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Saturday, January 23, 2021

Societe Generale SA (ADR) (OTCMKTS:SCGLY) Squeezes Higher as Frexit Risk Subsides

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Societe Generale SA (ADR) (OTCMKTS:SCGLY) is a big French bank. That puts the company at the forefront of investors’ minds this weekend as the citizens from France go to the polls to elect a new President. The vote is the crucial second round run-off vote that will be the final determinant. For SocGen, as it is known, this is the crucial issue. At stake is the future of the EU in many ways.

The election pits centrist Emmanuel Macron versus far-right contender Marine Le Pen. The key here for the big banks of France and Europe is that Le Pen is running on a “Frexit” ticket, meaning that, if she wins, it will represent a de facto vote by the French to exit the Euro currency. There would be plenty of hurdles to actually getting to that result, but the markets will likely take a Le Pen victory as a signal about what is to come. At the time of this writing, the results of the election are unknown, but the polls show a wide lead for Macron, and thus a high likelihood that euro skeptics will be denied their moment in the sun.

Societe Generale SA (ADR) (OTCMKTS:SCGLY) bills itself as a financial services firm with operations primarily in Europe. The company is a global player, but has roots and identity in France.

The company operates through three divisions: French Retail Banking, International Banking and Financial Services, and Global Banking and Investor Solutions. It offers domestic banking services to individuals, professionals, businesses, communities, and organizations under the Societe Generale, Crédit du Nord, and Boursorama brand names; and international retail banking and consumer credit services to individuals, professionals, corporates, institutions, and associations in Europe, Russia, Africa, Asia, the Mediterranean Basin, and French overseas departments and territories.

SCGLY also provides life, retirement savings schemes, personal protection, auto, home, personal accident, school, and other insurance products; vehicle leasing and fleet management services; and vendor and equipment finance.

In addition, it assists corporate, financial institutions, public sector institutions, and family offices in terms of investments, strategic advisory services, capital raising, and capital structure optimization; and offers structured finance, and investment and risk management solutions. Further, the company provides access to market through solutions in equities, fixed income, currencies, commodities, and alternative investments; debt refinancing solutions; and private banking services, such as asset allocation, portfolio management, funds, markets, and wealth management solutions to high net worth individuals.

Additionally, it offers asset management solutions; and securities services, including clearing, custody and trustee, liquidity management, fund administration and asset servicing, fund distribution, and global issuer services, as well as cash management, correspondent banking, international trade financing, factoring, and foreign exchange services. Societe Generale Group was founded in 1864 and is headquartered in Paris, France.

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As noted above, this weekend’s run-off vote in France for the President is the most important catalyst for SocGen, as well as the whole of the EU banking space. At this point (before the vote), markets closed last week with a very wide expectation of a Macron win. Hence, the hedges have come off, and stocks like this one have been soaring.

The reason recent polls have been such a strong catalyst for stocks like this is because of the contrast in outcomes. Had we entered the weekend with the polls going the other way, I would not be surprised to see this stock at $5 to $8/share. A French exit of the EU would not just be a French event. The EU is a three-legged stool, with the UK, France, and Germany as the legs. The countries of Southern Europe – Italy, Portugal, Spain, and Greece – sit atop that stool. With Brexit, the UK leg is gone. If we then saw Frexit, it is very likely the whole union would crumble.

That would pose a realistic risk of spurring a series of sovereign debt defaults and widespread bankruptcy in the banking sector – banks like SocGen have lent massive sums to entities that would be forced to default immediately.

Given the dramatic nature of this threat, it is no wonder that big money stayed on the sidelines until the polls widened. Now that the polls have done so, big money is playing a round of catch-up, and EU bank stocks are launching higher.

We foretold this back in October of last year, when we last covered the stock, noting that “…importantly, the most likely outcome right now is that Le Pen will not win, France will remain in the EU, the EU will avoid chaos, and SocGen will soar higher as the risk of this immediate Armageddon scenario subsides mid-way through next year.”

Our next crystal ball prediction on SCGLY is that Monday will bring a Macron Presidency, and a round of profit taking in the French banks. It’s time to Frexit this one for hefty gains out of the gap up open this week. There isn’t a lot of real growth here (about 1.3% on the top line), and the stock’s big gains have been mostly about de-hedging on geopolitics. You can bet we will update this one again as new information comes into view. For continuing coverage on shares of SCGLY stock, as well as our other hot stock picks, sign up for our free newsletter today and get our next hot stock pick!

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