IN DETAIL: BUSINESS

Five HorsesWorth Betting On?While nothing can ever be predicted with certainty, The Henley Group shares with us some market developments which, in their view, may materialise in the Year of the Horse, with a particular emphasis on those areas of risks and opportunities that a majority of market participants seem to overlook.

Number One - BitcoinsBitcoin has had a great run in 2013, but we are concerned about up and coming competition to the crypto-currency and therefore do not recommend it as an investment. While the supply of Bitcoins may be limited, the supply of virtual currencies, as such, is not. There are already more than 50 similar currencies being traded on the market, such as Litecoin, Megacoin, BetaCoin and Junkcoin to name but a few, many of these have been launched over the past several months, and they may well dilute each other’s values going forwards.

BritCham Magazine (Issue 29 Jan – Feb 2014)By the British Chamber of Commerce in Hong Kong

www.britcham.com

Martin W. Hennecke

Chief Economist, The Henley Group Limitedmwh@thehenleygroup.com.hk

DISCLAIMER: The purpose of the contents herein is to provide you with general market information and trends. No content herein may be construed as offer, invitation, advertisement, inducement, representation, advice or recommendation of any kind. You should consult with a licensed investment adviser for obtaining professional investment advice that is tailored to suit your specific needs and situation. The Henley Group makes no guarantee, representation or warranty and accepts no responsibility or liability as to the accuracy, completeness or correctness of the contents herein.

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IN DETAIL: BUSINESS

Number Two - RussiaAt an average price-to-earnings ratio of 5-6, which is a more than a 50% discount on the emerging markets average and almost a 70% discount on the developed markets average, Russian equities are now one of the most underpriced asset classes in the world. At the same time, this market also appears to be one of the most neglected, if not despised investments currently available, which is something one typically finds at major market bottoms.

In our view, Russian equities could surprise on the upside this year and beyond, with potential triggers being a planned pension reform that would result in higher local equity-market inflows, as well as the growing air pollution problem of China that may prompt the country to increase natural gas imports from Russia (as a means of reducing the use of coal in favour of cleaner burning natural gas).

Number Three - Property vs EquityHong Kong and China property prices have risen substantially over the past five years and are now the highest in the world in relation to annual household incomes. On the other hand, Hong Kong and China equities have vastly underperformed or outright dropped in the same past five years and are now among the world’s cheapest on a valuation basis.

In our view this trend has overshot and may now reverse course, with equities outperforming physical property prices over the coming years.

Number Four - BondsWestern sovereign bonds including France, Germany the US and the UK probably represent the largest financial market bubble one can find right now, and we would expect prices to fall this year and beyond. Yields are still near record lows, while interest rates and inflation may rise, causing potential capital and purchasing power loss on bonds.

Moreover, the default r isk appears to be completely ignored by investors as well. Standard & Poor’s warned us, back in March 2005, that a crisis leading to eventual default in what is the supposedly safest bonds may be around the corner, starting with France (which coincidently just reported an all-time record high number of unemployed, and meanwhile has already received two downgrades by S&P, just as the agency predicted nine years ago).

Number Five - Precious MetalsThe combination of the factors of an increasing spotlight on precious metals trading (and the alleged manipulation thereof) by Germany’s top banking regulator Bafin, meant strong Asian gold demand continued.

Continued rising mining costs and the return of the Eurozone crisis (despite publicity to the contrary, debt and unemployment across most of the Eurozone) has only continued to grow, and the Bundesbank is now suggesting a special ‘levy’ on tax payers of indebted Eurozone countries to deal with the crisis could lead to a substantial rebound in precious metals prices this year.

Hong Kong and China equities have vastly underperformed or outright dropped in the same past five years and are now

among the world’s cheapest on a valuation basis.