The Henley Group's Market Outlook for February 2013

Henley Market OutlookFEBRUARY 2013

Off and away!

Hong Kong | Singapore | Shanghai THE WEALTH MANAGEMENT PROFESSIONALS

The Henley Outlook February 2013Hong Kong, Singapore & Shanghai

EquiTiES

Global Overview ............................................................................................................................................. 3

Cash & Currencies ............................................................................................................................................. 5

Fixed Income .............................................................................................................................................. 6

Property ............................................................................................................................................. 7

Equities US .............................................................................................................................. 8

Japan ................................................................................................................................ 8

UK ....................................................................................................................................... 9

Europe Ex UK ................................................................................................................. 9

Australia ....................................................................................................................... 10

ASEAN .......................................................................................................................... 10

Greater China ............................................................................................................... 11

India ............................................................................................................................. 11

Other Emerging Markets ........................................................................................ 12

Commodities Energy ..............................................................................................................................13

Precious Metals ............................................................................................................13

Industrial Metals ......................................................................................................... 13

Agriculture ............................................................................................................. 14

Alternative Investments ............................................................................................................................................15

2

CONtENt

tHE INvEStMENt COMMIttEE

Peter Wynn WilliamsInvestment Director

& Partner

Andrew KellyPartner

David ReynoldsPartner

George RipponPartner

Simon LiuHead of Investment

Research

Paul BradyPartner

Chris SkinnerPartner

Mattias HoijerAssociate Investment

Director

the Henley Investment Committee combines more than 110 years’ experience and is unique in being backed by a full-time team of five investment professionals to optimise asset allocation and manager selection.

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GLOBAL OvERvIEW

YEAR OF tHE SNAKE? OR YEAR OF tHE LADDER?!

Chocks away, Biggles! Equity-market indices in New York, tokyo and London are all up over 7% so far this year; and, while silver is keeping up with them, gold was unchanged in January and US treasury prices are at nine-month lows. Governments and the mainstream media would have us believe that sentiment is positive, confidence is rising and recovery is just around the corner. Hard data, however, present a very different picture. Why have markets and fundamentals de-coupled so much?

Sorry, there are no prizes for guessing: excess debt and money printing. In the lead up to the credit crunch in 2008, the developed world essentially reached the limit of its capacity to borrow. Markets have their own very efficient ways of dealing with excessive debt (default, insolvency and write-offs); but governments want to avoid the political, economic and social consequences – not to mention an implosion of the quadrillion-dollar derivatives universe, of whose problems most mere mortals like us are largely unaware.

So, in 2008, governments started printing money. So far, they have printed about USD15tn and thrown this liquidity at the world’s insolvency problems, using various pretences such as boosting economic growth or reducing unemployment. the real reason for the money printing has been to fund government deficits, to keep the banks solvent and the system afloat. that US GDP growth turned negative in the quarter after QE to infinity was announced last September was deliciously ironic.

But now, the crisis has entered a new phase, which smells of desperation. American QE is now unlimited in size and open-ended in duration. Europe has announced (although not yet activated) a similar programme; and, last month, Japan announced its own open-ended QE programme alongside a fiscal stimulus equivalent to USD225bn. the UK is also considering re-activating its QE programme.

As an aside – pardon me for being my usual cynical self – but I had to chuckle when the US announced last month the “temporary suspension” of their debt ceiling. those were exactly the same two words President Nixon used when he announced in 1971 that he was ending the convertibility of dollars into gold. “temporary suspension” of the debt ceiling has removed the last statutory restriction on the printing and spending of the US government.

Where is all this leading? the problems in Europe so far have centred around the risk of sovereign default. For the US, the UK, Japan (and China), the problem is different. they all have their own currencies and their own printing presses, so the risk of repudiation is negligible. No, the certainty for them is that, sooner or later, if they remain on unsustainable fiscal courses, they will experience a currency crisis – probably in the form of a hyperinflation (a collapse in confidence in a currency caused by printing too much of it).

