
due to net outflows of USD2.7b. Overall, despite the ADXY index weakness, we didnt
witness dramatic equity or bond outflows in the last quarter of 2014.
Foreign investors net buying/selling of equities
USD b

2008

2009

2010

2011

2012

2013

2014

1Q14

2Q14

3Q14

4Q14

Since
2009

TW

(14.8)

14.8

9.2

(9.5)

4.9

8.3

11.8

2.6

6.8

0.6

1.7

39.4

KO

(33.3)

24.8

19.0

(7.2)

15.0

3.2

4.8

(3.3)

5.6

5.2

(2.7)

59.6

TH

(4.8)

1.1

2.7

(0.2)

2.5

(6.2)

(1.1)

(0.6)

(0.6)

1.2

(1.0)

(1.1)

ID

1.7

1.4

2.4

2.9

1.7

(1.8)

3.8

2.1

1.7

0.4

(0.5)

10.4

PH

(1.1)

0.4

1.2

1.3

2.5

0.7

1.3

0.4

0.6

0.3

(0.1)

7.5

IN

(12.7)

17.6

29.3

(0.5)

24.5

20.0

16.1

4.1

5.8

3.9

2.3

107.1

JP

(33.1)

17.1

38.0

22.3

34.2

152.8

6.6

(17.5)

8.8

6.5

8.7

270.9

Asia-7 (98.2)

77.3

101.8

9.2

85.4

176.9

43.2

(12.1)

28.7

18.1

8.5

493.8

Brazil

10.1

1.9

(0.1)

3.3

5.1

8.8

1.4

4.0

4.2

(0.8)

29.1

(13.3)

Foreign investors net buying/selling of bonds


USD b

2008

2009

2010

2011

2012

2013

2014

1Q14

2Q14

3Q14

4Q14

Since
2009

KO

27.7

33.4

37.3

35.4

4.6

11.5

8.4

11.0

133.8

IN

2.7

1.2

10.1

8.5

6.9

(8.5)

26.3

6.1

4.3

9.3

6.6

44.5

MY

0.4

3.5

10.2

9.5

8.9

2.6

2.6

1.1

2.0

0.8

(1.4)

37.2

TH

11.8

24.2

29.3

14.1

6.5

0.0

2.2

4.0

0.3

85.8

JP

(40.4)

(75.4)

7.5

55.7

29.5

(32.9)

87.8

(3.7)

3.5

41.6

46.5

72.3

Asia

(37.3)

(70.7)

39.4

125.7

108.0

12.5

158.6

8.1

23.4

64.0

63.1

373.6

Sources: Bloomberg; BNP Paribas; data as of 31 December 2014

63

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

One more central banks reflation


In past years, the quantitative easing process initiated by the Fed, has been followed by
the BoJ. In 2015, Chinese, Korean and European central banks have the potential to
take the relay. BNP Paribas EDS Asia believes 2015 might witness the last round of the
reflation story by central bankers; the number of bullets left is diminishing.
From the PMI perspective, the world economy is recovering, while the Eurozone
continues to struggle. Deflationary pressures among European countries continue to be
high and investors can expect concrete ECB measures in 2015. It is worth mentioning
that Australias latest PMI figure contracted, decelerating to 46.9 in December from 50.1
in November.
Following two years of QE in Japan, the Japanese PMI has improved and inflation
peaked at 3.7% y-y in May. The weaker yen has boosted import costs and investors
categorise this as bad inflation. We believe Japan is on the verge of stagflation, a
combination of stagnant growth and higher inflation. The core CPI in Japan declined to
2.4% y-y in November from its peak in May (Electricity CPI from its 11.4% y-y peak to
6% y-y in the same period). BNPP Japan Chief Economist Ryutaro Kono believes the
core CPI should stay below the 1% level in mid-2015, to be benefited by the plunging oil
and commodity prices. It is worth emphasising that Japans QQE cannot solve its
structural problem but has created the wealth effect. Japans debt continues to expand.
The consumption tax hike, part of the reforms and supposed to be crucial in reducing its
fiscal deficit, was found to be a failure. Abes success in the recent snap election gives
him more time to implement his philosophy of Abenomics.
Global central bank balance sheets
(USD b)
5,000

Fed

BoJ

China central banks balance sheet


(USD b)

ECB

6000
5000

4,000

4000

3,000

3000

2,000
2000

1,000

1000
0

0
2007 2008 2009 2010 2011 2012 2013 2014

02 03 04 05 06 07 08 09 10 11 12 13 14

Source: Bloomberg, weekly data as of 31 December 2014

Source: Bloomberg, monthly data as of November 2014

Debt as % of GDP

Japans inflation trend

(% GDP)

250

(y-y %)
15.0

226.1

Japan CPI Nationwide ex Food & Energy


Japan CPI Nationwide Electricity

175

200

10.0

133

150

124.2
91.1

100

5.0

79.9

72
0.0

50

(5.0)

Source: Bloomberg, annual data as of end-2013

US

Germany

UK

Ireland

Italy

Greece

Japan

64

Japan CPI Nationwide

(10.0)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Bloomberg, monthly data as of November 2014

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

PMI Heatmap slow and gradual recovery


Japan
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14

China

29.6
31.6
33.8
41.4
46.6
48.2
50.4
53.6
54.5
54.3
52.3
53.8
52.5
52.5
52.4
53.8
54.7
53.9
52.8
50.1
49.5
47.2
47.3
48.3
51.4
52.9
46.4
45.7
51.3
50.7
52.1
51.9
49.3
50.6
49.1
50.2
50.7
50.5
51.1
50.7
50.7
49.9
47.9
47.7
48.0
46.9
46.5
45.0
47.7
48.5
50.4
51.1
51.5
52.3
50.7
52.2
52.5
54.2
55.1
55.2
56.6
55.5
53.9
49.4
49.9
51.5
50.5
52.2
51.7
52.4
52.0
52.1

42.2
45.1
44.8
50.1
51.2
51.8
52.8
55.1
55.0
55.4
55.7
56.1
57.4
55.8
57.0
55.2
52.7
50.4
49.4
51.9
52.9
54.8
55.3
54.4
54.5
51.7
51.8
51.8
51.6
50.1
49.3
49.9
49.9
51.0
47.7
48.7
48.8
49.6
48.3
49.3
48.4
48.2
49.3
47.6
47.9
49.5
50.5
51.5
52.3
50.4
51.6
50.4
49.2
48.2
47.7
50.1
50.2
50.9
50.8
50.5
49.5
48.5
48.0
48.1
49.4
50.7
51.7
50.2
50.2
50.4
50.0
49.6

South Korea
39.7
44.9
50.7
51.2
51.2
52.0
54.0
53.6
52.7
52.5
52.6
52.8
55.6
58.2
55.6
57.1
54.6
53.3
53.2
50.9
48.8
46.7
50.2
53.9
53.5
53.4
52.8
51.7
51.2
51.1
51.3
49.7
47.5
48.0
47.1
46.4
49.2
50.7
52.0
51.9
51.0
49.4
47.2
47.5
45.7
47.4
48.2
50.1
49.9
50.9
52.0
52.6
51.1
49.4
47.2
47.5
49.7
50.2
50.4
50.8
50.9
49.8
50.4
50.2
49.5
48.4
49.3
50.3
48.8
48.7
49.0
49.9

India
46.7
47.0
49.5
53.3
55.7
55.3
55.3
53.2
55.0
54.5
53.0
55.6
57.6
58.5
57.8
57.2
59.0
57.3
57.6
57.2
55.1
57.2
58.4
56.7
56.8
57.9
57.9
58.0
57.5
55.3
53.6
52.6
50.4
52.0
51.0
54.2
57.5
56.6
54.7
54.9
54.8
55.0
52.9
52.8
52.8
52.9
53.7
54.7
53.2
54.2
52.0
51.0
50.1
50.3
50.1
48.5
49.6
49.6
51.3
50.7
51.4
52.5
51.3
51.3
51.4
51.5
53.0
52.4
51.0
51.6
53.3
54.5

Australia
36.5
30.9
33.4
31.2
37.6
38.4
44.4
50.3
51.0
49.9
50.7
46.2
51.6
55.8
50.5
59.8
56.3
52.9
54.4
51.7
47.3
49.4
47.6
46.3
46.7
51.1
47.9
48.4
47.7
52.9
43.4
43.3
42.3
47.4
47.8
50.2
51.6
51.3
49.5
43.9
42.4
47.2
40.3
45.3
44.1
45.2
44.3
44.3
40.2
45.6
44.4
36.7
43.8
49.6
42.0
46.4
51.7
53.2
47.7
47.6
46.7
48.6
47.9
44.8
49.2
48.9
50.7
47.3
46.5
49.4
50.1
46.9

US

Eurozone
34.9
35.5
36.0
39.5
41.7
45.8
49.9
53.5
54.4
56.0
54.4
55.3
56.6
55.7
59.3
58.9
57.8
56.1
56.4
57.8
56.5
57.3
58.2
57.3
59.2
59.6
59.3
59.4
53.5
55.8
52.3
53.2
53.2
51.5
52.3
52.9
53.7
51.9
53.3
54.1
52.5
50.2
50.5
50.7
51.6
51.7
49.9
50.2
53.1
54.2
51.3
50.7
49.0
50.9
55.4
55.7
56.2
56.4
57.3
57.0
51.3
57.1
55.5
55.4
56.4
57.3
55.8
57.9
57.5
55.9
54.7
53.9

34.4
33.5
33.9
36.8
40.7
42.6
46.3
48.2
49.3
50.7
51.2
51.6
52.4
54.2
56.6
57.6
55.8
55.6
56.7
55.1
53.7
54.6
55.3
57.1
57.3
59.0
57.5
58.0
54.6
52.0
50.4
49.0
48.5
47.1
46.4
46.9
48.8
49.0
47.7
45.9
45.1
45.1
44.0
45.1
46.1
45.4
46.2
46.1
47.9
47.9
46.8
46.7
48.3
48.8
50.3
51.4
51.1
51.3
51.6
52.7
54.0
53.2
53.0
53.4
52.2
51.8
51.8
50.7
50.3
50.6
50.4
50.6

