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TUESDAY, 12 MAY 2015
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INVESTMENT IDEAS
NEXT GENERATION: ENERGY TRANSITION
A STRONGER COMMITMENT TOWARDS A CLEANER CHINA
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China is getting serious about environmental regulation.
The ‘Airpocalypse’ of January 2013 was the first catalyst
and the more recent documentary ‘Under the Dome’ only accelerated this trend in public awareness.
In fact, the government has committed to making environment protection an emerging ‘pillar industry’, which
will require investments of RMB 2 trillion (USD 320 billion) per year over the next 5 five years.
Given the growing public consensus, along with the policy imperative, our growth market investment specialists
believe that the ‘Cleaner China’ theme represents a
long-term trend to which investors should pay close attention.
2013 ‘AIRPOCALYPSE’ AS A CATALYST FOR CHANGE
In January 2013, a blanket of warm air settled over the
Chinese capital, trapping beneath it the pollution from the
region’s 200 coal-fired power plants and more than five
million cars. The concentration of particles hit forty times
the level that the World Health Organisation deems as
safe, making the air worse than any smoking lounge and
causing hospitals to report 30% increases in patient admissions. This ‘airpocalypse’ injected a new urgency into
Chinese debate about the environment, which was further
reinforced by the documentary on Chinese pollution by
renowned investigative journalist, Chai Ming, called ‘Under the dome’, which attracted over 100 million viewers in
less than forty eight hours in March 2015.
2000. While the US and Europe are cutting their emissions
by about 70 million tonnes per year combined, China is
still increasing its own by over 500 million tonnes per year.
This makes the Chinese environmental challenge a unique
global threat – and as such should further push the topic
to the forefront of the Chinese policy agenda.
POLICY FOR ENVIRONMENTAL PROTECTION
The environmental urgency has not gone unnoticed by the
government. Indeed, it has already unveiled a series of
reforms to restrict air pollution. For instance, in 2013, it
started the country’s first carbon market, made prosecuting environmental crimes easier and made local officials
more accountable for air-quality problems in their areas.
According to the People’s Bank of China, China will need
to invest RMB 2 trillion (USD 320 billion) every year over
the next 5 five years to meet reduction targets.
NEW INITIATIVES ANNOUNCED BY PREMIER LI
In his annual ‘Government Work Report’ to China’s lawmakers at the opening of their 2015 plenary session in
March 2015 (during the National People’s Congress),
Premier Li called pollution “a blight on peoples’ quality of
life and a trouble that weighs on their hearts”. He delivered a report that introduced important new, stricter environmental regulations. Specifically, these included the
following initiatives:
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CHINA AS A GLOBAL ENVIRONMENTAL THREAT
The situation in China also has a global implication. In
1990, China’s greenhouse-gas emissions made up just
10% of the world’s total. Today, China’s emissions make
up over 30% of the world’s total, accounting for two-thirds
of the global growth in carbon-dioxide emissions since
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Expanding the seven city carbon trading pilot platform
to a national scheme.
Cutting 2015 emissions substantially. Carbon dioxide
intensity will be cut by at least 3.1% reducing both
chemical oxygen demand and ammonia nitrogen emissions by about 2% and reducing emissions of sulphur
Investment Solutions & Advisory, Investment Specialists & Writing | Please find important legal information at the end of this document.
INVESTMENT IDEAS | TUESDAY, 12 MAY 2015
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dioxide by around 3% and nitrogen oxides by about
5%.
A pledge to enforce environmental laws and regulations, cracking down on illegal emissions and ensuring
that heavy penalties are handed out to any offenders
and to hold officials who allow illegal emissions accountable for their conduct.
The government will promote the use of new-energy
vehicles, reduce vehicle exhaust emissions, raise the
national fuel quality standard and provide higher quality petrol and diesel. All highly polluting vehicles registered before 2005 will be banned from the roads
Implementing the ‘Water Act’ - strengthening pollution
control for rivers, lakes, and sea and investing over
RMB 800 billion in new water conservation project construction.
New 3rd-party environment pollution controls and
stricter punishment for polluters.
Further execution of the ‘Air Act’.