What would be the trigger for such a collapse? Well, that is pretty much the only variable in the equation we do not know. Black swans are by definition difficult (or impossible) to forecast. It could be a political assassination, a default on the COMEX, a bomb dropped on Iran, or any number of other triggers.

Perhaps in anticipation of the currency crisis (or capital controls?), it was interesting to see Germany announcing last month the repatriation from Paris and New York of 674 tonnes of its gold reserves; about 20% of the total. 37% of Germany’s total reserves will remain in New York, for the time being. Even more interesting will be whether other countries follow Germany’s example. If they do, the German move will be the most important event in the gold market since President de Gaulle exercised his right to demand gold in exchange for France’s dollar reserves, which led to the collapse of the London Gold Pool in 1968. I wonder whether the currency crisis will arrive before Germany finishes the repatriation in 2020? Most forecasters say we have about two years, plus or minus one year!

Peter Wynn WilliamsInvestment [email protected]


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GLOBAL OvERvIEW

However, in all this desperation lies opportunity. By and large, the money being printed is not being lent to consumers or corporates to spend or invest. Instead, the banks are using it to speculate in the markets, which is why asset prices are inflating even while the economic fundamentals deteriorate. the money being printed in the US, Japan and elsewhere is leaking into asset prices all over the world, and will continue to do so.

Unfortunately, this is only a window of opportunity rather than the start of a long-term bull market. I do not know how long the window will stay open (how I wish I did!); but it could be a couple of years, plus or minus a year – if we are lucky! the spectacular QE2 equity-market rally, which began in March 2009, lasted five calendar quarters. Since the money printers have no option but to keep printing, this party could have legs, until that black swan paddles into view!

Lastly, lest some of you think I am out of love with gold and silver after all these years, not at all. We still recommend a large core holding with an eye on that currency crisis, but not everybody has the patience for the long game. For some, it’s about the thrill of the chase! tally ho!

Peter Wynn Williams Investment Director

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CASH & CURRENCIES

Summary ■ All eyes were on the JPY at the start of January as Prime Minister Abe’s announced his new

monetary policy which focuses on higher inflation and a weaker JPY. This may also impact the AUD and NZD due to their roles in carry trades, if JPY weakens, AUD and NZD may gain until we start to see higher inflation and rate increases in Japan. Then we may see weakness.

■ Over the past few years the SGD has been the new safe haven currency due to the strength of the city state’s economy, and also the way the currency is managed. We expect this to continue, and in particular, to attract those who previously held JPY.

■ the EUR has gained more than 12% against the USD since July, and is now above 11 month highs.

■ It has been a very poor month for USD Index too, for the reasons outlined above. ■ Ultimately, despite the bullish data and the resolution of the fiscal cliff, the US economy is

still far from meeting the Federal Reserve’s conditions for concluding monetary stimulus. the current unemployment rate is 7.8%, and recovery from this level is expected to be slow. At this rate we don’t expect the Federal Reserve’s target jobless rate of 6.5% to be achieved any time soon. Second, the recent improvements in hiring and home sales suggests that US economy reacts positively to the monetary stimulus – perhaps encouraging this support to be held in place for longer.

HENLEY ASSESSMENTStrongly Negative

USD, GBP and EUR over medium-to-long term against a trade-weighted basket of currencies given that all of these currencies are debasing and devaluing through significant quantitative easing. AUD is to remain volatile based around the Chinese data. We still favour SGD as a safe haven, and commodity currencies for yield.

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FIXED INCOME

Points of General Interest ■ It has emerged that for the first time in 40 years, pension funds hold more of their assets in

bonds than shares.

Government Bonds ■ Japan plans to cut its reliance on government bonds as Prime Minister Abe tries to demonstrate

determination to repair the state’s stretched finances. ■ Portugal returned to debt markets, with the hugely successful sale of EUR2.5bn of bonds due

Oct17. ■ The yield on the 10-year US Treasury bond, which affects many other borrowing rates, briefly

popped above 2% for the first time since April 2012 in January.

