CM15007 Compendium July

Monthly market commentary
July 2015
Contents
Equities 2
Credit 3
Nominal Yields 4
Inflation 5
Real Yields 6
Asset Class Performance Summary 7
Editor’s Choice 8
Contacts & Disclaimer 9

Equities fall over the month as Eurozone crisis enters unchartered
territory and Chinese equity correction continues
Page 2 of 9
Equity indices
• Equities fared poorly over the month with all indices suffering losses.The FTSE All-Share was the worst
performer, declining by 5.7%, followed by the FTSE Emerging Market Index (-5.1%) and the EuroStoxx 50
(-3.9%).TheTopix fell by 2.4% and the S&P 500 was down 1.9%. Over the month, stock markets seemed to
be mostly driven by major events such as the escalation of the Greek Crisis and ongoing concerns about the
Chinese slowdown.
• The heavy fall in the FTSE All-Share Index probably did not reflect much of the UK economy as economic
data that came in over this month was relatively good; purchasing manager indices showed a pick-up in
construction as well as the highest level of confidence in this sector in more than a decade.The UK economy
is still expected to expand comfortably above 2% this year. However, given the high proportion of global
mining stocks in the FTSE All-Share Index, the ongoing slowdown in China sapped confidence with this
month’s sharp correction in the Chinese stock markets serving as a reminder.
• China was probably also an important factor for the poor performance in emerging markets as a slowing
Chinese economy is expected to take a heavy toll on commodity-exporting countries. Furthermore, as an
interest rate increase by the Federal Reserve is becoming increasingly likely, as early as September this year,
even more turbulent times might be ahead for many emerging market countries who could see substantial
capital outflows as a result.Those who rely on foreign capital to fund their current account deficit would be
especially heavily hit.
• European equities suffered as the Eurozone crisis entered into its most critical territory since summer of 2012.
The ongoing brinkmanship by Greek’s government further risked an exit from the single currency. By the end
of the month, capital controls and a daily deposit withdrawal limit had to be introduced as Greece defaulted
on an IMF payment, joining the ranks of Sudan, Cuba, Zimbabwe and the Democratic Republic of Congo.The
no vote to the referendum on whether to accept the austerity measures imposed on Greece’s by its creditors
gave Syriza the support of voters to continue negotiations with the European Union and International
Monetary Fund.
• Losses in US markets were limited due to another spree of good data. Persistently strong non-farm payrolls,
an upward revision of first quarter GDP growth, high levels of consumer confidence and consumption
suggested that the US economy keeps expanding. Progress in negotiating a free-trade agreement with a large
group of Asian countries added to the positive news.
Equity Markets Index
Percentage Change
28/02/2015 1 Week 1 Month 1 Year
S&P 500 (TR) 3816 -2.8% -1.9% 7.4%
FTSE All-Share (TR) 5614 -4.1% -5.7% 2.6%
EuroStoxx 50 (TR) 6492 -5.6% -3.9% 8.8%
Topix (TR) 2253 2.7% -2.4% 31.5%
FTSE Emerging
Market Index (TR)
700 -1.5% -5.1% 6.7%
S&P 500 TR
FTSE All-Share TR
EuroStoxx 50 TR
Topix TR
FTSE Emerging Market Index
(TR)
Figure 1: Equity Market Returns (rebased at 100)1
Source: Bloomberg, Capita
1
Total returns in local currency