Encouraging industrial solid waste recycling usage,
nuclear and hydro energy plants.
All of these initiatives and financial commitments should
benefit companies involved either in the quest for clean
energy (gas, wind and hydro) or better water and waste
treatment.
CONCLUSION FOR INVESTORS
In short, the National People’s Congress has this year
committed further to making environment protection an
emerging 'pillar industry'. These initiatives have already
made China the world’s largest investor in green energy –
a trend which is likely only to accelerate. Our research
department wrote in more detail about China’s efforts to
curb pollution in their Baer®Insight of 30 April 2013 entitled ‘Cleaner China – Striving to curb Pollution’. That pub-
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lication preceded the launch of the JB Tracker Certificate
on the Cleaner China Basket I, which has earned investors
nearly 70% over the last two years, outperforming the
MSCI China Total Return Index by 20%.
Our Growth Market Investment Specialists have now selected a revised basket of stocks that are set to benefit
from the strengthening important secular trend in the
Chinese economic development process. The new JB
Tracker Certificate on the Cleaner China basket II represents a roll-over of the JB Tracker Certificate on the
Cleaner China basket I. This product is in subscription
until 22 May 2015, 17.00 CET. Please see further details
on the next page.
JULIUS BAER NEXT GENERATION
‘Cleaner China’ is part of the Next Generation theme ‘Energy Transition’. Fossil fuel dependence, high prices, climate change and pollution are some of the challenges
spurring energy investments and innovation. We are in the
midst of transition where new technologies move the
world towards a cleaner, more efficient use of all available
resources. The Next Generation Investment Philosophy at
Julius Baer focuses on forward-looking structural changes
and fundamental imbalances within the economy and
society at large and thus looks beyond short-term markets. By spotting megatrends such as demographic shifts,
ecological balance and technological progress, and by
turning our insights into promising investments, we help
our clients not only to make a difference in their portfolio
but also to preserve wealth for the next generation.
www.juliusbaer.com/nextgeneration
INVESTMENT IDEAS | TUESDAY, 12 MAY 2015
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INVESTMENT OPPORTUNITIES
JB Tracker on the Cleaner China Basket II
Suitability
The product is suitable for investors with a high risk tolerance who are seeking exposure to stocks benefitting from
the anti-pollution efforts and investments in China.
Highlights
 The basket consists of ten equally weighted stocks (at
issue date).
 Tracker certificates allow the investor to fully participate
in the performance of the underlying.
 Julius Baer provides a secondary market for the product,
but investors should be aware of the spread risk (bid/ask
margin).
 Due to the Government commitment to enforcing stricter environmental regulations with regards to pollution,
shares of companies active in clean energy (gas, wind
and hydro), water and waste treatment are expected to
generate some above market returns in China.
Indicative terms
Underlying
Cleaner China Basket II
Currency
USD
ISIN
CH0263888247
Number of Holdings
10
Participation
100%
Issue date
02.06.15
Issue price
USD 100.00
Subscription until
22.05.2015 - 17:00 CET
Maturity date
26.05.16
Redemption date
02.06.16
Issuer
Bank Julius Baer & Co. Ltd, Zurich
Issuer Rating
A1 (Moody’s)
Constituents of the Cleaner China Basket II
Company
ISIN
Sector
Currency
Price
Target
Price*
FY1 Div. yield
Julius Baer
P/E
Research Rating
China Everbright International HK0257001336
Industrials
HKD
15.12
14.75
28.64
0.86%
Buy
China Longyuan Power Grp.
