Europe is revolting....

1. For professional investors only
6 March 2016 Straight from the Source 1
Uncommon truths
Europe is revolting
There has been a 10% rally in the S&P 500 since
February 11 but gold is also up over that period.
Inflation could explain that combination but it
seems unlikely. Interestingly the yen has also held
up well, while the euro has weakened. Apart from
the upcoming ECB meeting and the drag of a weak
pound, perhaps the political situation in Europe is
weighing on the single currency and boosting gold.
A 10% rally in the S&P 500 since February 11 suggests
market fears of recession have eased. However, the
improved mood in equity-like assets (see Figure 3) has
not been matched by a sell-off in safe-havens. As can
be seen from Figure 1, the price of gold is now higher
than it was on February 11. Maybe economic forecasts
have improved to the extent that higher inflation is now
the concern but that seems unlikely. Further, among
other safe-havens the Japanese yen has held up pretty
well (despite the BoJ negative rate announcement on
January 29), while the euro has weakened.
There could be a number of reasons why the euro has
faltered including the expectation of more aggressive
action by the ECB when it meets this week (March 10)
and the gravitational pull of a Brexit-weakened pound
(see Four months of uncertainty in the UK). Could
politics also be a factor?
After the swing to the left in Greece in late 2014 came
the establishment of a Socialist minority government in
Portugal in November 2015. Then the December
elections in Spain witnessed both a swing to the left
(Podemos gained 21% of the vote) and a splintering of
the vote (the Citizens Party gained 14%). As of yet, no
government has been formed (see here). A similar
problem was created in Ireland last weekend, with a
splintering of the vote by new parties, alliances and
independents (see this). As well as a popular rejection
of austerity in economies that have suffered its worst
effects, a common theme in these elections appears to
be disenchantment with national and EU political elites.
Figure 1 – Currencies and gold (all in USD and rebased to 03/12/15 = 100)
Source: Datastream and Source Research.

2. For professional investors only
6 March 2016 Straight from the Source 2
Figure 2 – US and Eurozone fiscal adjustments and net export contributions to GDP (percent)
Note: “Fiscal adjustment” is the change in cyclically adjusted government net borrowing as a percent of GDP. It is a way of capturing the stimulus (+ve) or
contraction (-ve) implicit in changes in the government’s fiscal stance. Based on OECD calculations. Source: OECD, Datastream and Source Research.
Considering the unemployment rates in these countries
(Greece 24%, Spain 21%, Portugal 12% and Ireland
9%), Europe’s politicians have only themselves to
blame for this revolt. Figure 2 compares the Eurozone
policy stance with that across the Atlantic since the
financial crisis: first, the US economy was cushioned by
a sizeable net export boost in both 2008 and 2009 while
the Eurozone suffered a net export drag in 2009 (the
Fed’s actions significantly weakened the dollar) and,
second, though fiscal policy was supportive in the
Eurozone (automatic stabilisers) it was far more so in
the US (the 2009 fiscal adjustment was three times
bigger in the US and unemployment is now 4.9%).
The euro eventually weakened but the net export boost
during 2011, 2012 and 2013 was more than offset by
tighter fiscal policy (governments have taken back what
the ECB has given). The irony is that the US
government was even more austere during those years
but by then the US economy was up and running and
could withstand the drag.
The electorates of these countries may be right to reject
austerity: first, with the demand for credit so low and
fiscal multipliers so high, expansionary fiscal policy is
more likely to be effective than expansionary monetary
policy. Second, it is now extremely cheap for
governments to borrow money and they could use it to
fund economically beneficial investments (education,
infrastructure, welcoming refugees etc).
Unfortunately, it is not the governments of the above
countries that need persuading; it is that of Germany.
There is no easy way for the electorates of other
countries to impact the politicians of Germany without
threatening exit from the Eurozone and/or the EU.
The UK Brexit process is muddying the water by
encouraging anti-EU sentiment in countries such as
France and Denmark. With a string of elections due in
the Eurozone during 2016 and French presidential
elections in 2017, this is not the time for Eurozone
leaders to take their eyes off the ball. Unfortunately,
German politicians are more focused on the refugee
crisis (watch the state elections taking place today and
next weekend) and the Eurozone could be sleep-
walking back into crisis (an economic slowdown is all
that would be needed to rekindle market speculation).