Germany
32.0
32.1
32.4
35.4
39.6
40.9
45.7
49.2
49.6
51.0
52.4
52.7
53.7
57.2
60.2
61.5
58.4
58.4
61.2
58.2
55.1
56.6
58.1
60.7
60.5
62.7
60.9
62.0
57.7
54.6
52.0
50.9
50.3
49.1
47.9
48.4
51.0
50.2
48.4
46.2
45.2
45.0
43.0
44.7
47.4
46.0
46.8
46.0
49.8
50.3
49.0
48.1
49.4
48.6
50.7
51.8
51.1
51.7
52.7
54.3
56.5
54.8
53.7
54.1
52.3
52.0
52.4
51.4
49.9
51.4
50.0
51.2

France
37.9
34.8
36.5
40.1
43.3
45.9
48.1
50.8
53.0
55.6
54.4
54.7
55.4
54.9
56.5
56.6
55.8
54.8
53.9
55.1
56.0
55.2
57.9
57.2
54.9
55.7
55.4
57.5
54.9
52.5
50.5
49.1
48.2
48.5
47.3
48.9
48.5
50.0
46.7
46.9
44.7
45.2
43.4
46.0
42.7
43.7
44.5
44.6
42.9
43.9
44.0
44.4
46.4
48.4
49.7
49.7
49.8
49.1
48.4
47.0
49.3
49.7
52.1
51.2
49.6
48.2
47.8
46.9
48.8
48.5
47.6
47.5

Sources: Bloomberg; BNP Paribas

65

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

Italy
36.1
35.0
34.6
37.2
41.1
42.7
45.4
44.2
47.6
49.2
50.1
50.8
51.7
51.6
53.7
54.3
54.0
54.3
54.4
52.8
52.6
53.0
52.0
54.7
56.6
59.0
56.2
55.5
52.8
49.8
50.1
47.0
48.3
43.3
44.0
44.3
46.8
47.8
47.9
43.8
44.8
44.6
44.3
43.6
45.7
45.5
45.1
46.7
47.8
45.8
44.5
45.5
47.3
49.1
50.4
51.3
50.8
50.7
51.4
53.3
53.1
52.3
52.4
54.0
53.2
52.6
51.9
49.8
50.7
49.0
49.0
48.4

Spain
31.5
31.8
32.9
34.6
39.8
42.8
47.3
47.2
45.8
46.3
45.3
45.2
45.3
49.1
51.8
53.3
51.5
51.2
51.6
51.2
49.6
51.2
50.0
51.5
52.0
52.1
51.6
50.6
48.2
47.3
45.6
45.3
43.7
43.9
43.8
43.7
45.1
45.0
44.5
43.5
42.0
41.1
42.3
44.0
44.5
43.5
45.3
44.6
46.1
46.8
44.2
44.7
48.1
50.0
49.8
51.1
50.7
50.9
48.6
50.8
52.2
52.5
52.8
52.7
52.9
54.6
53.9
52.8
52.6
52.6
54.7
53.8

NOT F or

CPI heatmap Eurozone is facing deflationary pressure


Japan
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14

China

0.0
-0.1
-0.3
-0.1
-1.1
-1.8
-2.2
-2.2
-2.2
-2.5
-1.9
-1.7
-1.3
-1.1
-1.1
-1.2
-0.9
-0.7
-0.9
-0.9
-0.6
0.2
0.1
0.0
-0.6
-0.5
-0.5
-0.4
-0.4
-0.4
0.2
0.2
0.0
-0.2
-0.5
-0.2
0.1
0.3
0.5
0.4
0.2
-0.2
-0.4
-0.4
-0.3
-0.4
-0.2
-0.1
-0.3
-0.7
-0.9
-0.7
-0.3
0.2
0.7
0.9
1.1
1.1
1.5
1.6
1.4
1.5
1.6
3.4
3.7
3.6
3.4
3.3
3.2
2.9
2.4

1.0
-1.6
-1.2
-1.5
-1.4
-1.7
-1.8
-1.2
-0.8
-0.5
0.6
1.9
1.5
2.7
2.4
2.8
3.1
2.9
3.3
3.5
3.6
4.4
5.1
4.6
4.9
4.9
5.4
5.3
5.5
6.4
6.5
6.2
6.1
5.5
4.2
4.1
4.5
3.2
3.6
3.4
3.0
2.2
1.8
2.0
1.9
1.7
2.0
2.5
2.0
3.2
2.1
2.4
2.1
2.7
2.7
2.6
3.1
3.2
3.0
2.5
2.5
2.0
2.4
1.8
2.5
2.3
2.3
2.0
1.6
1.6
1.4

South Korea
3.7
4.1
3.9
3.6
2.7
2.0
1.6
2.2
2.2
2.0
2.4
2.8
3.5
3.0
2.5
2.6
2.7
2.7
2.5
2.7
3.4
3.7
3.0
3.0
3.4
3.9
4.1
3.8
3.9
4.2
4.5
4.7
3.8
3.6
4.2
4.2
3.3
3.0
2.7
2.6
2.5
2.2
1.5
1.3
2.1
2.1
1.6
1.4
1.6
1.6
1.5
1.3
1.1
1.2
1.6
1.5
1.0
0.9
1.2
1.1
1.1
1.0
1.3
1.5
1.7
1.7
1.6
1.4
1.1
1.2
1.0
0.8

India
5.9
3.6
1.7
1.2
1.5
-0.4
-0.3
0.5
1.4
1.8
4.7
7.2
8.7
9.7
10.4
10.9
10.5
10.3
10.0
8.9
9.0
9.1
8.2
9.5
9.5
9.5
9.7
9.7
9.6
9.5
9.4
9.8
10.0
9.9
9.5
7.7
7.2
7.6
7.7
7.5
7.6
7.6
7.5
8.0
8.1
7.3
7.2
7.3
7.3
7.3
5.7
4.8
4.6
5.2
5.9
7.0
7.1
7.2
7.5
6.4
5.1
5.0
6.0
5.6
6.2
5.7
5.4
3.9
2.4
1.8
0.0

Australia

2.4

1.4

1.2

2.1

2.9

3.1

2.9

2.8

3.3

3.5

3.4

3.0

1.6

1.2

2.0

2.2

2.5

2.4

2.2

2.7

2.9

3.0

2.3

US

Eurozone
0.0
0.2
-0.4
-0.7
-1.3
-1.4
-2.1
-1.5
-1.3
-0.2
1.8
2.7
2.6
2.1
2.3
2.2
2.0
1.1
1.2
1.1
1.1
1.2
1.1
1.5
1.6
2.1
2.7
3.2
3.6
3.6
3.6
3.8
3.9
3.5
3.4
3.0
2.9
2.9
2.7
2.3
1.7
1.7
1.4
1.7
2.0
2.2
1.8
1.7
1.6
2.0
1.5
1.1
1.4
1.8
2.0
1.5
1.2
1.0
1.2
1.5
1.6
1.1
1.5
2.0
2.1
2.1
2.0
1.7
1.7
1.7
1.3

1.1
1.2
0.6
0.6
0.0
-0.1
-0.6
-0.2
-0.3
-0.1
0.5
0.9
0.9
0.8
1.6
1.6
1.7
1.5
1.7
1.6
1.9
1.9
1.9
2.2
2.3
2.4
2.7
2.8
2.7
2.7
2.6
2.5
3.0
3.0
3.0
2.7
2.7
2.7
2.7
2.6
2.4
2.4
2.4
2.6
2.6
2.5
2.2
2.2
2.0
1.8
1.7
1.2
1.4
1.6
1.6
1.3
1.1
0.7
0.9
0.8
0.8
0.7
0.5
0.7
0.5
0.5
0.4
0.4
0.3
0.4
0.3

Germany
0.9
1.1
0.4
0.7
0.0
0.1
-0.5
0.0
-0.2
0.0
0.4
0.8
0.7
0.5
1.2
1.2
1.2
0.9
1.1
1.0
1.2
1.3
1.5
1.3
1.7
1.9
2.0
1.9
2.0
2.1
2.1
2.1
2.4
2.3
2.4
2.0
2.1
2.2
2.2
2.0
2.0
1.7
1.9
2.2
2.0
2.0
1.9
2.0
1.7
1.5
1.4
1.2
1.5
1.8
1.9
1.5
1.4
1.2
1.3
1.4
1.3
1.2
1.0
1.3
0.9
1.0
0.8
0.8
0.8
0.8
0.6
0.2

France
0.7
0.9
0.3
0.1
-0.3
-0.5
-0.7
-0.2
-0.4
-0.2
0.4
0.9
1.1
1.3
1.6
1.7
1.6
1.5
1.7
1.4
1.6
1.6
1.6
1.8
1.8
1.7
2.0
2.1
2.0
2.1
1.9
2.2
2.2
2.3
2.5
2.5
2.3
2.3
2.3
2.1
2.0
1.9
1.9
2.1
1.9
1.9
1.4
1.3
1.2
1.0
1.0
0.7
0.8
0.9
1.1
0.9
0.9
0.6
0.7
0.7
0.7
0.9
0.6
0.7
0.7
0.5
0.5
0.4
0.3
0.5
0.3

Sources: Bloomberg; BNP Paribas

66

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

Italy

Spain
1.6
1.6
1.2
1.2
0.9
0.5
0.0
0.1
0.2
0.3
0.7
1.0
1.3
1.2
1.4
1.5
1.4
1.3
1.7
1.6
1.6
1.7
1.7
1.9
2.1
2.4
2.5
2.6
2.6
2.7
2.7
2.8
3.0
3.4
3.3
3.3
3.2
3.3
3.3
3.3
3.2
3.3
3.1
3.2
3.2
2.6
2.5
2.3
2.2
1.9
1.6
1.1
1.1
1.2
1.2
1.2
0.9
0.8
0.7
0.7
0.7
0.5
0.4
0.6
0.5
0.3
0.1
-0.1
-0.2
0.1
0.2