Corporate Bonds ■ Sales of corporate bonds in the US dropped 57% in late January and relative yields narrowed

as foreign borrowers dominated dollar-denominated issuance.

Offshore Bank Accounts- Best Buys ■ No Notice Account- Britannia International – 2%pa. ■ 60 Day Notice- Britannia International- 2.25%pa.

HENLEY ASSESSMENtNegative

While there may be some short-term relief in fixed income from the volatility seen in equity markets, and also a comparative positive return when compared to holding straight cash in the short term, we are of the opinion that such short-term relief has the potential to come at a costly price in the medium to long term. With the developed economies committed to the path of continued monetary easing, we believe that inflation will become a serious concern in the future. Such an environment would see the relatively low yields enjoyed by fixed interest over-run by the cost of goods.

there may be an argument to seek short-term safety in specific emerging market bonds but we see serious danger in accepting the debt of the developed economies, both on a sovereign default front (especially within Europe) and on a return vs. inflation front.

Also, as the graph below accurately demonstrates, inflows into bonds have become somewhat excessive and with the allure of dividends and the current short-term respite from the US and Euro debt crisis, a shift from bonds into equities may burst the bubble that has been growing since the global financial crisis.

EQUItIES

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PROPERtY

Positives ■ Prime London Central property continues to be viewed as a safe haven investment area.

Prices rose 15.3% in 2012, bringing the average property price to GBP1.024m according to the Land Registry. Property transactions fell by 9% over the year, which was thought to be a combination of owners holding onto their best performing assets and the adoption of a “wait and see” attitude in the face of further UK government property tax announcements in relation to properties owned by “non-natural persons” above GBP2m.

■ In Singapore home prices in Q412 climbed to a record high and prices have now risen for four straight years. As a result the government has just introduced yet more cooling measures to control property price rises. Homebuyers will have to pay between 5% and 7% more in stamp duty and there is a now a tax of up to 15% for sellers of industrial buildings if properties are sold within one year.

■ Recent US housing data continues to be mixed but reflects that the housing market may have found a bottom during 2012, after falls of 35% from the 2006 peak. the S&P/Case-Shiller 10 and 20 City Indices reflected gains of 3.4% and 4.3% respectively in October 2012 YOY. However, bank repossessions remain a problem. 59,134 houses were repossessed in NOv12 up 5.4% MOM, as lenders seek to manage the flow of distressed properties without disrupting any recovery.

Negatives ■ Land Registry data on average home prices in England and Wales for 2012 reflected a largely

static market, with an increase of only 0.75% to GBP249,958. Estimates of UK home prices for 2013 are showing a flat to slightly negative return. All of this reflects the uncertain economic outlook and difficulty in obtaining finance, with the result that the number of transactions is lower. Bank of England data shows mortgage approvals of approximately 54,000 for November 12, which is only about half the monthly average of mortgage approvals for the decade ending 2007, ie, before the financial crisis.

■ Australian residential property loan applications unexpectedly fell 0.5% MOM in November reflecting reduced demand because of a soft economic outlook. This comes after six central bank interest rate cuts over the last year, with current interest rates matching a 50 year low.

■ In Europe the housing slump continues with Standard & Poor’s estimating that prices will continue to slide for another two years. House prices in Spain are likely to fall another 7.9% this year and may need to fall an additional 20% or more to clear an overhang of one million homes. Dutch and French property prices are forecast to fall 6% and 5% in 2013 respectively. Germany is the standout market, with home prices expected to rise 3% in 2013.