CNE100000HD4
Utilities
HKD
9.50
10.92
17.02
1.14%
not covered
Guangdong Investment
HK0270001396
Utilities
HKD
11.08
10.52
16.61
2.52%
not covered
China Gas Holdings
BMG2109G1033
Utilities
HKD
13.44
15.40
20.58
1.10%
not covered
Huaneng Renewables Corp
CNE100000WS1
Utilities
HKD
3.44
3.60
16.02
1.16%
not covered
Beijing Enterprises Water
BMG0957L1090
Utilities
HKD
6.59
6.75
25.94
1.37%
not covered
Wasion Group Holdings
KYG9463P1081
Information Technology
HKD
11.76
11.88
14.85
2.53%
not covered
Xinjiang Goldwind Sc. & Tech CNE100000PP1
Industrials
HKD
17.62
17.68
17.04
2.80%
not covered
Huadian Fuxin Energy Corp
CNE100001F60
Utilities
HKD
3.92
5.11
10.40
1.88%
not covered
Beijing Enterprises Holdings
HK0392044647
Industrials
HKD
71.60
72.13
15.63
1.67%
not covered
Data as of 12 May 2015; Source: Bloomberg Finance L.P., Julius Baer
*Target prices: Bloomberg Finance L.P. consensus target
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EQUITY RESEARCH
Frequently used abbreviations
Abbreviation Description
Abbreviation Description
Abbreviation Description
CAGR
Compound annual growth
rate
EPS
Earnings per share
P/B
Price-to-book value
DCF
Discounted cash flow
EV
Enterprise value
P/E
Price-to-earnings ratio
DY
Dividend yield
FCF
Free cash flow
PEG
P/E divided by year-onyear EPS growth
EBIT
Earnings before interest
and taxes
MV
Market value
ROE
Return on equity
EBITDA
Earnings before interest,
taxes, depreciation and
amortisation
Rating system for global equity research (stock rating)
Buy/Overweight
Expected to outperform the MSCI regional industry group by at least 5% in the coming 9–12 months, unless
otherwise stated.
Hold/Neutral
Expected to perform in line (±5%) with the MSCI regional industry group in the coming 9–12 months, unless
otherwise stated.
Reduce/Underweight
Expected to underperform the MSCI regional industry group by at least 5% in the coming 9–12 months, unless
otherwise stated.
Risk rating system for global equity research
Low/medium/high
Level of expected share price volatility in the next 9-12 months.
FIXED INCOME RESEARCH
Frequently used abbreviations
Abbreviation Description
Abbreviation Description
Abbreviation Description
Ccy
Currency
NC
Next call date (at the discretion of the issuer)
YTC
Yield to Call; in %
Cpn
Coupon
N.R.
Not rated by Julius Baer
Bond Research
YTM
Yield to maturity; in %
DUR
Duration in years
NP
Next put date (at the discretion of the holder)
YTP
Yield to Put; in %
Incr.
Increment; smallest possible positive change of the
nominal amount tradable
(on top of the minimum
nominal investment size).
W-Tax
Withholding Tax held
back at source
(best effort basis; source:
Euroclear/Julius Baer host
system).
YTW
Yield to worst; in %
Mdy’s
Moody’s
YAS
Yield adjusted spread;
option adjusted risk premium in basis points over
respective government
bond yield curve.
ASW
Asset Swap Spread; spread
over LIBOR in basis points
Rating system for Fixed Income
Buy
Within its risk category, the issuer is highly recommended due to its financial and business condition (strong balance sheet,
income statement, cash flow and good position in the industry). Debt instruments of the issuer are regarded as an attractive
investment from a risk/return perspective.
Hold
Maintain position based on stable credit fundamentals and/or average expected return characteristics within peer group.
Sell
The rating is changed to Sell, depending on a significant deterioration in the fundamental data of the issuer in relation to the
industry peers. The investment is no longer justified from a risk/return perspective for the relevant category.
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Risk categories for Fixed Income Research
Conservative issuer
Top rating preserved throughout a normal business cycle. Mainly supranational issuers, top-rated sovereigns
and bodies that are directly and fully guaranteed by these institutions.
Quality issuer
Top rating preserved throughout a normal business cycle. Sovereigns and corporate issuers that are very likely
to service and repay debt within a five-year credit scenario.
Opportunistic issuer
Attractive risk/return profile in the current credit scenario but are subject to rating downgrade risk and, thus,
might be exchanged periodically. Issuers that are quite likely to service and repay debt within the five-year
credit scenario.
Speculative issuer
(Sub-) investment grade issuers in Europe, USA and Emerging Markets. Investors must note that these issuers
are subject to a higher default frequency and that an active management of these positions is crucial.