0.8
0.7
-0.1
-0.2
-0.9
-1.0
-1.4
-0.8
-1.0
-0.7
0.3
0.8
1.0
0.8
1.4
1.5
1.8
1.5
1.9
1.8
2.1
2.3
2.3
3.0
3.3
3.6
3.6
3.8
3.5
3.2
3.1
3.0
3.1
3.0
2.9
2.4
2.0
2.0
1.9
2.1
1.9
1.9
2.2
2.7
3.4
3.5
2.9
2.9
2.7
2.8
2.4
1.4
1.7
2.1
1.8
1.5
0.3
-0.1
0.2
0.3
0.2
0.0
-0.1
0.4
0.2
0.1
-0.3
-0.5
-0.2
-0.1
-0.4
-1.1

NOT F or

Global risk parameters


The recent risk-off on the back of plunging oil prices boosted VIX and V2X indices to
recent peaks of 23.57 and 29.53 vol-pt, respectively, in mid-December. VNKY index
peaked at 30 vol-pt on 10 December as investors took profits ahead of the snap election.
In early December, HSCEI skews reached all-time lows; investors kept chasing the
upside volatility. After Chinas rate cuts, domestic sentiment improved substantially:
mainland retail investors are seeing the first rates cut as a crucial move of a reversal in
monetary stance; their investment philosophy is to follow the policy makers moves.
Complacency in Asian IVs and skews
Institutional investors use SPX and SX5E indices to hedge against downside risk. In the
US, pension funds are structurally inflating the long dated downside volatility by rolling
puts. In Asia, structured product activities are dislocating the long dated downside
volatility as Asian retail investors are selling downside put to collect coupons. Long-dated
NKY and Kospi2 implied-volatility are at lows, and selling puts are no longer attractive;
retail investors diversified underlying and are now selling global indices volatilities.
Despite the EM currency and commodity moves, Asian equities remained relatively
resilient. Asian skews are all cheap as a result of the extended demand on structured
product activities. Recently NKY index volatilities and skews have been trending higher.
Extraordinarily low HSCEI skews have been driven by upside volatility demand as
investors turned bullish. Developed world indices have high skews. DAX and SX5E
indices belong to the high volatility universe, while SPX and AS51 indices are enjoying
relatively low volatility.
High IV and High Skew: DAX and SX5E
Low IV and High Skew: SPX and AS51
Low IV and Low Skew: Kospi2, TWSE, Nifty, HSI
High IV and Low Skew: HSCEI, NKY
Global risk gauges
(vol-point)

VIX

50

V2X

12M 90-110% skew


VNKY

45
40
35
30
25
20
15
10
Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

Sources: Bloomberg; BNP Paribas; data as of 6 January 2015

(vol-point)
8
7
6
5
4
3
2
1
0
(1)
2008
2009

30
28
26
24
22
20
18
16
14
12
10

2011

2012

NKY

2013

2014

SPX

SX5E

NKY

HSCEI

KOSPI2

AS51

3M 90-110% Skew (vol-pt)


14.0
Low IV
SPX
12.0
High Skew
10.0

High IV
High Skew
DAX

AS51

SX5E

6.0
2.0

KOSPI2
Low IV
Low Skew

0.0
(2.0)
3M

6M

9M

12M

Source: BNP Paribas; data as of 6 January 2015

18M

24M

36M

NIFTY

TWSE

4.0

2M

2015

3M 90-110% Skew vs. 3M ATM IV

8.0

1M

67

2010

SX5E
Kospi2

Source: BNP Paribas; data as of 6 January 2015

Implied volatility term structure


(vol-point)

SPX
HSCEI

10

15

NKY

High IV
Low Skew

HSI
HSCEI
20
25
3M ATM IV (vol-pt)

Source: BNP Paribas; data as of 6 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

30

NOT F or

Conviction Trade 7: HSCEI and AS51 Valuation Convergence


Play
Shuai Chen and Winner Lee

Australian equities likely to underperform

Buy Mar-15 105/120% Outperformance Call on HSCEI over AS51 condition


on HSCEI return > 0 at 2.7% [implied correlation bid at 20%], without
condition at 3%

Buy Mar-15 95/85% AS51 Put Spread at 1.15% (delta -21%) and sell Mar-15
95/85% HSCEI Put Spread at 2.01% (delta -21.5%)

Negative commodity prices impact


The global commodity price correction weighed on the Australian trade balance, and
finally impacted Australian equities. In 2013-2014, exports related to commodities
represented 47.6% of total country exports, and 9.1% of the GDP. Commodity stocks
contributed 21% of the AS51 Index. In April, the trade balance deteriorated to a deficit
and has now reached AUD7.94b.
The relative performance of AS51 Index vs. the Asia Pac ex-Japan index lags our
custom commodity index (based on Australian 2013-2014 exports segmentation) by six
months. We believe the AS51 index should follow the downtrend as commodity prices
recently sold-off.
Australia exports composition in 2013-2014

Commodity prices lead AS51 Index


Customized Commodity Price Index (LHS)

120%

AS51 Index Relative Performance vs Asia Pac ex Japan


(lagging 6M, RHS)
120%

110%

115%

100%

110%

90%

105%

80%

100%

70%

95%

Iron Ores
Iron Ores,
22.6%

Other Goods
& Services,
52.4%

Gas & Oil,


8.9%

Gas & Oil


Coal
Gold

Coal, 12.1%
Gold, 4.0%

Other Goods &


Services

60%
Jul 12

Sources: Department of Foreign Affairs and Trade, Australia

90%
Jan 13

Jul 13

Jan 14

Jul 14

Sources: Bloomberg, BNP Paribas; data as of 11 December 2014

In 2H14, commodity prices fell by 25.4%, dragging the AS51 Material Index by only
9.3%; while financials, up 3.0%, outperformed the AS51 index. They saved the AS51
index from falling.
AS51 Materials corrected 14% YTD
(Index, Jan-13=100))

Commodity declined 25.4% in 2H14

S&P/ASX 200
S&P/ASX 200 Financial

140.0

S&P/ASX 200 Materials

130.0

(Index, Jan-13=100))

CRB Commodity Index

110.0

S&P/ASX 200 Materials

105.0
100.0

120.0

95.0

110.0

90.0
100.0

85.0

90.0

80.0

80.0

75.0

70.0
Jan-13

Jul-13

Jan-14

Jul-14

Sources: Bloomberg, BNP Paribas; data as of 2 January 2015

68

Jan-15

70.0
Jan-13

Jul-13

Jan-14

Jul-14

Sources: Bloomberg, BNP Paribas; data as of 2 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

Jan-15

NOT F or

Trade balance under pressure


Australias trade balance remains negative, while the AUDUSD has trended lower and is
now at a four-year low. We believe the AUD correction has prevented the trade balance
from deteriorating further in the past few months. BNP Paribas forecasts the AUDUSD
will fluctuate between 0.83 and 0.85 in 2015. As the AUD currency stabilises, the trade
deficit will potentially increase in 2015. BNP Paribas economists forecast that the trade
balance will worsen to an AUD17.9b deficit in 2015 (from an AUD9.6b deficit in 2014).
Similarly, the current account balance might worsen to an AUD55.9b deficit in 2015
(3.4% of GDP), from an AUD47.1b deficit in 2014 (2.9% of GDP), according to BNPP
Regional Economic Team.
Australias latest PMI figure is worrying as it dipped into contraction zone, decelerated
significantly to 46.9 in December from 50.1 in November.
Australias trade balance remains negative
(AUD m)
3000

Australian Trade Balance

AUDUSD depreciated 13.3% in 2H14


(AUDUSD)
1.10

2000

1.05

1000

1.00

0.95

(1000)

0.90

(2000)

0.85

(3000)

0.80

(4000)
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: Bloomberg; monthly data as of October 2014

0.75
Jan-13

Jul-13

Jan-14

Sources: Bloomberg, BNP Paribas; data as of 2 January 2015

HSCEI vs. AS51 valuation gap


Over the past few years, despite its high EPS growth, the HSCEI index failed to rally.
Heavy-weighted Chinese banks suffered a valuation de-rating due to NPL concerns. We
believe Chinese banks might re-rate along with the monetary easing cycle that started in
November and the upcoming interest rate liberalisation of the banking sector. The
earnings growth is likely to accelerate from single-digit growth now. P/E ratios should
expand, driving up the HSCEI index performance. In contrast, the AS51 performance is
roughly in line with its EPS trend, while its ROE is deteriorating. AS51s valuation looks
expensive. HSCEI is now trading at a 47.6% discount to AS51 from a P/E perspective
and 39.2% from the P/BV perspective.

Currency risk and liquidity


In USD terms, HSCEI and AS51 performances diverged significantly. Australian equity
investors were affected by the recent correction in equities and the AUD currency. In
2H14, the recent USD strength and carry trade unwind hammered the AUD currency.
Chinese equities listed in Hong Kong are exposed to the HKD currency (USD peg). As
previously mentioned in our China theme, in 2015, Chinese equities will experience
favourable liquidity conditions, while according to BNPP Regional Economic Team, the
Reserve Bank of Australia will likely keep rates on hold until at least 2016.

69

Jul-14

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

Jan-15

NOT F or

AS51 Index and EPS


(Index)

AS51 Index and ROE

AS51 (LHS)

7500

AS51 Bloomberg Estimated EPS (RHS)

7000

(AUD)
500

6000

400

5500
5000

350

4500
4000

300

3500
3000

250
05

06

07

08

09

10

11

12

13

AS51 Bloomberg Estimated ROE (RHS)

24
22

5500

20

5000

18

4500

16

4000

14

3500

12

3000

10
05

06

07

08

09

10

11

12

13

14

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

HSCEI and AS51 performance in USD


HSCEI in USD (LHS)

(USD))

(HKD)
1600
HSCEI Bloomberg Estimated EPS (RHS)

1700.0

1400

1600.0

1200

1500.0

1000

1400.0

800

1300.0

600

1200.0

400

1100.0
Jan-14

HSCEI (LHS)

(USD))

AS51 in USD (RHS)

5400
5200
5000
4800
4600

05

06

07

08

09

10

11

12

13

14

Source: BNP Paribas; data as of 2 January 2015

(Index)

4200
Apr-14

Jul-14

4000
Jan-15

Oct-14

HSCEI is trading at deep discount to AS51


(% discount)

HSCEI Bloomberg Estimated PE

35

4400

Source: BNP Paribas; data as of 2 January 2015

Bloomberg estimated P/E HSCEI vs. AS51

PE discount - HSCEI over AS51

80.0%

AS51 Bloomberg Estimated PE

30

60.0%

25

40.0%

PB discount - HSCEI over AS51

20.0%

20

0.0%
15

-20.0%

10

-40.0%

-60.0%

-80.0%
05

06

07

08

09

10

11

12

13

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

14

05

06

07

08

09

10

11

12

13

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

Risk parameters
The HSCEI implied volatility term structure turned downward sloping after interest rates
were cut on 21 November. Short-dated volatilities spiked. The AS51 implied volatility
term structure remains upward sloping and continues to trend lower. AS51 skews remain
relatively elevated indicating downside volatility demand; this has been confirmed by
active put purchases in the listed option market since mid-December.