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Credit
• An increase in spreads on fixed income for all ratings might reflect the increased volatility driven
by global events over the month as well as uncertainty regarding the impact of first interest rate
increases by the Federal Reserve and Bank of England.
Bracing your fixed income portfolio for rising interest rates
• Policy rate increases appear to be a foregone conclusion – at least in the UK and the US, where the economic
recovery remains entrenched and central banks are just waiting for signs of a sustained pick-up in wages
and inflation before making their first move.
• For pension schemes in particular, this should not be a big problem. Fixed income securities are normally
held as liability matching assets to hedge interest rate risk and should therefore move in line with liabilities.
Trustees of pension schemes might still feel tempted to take a view on interest rates and monetary policy
shifts to protect their fixed income portfolio against losses arising from central bank policy rate increases.
In the optimal case, rising interest rates would reduce liabilities without affecting the fixed income portfolio
when hedged with derivatives, leading to an even more pronounced improvement in the funding level.
• Even though there are ways to achieve this, it might be a better idea forTrustees to focus on stabilising
their funding level and following a long-term strategy that allows them to de-risk over time instead
of trying to predict short-term movements in interest rates. Such tactical decisions are probably
better delegated to active fund managers.
• There are certainly methods which active fund managers can employ to reduce the impact of interest rate
movements on the ultimate return of their fixed interest holdings, for example through the use of derivatives.
• IfTrustees are interested in seizing short-term opportunities, a multi asset fixed income manager may
be the most appropriate option as they can add value to the fixed income portfolio by taking views on
short-term developments with sufficient expertise and resources to efficiently manage risk and react
to quickly changing market conditions.
1 Week Movements
1 Month Movements
1 Year Movements
Credit: spreads widen over the month for all ratings
Figure 2: GBP Corporate Bond Spreads over Gilts by Rating
(change over week/month/year)
Figure 3: GBP Corporate Bond Spreads over Gilts by Rating (Historic)
Source: Bloomberg, Bank of America Merrill Lynch, Capita
Source: Bloomberg, Bank of America Merrill Lynch, Capita
CreditSpreads(bps)
AAA AA A BBB
PremiumoverGilts(+15YrGiltsIndex)%

0 10 20 30
Nominal Yields: Gilt yields increase over the month
Page 4 of 9
Nominal Gilt yields – the recent pick up might not be sustained
• Nominal gilt yields rose over the month for all maturities but the shape
of the yield curve remained largely unchanged.
• A continuing flow of positive economic data from the UK makes an interest rate increase by the Bank
of England more likely – especially once the oil price effect drops out of the inflation rate calculation
later this year. Sustained wage pressure can already be noticed with the recent pick-up in average earnings.
• However, this pickup in gilt yields might still prove to be short-lived. Current developments in the
Eurozone could lead to renewed inflows into safe havens.
• Furthermore, markets are starting to anticipate the potential outcome of next year’s EU referendum.
Prime Minister David Cameron’s cautious approach so far seemed to be well received in Brussels
and many European leaders are aware that the European Union would want to avoid a “Brexit”.
Nevertheless, differences on core issues such as freedom of movement remain.
• Even though most recent YouGov polls show that a majority of British people might vote to stay in the EU,
there is always a degree of uncertainty associated with polling. Negotiations on EU reforms remain ongoing
and the outcome of these could greatly influence public opinion and perception.
• Gilt yield volatility could increase as we get closer to the referendum. Given that uncertainty tends to lead
to rising demand for gilts, yields might not rise as much as they otherwise could have, at least until after the
referendum (and subject to its outcome).
Figure 4: Nominal Term Structure of Gilts
Nominal Gilt Rates
Maturity Points (yrs)
2 5 10 15 20 30
Current % 0.56 1.51 2.02 2.42 2.65 2.72
1 Week Change (bps) -6 -5 -8 -10 -10 -12
1 Month Change (bps) 5 16 21 20 22 18
1 Year Change (bps) -31 -53 -65 -74 -66 -71
2 5 10 15 20 30
RedemptionYield%Change(bps)
Maturity (years)
Maturity (years)
Gilt Change m/m

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Inflation
• The consumer price index rose by 0.1% in the year to May 2015, compared to 0.1% fall in
the previous month. The largest upward contributors were transport, motor fuels and food,
partly offset by recreation and culture.
• As expected, UK deflation seemed to have been short-lived as an expanding economy
and rising wages are starting to put pressure on prices.
• Once the oil price effect falls out later this year (i.e. the base month of the year on year
comparison will also have low oil prices), inflation is expected to pick up more rapidly
from then and gradually return to normal levels of close to 2%, which is the Bank
of England’s inflation target. Oil prices are expected to stay low if the imminent Iran
agreement leads to a return of its exporters to the market. This would increase supply
even more and could lead to lower prices.
Gilt Breakeven
Inflation
2 5 10 15 20 30
Current % 2.08 3.07 2.98 3.16 3.40 3.42
1 Week Change (bps) -9 -4 -5 -5 -2 -4
1 Month Change (bps) -1 10 12 8 10 4
1 Year Change (bps) -41 -23 -15 -14 0 -4
Inflation: UK deflation proved to be short-lived
Figure 5: Gilt Breakeven Inflation2
Figure 6: CPI in the UK, US and Eurozone
2
Gilt breakeven inflation has been calculated as the difference between nominal Gilt yields
and Gilt real yields.
Maturity (years)
BreakevenInflation%
Changey/yin%
Maturity (years)
Change(bps)
Break even inflation
Change m/m