Non-investment grade
Investment grade
Credit ratings, following the definitions and methodology of credit rating agencies
Moody’s
S&P
Fitch /
I BCA
Credit rating definition
Aaa
AAA
AAA
Obligations rated Aaa are judged to be of the higher quality, with minimal
credit risk.
Aa1
AA+
AA
Aa2
AA
AA-
Obligations rated Aa are judged to be of high quality and are subject to
very low credit risk.
Aa3
AA-
A1
A+
A+
A2
A
A
A3
A-
A-
Baa1
BBB+
BBB+
Baa2
BBB
BBB
Baa3
BBB-
BBB-
Ba1
BB+
BB+
Ba2
BB
BB
Ba3
BB-
BB-
B1
B+
B+
B2
B
B
B3
B-
B-
Caa1
CCC+
CCC+
Caa2
CCC
CCC
Caa3
CCC-
CCC-
Ca
CC
CC+
C
CC
Obligations rated A are considered upper-medium grade and are subject
to low credit risk.
Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics.
Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk.
Obligations rated B are considered speculative and are subject to high
credit risk.
Obligations rated Caa are judged to be of poor standing and are subject to
very high credit risk.
Obligations rated Ca are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and interest.
CCC
D
DDD
Obligations rated C are the lowest rated class of bonds and are typically in
default, with little prospect for recovery of principal or interest.
COMMODITY RESEARCH
Rating system for commodities
Bullish (Buy)
Julius Baer commodity research sees upside from current spot prices.
Neutral (Hold)
Julius Baer commodity research believes prices to remain range-bound.
Bearish (Sell)
Julius Baer commodity research sees downside from current spot prices.
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CURRENCY RESEARCH
Frequently used abbreviations
Major currencies
Other currencies
AUD
Australian dollar
JPY
Japanese yen
BRL
Brazilian real
MXN
Mexican peso
CAD
Canadian dollar
NOK
Norwegian krone
CNH
Chinese yuan
(offshore version)
MYR
Malaysian ringgit
CHF
Swiss franc
NZD
New Zealand dollar
CNY
Chinese yuan
(onshore version)
PLN
Polish zloty
EUR
Euro
SEK
Swedish krone
CZK
Czech koruna
RMB
Chinese renminbi
GBP
British pound
USD
US dollar
HUF
Hungarian forint
RUB
Russian ruble
INR
Indian rupee
TRY
Turkish lira
KRW
Korean won
ZAR
South Africa rand
Rating system for currencies
Positive
Significant outperformance of a currency. Return from the expected change in the bilateral exchange rate + the relative carry of the currency pair.
Neutral
Marginal outperformance of a currency. Return from the expected change in the bilateral exchange rate + the relative
carry of the currency pair.
Negative
Based on negative expected total returns of a currency.
FUND SOLUTIONS
Frequently used abbreviations
Abbreviation
Description
Abbreviation
Description
NAV
Net asset value
TER
Total expense ratio
Investment styles for funds
Independent growth
The product seeks to generate positive returns (Libor plus), irrespective of market movements.
Opportunistic
The performance of the product depends on a manager’s longer term ideas that may result in shorter term
underperformance.
Market exposure
The product creates full and diversified exposure to the respective underlying market with the aim of generating relative outperformance.
Prudent participation
The product builds controlled exposure to the underlying investment universe and is therefore supposed to
lose less in bear markets.
Distribution types for funds
Accumulation
All capital income (e.g. dividends, interest income) is reinvested.
Income
Capital income (e.g. dividends, interest income) is distributed among investors. The amount of distributed capital
income is at the discretion of the fund manager.
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Julius Baer risk rating for funds
The Julius Baer Product Risk Rating divides financial instruments into four risk categories taking into account different risk factors,
such as volatility, credit default risk, currency risk and other risk factors, depending on the instrument type. The risk category “Low”
does not mean “risk free”. The Julius Baer Product Risk Rating is not aligned with the risk classification of the product provider (e.g.
the SSRI for UCITS funds). For a full discussion of the risks associated with an investment in this fund, prospective investors should
carefully review the current official fund documentation, such as the Prospectus, the Offering Memorandum, Product Highlight Sheet,
Key Facts Sheet and the Key Investor Information Document (KIID), as applicable.