HENLEY ASSESSMENt Neutral

Property prices generally, after significant falls in 2009, stabilised in 2010 and 2011. Further weakness of property prices in many areas is now apparent in 2012 as economic conditions remain difficult. Property values have recovered in selected areas such as Singapore, Hong Kong and London. Additinally we are seeing early signs of some stability in the US housing market. We still consider some specialised property assets such as student accommodation to merit inclusion in our portfolios. Other than these investments, we would suggest that clients do not invest further at this time.


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HENLEY ASSESSMENtNeutral

Japanese has accumulated debts worth some USD14.6tn, or 230% of GDP. A quarter of Japan’s budget now goes to servicing debt. So far tokyo has done little to change its course. to make matters worse, we have seen a deterioration in the balance of trade in 2012. Japan had a record trade deficit of JPY1,476.9bn in January and has been reporting deficits of over JPY500bn in recent months. Japan’s standoff with China over the disputed islands also contributed to declines in Japan’s shipments to China for six months through November. We doubt if Japan waiving the debt limit of JPY44tn (USD514bn) for the fiscal year and targeting higher (2%) inflation are sound economic policies in the medium term.

Positives ■ Nikkei touched 10,900 and set for best yearly rise since 2005. ■ JPY has tumbled 12% in the last three months. USD touched JPY90 as Bank of Japan bowed

to the pressure for further easing.

Negatives ■ In a joint statement with the government, the Bank of Japan (BoJ) officially introduced a

2% inflation target, replacing its previous price goal of 1%. BoJ also introduced an open-ended asset-buying plan in 2014, setting monthly purchases at JPY13tn including JPY2tn for Japanese government bonds and JPY10tn for short-term bills. But stocks and foreign exchange markets were disappointed that stimulus does not come sooner.

HENLEY ASSESSMENtNegative on Fundamentals, Positive on Markets short term

Chances of Congress and the White House addressing the long-term solvency issues of the US government in a meaningful manner remain nil. the changes required to balance the system are too politically painful; so a currency crisis within the next couple of years seems the most likely outcome – especially if there is a black-swan event, such as an assassination, a COMEX default or a bomb on Iran, for example. Meanwhile the economy continues to bottom bounce, fundamentals continue to deteriorate, and markets continue not to care, buoyed by a rising tide of confetti (and nothing else).

Positives ■ QE to infinity will inflate asset prices. ■ the US Federal Reserve has forecast rates will remain unchanged until at least 2015. ■ In the long term, demographics and returned energy self-sufficiency bode well.

Negatives ■ National debt: USD16.5tn and rising; debt to GDP: 106% and rising. this is absurdly

unsustainable. ■ QE to infinity promises currency debasement, rising prices and lower discretionary spending. ■ Foreigners are buying fewer and selling more US treasury bonds. ■ Debt ceiling “temporarily suspended” plus QE to infinity may result in currency crisis in a

couple of years.

EQUItIES

UNITED STATES

JAPAN

Source: Der Spiegel

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Positives ■ The euro zone finance chiefs gave the green light for the payout of EUR9.2bn to Greece this

month. Of the funds, EUR7.2bn in bonds are for the further recapitalisation of Greek banks, and EUR2bn in cash are to cover the government’s budget needs.

■ Spanish two-year bond yield – one of the maturities the central bank could target – has plunged from a peak of more than 7% last year to 2.59%. the decline in Madrid’s borrowing costs also reflects slightly better fundamentals, not just the ECB backstop. The banking sector – long the biggest weight around Spain’s neck – is being restructured and recapitalised.

Negatives ■ Italy, Spain, Portugal, Ireland and Greece shrank their combined current account deficit to

an estimated 1.5% of GDP in 2012 from 7% in 2008, and look set to balance their external accounts this year. However, this “rebalancing” has been mostly achieved by slashing imports, more so than increasing exports.

■ the long-delayed bailout of Cyprus is set to be pushed back at least two months amid mounting disagreement over how to bring down the cost to a manageable level for the debt-laden country. The IMF was insisting on significant amounts of debt relief before it agreed to participate in the programme.