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Gilt Real Yields
• The real yield curve shifted up and its shape stayed pretty much in line with nominal yields.
• Real yields still remained deep in negative territory as long-term inflation expectations have
hardly been affected by the recent temporary bout of deflation.
Gilt Real Yield
2 5 10 15 20 30
Current % -1.52 -1.56 -0.96 -0.75 -0.75 -0.71
1 Week Change (bps) 3 -1 -3 -5 -8 -8
1 Month Change (bps) 6 6 10 13 12 14
1 Year Change (bps) 10 -30 -50 -59 -66 -67
Real Yields rise in line with nominal yields
Figure 7: Gilt Real Yield3
Term Structure Figure 8: 10-year and 30-year Real Yields
3
Gilt real yield has been calculated as the yield on index-linked Gilts
0 10 20 30
2 5 10 15 20 30
Maturity (years)
Maturity (years)
RealRedemptionYield%Change(bps)
Yield

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Asset Class Performance Summary
The charts below and the table on the left show the one month and one year performance of
various asset classes to the end of June 2015.
Asset Class Performance Summary
Asset Class 1 Month Return 1 Year Return
FTSE All-Share TR -5.7% 2.6%
S&P 500 TR -1.9% 7.4%
Eurostoxx 50 TR -3.9% 8.8%
Topix TR -2.4% 31.5%
FTSE AW Emerging Market Index TR -5.1% 6.7%
FTSE A Gilt +15 Yrs -3.2% 16.3%
iBoxx Non-Gilt £ 10+ TR -3.9% 8.8%
FTSE A ILG +5 Yrs -2.8% 15.8%
FTSE UK Commercial Property Index 0.0% 14.7%
1 Month LIBOR 0.0% 0.5%
1 Month Return 1 Year Return
-4% -2%-6% 0% 2%
FTSE All-Share TR
S&P 500 TR
Eurostoxx 50 TR
Topix TR
FTSE AW Emerging Market Index TR
FTSE A Gilt +15 Yrs
iBoxx Non-Gilt £ 10+ TR
FTSE A ILG +5 Yrs
FTSE UK Commercial Property Index
1 Month LIBOR
FTSE All-Share TR
S&P 500 TR
Eurostoxx 50 TR
Topix TR
FTSE AW Emerging Market Index TR
FTSE A Gilt +15 Yrs
iBoxx Non-Gilt £ 10+ TR
FTSE A ILG +5 Yrs
FTSE UK Commercial Property Index
1 Month LIBOR
45%30%15%0%

