1. 1 of 4
Market Pulse
Investment Weekly Week 19 | May 2015
US GDP: it’s not all bad news
Greeks find a way to reset negotiations
Euro bounce impacts cyclical stocks
Goodbody Wealth Management
Bernard Swords
Chief Investment Officer
T +353 1 667 0400 E bernard.k.swords@goodbody.ie

2. 2 of 4
DateInvestment Weekly
Market Pulse
US GDP changes rate outlook
There were some sharp reversals in financial markets last
week. The release of disappointing Q1 GDP numbers from the
US were the main talking point, but investors also had the
minutes of the April Federal Open Market Committee (FOMC)
meeting to chew over. The GDP release was weak with growth
of just 0.2% at an annualised rate in the first quarter of the year
against expectations of 1%. Some transitory influences - bad
winter weather and longshoreman strikes in Pacific ports -
depressed exports. But, even allowing for these, the quarter
was a weak one.
View
The release supports our fears that the US economy has been
losing momentum and that we could have a growth scare.
There is nothing in the release to suggest that the economy is
heading back towards recession, however. Remember: the US
economy contracted by more than 2% in the first quarter of last
year, but ended up growing by 2.4% for the full year. It does push
out the potential date for a rise in interest rates, although the
Fed did not acknowledge this in its recent minutes.
A chink of light in Greece
The protracted negotiations in Greece may have moved in the
right direction over the last week. The Greek government does
seem to be making some changes that could show a way forward.
Firstly, Greek finance minister Yanis Varoufakis was dumped as
lead negotiator in favour of the less extreme Euclid Tsakalotos,
the deputy foreign minister. The change should allow participants
to reset some of their positions in the negotiation process.
Secondly, prime minister Alexis Tsipras has indicated he favours
a referendum rather than fresh elections should an agreement
prove politically too onerous. This allows the government to
accept an agreement subject to popular acceptance.
View
The week’s developments give further credence to the notion
that Greece and the troika will muddle through. Opinion polls in
Greece are firmly in favour of remaining within the euro area.
The referendum idea allows a face saving way out for the Greek
government. The question is whether time will permit.
The euro area negotiators are sceptical that a referendum can
be held in time, but it is good to see that the Greeks are looking
at mechanisms that allow them to sign an agreement.
Action
We still feel that lower growth is a mixed blessing for US
assets, but overall it should be supportive. The negative
impact of the lower growth expectations will be more than
compensated for by the delay in interest rate increases.
The US dollar has started to weaken and we expect this to
continue in the short term.
Action
The protracted nature of the Greek negotiations have weighed
on euro area assets. A resolution would give the euro a boost
and help peripheral bonds. For the equity market, the reduced
uncertainty will help, but a stronger euro will temper gains.
Market performance
Current Prior MTD YTD
FT World (local) 273.68 -0.9% 0.9% 6.8%
FT World (euros) 298.66 -3.2% 1.0% 14.2%
Iseq 6144.42 -2.3% 1.6% 17.6%
FT 100 7043.74 0.0% 1.2% 7.3%
Euro Stoxx 376.81 -0.9% 1.4% 17.9%
S&P500 2114.49 -0.2% 1.4% 2.7%
Oil
Brent 66.77 2.3% 0.0% 16.0%
Market performance
Current Prior Year end
Bond markets (10 year yields)
Euro area 0.42 0.18 0.14
UK 1.88 1.59 1.64
US 2.13 1.89 1.91
Currencies
Dollar/euro 1.110 1.093 1.08
Sterling/euro 0.734 0.734 0.72
Source: Bloomberg
Week 19 | May 2015
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3. 3 of 4
DateInvestment Weekly
Market Pulse
Evolving Theme
US economy hits a soft patch
The main drags on US GDP growth in the first quarter were
exports and capital investment. Exports declined 7.2%. Some of
this was due to strikes the Pacific ports strike, but some must
also be due to the recent strength in the US dollar. Overall net
trade took 1.3% off the growth rate, but there should be some
rebound in Q2 as the strikes have now ended. The weakness in
capital investment was concentrated in the extractive industries
(primarily oil), where it fell down 43%, reducing GDP growth by
0.8%. With the oil price stabilising there is a chance that capital
investment will also stabilise and thus will not be as big a drag in
the second quarter.
Consumption growth slowed to 1.9% from over 4% in Q4 2014.
However, part of this was due to weak motor demand in the
weather-beaten months of January and February. There was a
sizeable recovery in March as weather returned to more normal
patterns. It does look like there is a good chance that in Q2
consumption growth will improve and return towards 3% in the
later quarters.
There is likely to be continued uncertainty over whether we are
witnessing a soft patch in the US economy or whether this blip
will turn out to be a longer term deceleration in the economy.
We believe that it is a soft patch, as we have not seen any major
weakness in the labour market. But the uncertainty should mean
that a rate hike before Q4 looks unlikely.
Week 19 | May 2015
Exchange Rate
Source: Bloomberg
US Consumer
Source: Factset
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
50.0
60.0
70.0
80.0
90.0
100.0
110.0
29/04/2011 29/02/2012 31/12/2012 31/10/2013 29/08/2014
Consumer Sentiment Retail Sales YoY grth. (RHS)
Excluding Motors US Consumption
continue to recover
1.00
1.05
1.10
1.15
1.20
1.25
02/01/2015 02/02/2015 02/03/2015 02/04/2015
Dollar Euro
Euro bouncing
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
50.0
60.0
70.0
80.0
90.0
100.0
110.0
29/04/2011 29/02/2012 31/12/2012 31/10/2013 29/08/2014
Consumer Sentiment Retail Sales YoY grth. (RHS)
Excluding Motors US Consumption
continue to recover
Sector Strategy
Cyclicals turn from overseas to domestic
Since the start of the year the trend in the currency markets has
been for the euro to weaken and the US dollar to strengthen.
The combination of a weaker euro and better economic
figures from the euro area has pushed cyclicals with overseas
earnings, such as motors, to the top of the sector performances.
Over the last week the euro has rebounded almost 5% against
the US dollar and this is beginning to impact sector performances.
We have just seen the export heavy motor sector in Europe
beginning to lag the rest of the euro area and it is likely that this
trend will continue. So in the short term we expect the focus to
move to euro area cyclicals with domestic exposure.
There are two major sectors that fit this requirement. The
banking sector generates the bulk of its income from the euro
area and is sensitive to economic growth within the region.
The performance of the sector has been held back by investors’
focus on companies with non-euro earnings and the protracted
negotiations in Greece. We believe both of these concerns will
recede over the next few weeks and that we will start to see
stronger performance from the sector. The French bank BNP
is our first choice, but we also like the iShares Euro Stoxx
Banks ETF.
Construction is the other sector which should benefit from the
change in sector trends. A stronger euro area economy will ease
fiscal pressures across the region and thus allow governments to
look at increases in capital spending again. QE will keep interest
rates lower for longer, which will underpin property markets and
prompt further new building. Our favoured companies here
are CRH and Kingspan. CRH has the added benefit of integrating
its newly acquired assets from the Holcim/Lafarge deals.
Hence, it should get extra profit growth beyond what the
economic momentum will deliver.

4. 4 of 4
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T +353 66 710 2752
www.goodbody.ie Wealth Management | Corporate Finance | Capital Markets
Prepared by Bernard Swords, Chief Investment Officer
The named author does not hold a position in any of the listed stocks
Produced on 5 May 2015
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