■ the IMF cut global growth forecasts and now projects a second year of contraction in EUR region as progress in battling Europe’s debt crisis fails to produce economic recovery. 7 out of 17 euro zone economies are now in recession – others are not far behind.

HENLEY ASSESSMENtStrongly negative

Financial conditions have improved enormously since the ECB promised to do whatever it takes to preserve the euro. Yields on the bonds of highly indebted peripheral countries have fallen sharply, bank funding strains have eased and stock markets have rallied. Countries on the southern rim of the euro zone have made big strides in reducing their budget and trade deficits. They are no longer living way beyond their means. But demand is likely to remain weak, while unemployment, already at a record 11.8%, is forecast to rise further before it comes down. Recovery will be slow and serious risks remain. the euro zone needs growth in its major markets abroad and the political patience to stay the course at home.

HENLEY ASSESSMENtNegative the UK economy and the chancellor in particular, have again had a grim time in the past few weeks. As George, David and Boris were munching on fondue in Davos, figures were released showing a contraction in the economy, increasing the likelihood of an unprecedented triple dip recession. Borrowing targets are also unlikely to be hit, which raises the probability that at least one of the credit rating agencies will downgrade the UK from its coveted triple A rating. this will be particularly hard for George Osborne as he has staked his political credibility on this. In the short term this is likely to lead to downward pressure on sterling, and this has already dipped below the neutral 1.60 mark to USD.

Positives ■ the man hand-picked by George Osborne to run the Bank of England has fuelled speculation

that he will order a policy revolution to jump-start the stalled British economy. Speaking at the World Economic Forum in Davos, the Canadian Mark Carney, who will take over in July, hinted strongly at a new approach when he said that central bankers should be prepared to take aggressive measures to help economies achieve what he called “escape velocity”.

■ David Cameron has rebuffed criticism at home and abroad of his commitment to hold a referendum on the UK’s future in Europe if he wins the next election. In a savvy political move, he has neutralised the threat of UKIP, thrown the ball back to the Labour party and significantly increased the Conservatives chances of being reelected for a further term.

Negatives ■ Jim O’Neill, the chairman of Goldman Sachs Asset Management, criticised the chancellor’s

continued pursuit of austerity despite signs that the economy was stagnating, including worse than expected GDP figures, and that the chancellor risked a lost decade for the British economy with low growth and increasing public debt.

■ Figures unveiled on Friday showed that the British economy shrank in the last quarter of 2012. If the economy shrinks again in the first quarter of 2012, Britain will be in recession for the third time since the economic crash of 2008. the government insists that its policy of cutting expenditure is the only course available but critics insist that the absence of growth was increasing the deficit rather than cutting it.

UNITED KINGDOM

EUROPE EX UNITED KINGDOM

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HENLEY ASSESSMENtPositive

Japan’s drive to revive growth may boost ASEAN as rising demand in the world’s No. 3 economy spurs orders and Japanese companies take advantage of cheap funding to invest in the region. Indonesia, thailand and Malaysia are identified by HSBC Holdings Plc and Credit Suisse Group AG to be among the biggest beneficiaries of Japanese monetary easing and Abe’s JPY10.3tn (USD115bn) stimulus plan. Lower borrowing costs at home may add momentum to plans for overseas expansion, with toyota Motor Corporation announcing in Nov12 it will increase production in Indonesia. Japan’s dispute with China over the sovereignty of islands has also helped shift Abe’s focus toward Southeast Asia and prompted companies to add investments elsewhere in the region.


Despite recent rate cuts by the Reserve Bank, manufacturing and construction industries continue to report weak performance and declining business sentiment. Business outlook for sales, profit and economic conditions worsened between September and December, according to a survey of 600 construction and manufacturing firms compiled by the Australian Chamber of Commerce and Industry. Sales and profits have seen no sign of rebounding since early 2010 and business hiring intentions for the next six months have declined to the lowest level since the survey began in 1998. It is widely expected expect that there is a clear case for at least one more rate cut in this cycle and the target has been the February/March “window”, especially with the lower consumer prices.