All of the above may be rather alarmist but it must be
remembered that the Eurozone project was always
going to be difficult: first, fixed exchange rates have a
habit of breaking down exactly because one set of
countries ends up with high unemployment and,
second, without fiscal union it was flawed (open to
market attack on individual bond markets).
Continued growth is probably the best cure for many of
these ills and the ECB stands ready to defend bond
markets and the euro (when it isn’t trying to depress it).
However, the ECB is unlikely to get the requisite help
from governments (less austerity and a move to fiscal
union) until then next crisis, by which time it may be too
late. I think gold is overvalued and will normalise over
time as US yields rise but this sort of backdrop in
Europe can only encourage the bulls.
-4
-3
-2
-1
0
1
2
3
4
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
EZ net exports EZ fiscal adjustment
US net exports US fiscal adjustment

3. For professional investors only
6 March 2016 Straight from the Source 3
Figure 3 – Asset class total returns
Source: MSCI, Datastream and Source Research. Notes: *The currency section is organised so that in all cases the numbers show the movement in the
mentioned currency versus USD (+ve indicates appreciation, -ve indicates depreciation).
Data as at 04/03/2016 Current
Index Level/RY 1w 1m QTD YTD 1w 1m QTD YTD
Equities
World MSCI 387 3.8 4.4 -2.6 -2.6 3.2 4.2 -3.2 -3.2
Emerging Markets MSCI 791 6.9 7.1 -0.2 -0.2 4.8 5.8 -0.4 -0.4
US MSCI 1900 2.8 4.6 -2.1 -2.1 2.8 4.6 -2.1 -2.1
Europe MSCI 1444 4.1 2.9 -4.6 -4.6 2.8 4.5 -4.3 -4.3
Europe ex-UK MSCI 1654 3.9 2.7 -5.3 -5.3 3.1 3.8 -6.3 -6.3
UK MSCI 1071 4.6 3.4 -3.1 -3.1 2.0 6.0 0.4 0.4
Japan MSCI 2638 5.1 2.1 -6.0 -6.0 5.0 -0.8 -11.1 -11.1
Government Bonds
World BofA-ML 0.82 0.2 0.8 4.6 4.6 -0.2 0.6 2.9 2.9
Emerging Markets JPM 7.00 4.2 3.5 5.2 5.2 1.1 1.3 3.5 3.5
US (10y) Datastream 1.88 -1.0 -0.1 3.7 3.7 -1.0 -0.1 3.7 3.7
Europe Bofa-ML 0.71 0.8 -1.2 3.0 3.0 0.0 0.2 1.6 1.6
Europe ex-UK (EMU, 10y) Datastream 0.24 -0.2 -0.8 5.8 5.8 -0.9 0.7 4.5 4.5
UK (10y) Datastream 1.49 1.8 -1.7 0.8 0.8 -0.7 0.8 4.5 4.5
Japan (10y) Datastream -0.05 0.0 4.1 9.1 9.1 -0.1 1.1 3.2 3.2
IG Corporate Bonds
Global BofA-ML 2.98 0.6 0.2 1.4 1.4 0.2 0.5 1.0 1.0
US BofA-ML 3.60 0.2 0.6 1.1 1.1 0.2 0.6 1.1 1.1
Europe BofA-ML 1.27 1.0 -0.8 2.5 2.5 0.2 0.7 1.1 1.1
UK BofA-ML 3.63 2.9 -2.7 -3.1 -3.1 0.3 -0.2 0.5 0.5
Japan BofA-ML 0.22 0.0 3.0 6.4 6.4 -0.1 0.0 0.7 0.7
HY Corporate Bonds
Global BofA-ML 8.47 2.8 2.7 1.1 1.1 2.6 3.1 1.1 1.1
US BofA-ML 8.80 3.1 3.8 1.3 1.3 3.1 3.8 1.3 1.3
Europe BofA-ML 5.67 2.2 -0.5 0.7 0.7 1.5 1.0 -0.6 -0.6
Cash (Overnight LIBOR)
US 0.37 0.0 0.0 0.1 0.1 0.0 0.0 0.1 0.1