70

26

6000

HSCEI Index and EPS

23000
21000
19000
17000
15000
13000
11000
9000
7000
5000
3000

(%)
28

6500

14

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

(Index)

AS51 (LHS)

7500
7000

450

6500

(Index)

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

14

NOT F or

Derivatives strategy
Given the large implied volatility gap between HSCEI and AS51, selling AS51 calls in
order to fund buying HSCEI calls doesnt seem attractive. As mentioned previously,
HSCEI should outperform AS51 under a bull case scenario; we therefore suggest
investors consider buying the outperformance on HSCEI over AS51 on the condition that
the HSCEI return > 0. The downside risk of an outperformance call is capped at the
premium paid. A cheap way to play the outperformance HSCEI vs. AS51 in a correction
scenario would be to sell HSCEI Put Spread, monetising the flat downside skew, and at
the same time buy AS51 Put Spread taking advantage of a steep downside skew.
HSCEI vs. AS51 3M 90-110% Skew
(vol-point)
14
12
10
8
6
4
2
0
(2)
(4)
2008

AS51 listed options

HSCEI 3M 90-110% Skew


AS51 3M 90-110% Skew

2009

2010

2011

2012

2013

2014

2015

(No of contract)
Call Volume
Put Volume
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15
Sources: Bloomberg, BNP Paribas; data as of 2 January 2015

Source: BNP Paribas; data as of 2 January 2015

HSCEI vs. AS51 IV term structure


(vol-point)

AS51 Implied Vol

HSCEI & AS51 rolling 6M correlation

HSCEI Implied Vol

30
28
26
24
22
20
18
16
14
12
10

(%)

AS51-HSCEI 6M Realized Correlation

85
75
65
55
45
35
25
1M

2M

3M

6M

9M

12M

18M

24M

36M

Source: BNP Paribas; data as of 6 January 2015

15
2007

2008

AS51 Implied Vol

2010

2011

2012

2013

2014

2015

Source: BNP Paribas; data as of 6 January 2015

AS51 Implied vs. realised term structure


(vol-point)

2009

HSCEI vs. AS51 downside skew

AS51 Realized Vol

35

(vol-point)

HSCEI 3M 85-95% Skew

8.0

AS51 3M 85-95% Skew

7.0

30

6.0
5.0

25

4.0
20

3.0
2.0

15

1.0

10
1M

2M

3M

6M

9M

12M

18M

24M

Sources: Bloomberg, BNP Paribas; data as of 6 January 2015

71

36M

0.0
2008

2009

2010

2011

2012

Source: BNP Paribas; data as of 6 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2013

2014

2015

NOT F or

Trade Idea 8: Asia Pacific Equities Hedging Tools


Winner Lee and Guillaume Derville

1) Short term tail-risk hedge Best of Put on Asian Indices

Buy Mar-15 95% Best-of Put on AS51, TWSE and HSI at 0.53%

Buy Mar-15 95% Best-of Put on AS51, TWSE and NKY at 0.52%

Buy Mar-15 95% Best-of Put on AS51, TWSE and Kospi2 at 0.42%
Note: Quanto USD and 30-March-2015 maturity

EDS Asia discussed the theme USD strength vs. JPY weakness and carry-trades
unwind in our 4Q14 strategy The Tipping Point (dated 9 October 2014). The US dollar
strength hurt emerging market currencies and equities in the fourth quarter of 2014.
Since the start of the US quantitative easing process in 2009, investors have been
borrowing US dollars to fund riskier asset investments (EM currencies and equities, as
well as commodities). The start of the tapering rhetoric in mid-2013 by the Federal
Reserve initiated the US dollar carry trades unwinding process. In 2014, EM (emerging
markets) underperformed DM (developed markets) equities. The US dollar carry trades
unwind process combined with an intensifying currency war, where Japan is exporting
deflation through a violent debasement of its yen currency, might end in a currency
crisis. We believe the recent collapse of the ruble represents collateral damage of the
above mentioned process.
Potential Contagion
Asia ex-Japan equities are holding up relatively well; we only witnessed marginal equity
outflows from Korea, Thailand, Indonesia and the Philippines in 4Q14. In the emerging
world, Russia and Brazil have been the most affected heavyweights recently, indicated
by the underperformance of MSCI EM (MXEF Index) and MSCI EM ex-Asia (MXEFZ
Index) vs. the MSCI Asia-ex Japan index (MXASJ Index). We believe waves of carry
trade unwinds will keep weighing on emerging assets. At some stage Asian equities
might be affected as we should witness contagion effects under which risk-off could
spread to the Asia Pacific equities space.
ADXY vs. MSCI Asia ex Japan
(Index)

MSCI Asia ex Japan (LHS)

650
600
550
500
450
400
350
300
250
200
2008

ADXY (RHS)

JPMorgan EM Currency Index vs. MSCI EM


(Index)
125
120
115

(Index)

(Index)

MSCI EM (LHS)

120.0

MSCI EM ex Asia (LHS)

115

100.0

JPMorgan Emerging Markets Currency


Index (RHS)

110

80.0

100

60.0
110
105

2009

2010

2011

2012

2013

2014

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

100
2015

95
90

40.0

Lehman Crisis low

80
2009

2010

2011

2012

2013

2014

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

Asian hidden assets are offering interesting risk-parameter features, which can be used
to build short-term global hedges:

Low Index Volatilities: Among Asian indices, AS51, Kospi2, TWSE, Nifty and HSI
have relatively lower implied volatilities. These distortions are explained by investor
bullishness (AS51 and TWSE) and extensive structured product activity (Kospi2).
The Nifty falls into the low volatility space, but its volatility is illiquid (especially in
medium- to long-term maturities).

Low Index Correlations: The 3M correlation of the above three combinations


(AS51-TWSE-HSI, AS51-TWSE-NKY and AS51-TWSE-Kospi2) are realising at lows

72

85

20.0
0.0
2008

105

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

75
2015

NOT F or

(40-50 correl-pt); in the past (2008 Lehman crisis, 2011 European financial and debt
crisis), the risk-aversion spike has been associated with global and regional equities
collapsing in tandem.
Asian indices as a global risk-off hedge
Investors should consider buying a Best-of-Put on an Asian indices basket (AS51TWSE-HSI or AS51-TWSE-NKY or AS51-TWSE-Kospi2). The strategy is long volatility,
long correlation and short delta; it takes advantage of current risk parameter distortions.
The breakeven of this strategy requires the best performer to lose by more than
5%+premium; while the risk is capped at the premium paid.
3M 90-110% skew vs. 3M ATM IV
3M 90-110% Skew (vol-pt)
14.0
Low IV
SPX
12.0
High Skew
10.0

(vol-pt)

High IV
High Skew
DAX

NIFTY

TWSE

2.0

KOSPI2
Low IV
Low Skew

0.0
(2.0)
10

15

NKY

High IV
Low Skew

AS51

70

40
30

HSI

20

HSCEI
20
25
3M ATM IV (vol-pt)

30

10
2008

2009

2010

2011

2012

2013

2014

2015

Source: BNP Paribas; data as of 6 January 2015

AS51, TWSE and NKY (3M ATM IV)


NKY

TWSE

50

Source: BNP Paribas; data as of 6 January 2015

(vol-pt)

Kospi2

60

SX5E

6.0
4.0

HSI

80

AS51

8.0

Low implied-vol candidates (3M ATM IV)

AS51

3M realised correlation (AS51, TWSE and HSI)


TWSE

100

(%)

AS51-TWSE-HSI 3M Realized Correlation

90.0

90

80.0

80
70

70.0

60

60.0

50

50.0

40

40.0

30

30.0

20
10
2008

2009

2010

2011

2012

2013

2014

2015

Source: BNP Paribas; data as of 6 January 2015

3M realised correlation (AS51, TWSE and NKY)


(%)

AS51-TWSE-NKY 3M Realized Correlation

20.0
2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: BNP Paribas; data as of 6 January 2015

3M realised correlation (AS51, TWSE and Kospi2)


(%)

AS51-TWSE-Kospi2 3M Realized Correlation

90.0

90.0

80.0

80.0

70.0

70.0

60.0

60.0

50.0

50.0

40.0

40.0

30.0

30.0

20.0
2007 2008 2009 2010 2011 2012 2013 2014 2015

20.0
2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: BNP Paribas; data as of 6 January 2015

73

Source: BNP Paribas; data as of 6 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

2) Buy Protection on Indian equities

Buy Feb-15 95% Put on Nifty Index at 85bp (delta -15%)

Buy Feb-15 95/85% Put Spread on Nifty Index at 75bp (delta -14%)