Positives ■ Singapore will increase spending on population-growth measures by 25%, rolling out incentives

ranging from government-paid time off for adoption and paternity leave, to funding for fertility treatments. An annual budget of SGD2bn (USD1.6bn) will be set aside for measures including state-funded childcare leave, healthcare costs and financial support for housing to married couples. the government will pay 75% of the cost of reproduction technology treatments for couples. those with more than one child will also be eligible for the funding. Singapore will also provide four weeks of government-paid leave for working mothers of adopted children in the first year as well as introduce a week of paternity leave for fathers.

■ thailand’s export growth quickened to a 15-month high in Nov12 as factories returned to full capacity after floods in 2011 and global demand improved. Overseas sales rose 26.9%YOY after climbing a previously reported 15.6% in Oct12.

Negatives ■ Singapore’s citizen workforce will begin shrinking in 2020 for the first time in its history, while

land and labour limits will constrain its economic competitiveness. ■ The Philippine central bank will also struggle to manage inflation without sacrificing

competitiveness or economic stability. Its growth is attracting funds that pushed the peso to a four-year high in Nov12, even as Bangko Sentral ng Pilipinas lowered rates four times this year and introduced measures to curb inflows.

■ North Jakarta is still stranded while more than 18,000 have been evacuated from their homes, as floods that started 15Jan13 submerge areas of the city. Jakarta accounts for a huge part of Indonesia’s GDP (16% in 3Q12). Jakarta sits in a low-lying area with 13 rivers and more than 1,400 km (870 miles) of man-made waterways, making it prone to flooding.

■ Rubber production in Indonesia, the second-biggest grower, may drop for the first time in four years in 2013 as the country limits output and shipments in coordination with other producers.

ASEAN

AUSTRALIA

Positives ■ the Westpac Melbourne Institute Index of Consumer Sentiment rose by 0.6% from 100.0 in

Dec12 to 100.6 in Jan13. this is the third consecutive month when the Index has been at or above the 100 level. that compares with 14 of the previous 16 months when the Index had registered below 100.

■ Australian consumer prices gained less than economists forecast last quarter on cheaper food and health care, pushing down the AUD and giving the central bank scope to reduce interest rates.

Negatives ■ Prices of iron ore may tumble by the end of the year as global supply increases, undermining a

rally that pushed the price of the steel-making raw material to a 15-month high. ■ Fitch warns that Australia risks losing its coveted triple-A credit rating as the nation’s ageing

population drains government coffers. In the same report, it estimates Australia’s public debt will explode from 2020 onwards if current productivity and workforce participation remains static.

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Positives ■ to reduce the current account gap, India increased import tax on gold for the second time in

10 months; the figure now stand at 6%. ■ With an increase in the diesel price by 45 paise per litre, the government has decided to do

away with the subsidy thereby allowing the state-owned oil companies to charge the market rate.

■ Purchasing activity in the manufacturing sector increased for 45th successive month reflecting in a healthy PMI of 54.7 in December, compared to 53.7 in November

Negatives ■ Reserve Bank of India, the country’s central bank, reduced the benchmark interest rate to

7.75% from 8% thanks to the easing of India’s Wholesale Price Index (WPI ) at 7.18% in December 2012 against 7.24% in November.

■ India revised their GDP growth to 5.5% for the year ending March 2013, a sharp decline from the last 10 years’ average of 7.8%.

■ the ruling Indian National Congress suffered a humiliating defeat in the State of Gujarat and with nine more states going for election this year, speculations are rife about the implementation of some of the unpopular reforms.