Low
Funds of the category “low” tend to experience small fluctuations of the investment value under normal market conditions, resulting in a very limited potential for capital losses but also have limited potential for income and capital
growth.
Moderate
Funds of the category “moderate” offer a combination of modest income and growth potential but may experience
short term losses and moderate fluctuations of the investment value.
Considerable
Funds of the category “considerable” may experience the risk of considerable fluctuation of the investment value
while offering higher potential for capital growth and income.
High
Funds of the category “high” are exposed to significant risk and fluctuation including the loss of the investment value,
while providing the potential to maximize long term growth opportunities.
MISCELLANEOUS
Frequently used abbreviations
Abbreviation Description
Abbreviation Description
Abbreviation Description
ETC
Exchange Traded Commodity
KG
Kilogram
Mln
Million
ETF
Exchange Traded Fund
mBtu
Million British Thermal
Units
Oz
Ounces
ISIN
International Securities
Identification Number
Frequently used abbreviations for indices
Abbreviation Description
Abbreviation Description
Abbreviation Description
AEX
Amsterdam Exchange
Index (Dutch stock market
index)
HIS
Hang Seng Index (Hong
Kong stock market index)
SMI
Swiss Market Index
CAC40
Cotation Assistée en
Continu (French stock
market index)
KFX
Copenhagen Index (Danish
stock market index)
SPX
Standard & Poor’s Index
DAX
Deutscher Aktien Index
(German stock market
index)
MEXBOL
Mexican Bolsa (Mexican
stock market index)
TPX
Topix – Tokyo Stock Price
Index (Japanese stock
market index)
FTSE100
FTSE Group Index (London
stock market index)
OMX
Stockholm Index (Swedish
stock market index)
Definitions
Conversion premium
Percentage amount of price paid for the convertible security exceeding its current straight price.
Delta
Calculated ratio of price change if underlying changes by 1%.
Nominal
Nominal; minimum nominal investment size (in respective currency).
Payment rank
Rank with respect to payment of distributions for the security.
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IMPORTANT LEGAL INFORMATION
This publication constitutes marketing material and is not the result of independent financial research. Therefore the legal requirements regarding the independence of financial research do not apply. This material is not independent from the proprietary interests
of Julius Baer, which may conflict with your interests.
The information and opinions expressed in this publication were produced by Bank Julius Baer & Co. Ltd., Zurich, as of the date of
writing and are subject to change without notice. This publication is intended for information purposes only and does not constitute an offer or an invitation by, or on behalf of, Julius Baer to make any investments. Opinions and comments of the authors reflect
their current views, but not necessarily of other Julius Baer entities or any other third party.
Services and/or products mentioned in this publication may not be suitable for all recipients and may not be available in all countries.
Clients of Julius Baer are kindly requested to get in touch with the local Julius Baer entity in order to be informed about the
services and/or products available in such country.
This publication has been prepared without taking account of the objectives, financial situation or needs of any particular investor.
Before entering into any transaction, investors should consider the suitability of the transaction to individual circumstances and
objectives. Any investment or trading or other decision should only be made by the client after a thorough reading of the relevant
product term sheet, subscription agreement, information memorandum, prospectus or other offering document relating to the issue of
the securities or other financial instruments. Nothing in this publication constitutes investment, legal, accounting or tax advice,
or a representation that any investment or strategy is suitable or appropriate for individual circumstances, or otherwise constitutes a
personal recommendation for any specific investor. Julius Baer recommends that investors independently assess,
with a professional advisor, the specific financial risks as well as legal, regulatory, credit, tax and accounting consequences.
Past performance is not a reliable indicator of future results. Performance forecasts are not a reliable indicator of future
performance. The investor may not get back the amount invested.
Although the information and data herein are obtained from sources believed to be reliable,
no representation is made that the information is accurate or complete. Bank Julius Baer & Co. Ltd., Zurich,
its subsidiaries and affiliated companies do not accept liability for any loss arising from the use of this publication.
Investments in funds mentioned in this publication should only be made after a thorough reading of the current prospectus,
the current Key Investor Information Document or simplified prospectus, the fund regulations or articles of association and the latest
annual and semi-annual reports. These documents can be obtained free of charge upon request. The value of the units and the return
they generate can go down as well as up. Performance values are calculated without taking account of commissions and costs that
result from selling and buying back investments.