Euro Area -0.29 0.6 -1.8 1.3 1.3 0.0 0.0 0.0 0.0
UK 0.48 2.6 -2.4 -3.4 -3.4 0.0 0.0 0.1 0.1
Japan -0.04 0.2 2.6 5.8 5.8 0.0 0.0 0.0 0.0
Real Estate (REITs)
Global FTSE 1679 4.1 4.3 -0.3 -0.3 3.3 5.8 -1.6 -1.6
Emerging Markets FTSE 1629 7.5 9.6 -3.0 -3.0 6.7 11.2 -4.3 -4.3
US FTSE 2813 3.8 3.6 -0.1 -0.1 3.8 3.6 -0.1 -0.1
Europe ex-UK FTSE 2910 2.9 1.2 -0.5 -0.5 2.2 2.7 -1.8 -1.8
UK FTSE 1046 3.4 -0.1 -3.5 -3.5 2.7 1.4 -4.8 -4.8
Japan FTSE 2637 1.6 4.0 5.4 5.4 1.5 1.1 -0.3 -0.3
Commodities
All GSCI 2091 4.9 4.0 -3.7 -3.7 - - - -
Energy GSCI 335 7.3 5.4 -9.0 -9.0 - - - -
Industrial Metals GSCI 1019 5.1 5.9 6.7 6.7 - - - -
Precious Metals GSCI 1548 4.4 9.4 19.2 19.2 - - - -
Agricultural Goods GSCI 439 1.8 -0.7 -2.5 -2.5 - - - -
Currencies (vs USD)*
EUR 1.10 0.6 -1.8 1.3 1.3 - - - -
JPY 113.76 0.2 2.7 5.8 5.8 - - - -
GBP 1.42 2.5 -2.5 -3.6 -3.6 - - - -
CHF 1.01 0.3 -0.1 0.8 0.8 - - - -
CNY 6.51 0.5 0.9 -0.2 -0.2 - - - -
Total Return (USD, %) Total Return (Local Currency, %)

4. For professional investors only
6 March 2016 Straight from the Source 4
Figure 4 – Equity sector total returns relative to local market
Data as at 04/03/2016 US Europe
1w 1m QTD YTD 1w 1m QTD YTD
Oil & Gas 3.0 1.7 3.6 3.6 2.8 5.0 11.4 11.4
Materials 0.6 0.9 1.8 1.8 2.9 5.4 4.9 4.9
Basic Resources 8.0 15.2 21.8 21.8 13.3 20.8 24.8 24.8
Chemicals -0.6 -1.6 -0.5 -0.5 -1.2 -0.3 -1.9 -1.9
Industrials -0.2 1.7 3.0 3.0 0.9 2.2 4.2 4.2
Construction & Materials 0.5 6.8 6.0 6.0 0.3 1.1 3.6 3.6
Industrial Goods & Services 0.0 1.3 3.1 3.1 1.0 2.5 4.4 4.4
Consumer Discretionary -0.2 1.2 -0.1 -0.1 0.0 0.8 -0.4 -0.4
Automobiles & Parts 3.9 7.9 -4.1 -4.1 5.5 8.1 -4.9 -4.9
Media 0.5 -2.2 3.2 3.2 -2.0 -1.9 1.8 1.8
Retail -1.0 1.6 -1.4 -1.4 0.5 0.6 3.5 3.5
Travel & Leisure -1.3 0.7 0.5 0.5 -2.3 -0.2 0.2 0.2
Consumer Staples -0.8 0.0 4.9 4.9 -1.2 -2.5 5.0 5.0
Food & Beverages -0.6 0.8 3.6 3.6 -1.4 -4.4 2.7 2.7
Personal & Household Goods -0.4 0.5 7.4 7.4 -1.9 -1.8 5.4 5.4
Healthcare -2.5 -2.0 -4.8 -4.8 -3.5 -1.3 -3.5 -3.5
Financials 1.8 0.2 -4.9 -4.9 1.8 0.6 -7.1 -7.1
Banks 2.7 -0.7 -10.0 -10.0 2.9 2.1 -8.8 -8.8
Financial Services 2.1 3.0 -4.5 -4.5 -0.1 1.3 -3.8 -3.8
Insurance 0.0 0.0 -2.7 -2.7 0.8 -1.1 -6.4 -6.4
Real Estate 1.3 -1.2 0.0 0.0 0.1 -3.7 -0.2 -0.2
Technology 0.2 -0.3 -0.9 -0.9 -1.6 -2.5 -0.9 -0.9
Telecommunications -0.6 -0.7 14.4 14.4 -0.8 -2.6 1.1 1.1
Utilities -0.7 -3.1 10.8 10.8 -2.1 -6.8 -0.4 -0.4
We use a sector classification created by merging the two main systems used by Standard & Poors (S&P) for the US and Stoxx for Europe. We have
decided to classify our 10 top level industries using categories that most closely resemble the Global Industry Classification Standard (GICS) and at the