We believe the Chinese economy bottomed out in 3Q 2012 and a recovery was sustained throughout 4Q. Since September, several positive changes have contributed to a modest acceleration in industrial production. In October and November, the raw material inventory and PMI showed continuous improvement.Also, demand has recovered modestly in the past two months, the rebound in export growth suggested the external sentiment of developed markets turned for the better. Hence, we almost have witnessed the “Hard Landing” of China economy and now 2013’s cyclical recovery will be led mainly by investment and exports.


With the Supreme Court’s diktat to the government of India to explain the underlying reasons for the ‘daredevil reforms’ – read foreign direct investments (FDI) in retail – the euphoria over these recent reforms seem to be fading away. Indeed, the government’s political posturing cannot last long since it would be imperative for them to announce populist measures ahead of the general elections scheduled in 2014.

Positives ■ Potential upside for China stocks, especially

A-shares, is huge given the last a few years’ underperformance and cheap valuation. MSCI China is still traded at 10.3x forward P/E, which is far below the historical average of 12.6x.

■ Xi Jinping, the newly elected party secretary, admitted that official corruption is one of the most serious challenges that the CCP faces. the party discussed the anti-corruption campaign in a recent meeting and decided to use the most effective measures and observe a material impact going forward.In the long-run, it is definitely an encouraging sign for social stability however these actions will likely lead to revenue deceleration in sectors including Macau gaming, luxury consumption, as well as gift card sales in department stores in the short term.

■ While the current real estate policy is unlikely to change, the real demand for property remains healthy as urbanisation is expected to speed up in 2013 and affordability has improved. It is certain that the upward pressure on property prices in major cities will benefit mainland real estate developers.

Negatives ■ the key downside risks for the Chinese economy in 2013 include a stalemate on the US debt

ceiling, geopolitical risks in the Middle East and an escalation in tensions between China and Japan.

■ the biggest worry among investors is that China’s banking system nonperforming loans (NPLs) will rise substantially; expectations are that they will continue to rise in the coming two to three quarters, but will peak later in the year.

INDIA

GREATER CHINA

Source: Bloomberg Finance LP/Deutsche Bank

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With the Brazilian presidential election due in 2014, officials will do whatever it takes to meet their forecast of 4% growth this year. Further stimulus may come partly in the form of yet more giveaway credits from state banks. But policy is already very loose. the central bank’s benchmark rate is less than 1.5% in real terms. Any further stimulus is more likely to push up inflation than growth. Also, the performance of the MSCI BRIC Index lagged behind global equities for a record third year. this was largely due to investors’ concern over government interference in markets. Mutual funds that invest in BRIC nations have posted USD1.65bn of outflows in 2012, and this trend will probably persist in 2013

Positives ■ According to the Economic Development Ministry’s estimates, Russia’s GDP growth for

January-November of 2012 was 3.5% ■ Park Geun-hye won the South Korean presidential election to become the country’s first

female leader. She is the daugther of Park Chung-hee, who ruled for 18 years and transformed the country from the ruins of the 1950-53 Korean War into an industrial powerhouse.

Negatives ■ Brazil’s official IPCA consumer-price index closed out 2012 at 5.84%, down only slightly from

a 6.5% advance in 2011. The central bank has an inflation target of 4.5%, with a tolerance band of two points above and below that, putting the 2011 inflation at the limit.

■ At the same time that the inflation outlook has worsened, so have growth expectations in Brazil. The central bank survey of economists showed a consensus figure for 2013 growth of only 3.2%, down from 3.26% a week earlier. Growth in 2012 was only about 1.0%.

■ Russia is pushing for growth of at least 5% in 2013, up from 3.5% in 2012. Russia has not seen that level of growth since 2008 and official forecasts do not predict that it will be achieved again soon. Prime Minister Medvedev called for more steps to improve the business climate and loosen state control, but so far reforms and the privatisation push are stumbling.

■ South Korea’s central bank on Friday cut its 2013 growth forecast to 2.8% from a previous estimate of 3.2%, its third downgrade in a year, reinforcing expectations for another interest rate cut in South Korea in the months ahead.