Structured products (e.g. baskets, certificates) are complex financial products and therefore involve a higher degree of risk. They are
intended for investors who understand and are capable of assuming all risks involved. Structured products may therefore only be sold
to experienced investors and require additional advice regarding the products specific risks.
The value of the products is not only dependent on the development of the underlying, but also on the creditworthiness of the issuer,
which may vary over the term of the product. In case of the issuer’s insolvency or bankruptcy, the investor in the product may lose his
entire investment. Before entering an investment all documents related to the issue of the described structured product has to be read.
The full terms of the respective structured product may be obtained free of charge.
The investor may be exposed to currency risk, because the product or underlyings of the product are denominated in other currencies
than that of the country in which the investor is resident. The investment as well as its performance are therefore exposed to currency
fluctuations and may increase or decrease in value.
This publication may only be distributed in countries where its distribution is legally permitted.
This publication is not directed to any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise)
such publications are prohibited.
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Authority to provide investment marketing and portfolio management services. Pursuant to Israeli law, ‘investment marketing’ is the
provision of advice to clients concerning the merit of an investment, holding, purchase or sale of securities or financial instruments,
when the provider of such advice has an affiliation to the security or financial instrument. Due to its affiliation to Bank Julius Baer &
Co. Ltd., JBFS is considered to be affiliated to certain securities and financial instruments that may be connected to the services JBFS
provides, and therefore any use of the term ‘investment advice’ or any variation thereof, in this publication should be understood as
‘investment marketing’, as explained above. A Julius Baer entity, including JBFS, may have an affiliation with certain financial instruments and/or other financial products. It should be noted that with respect to these financial instruments or products, a Julius Baer
entity and/or JBFS may receive a financial or other benefit as a result of the client's investment, and JBFS may give preference to these
INVESTMENT IDEAS | TUESDAY, 12 MAY 2015
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financial instruments or products in connection with the services it provides its clients. For further information about our interest in the
investments featured in this publication, please contact your relationship manager.
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note that Julius Baer (Bahrain) B.S.C.(c) offers financial products or services only to expert and accredited investor clients in line with
the definition of the CBB’s rulebook that contains regulations, directives and rules pursuant to the CBB rulemaking powers under the
CBB law. This publication may not be relied upon by or distributed to retail clients. The CBB does not take any responsibility for the
accuracy of the statements and information contained in this publication nor shall it have any liability to any person for any damage or
loss resulting from reliance on any statement or information contained herein.
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supervised by the Capital Markets Authority.
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Market Supervisory Authority FINMA and is distributed by Julius Baer Investment Services S.à r.l., authorised and regulated by the
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publication produced by Bank Julius Baer & Co. Ltd., Zurich, an institution in Switzerland under the supervision of the Swiss Financial
Market Supervisory Authority FINMA.
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instruments mentioned in this publication are neither registered with nor under the supervision of the Superintendence of the Securities Market (formerly the National Securities Commission). The exemption from registration is based on numerals 2 (private placement) and/or 3 (institutional investors) of Article 129 of Decree Law 1 of July 8, 1999 as amended and organized into a single text by
Title II of Law 67 of 2011 (the “Securities Law”). In consequence, the tax treatment established in Articles 334 to 336 of the Securities
Law, does not apply to them.
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distributes this publication to its clients. The relevant services and/or products mentioned in this publication shall only be provided in
Spain by a Julius Baer entity authorised to provide such services/products in Spain. This publication has been produced by Bank Julius
Baer & Co. Ltd., Zurich, which is supervised by the Swiss Financial Market Supervisory Authority FINMA.
Switzerland: in Switzerland this publication has been distributed by Bank Julius Baer & Co. Ltd., Zurich, authorised and regulated by
the Swiss Financial Market Supervisory Authority FINMA. All investment funds mentioned in this publication are authorised for distribution in Switzerland. Structured products do not constitute a participation in a collective investment scheme. Therefore, they are not
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INVESTMENT IDEAS | TUESDAY, 12 MAY 2015
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