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Ireland:One way to balance the books
During the financial crisis of 2008/2009, many countries all
over the world were affected to different extents. Ireland found
itself being sucked towards the epicentre of these events.The
people of Ireland could only stand and watch as their economy
swayed, trembled and very nearly crumbled under the mighty
pressure of the “Great Recession”.
The Irish banking system was the root cause of the country’s
problems. Property prices had soared to heights that were
never before seen. Banks fuelled this by expanding credit to
both developers and households, but seemed to be unaware
of the risks building up on their balance sheets. A sharp decline
in property prices ensued and banks suffered massive losses
on their loans. Simultaneously, inter-bank lending began to
tighten. Irish banks were sinking into a big hole of debt while
cheap short term funding on which they had been relying to
refinance their debt was rapidly drying up.The final blow to
the Irish economy was struck when the decision was made to
recapitalize the banking system with Irish taxpayers suffering
the losses. In November 2010, after a lengthy negotiation with
the European Union, a bailout program totalling €85 billion
was agreed upon.
When we look at Ireland and Greece, we see two countries
who have faced a similar battle to overcome a debt crisis
but there is stark contrast in how each have approached it.
Through harsh austerity measures, Ireland approached their
crisis by raising taxes, cutting expenditure and downsizing its
welfare state. In 2011, the nation experienced their toughest
budget ever that would trim circa €6 billion from the deficit.
Cut backs included deducting €400 million from public service
pay, increasingVAT from 21% to 23%, alongside many other
difficult decisions such as lowering child benefits and closing
police stations. Since 2008, high unemployment rates reaching
30% have seen over 200,000 young people to emigrate out of
the country in search of work abroad. However, for the rest of
the population that stayed, accepting the policies put in place
by the EU and International Monetary Fund (IMF), the Irish
collectively decided to deal with their issues that were made
through harsh austerity measures.
Two years before Ireland received the bailout, the country had
already begun increasing taxes and making huge spending cuts
and as a consequence it passed every quarterly review by the
country’s bailout monitor with ease. Greece, on the other hand,
partly resisted calls for reforms and budget consolidation. Its
last election earlier this year saw a large proportion of Greek
voters giving their vote to anti-bailout parties.The Greek Prime
Minister, AlexisTsipras, took a bold step to test the support for
continuing to push back against creditor’s demands by holding
a referendum on whether to accept the bailout conditions set
by its creditors. Even though the “No” vote won with 61.3%, a
bailout agreement was reached in the 11th hour, but only after
the country had been pushed closer to an uncoordinated exit
from the Eurozone than ever before.
The Irish example highlights one way to deal with a financial
crisis, being the first Eurozone country to successfully exit a
bailout. In 2013, the Irish Prime Minister Enda Kenny and leader
of the Fine Gael party announced that the country had saved
€28 billion (£20.5 billion) and that they would exit the bailout
by the end of the year. He remained true to his word and the
official exit was completed in December.This was a milestone
for the people of Ireland that marked massive progress and
reward for the sacrifices made. At this junction, the Greek
population has signalled some austerity-fatigue and, by voting
Syriza to power, a desire to roll back some of the reforms.
However, any way forward must be agreed by Greece as well as
by their creditors.The IMF recently raised questions about the
sustainability of Greek debt levels, and even suggested that it
might walk away from the recent deal unless all parties agree a
solution that will lead to long-term sustainability.
Greece like Ireland before the recession, saw strong economic
growth, albeit fuelled partly by cheap credit. Both countries
have been hit hard by the financial crisis. While Ireland has
showcased one example of how to deal with a financial crisis
and has reaped the benefits of this, Greece must now work
together with its creditors to find their own sustainable path to
renewed economic prosperity.
Derek is an investment analyst. Whilst the article below does not reflect Capita’s view or opinions,
it shows the development in thinking of one of our investment team.
Derek Phelan

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In preparing this report we have relied upon data supplied by third
parties. Although reasonable care has been taken to gauge the reliability
of this data, this report therefore carries no guarantee of accuracy or
completeness, and Capita Employee Benefits (“Capita”) cannot be held
accountable for the misrepresentation of data by third parties involved.
The report is for your private information and is for discussion
purposes only.
This report is based on data/information available to Capita at the date
of the report and takes no account of subsequent developments after
that date. It may not be modified or provided by the Recipients to any
other party without Capita’s prior written permission. It may also not
be disclosed by the Recipients to any other party without Capita’s prior
written permission except as may be required by law. In the absence
of our express written agreement to the contrary, Capita accepts no
responsibility for any consequences arising from any third party relying
on this report or the opinions expressed therein.
This report is not intended by Capita to form a basis of any decision by a
third party to do or omit to do anything.
Bobby Riddaway
Head of Investment Consulting
t 020 7709 4532
e bobby.riddaway@capita.co.uk
Albert Küller
Chief Economist
t 020 7709 4912
e albert.kuller@capita.co.uk
Capita Employee Benefits is a trading name of Capita Employee Benefits Limited and Capita Employee Benefits (Consulting) Limited. Part of Capita plc.
www.capita.co.uk. Capita Employee Benefits Limited and Capita Employee Benefits (Consulting) Limited are registered in England & Wales No: 02260524 and 01860772 respectively.
Registered Office: 17 Rochester Row, Westminster, London, SW1P 1QT. Separately authorised and regulated by the Financial Conduct Authority.
CM15007
www.capita.co.uk/employeebenefits
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Contacts & Disclaimer

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