Indian equities outperformed, supported by macro, reforms and foreign inflows


Since 2009, Indian equities have enjoyed the most significant foreign inflows among
emerging and Asia ex-Japan equities, absorbing USD107b. The Niftys rally has been
supported by upward earnings revisions along with improving domestic and global
outlooks: the new Prime Minister Narendra Modi is expected to carry out major reforms.
Unlike Russia and Brazil, which are key commodity exporters, India is a major oil
importer; the recent oil prices collapse should help its economy. The Indian rupee was
relatively resilient in 4Q14: Indias current account deficit situation improved and the
country benefited from portfolio inflows (bonds: USD6.3b; equities: USD2.3b). Indian
macro improved significantly: the manufacturing PMI stayed in the expansion phase in
2014 and even accelerated to 54.5 in December.
The current relatively high valuation is supported by consensuss high growth
expectation. But ROEs of Indian equities began deteriorating since the beginning of
2014.
Potential foreign outflows
Indias twin deficits (current account and fiscal deficits) make it vulnerable to any external
shock; in the summer of 2013, India burnt its foreign reserves to defend its currency. Its
foreign reserves have gradually recovered from USD39b in September 2013 to
USD314.6b currently.
Nifty Index risk parameters
Investors might take advantage of the current relatively low volatility environment (3M
implied volatility at 25%-tile since 2008) and consider buying protection on the Nifty
Index. The short-dated volatilities spiked along with the recent global risk-off fear. The
3M implied volatility remains relatively expensive compared to other maturities. There is
more demand for Mar-15 volatility because of the Indian budget, to be announced on 28
February, which may create some market volatility. BNP Paribas Asia Equity Strategist,
Manishi Raychaudhuri, mentioned that market participants are expecting a few
investment boosting policies to be announced and the market might correct if the
government is unable to pass any of the new laws.
The Nifty flat skew (3M 90-110% skew at 6%-tile since 2008) suggests bullishness has
been priced in. Investors might consider selling calls and buying protection at almost
zero cost. The downside skews (80-95%) do not look steep compared to historical levels
but remain more expensive than other Asian indices.
We suggest investors, who share our concerns, consider buying put or put spread on
Nifty Index to hedge against any external shock.
MSCI India vs. MSCI EM performance
(Index, Jan-09=100)
300.0
MSCI India (USD)

MSCI EM

India equities: USD107b foreign inflows since 2009


Accumulated foreign inflows into
Indian equities (LHS)
MSCI India (RHS)

(USD b)
120.0
100.0

250.0

550

80.0

200.0

60.0

150.0

40.0

500
450
400
350

20.0

100.0

Sources: Bloomberg, BNP Paribas; data as of 2 January 2015

74

300

0.0

50.0
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

(20.0)
2009

(Index)
650
600

250
2010

2011

2012

2013

2014

Sources: Bloomberg, BNP Paribas; data as of 2 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

200
2015

NOT F or

The liquidity on Nifty option market remains tight, BNP Paribas Index Trading can
provide liquidity on the following axe:

Buy Dec-17 ATM Put on Nifty at 6.8% (delta -25%, iv 19.5 vol-pt)

Sell Dec-16 105% Call and Buy 95% Put Nifty receives 8.25% (delta 86%)

Sell Dec-17 105% Call and Buy 95% Put on Nifty receives 11.6% (delta 89%)

Niftys rally is supported by upward earnings revision


over the past few years
(Index)

NIFTY (LHS)

8000

(INR)
NIFTY Bloomberg Estimated EPS (RHS) 500
450

7000

400

9000

6000

350

5000

Return-on-equity is under pressure


(Index)

NIFTY (LHS)

9000

NIFTY Bloomberg Estimated ROE (RHS)

8000
7000
6000
5000

300

4000

4000

3000

250

2000

200

2000

150

1000

1000
05

06

07

08

09

10

11

12

13

3000

14

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

05

Sources: Bloomberg; BNP Paribas; quarterly data as of September 2014

Indias foreign reserve was USD314.6b in December

08

09

10

11

12

13

14

Brent crude price in INR terms is collapsing


(INR/barrel)
9000
8000
7000
6000
5000
4000
3000
2000
1000
06

07

08

09

10

11

12

13

14

India HSBC Manufacturing PMI recovered strongly


since its low in October 2013
(Index)

350.0

65.0
60.0

250.0
200.0

55.0

150.0

50.0

100.0

45.0

50.0
0.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Sources: Bloomberg; BNP Paribas; weekly data as of 5 December 2015

75

15

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

(USD b)
300.0

07

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

Indias latest current account deficit was 1.3% of GDP


in 3Q
(% GDP)
4.0
3.0
2.0
1.0
0.0
(1.0)
(2.0)
(3.0)
(4.0)
(5.0)
(6.0)
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

06

(%)
30
28
26
24
22
20
18
16
14
12
10

40.0
07

08

09

10

11

12

13

Sources: Bloomberg; BNP Paribas; data as of 2 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

14

NOT F or

Nifty 3M implied vol is relatively expensive

Nifty 3M implied volatility (25%-tile since 2008)

(vol-pt)

(vol-pt)

Current

19.0
18.0
17.0
16.0
15.0
14.0
13.0
12.0
11.0
10.0

1-wk ago

1-mth ago

90
Nifty 3M IV

80
70
60
50
40
30
20

1M

2M

3M

6M

9M

12M 18M 24M 36M

Source: BNP Paribas; data as of 6 January 2015

10
2008

2009

(vol-point)

(vol-point)

3M 90-110% Skew

2013

2014

2015

80-95% Skew
Skew
3M3M80-95%

11.0
10.0

9
8

9.0

8.0

7.0

6.0

5.0

3
2009

2010

2011

2012

Source: BNP Paribas; data as of 6 January 2015

76

2012

Nifty 3M 80-95% skew

10

2
2008

2011

Source: BNP Paribas; data as of 6 January 2015

Nifty skew is pretty flat (6%-tile since 2008)

11

2010

2013

2014

2015

4.0
2008

2009

2010

2011

2012

Source: BNP Paribas; data as of 6 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2013

2014

2015

NOT F or

Risk Parameters Arbitrage Corner


Conviction Trade 9: Systematic Strategy on Skew Spreads
Shuai Chen, Pierre Carubia and Winner Lee
Asia Smiles strategy: an Asia over US outperformance play

Buy every month a 3M 100/104 call spread on Asian Index Basket and sell a
3M 100/104 call spread on SPX Index with 0% floor overall payoff offered at
4.4%
Maturity: Jun 16 (18 months maturity = 16 monthly rolling swaplets of 3 months)
Execute it in a statistical way by rolling it every month until maturity
Floor overall P&L to avoid unexpected loss

Retail investor activities are pushing Asia volatility and skew lower: In Asian
markets, there is a large amount of vega on Asian indices being bought by investment
banks from retail investors via structured products. Because of these trades, banks are
typically buying volatility and smile, and their hedging activities push volatility and smile
lower.
Institutional investors are inflating US skews: In contrast, US flows are in the
opposite direction. Structured products make up a smaller part of the US options market
and dont have as much influence on the SPX volatility surface and smile. But insurance
companies keep rolling long-dated downside puts and are driving the SPX volatility
market and skew higher.
Dislocated skew spread between Asia and the US: Currently in Asian markets, major
indices are experiencing historically low skews. In Hong Kong, given the expectation of
further easing measures by PBoC, investors are positioning for Chinese equities upside;
HSCEI and HSI 3M 90-110% skews reached multi-year lows of -2.4% and 0%
respectively (early December 2014). NKY skew is trading at a two-year low, as the shortterm uncertainty has been cleared by the snap election LDP victory last December.
KOSPI2 index 3M 90-110% skew has also been trending down with other Asian markets,
th
now at 2.6%, the 10 percentile in five years.
On the other hand, SPX skew remained stable during 2014 but rose slightly near the
year-end amid the sell-off in the commodity market and rising risk-off sentiment. SPX 3M
th
90-110% skew has spiked to a high level at 6.5%, the 95 percentile in its five-year
history.
3M 90%-110% skew time series
(vol-point)
16
14
12
10
8
6
4
2
0
(2)
(4)
2008
2009

SPX
HSCEI

NKY-SPX

(vol-point)

NKY
Kospi2

HSCEI-SPX

KOSPI2-SPX

4
2
0
(2)
(4)
(6)
(8)
(10)
(12)

2010

2011

2012

Source: BNP Paribas; data as of 6 January 2015

77

3M 90%-110% skew spread between indices

2013

2014

2015

(14)
2008

2009

2010

2011

2012

Source: BNP Paribas; data as of 6 January 2015

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2013

2014

2015

NOT F or

Opportunity via a systematic strategy


Asia Smile strategy is an outperformance trade on Asia vs. SPX that takes advantage of
the widening skew spread between Asia and the US. Call spread is one of the easiest
ways to monetize a dislocated skew. To play the arbitrage between the SPX and Asian
indices skews, we can consider selling SPX 3M 100/104 call spreads while buying 3M
100/104 Asian index basket call spreads. Due to the opposite positioning, the overall
delta, vega and theta exposures are greatly reduced at inception.
As a systematic/statistical strategy, we propose entering this structure every month until
maturity (16 monthly rolling swaplets of 3 months). The major benefit of a systematic
strategy is that its profitability is much less dependent on the timing of the trades. If one
of the swaplets ends up unprofitable, the loss can be covered by the other 15 swaplets,
generating a positive overall payoff.
The maximum loss of the strategy is capped at the premium paid, which protects the
investors from unexpected losses.
Payoff formula

Source: BNP Paribas

Underlyings

Asian Index Basket (Equally-weighted)


Japan

NKY Index

China H-Shares

HSCEI Index

Korea

KOSPI2 Index

United States

SPX Index

Source: BNP Paribas

Trade details

Maturity

18 Months

Currency

USD

Indicative Pricing

4.4%

Source: BNP Paribas

Divergence in Easing Cycles


The below back-test result shows how the Asia Smiles strategy would have worked in
the past.
It is worth mentioning that the performance of the strategy in recent years was impacted
by the SPX rally and its relative outperformance to Asian indices. From a macro
perspective, we think the situation in 2015 will change. As the last round of reflationary
measures kick in, we believe that the US is going to face a relative liquidity squeeze in
2015, while Japan, China and Korea will continue to ease. This systematic strategy will
start to benefit from this divergence in easing cycles and liquidity between the US and
Asia.