level below that (super sectors) we are using the Industry Classification Benchmark (ICB). The former is used for the S&P 500 index and the latter for the
Stoxx 600, our benchmark indices. The two systems overlap in most cases and the only material difference seems to be in the consumer sectors.
Therefore, we define consumer staples as the aggregate of personal & household goods and food & beverage, while consumer discretionary includes
automobiles & parts, media, retail and travel & leisure. For the rest, we assume 100% overlap for the corresponding top level sectors.
Source: Datastream and Source Research

5. For professional investors only
6 March 2016 Straight from the Source 5
Figure 5 – Upcoming macro events
Country Event Name Period Unit Consensus Prior
Monday – 7
th
March
Japan Leading Index Jan 101.6 102.1
Germany Factory Orders MM Jan % -0.4 -0.7
Eurozone Sentix Investor Confidence Index Mar 8.2 6.0
Tuesday – 8
th
March
Japan Current Account Balance SA Jan ¥bn 1654.8 1635.4
Japan GDP Final QQ Q4 % -0.4 -0.4
China Foreign Reserves Feb $bn 3190 3231
China Trade Balance Feb $bn 50.8 63.3
China Exports YY Feb % -15.0 -11.2
Australia NAB Business Confidence Feb 2
Japan Consumer Confidence Index Feb 42.2 42.5
Japan Economy Watchers Survey Feb 47.5 46.6
Germany Industrial Production MM Jan % 0.5 -1.2
France Trade Balance, SA Jan €bn -3.9
France Current Account Jan €bn -0.7
Spain Industrial Production Cal Adj YY Jan % 3.7 3.7
Eurozone GDP Revised QQ Q4 % 0.3 0.3
United States NFIB Small Business Optimism Feb 94.2 93.9
Wednesday – 9
th
March
Japan Machine Tool Orders YY Feb % -17.2
France Bank of France Business Sentiment Feb 101
United Kingdom Industrial Production MM Jan % 0.5 -1.1
Brazil IPCA Inflation YY Feb % 10.8 10.7
Canada BoC Rate Decision % 0.50 0.50
Thursday – 10
th
March
Japan PPI YY Feb % -3.4 -3.1
China CPI YY Feb % 1.8 1.8
China PPI YY Feb % -4.9 -5.3
Germany Trade Balance SA Jan €bn 17.5 19.0
Germany Exports MM Jan % 0.8 -1.4
France Industrial Production MM Jan % 0.7 -1.6
Eurozone ECB Deposit Facility Rate % -0.40 -0.30
United States Federal Budget Balance Feb $bn -200.0 55.2
Friday – 11
th
March
Japan MOF Business Conditions (All Ind) Q1 4.6
Germany HICP Final YY Feb % -0.2 -0.2
Spain CPI Core YY Feb % 0.9
Italy Industrial Production MM Jan % 0.8 -0.7
United Kingdom Trade Balance Jan £bn -3.0 -2.7
Saturday – 12
th
March
China Retail Sales YTD YY Feb % 10.9 10.7
China Industrial Output YTD YY Feb % 5.6 6.1
Source: Bloomberg and Thomson Reuters

6. For professional investors only
6 March 2016 Straight from the Source 6
Figure 6 – Source Multi-Asset Portfolio
Source: Source Research Note: This is a simulated portfolio (See the latest The Big Picture for more details). Arrows indicate latest changes in allocation.
