1. 1 of 4
Market Pulse
Investment Weekly Week 20 | May 2015
Bonds: play short game for the win
UK election: rally now, worry later
Easing with Chinese characteristics
Goodbody Wealth Management
Bernard Swords
Chief Investment Officer
T +353 1 667 0400 E bernard.k.swords@goodbody.ie
Jude O’Reilly
Senior Research Analyst
T +353 1 667 0400 E jude.c.o’reilly@goodbody.ie

2. 2 of 4
DateInvestment Weekly
Market Pulse
Bond drama supports short
duration strategy
It has been a dramatic few weeks in bond markets as German
10 year yields fell to 7bps and reversed back to 0.5% in the space
of a couple of weeks. People are groping around for reasons to
explain the reversal, but there was little justification for the fall
in yield to 0.07% in the first place. So it is unsurprising that there
is no convincing reason for them rising again.
View
We do not believe that the bond market is making any great
statement about inflation or growth expectations. It is merely
animal spirits of the market place making their presence felt.
As we have highlighted before, both the US and Japan
experienced an increase in yields after the establishment of
quantitative easing. This pattern has now been repeated in
the euro and highlights the importance of a skewing exposure
towards short-dated bonds. What has become a new feature
of bond markets is the influence of the euro area. We had weak
economic figures from the US but, despite this, bond yields
rose there in tandem with the euro area.
UK surprise removes uncertainty
for now
The UK general election has produced an outcome which differs
significantly from prior polls and expectations. Yes, the SNP
dominated Scotland and the number of Liberal Democrat seats
has been hugely reduced, but both results were anticipated
even if the scale was a surprise. However, the Conservatives
have won an overall majority and Labour fared much worse than
expected. The Conservatives have won 330 seats (278 expected),
while Labour retained 232 (267 expected). The markets reacted
positively to this news. Sterling strengthened as the uncertainty
of a hung parliament vanished. Meanwhile those sectors at risk
of intervention from a Labour government - domestic banks,
energy, utilities, contractors, homebuilders and gaming stocks
traded higher by mid-to-high single digit percentages.
View
A Conservative government is likely to pursue a continuation
of the prior government’s economic policies. That means more
austerity and reduction of the deficit. So no substantial change
to expected economic growth. However, the result raises the
prospect of a referendum on EU membership before the end
of 2017. Near term political risk has reduced due to a conclusive
election result, but it is likely to increase by 2017.
Action
We continue to recommend short-dated exposure as a
means of limiting interest rate risk and using non-euro and
corporate bonds to enhance the yield in portfolios. This
approach struggled as German yields headed for 0% but has
performed well in a relative sense in the recent correction in
bond markets.
Action
Sterling has strengthened following the election result,
but we see risks of medium term weakness as a referendum
on EU membership looms. In this scenario we would expect
UK-listed companies with significant international revenues
and profits to do well.
Market performance
Current Prior MTD YTD
FT World (local) 273.01 -0.2% 0.6% 6.6%
FT World (euros) 297.31 -0.5% 0.6% 13.7%
Iseq 6224.12 1.3% 2.9% 19.1%
FT 100 7079.45 0.5% 1.7% 7.8%
Euro Stoxx 373.71 -0.8% 0.6% 16.9%
S&P500 2116.10 0.1% 1.5% 2.8%
Oil
Brent 65.68 -1.6% -1.6% 14.6%
Week 20 | May 2015
Market performance
Current Prior Year end
Bond markets (10 year yields)
Euro area 0.56 0.42 0.54
UK 1.90 1.88 1.76
US 2.15 2.13 2.17
Currencies
Dollar/euro 1.116 1.110 1.21
Sterling/euro 0.724 0.734 0.78
Source: Bloomberg
++

3. 3 of 4
DateInvestment Weekly
Market Pulse
Evolving Theme
Wait and see with China
Over the last six months there has been a disconnect between
the negative news flow on the Chinese economy and the
performance of the equity market, which is up 74%. While the
economy has been showing continual deceleration, the equity
market has powered ahead. The forecast growth rate for the
Chinese economy has already been cut to 7% and, if this trend
in the statistics continues, we could see it being revised down
to the 6.5% - 6.75% range.
Of course there have been some positive developments.
The People’s Bank of China (PBoC) has already said that the
economy is weaker than it would like, which has been taken as
a statement of intent. The bank cut interest rates for the third
time in six months over the weekend and has been reducing
reserve requirements in the banking system to promote lending
growth and thus stem the slowdown. There were even rumours
the PBoC would implement quantitative easing (QE) by buying
local government debt, thus sorting out one of the problem
areas for the Chinese economy.
While we are likely to see more interest rate cuts and further
easing of credit availability, the chief economist in the PBoC has
stated that there are many measures that can be implemented
before using unconventional policy tools such as QE. And even
if such measures are used, local government debt cannot be
purchased by law. Consequently it would appear that expectations
about the extent of a policy response seem overdone.
We remain cautious of emerging markets relative to developing
markets because of the performance of the Chinese economy.
While easier monetary policy is a positive, for a sustained move
in the markets we also need to see evidence that the economy
is stabilising. We are not there yet.
Week 20 | May 2015
Chinese Equity Market Performance
Source: Bloomberg
8
9
10
11
12
13
14
15
16
17
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15
Shanghai Composite Shanghai Composite rel to FT World
“The combination of an experienced team and
disciplined investment process has delivered
attractive returns over the medium term,
but especially in declining markets”.
Jude O’Reilly, Senior Research Analyst
Investment Strategy
Seek rewards in small caps
The introduction of quantitative easing by the ECB and the
depreciation of the euro are two important forces that support
an improvement in the euro area economy this year. So far
we have already seen euro area GDP forecast upgrades by the
European Commission in both February and May. When we look
at the performance of European stocks and sectors this year,
our conclusion is that the market has rewarded those stocks and
sectors that benefit from a weakening euro. But it has not yet
rewarded those that will do better as the euro area economy
recovers. This suggests that domestic cyclical sectors such as
financials will do well and also that euro area small capitalisation
stocks will start to perform better. That is because euro area
small-cap stocks tend to be more domestically focused. They
are also concentrated in the more cyclical sectors like financials,
industrials, technology and consumer discretionary.
We recommend that clients seeking exposure to euro area small-
cap equity invest in the Barings Europe Select Trust. This fund
is managed by an experienced team, has a long track record of
attractive returns and is an inexpensive vehicle for exposure to
more than 100 small cap stocks throughout continental Europe.
The fund invests in higher quality companies with under-
appreciated earnings growth trading at attractive valuations
which are expected to have positive newsflow. Through its
research process the fund seeks to identify companies with solid
business franchises, good management teams and strong balance
sheets. On top of that they look for meaningful and sustainable
medium term earnings growth that is unrecognised by the
market. By purchasing these companies at attractive prices and
valuations the fund, the fund should benefit as positive newsflow
and results confirm better earnings than expected by the market.
The fund narrows its universe of potential investments by
excluding those that have low trading liquidity, weak financial
position, poor treatment of minority shareholders, and irregular
published accounts. It then picks the best 25% and, through
fundamental research, company meetings and a disciplined
approach to valuation and timing, cuts the list to the most
attractive 80 - 110 companies.

4. Dublin
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T +353 1 667 0400
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T +353 21 427 9266
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www.goodbody.ie Wealth Management | Corporate Finance | Capital Markets
4 of 4
Prepared by:
Bernard Swords, Chief Investment Officer (does not hold a position in any of the listed stocks)
Jude O’Reilly, Senior Research Analyst (does not hold a position in any of the listed stocks)
Produced on 11 May 2015
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