78

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Simulated performance
Payoff

Simulated performance distribution

Premium

50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%

16%

12%

8%

4%

0%

21.4%
14.4%
10.4%

0-3%
01

02

03

Source: BNP Paribas

79

45.4%

04

05

06

07

08

09

10

11

12

3-6%

8.4%

6-9%

13
Source: BNP Paribas

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

9-12%

12-15%

NOT F or

Trade Idea 10: Asian Basket Volatility vs. SPX/AS51 Volatility


Shuai Chen and Pierre Carubia

Buy Basket of Dec-16 80% Put on Asian Indices [NKY, HSCEI and Kospi2] and
Sell Basket of Dec-16 80% Put on Global Indices [SPX, AS51] at 0.04 vol-pt
difference

EDS Asia proposed the strategy Asian Basket Volatility vs. US/AS51 Volatility in its
4Q14 report The Tipping Point (dated 9 October 2014). Since then, this strategy has
been realising well. In the past quarter, the average realised/implied volatility ratios were
1.04 for NKY, 0.87 for HSCEI, 0.76 for Kospi2, while 0.61 for SPX and 0.68 for AS51.
Asian market underreacted in the most recent sell-off: On 5 January 2015, SPX fell
1.83% and SX5E 3.7% amid a further 5% plunge in oil prices. VIX added 2.1 vol-pts, but
VNKY, VHSI and VKOPSI only added 1.4, 0.5 and 1.5 vol-pts respectively. This
suggests it is a good time to enter this volatility carry arbitrage trade again.
A recap of our arbitrage strategy rationale: As mentioned in the section Conviction
Trade 9: Systematic Strategy on Skew Spreads, the volatility dynamics in Asia and the
US are driven by different market activities. Asia volatility is usually pushed lower by
banks due to structured product issuance, while SPX volatility is usually lifted by the US
insurance companies rolling long-dated puts.
As a result, the realised/implied volatility ratio of Asian indices are usually below that of
SPX, as shown in the chart below, suggesting a good volatility carry arbitrage
opportunity. Also, we notice that the AS51 index has a remarkably low realised/implied
volatility ratio and, therefore, can be considered as a decent substitute for SPX.
Historically, variance or volatility swaps were the simplest ways to implement relative
value trades. However, hedging variance swaps on Asian indices using very low strikes
is challenging as the liquidity of the low strikes is limited. This has resulted in higher
premium between variance swaps and vanilla option. Asian indices have been impacted
more than those in the US or the European Union due to liquidity constraints. So now
when trading spreads of volatility between Asia and the US, volatility arbitragers are
willing to avoid paying for this expensive spread of convexity and are turning to plain
vanilla. The volatility arbitrage opportunity via plain-vanilla puts offer very tight spreads
and very good liquidity.
SPX and AS51 have the lowest realised/implied volatility ratios
Comparison Ratio Realized / Implied Volatility
160%
HSCEI, NKY and Kospi2 have the highest
realized/implied ratio
SPX and AS51 have the lowest
realized/implied ratio

140%
120%
100%
80%
60%
40%
2007

2008
NKY

2009
Kospi2

2010
HSCEI

2011
DAX

2012
SX5E

2013
UKX

Source: BNP Paribas; data as of 6 October 2014

80

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2014
SPX

AS51

NOT F or

18M realised/implied volatility ratio


HSCEI

NKY

Kospi2

SX5E

DAX

UKX

SPX

AS51

91%

86%

83%

77%

77%

74%

88%

89%

83%

73%

70%

70%

Average ratio
103%
98%
since 2007
Average ratio
95%
94%
since 2011
Source: BNP Paribas; data as of 6 October 2014

Arbitrage opportunity via vanilla puts


The table below shows a put spread prices recapitulative table, which includes realised
volatility statistics.
Dec-16 80% put vs. put prices on Asian indices vs. SPX and AS51
Average
Realised Vol
Spread minus
Offer

Min Realised
Vol Spread
minus Offer

Max Realised
Vol Spread
minus Offer

Last Realised
Vol Spread
minus Offer

Long Put

Short Put

Vol Spread
offer

Kospi2

SPX

-5.59%

11.2%

5.9%

17.0%

9.8%

HSCEI

SPX

1.36%

10.0%

2.5%

21.8%

6.2%

NKY

SPX

-1.36%

6.6%

1.0%

14.6%

14.0%

Kospi2

AS51

-1.78%

6.8%

2.9%

9.6%

2.9%

HSCEI

AS51

5.17%

5.5%

-1.3%

18.2%

-0.7%

NKY

AS51

2.45%

2.1%

-3.2%

8.1%

7.1%

Asia

AS51 / SPX

0.04%

7.1%

3.6%

11.5%

6.6%

Source: BNP Paribas; data as of 7 January 2015

NKY SPX volatility arbitrage opportunity

NKY AS51 volatility arbitrage opportunity


40%

35%

NKY AS51 3m Realized Spread

NKY SPX 3m Realized Spread


NKY SPX Long Term Realized Spread

25%

NKY AS51 Long Term Realized Spread

30%

NKY SPX Implied Spread

NKY AS51 Implied Spread

15%

20%

5%

10%

-5%

0%

-15%
2007

2008

2009

2010

2011

2012

2013

2014

-10%
2007

HSCEI SPX volatility arbitrage opportunity

2008

2009

2010

2011

2012

2013

2014

HSCEI AS51 volatility arbitrage opportunity


60%

60%

HSCEI AS51 3m Realized Spread

HSCEI SPX 3m Realized Spread


50%

HSCEI SPX Long Term Realized Spread

40%

HSCEI SPX Implied Spread

HSCEI AS51 Long Term Realized Spread

50%

HSCEI AS51 Implied Spread


40%

30%

30%
20%

20%

10%

10%

0%
-10%
2007

81

2008

2009

2010

2011

2012

2013

2014

0%
2007

2008

2009

2010

2011

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2012

2013

2014

NOT F or

Kospi2 SPX volatility arbitrage opportunity

Kospi2 AS51 volatility arbitrage opportunity


25%

20%

Kospi2 AS51 3m Realized Spread

Kospi2 SPX 3m Realized Spread


15%

20%

Kospi2 SPX Long Term Realized Spread

10%

Kospi2 SPX Implied Spread

5%

10%

0%

5%

-5%

0%

-10%

-5%

-15%
2007

2008

2009

2010

2011

2012

Kospi2 AS51 Long Term Realized Spread

15%

2013

-10%
2007

2014

Source: BNP Paribas; data as of 7 January 2015

Kospi2 AS51 Implied Spread

2008

2009

2010

2011

Source: BNP Paribas; data as of 7 January 2015

Asian basket vs. SPX/AS51 basket


Investors can mitigate their risk by adding up all spreads and trade the difference in flow
dynamics in a more diversified way. It makes sense to buy a portfolio of long-dated puts
on Asian indices (NKY, HSCEI and Kospi2) and sell a portfolio of long-dated puts on
SPX and AS51 indices; the trade offers a steady realised volatility spread above the
implied volatility spread offer.
Asian indices vs. global indices
25%
Asia vs. AS51 / SPX 3m Realized Spread
Asia vs. AS51 / SPX Long Term Realized Spread

20%

Asia vs. AS51 / SPX Implied Spread


15%

10%

5%

0%

-5%
2007

2008

2009

2010

2011

2012

2013

2014

Source: BNP Paribas; data as of 7 January 2015

Corridor variance swap as an alternative


Investors can also keep a constant vega exposure between these two legs by entering a
corridor variance swap. For instance, investors can enter the HSCEI-SPX 70/110
corridor var spread at 2.8 vol pts. In that case investors are only exposed to the volatility
when the spot of HSCEI is between the two barriers of the corridor.
Compared to a pure variance swap the corridor feature enables the removal of
expensive wings and significantly cheapens the convexity. Compared to the spread of
puts, investors are paying 1.44 extra points of volatility, have a more constant exposure
to vega and do not need to delta hedge their positions.

82

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2012

2013

2014

NOT F or

III. HIDDEN ASSETS


Implied volatility term structure
Implied volatility term structure NKY
(vol-pt)

Current

1-wk ago

1-mth ago

Implied volatility term structure HSI


(vol-pt)

25.0

21.0

24.0

20.0

Current

1-wk ago

1-mth ago

19.0

23.0

18.0
22.0

17.0

21.0

16.0
15.0

20.0
1M

2M

3M

6M

9M

1M

12M 18M 24M 36M

Implied volatility term structure HSCEI


(vol-pt)

2M

29.0

late June

1-mth ago

28.0

6M

9M

Current

17.0

1-wk ago

1-mth ago

16.0

27.0

15.0

26.0

14.0

25.0

13.0

24.0

12.0

23.0
22.0

11.0
1M

2M

3M

6M

9M

12M 18M 24M 36M

1M

Implied volatility term structure AS51

2M

3M

6M

9M

12M 18M 24M 36M

Implied volatility term structure Nifty


(vol-pt)

(vol-pt)
Current

19.0

1-wk ago

1-mth ago

18.0
17.0
16.0
15.0
14.0
13.0
12.0
11.0
1M

2M

3M

6M

9M

12M 18M 24M 36M

Current

19.0
18.0
17.0
16.0
15.0
14.0
13.0
12.0
11.0
10.0
1M

2M

3M

1-wk ago

6M

9M

Note: Implied volatility data as of 2 January 2015;


Source: BNP Paribas

83

12M 18M 24M 36M

Implied volatility term structure Kospi2


(vol-pt)

Current

3M

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

1-mth ago

12M 18M 24M 36M

NOT F or

Fear Index
VIX (S&P 500 volatility index)

V2X (EuroStoxx volatility index)


(vol-point)

(vol-point)

90
80
70
60
50
40
30
20
10
0
2007 2008 2009 2010 2011 2012 2013 2014

100
90
80
70
60
50
40
30
20
10
2007 2008 2009 2010 2011 2012 2013 2014 2015

VNKY (Nikkei 225 volatility index)


(vol-point)

VHSI (HSI volatility index)


(vol-point)

100
90
80
70
60
50
40
30
20
10
0
2007 2008

2009 2010 2011 2012 2013 2014

110.0
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
2007 2008 2009 2010 2011 2012 2013 2014 2015

VKOSPI (Kospi2 volatility index)