Neutral Policy Range Allocation Position vs Neutral Hedged Currency
Cash 5% 0-10% 10%
Cash 2.5% 10%
Gold 2.5% 0%
Bonds 45% 10-80% 35%
Government 30% 10-50% 20%
US 10% 8%
Europe ex-UK (Eurozone) 8% 5%
UK 2% 1%
Japan 8% 2%
Emerging Markets 2% 4%
Corporate IG 10% 0-20% 5%
US Dollar 5% 3%
Euro 3% 1%
Sterling 1% 1%
Japanese Yen 1% 0%
Corporate HY 5% 0-10% 10%
US Dollar 4% 8%
Euro 1% 2%
Equities 45% 20-70% 49%
US 25% 20%
Europe ex-UK 7% 14% 100% USD
UK 4% 4%
Japan 4% 8%
Emerging Markets 5% 3%
Real Estate 3% 0-6% 6%
US 1% 1%
Europe ex-UK 1% 2%
UK 0.5% 0%
Japan 0.5% 2%
Emerging Markets 0% 1%
Commodities 2% 0-4% 0%
Energy 1% 0%
Industrial Metals 0.3% 0%
Precious Metals 0.3% 0%
Agriculture 0.3% 0%
Total 100% 100%
Currency Exposure
USD 49% 60% 1
EUR 21% 11% -2
GBP 8% 7% -1
JPY 14% 13% 0
EM 7% 9% 1
Total 100% 100%

7. For professional investors only
6 March 2016 Straight from the Source 7
Figure 7 – Source sector strategy
US Europe Preferred
Neutral Source Neutral Source Region
Oil & Gas 6.5% Underweight 5.5% Underweight Europe
Materials 2.0% Underweight 5.7% Overweight Europe
Basic Resources 0.3% Underweight 1.6% Underweight US
Chemicals 1.7% Underweight 4.1% Overweight Europe
Industrials 11.0% Underweight 12.9% Neutral Europe
Construction & Materials 0.4% Underweight 2.5% Neutral Europe
Industrial Goods & Services 10.6% Underweight 10.4% Neutral Europe
Consumer Discretionary 16.0% Overweight 12.1% Overweight US
Automobiles & Parts 1.0% Underweight 3.1% Underweight US
Media 3.2% Neutral 3.1% Overweight Europe
Retail 8.8% Overweight 4.0% Overweight US
Travel & Leisure 3.0% Overweight 1.9% Overweight US
Consumer Staples 10.8% Neutral 17.8% Neutral US
Food & Beverages 4.9% Overweight 9.0% Neutral US
Personal & Household Goods 5.8% Neutral 8.8% Underweight US
Healthcare 13.7% Underweight 11.4% Underweight US
Financials 17.0% Overweight 20.7% Overweight Europe
Banks 5.6% Overweight 11.4% Overweight Europe
Financial Services 5.0% Underweight 1.9% Neutral Europe
Insurance 3.5% Overweight 5.7% Overweight Europe
Real Estate 2.9% Underweight 1.7% Neutral Europe
Technology 17.2% Neutral 3.9% Neutral US
Telecommunications 2.6% Overweight 5.3% Overweight Europe
Utilities 3.2% Underweight 4.6% Overweight Europe
Source: Datastream and Source Research. Notes: See the latest Source Sector Selector for more details. Arrows indicate latest changes in
recommendations.

8. For professional investors only
6 March 2016 Straight from the Source 8
Authors
Paul Jackson
Head of Research
T.
+
44 (0)20 3370 1172
E. paul.jackson@sourceETF.com
András Vig
Director
T.
+
44 (0)20 3370 1152
E. andras.vig@sourceETF.com
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