INVIXN (India NSE volatility index)


(vol-point)

(vol-point)

90

100.0
90.0

80

80.0

70

70.0

60

60.0

50

50.0

40

40.0
30.0

30

20.0

20

10.0
2007 2008 2009 2010 2011 2012 2013 2014 2015

10
2008

2009

2010

2011

2012

Note: Fear index as of 2January 2015,


Sources: Bloomberg; BNP Paribas

84

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2013

2014

2015

NOT F or

Convexity (variance minus volatility)


Convexity (Var-Vol) 3M and 1Y NKY

Convexity (Var-Vol) 3M and 1Y HSI


(vol-point)

(vol-point)

3M HSI Convexity

3M NKY Convexity
6.0%

6.0%

12M NKY Convexity

5.0%

5.0%

4.0%

4.0%

3.0%

3.0%

2.0%

2.0%

1.0%

1.0%

0.0%
2008

2009

2010

2011

2012

2013

2014

2015

12M HSI Convexity

0.0%
2008

Convexity (Var-Vol) 3M and 1Y HSCEI

2009

2010

2011

2012

2013

2014

2015

Convexity (Var-Vol) 3M and 1Y Kospi2

(vol-point)

(vol-point)

3M HSCEI Convexity
7.0%

3M Kospi2 Convexity
6.0%

12M HSCEI Convexity

6.0%

12M Kospi2 Convexity

5.0%

5.0%

4.0%

4.0%

3.0%

3.0%
2.0%

2.0%

1.0%

1.0%
0.0%
2008

2009

2010

2011

2012

2013

2014

2015

0.0%
2008

Convexity (Var-Vol) 3M and 1Y AS51 (ASX200)


(vol-point)

2009

2010

2012

2013

2014

2015

Convexity (Var-Vol) 3M and 1Y Nifty


(vol-point)

3M AS51 Convexity
3.5%

3M Nifty Convexity
3.5%

12M AS51 Convexity

3.0%

3.0%

2.5%

2.5%

2.0%

2.0%

1.5%

1.5%

1.0%

1.0%

0.5%

0.5%

0.0%
2008

2011

2009

2010

2011

2012

2013

2014

2015

0.0%
2008

12M Nifty Convexity

2009

2010

2011

2012

2013

2014

2015

Note: Convexity (variance swap minus volatility swap spread) is calculated as (implied variance swap minus implied volatility of ATM straddles)/2; Convexity
data as of 2 January 2015;
Source: BNP Paribas

85

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Realised correlation
6M Correlation Of Regional Indices
Current
6Y Max
6Y Low
(vol-point) (vol-point) (vol-point)

Regional Indices

Deviation from Percentile


Max (vol-point)
Rank (%)

SPX-SX5E-NKY

25.3

54.6

19.9

(29.2)

5.5

HSI-AS51-NKY

38.4

80.7

28.2

(42.3)

3.2

HSI-HSCEI-NKY

45.1

84.5

40.3

(39.3)

1.2

HSI-KOSPI2-NKY

31.3

79.2

26.6

(47.9)

1.6

HSI-KOSPI2-AS51

38.3

82.1

28.2

(43.8)

3.3

HSI-KOSPI2-TWSE

38.2

84.0

41.5

(45.9)

1.5

6M realised correlation SPX-SX5E-NKY


(%)

6M realised correlation HSI-AS51-NKY

SPX-SX5E-NKY 6M Realized Correlation

60

(%)

HSI-AS51-NKY 6M Realized Correlation

90.0
80.0

50

70.0
40

60.0

30

50.0
40.0

20

30.0

10
2007

2008

2009

2010

2011

2012

2013

2014

2015

20.0
2007 2008 2009 2010 2011 2012 2013 2014 2015

6M realised correlation HSI-HSCEI-NKY


(%)

HSI-HSCEI-NKY 6M Realized Correlation

6M realised correlation HSI-KOSPI2-NKY


(%)

90.0

90.0

80.0

80.0

HSI-KOSPI2-NKY 6M Realized Correlation

70.0

70.0

60.0
60.0
50.0
50.0

40.0

40.0

30.0

30.0
2007 2008 2009 2010 2011 2012 2013 2014 2015

20.0
2007 2008 2009 2010 2011 2012 2013 2014 2015

6M realised correlation HSI-KOSPI2-AS51

6M realised correlation HSI-KOSPI2-TWSE

(%)

HSI-KOSPI2-AS51 6M Realized Correlation

(%)

90.0

90.0

80.0

80.0

70.0

HSI-Kospi2-TWSE 6M Realized Correlation

70.0

60.0
60.0
50.0
50.0

40.0
30.0

40.0

20.0
2007 2008 2009 2010 2011 2012 2013 2014 2015

30.0
2007 2008 2009 2010 2011 2012 2013 2014 2015

Note: Correlation data as of 2 January 2015;


Source: BNP Paribas

86

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Implied volatility skew


90-110% skew SPX
(vol-point)

3M

6M

90-110% skew EuroStoxx

1Y

(vol-point)

2Y

16

14

14

12

12

10

10

2
2007

2008

2009 2010

2011 2012

2013 2014

2015

0
2007 2008

1Y 90-110% skew
SPX
HSCEI

(vol-point)
8

3M

6M

1Y

2Y

2009 2010 2011 2012 2013 2014 2015

90-110% skew term structure

SX5E
Kospi2

NKY

(vol-point)

SPX

SX5E

NKY

14

HSI

NIFTY

AS51

12

6
5
4

10

1
0

(1)
2008

0
2009

2010

2011

2012

2013

2014

2015

1M

NKY 90-110% skew term structure


(vol-pt)

2M

3M

6M

9M

12M 18M 24M 36M

HSCEI 90-110% skew term structure


(vol-pt)

Current

12.0

1-wk ago

1-mth ago

10.0
8.0
6.0
4.0
2.0
0.0
1M

2M

3M

6M

9M

12M 18M 24M 36M

Current

0.5
0.0
(0.5)
(1.0)
(1.5)
(2.0)
(2.5)
(3.0)
(3.5)
(4.0)
1M

2M

3M

1-wk ago

6M

9M

1-mth ago

12M 18M 24M 36M

Note: We defined the 90-110% skew as the implied volatility of 90% strike minus the implied volatility of 110% strike; skew data as of 2 January 2015;
Sources: Bloomberg; BNP Paribas

87

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

90-110% skew NKY


(vol-point)

3M

6M

1Y

90-110% skew HSI


2Y

(vol-point)

14

14

12

12

10

10

0
2007 2008

2009 2010 2011 2012 2013 2014 2015

3M

6M

1Y

2Y

(vol-point)

6M

1Y

2Y

3M

6M

9M

2Y

14
12
10
8
6
4
2
0
2007 2008 2009 2010 2011 2012 2013 2014 2015

90-110% skew AS51


3M

1Y

90-110% skew Kospi2

14
12
10
8
6
4
2
0
(2)
(4)
2007 2008 2009 2010 2011 2012 2013 2014 2015

(vol-point)

6M

0
2007 2008 2009 2010 2011 2012 2013 2014 2015

90-110% skew HSCEI


(vol-point)

3M

90-110% skew Nifty


2Y

11
10
9
8
7
6
5
4
3
2
2007 2008 2009 2010 2011 2012 2013 2014 2015

(vol-point)

3M

6M

1Y

2Y

12
10
8
6
4
2
0
2007 2008 2009 2010 2011 2012 2013 2014 2015

Note: We defined the 90-110% skew as the implied volatility of 90% strike minus the implied volatility of 110% strike; skew data as of 2 January 2015;
Sources: Bloomberg; BNP Paribas

88

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Put/Call ratio
Put/Call (open interest) ratio NKY
(Index)
1.15
1.10

NKY listed options open interest

Put/Call (OI) Ratio on NKY (LHS)


(Index)
NKY (RHS)
20000
Put/Call Ratio - 20-day moving average
18000

1.05

16000

1.00
14000
0.95

('000 contract)

0.85

10000

0.80
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14

8000

2200
2000

1600
1400
1200
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14

Put/Call (open interest) ratio HSI

HSI listed options open interest

1.70

Put/Call (OI) Ratio on HSI (LHS)


(Index)
HSI (RHS)
26000
Put/Call ratio - 20-day moving average
25000

1.60

24000

1.50
1.40
1.30

('000 contract)
350

250

22000

200

1.10

20000

1.00

19000

0.90
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14

18000

OI of Put contract (20-day moving average)


OI of Call contract (20-day moving average)

300

23000
21000

1.20

150
100
50
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14

Put/Call (open interest) ratio HSCEI


(Index)

OI of Call contract (20-day moving average)

2400

1800

12000

0.90

(Index)
1.80

OI of Put contract (20-day moving average)

2600

HSCEI listed options open interest


('000 contract)

Put/Call (OI) Ratio on HSCEI (LHS)


(Index)
HSCEI (RHS)
12500
Put/Call Ratio - 20-day moving average
12000

1000

11500

800

11000

700

10500

600

10000

500

9500

400

9000

300

8500

200
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14

2.00
1.90
1.80
1.70
1.60
1.50
1.40
1.30
1.20
1.10
1.00
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14

900

OI of Put contract (20-day moving average)


OI of Call contract (20-day moving average)

Note: Put/Call Ratio = Open interest of total Put contracts / Open interest of total Call contracts; we use 20-day moving average to smooth out the effect of
monthly expiration which lead to a sudden drop in open interest; Data as of 2 January 2015;
Sources: Bloomberg; BNP Paribas

89

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Put/Call (open interest) ratio Kospi2

Kospi2 listed options open interest

Put/Call (OI) Ratio on Kospi2 (LHS)


(Index)
Kospi2 (RHS)
1.90
275
Put/Call Ratio - 20-day moving average
270
1.70
265
1.50
260
1.30
255
250
1.10
245
0.90
240
0.70
235
0.50
230
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14
(Index)

('000 contract)
650
550
500
450
400
350
300
250

200
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14

AS51 listed options open interest

Put/Call OI Ratio on AS51 (LHS)


(Index)
AS51 (RHS)
5800
Put/Call Ratio - 20-day moving average
5600

3.00
2.80
2.60
2.40
2.20
2.00
1.80
1.60
1.40
1.20
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14

5400
5200
5000
4800
4600
4400
4200

('000 contract)
OI of Put contract (20-day moving average)
600
OI of Call contract (20-day moving average)
550
500
450
400
350
300
250
200
150
100
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14

Put/Call (open interest) ratio Nifty


(Index)
1.80
1.60

OI of Call contract (20-day moving average)

600

Put/Call (open interest) ratio AS51


(Index)

OI of Put contract (20-day moving average)

Nifty listed options open interest


('000 contract)

Put/Call (OI) Ratio on Nifty (LHS)


(Index)
Nifty (RHS)
9000
Put/Call Ratio - 20-day moving average
8500

2600

8000

2200

7500

2000

7000

1800

6500

1600

6000

1400

5500

1200

5000

1000
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14

1.40
1.20
1.00
0.80
0.60
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14

2400

OI of Put contract (20-day moving average)


OI of Call contract (20-day moving average)

Note: Put/Call Ratio = Open interest of total Put contracts / Open interest of total Call contracts; we use 20-day moving average to smooth out the effect of
monthly expiration which lead to a sudden drop in open interest; Data as of 2 January 2015;
Sources: Bloomberg; BNP Paribas

90

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

Government bond yield


US Treasury 10Y yield
(%)

Japan government bond 10Y yield


(%)

US Treasury 10Y Yield

JGB 10Y Yield

2.0

4.5
4.0

1.5

3.5
3.0

1.0
2.5
2.0

0.5

1.5
1.0
2008

2009

2010

2011

2012

2013

2014

2015

0.0
2008

German government bond 10Y yield


(%)

2009

2010

2011

2012

2013

2014

2015

France government bond 10Y yield


(%)

German Government Bond Yield 10 Yr

5.0

6.0

4.0

5.0

France Government Bond Yield 10Y

4.0

3.0

3.0

2.0

2.0

1.0
0.0
2008

1.0

2009

2010

2011

2012

2013

2014

2015

0.0
2008

Italy government bond 10Y yield


(%)

2009

2010

2011

2012

2013

2014

2015

Spanish government bond 10Y yield

Italy Government Bond Yield 10 Yr

(%)

8.0

8.0

7.0

7.0

Spanish Government Bond Yield 10 Yr

6.0

6.0

5.0
5.0

4.0

4.0

3.0

3.0
2.0
2008

2.0
2009

2010

2011

2012

2013

2014

1.0
2008

2009

2010

2011

2012

Data as of 2 January 2015;


Sources: Bloomberg; BNP Paribas

91

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2013

2014

2015

NOT F or

APPENDIX 1: COUNTRY PERFORMANCE


Performance charts
Japan

China

(Index, Jan-08=100)
110
100
90
80
70
60
50
40
30
2008

(Index, Jan-08=100)

MSCI Japan

MSCI Asia ex Japan

MSCI China

110

2009

2010

2011

2012

2013

2014

2015

60
50
40
30
2008

2009

2010

2011

Hong Kong

2010

2011

MSCI Asia ex Japan

2012

2013

2014

2015

120
110
100
90
80
70
60
50
40
30
2008

MSCI Korea

2009

2010

Taiwan

2010

2011

MSCI Asia ex Japan

2012

2013

2014

2015

110
100
90
80
70
60
50
40
30
2008

MSCI Asia ex Japan

2012

2014

2015

2009

2010

2011

MSCI Asia Pacific ex Japan

2012

2013

2014

2015

Singapore

2010

2011

MSCI Asia ex Japan

2012

2013

2014

2015

120
110
100
90
80
70
60
50
40
30
2008

MSCI Singapore

2009

2010

2011

MSCI Asia ex Japan

2012

Note: Data as of 2 January 2015


Sources: Bloomberg, BNP Paribas

92

2013

(Index, Jan-08=100)

MSCI India

2009

2011

MSCI Australia

India
(Index, Jan-08=100)
110
100
90
80
70
60
50
40
30
2008

2015

(Index, Jan-08=100)

MSCI Taiwan

2009

2014

Australia

(Index, Jan-08=100)
120
110
100
90
80
70
60
50
40
30
2008

2013

(Index, Jan-08=100)

MSCI Hong Kong

2009

2012

Korea

(Index, Jan-08=100)
120
110
100
90
80
70
60
50
40
30
2008

MSCI Asia ex Japan

100
90
80
70

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2013

2014

2015

NOT F or

APPENDIX 1: COUNTRY PERFORMANCE (CONTD)


Performance charts
Malaysia

Thailand

(Index, Jan-08=100)

(Index, Jan-08=100)

MSCI Malaysia

150

MSCI Asia ex Japan

130
110
90
70
50
30
2008

2009

2010

2011

2012

2013

2014

2015

210
190
170
150
130
110
90
70
50
30
2008

MSCI Thailand

2009

2010

Indonesia

MSCI Asia ex Japan

130
110
90
70
50
2009

2010

2011

2012

2013

2014

2015

190
170
150
130
110
90
70
50
30
2008

MSCI Philippines

2014

2009

2010

2011

MSCI Asia ex Japan

2012

Note: Data as of 2 January 2015


Sources: Bloomberg, BNP Paribas

93

2013

(Index, Jan-08=100)

MSCI Indonesia

150

30
2008

2012

Philippines

(Index, Jan-08=100)
170

2011

MSCI Asia ex Japan

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

2013

2014

NOT F or

Contacts Global Equity Derivatives Strategy


Europe
Gerry Fowler (Global Head)

+44 20 7595 8619

gerry.fowler@uk.bnpparibas.com

Martial Godet

+44 207 595 8132

martial.godet@uk.bnpparibas.com

Antoine Deix

+33 1 40 14 06 22

antoine.deix@bnpparibas.com

Ankit Kumar Gheedia

+44 20 7595 1215

ankitkumar.gheedia@uk.bnpparibas.com

Kevin Selmane

+44 20 75951280

kevin.selmane@uk.bnpparibas.com

Clodagh Muldoon

+44 207 5951215

clodagh.muldoon@uk.bnpparibas.com

Antoine Porcheret

+44 207 595 4410

anthoine.porcheret@uk.bnpparibas.com

Orrin Sharp-Pierson

+1 212 841 3313

orrin.sharppierson@americas.bnpparibas.com

Anand Omprakash

+1 212 841 2886

anand.omprakash@americas.bnpparibas.com

Guillaume Derville (PanAsia Head)

+852 2825 1055

guillaume.derville@asia.bnpparibas.com

Winner Lee

+852 2108 5658

winner.lee@asia.bnpparibas.com

Shun Maruyama

+81 3 6377 2252

shun.maruyama@japan.bnpparibas.com

Shuai Chen

+852 2108 5638

shuai.chen@asia.bnpparibas.com

US

Asia

Contacts Pan-Asia Flow Desk


Hong Kong
Valery Bloud

Regional Head of Pan-Asia Flow Sales +852 2108 5639

valery.bloud@asia.bnpparibas.com

Christopher Littell

Pan-Asia Flow Sales

+852 2108 5706

christopher.littell@asia.bnpparibas.com

Will Chen

Pan-Asia Flow Sales

+852 2108 5787

will.chen@asia.bnpparibas.com

Andrea Baumeister

Pan-Asia Flow Sales

+852 2108 5649

andrea.baumeister@asia.bnpparibas.com

Bum Soo Kim

Pan-Asia Flow Sales

+852 2108 5660

bumsoo.kim@asia.bnpparibas.com

Jon Harris

Head of IRM, Asia Pacific

+852 2825 1805

jon.harris@asia.bnpparibas.com

Stephanie Wong

Hedge Fund Relationship Manager

+852 2108 5730

stephanie.wong@asia.bnpparibas.com

Robert Newcombe

Pan-Asia Flow Sales

+65 6210 1883

robert.newcombe@asia.bnpparibas.com

Nadia Poilane

Pan-Asia Flow Sales

+65 6210 1880

nadia.poilane@asia.bnpparibas.com

Singapore

94

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

NOTES

95

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

NOTES

96

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

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97

Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883

NOT F or

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NOT F or

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BNP Paribas Securities (Japan) Ltd


GranTokyo North Tower
1-9-1 Marunouchi, Chiyoda-Ku
Tokyo 100-6740
Japan
Tel (81 3) 6377 2000
Fax (81 3) 5218 5970

BNP Paribas Cadiz Securities (Pty) Ltd


Ground floor, Fernwood House
The Oval, 1 Oakdale Road, Newlands
Cape Town
South Africa 7700
Tel (27 21) 657 8300
Fax (27 21) 657 8301

FRANKFURT

GENEVA

LONDON

MADRID

BNP Paribas
Mainzer Landstrasse 16
60325 Frankfurt
Germany
Tel (49 69) 7193 6637
Fax (49 69) 7193 2520

BNP Paribas
2 Place de Hollande
1211 Geneva 11
Switzerland
Tel (41 22) 787 7377
Fax (41 22) 787 8020

BNP Paribas
10 Harewood Avenue
London NW1 6AA
UK
Tel (44 20) 7595 2000
Fax (44 20) 7595 2555

MILAN

BNP Paribas SA, sucursal en Espana


Hermanos Becquer 3
PO Box 50784
28006 Madrid
Spain
Tel (34 91) 745 9000
Fax (34 91) 745 8888

BNP Paribas Equities Italia SIM SpA


Piazza San Fedele, 2
20121 Milan
Italy
Tel (39 02) 72 47 1
Fax (39 02) 72 47 6562

PARIS

ZURICH

MANAMA

BNP Paribas Equities France


Socit de Bourse
20 boulevard des Italiens
75009 Paris
France
Tel (33 1) 4014 9673
Fax (33 1) 4014 0066

BNP Paribas
Talstrasse 41
8022 Zurich
Switzerland
Tel (41 1) 229 6891
Fax (41 1) 267 6813

BNP Paribas Bahrain


PO Box 5253
Manama
Bahrain
Tel (973) 53 3978
Fax (973) 53 1237

https://eqresearch.bnpparibas.com