OTHER EMERGING MARKETS (SOUTH KOREA, RUSSIA, BRAzIL)

Source: Nomura, IBGE

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We remain Neutral. the situation in the Middle East remains complicated and the latest flare up of tension in Algeria and Mali is adding to the geopolitical instability. In Syria, the civil war rages on with no end in sight. Chinese GDP came in above expectations which, too, adding some support to energy prices in the short term. However, our fundamental assessment remains the same in that we believe that economic growth will face headwinds as nations need to bring debt levels to a sustainable level. therefore, we believe energy prices will be range bound for the foreseeable future.


We remain strongly positive on precious metals for 2013 and beyond. the case for precious metals remains as solid as ever. Little has been done to bring down excessive debt levels and policy makers continue to treat the crisis like a liquidity problem rather than a question about solvency. In the US, the fiscal cliff was narrowly avoided but the increases in taxes, around USD60bn per annum, do very little to address the annual deficit which during 2011 ran at more than USD1,000bn. Overall, we continue to see gold and related mining shares as key building blocks in portfolios offering a good hedge against many of the risks that we see on the investment horizon during 2013 and beyond.

Positives ■ Tension is flaring up in North Africa. ■ OPEC cut December output to the lowest level since Oct11.

Negatives ■ On-going debt concerns in Europe and the challenging fiscal situation in the US may weigh

on sentiment. ■ United States is quickly ramping up energy production in a bid to become energy independent

by 2020.

Positives ■ Signs of shortage of physical silver are appearing. the US mint suspended sales of silver

eagles after running out of inventory. ■ Gold is a good hedge against currency debasement and future inflation. ■ Gold and gold mining shares remain an under-owned asset class compared to financial assets.

Negatives ■ Near-term volatility to persist

ENERGY

PRECIOUS METALS

COMMODItIES


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We maintain our neutral view on base metals. the world economy is facing headwinds with China reporting its slowest growth for 2012 in 13 years. We see better value in other commodity sectors at the moment.

COMMODItIES

HENLEY ASSESSMENtPositive and Negative

there are two very different markets playing out in the agriculture sector –physical and equity. Many physical soft commodity prices have exploded due to changing global weather patterns over the past few months, however these sharp price increases tend to be followed with just as sharp falls. With many soft commodity prices at or near record highs we have a negative view on investing and encourage profit taking. On the equity side, the largest weighting funds have to this sector is via fertilizer and seed companies which have a significantly more important role to play to increase yield and in the case of seed companies, invent seed which is tolerant to changing global weather patterns. We remain positive agriculture equity funds.

Positives ■ UN’s Food and Agriculture Organization estimates there will be over nine billion mouths to

feed on the planet by 2050. ■ Middle class consumers in BRIC economies are increasingly demanding more varied and

protein-rich foods. As affluence increases, protein from beef, sheep, poultry, pigs, cows and fish may in turn displace grains in diets.

■ Urbanisation and life expectancy is expected to increase.

Negatives ■ Prices are subject to many uncontrollable risks, eg, weather and natural disasters, politics and

other pests. ■ Prices are subject to many uncontrollable risks, eg, weather and natural disasters, politics and

other pests. ■ Due to recent drought

conditions in the American Mid-West and Russian Black Sea regions we have seen corn, wheat and soy prices increase on average over 50% within a few months.

AGRICULTURE

INDUSTRIAL METALS

Positives ■ Currency debasement will support real asset prices.

Negatives ■ Growth in China for 2012 came in at a 13-year low. ■ Uncertainties in how Europe and US will tackle their debt burden will weight on confidence

and growth.

Source: DWS

EquitiEs

HENLEY ASSESSMENt Neutral

Broadly, hedge fund performance in 2012 was in line with investor expectations. However, consolidation of this industry continuously goes on. It is our long-term expectation that delivery of absolute returns with little reliance on market beta will constantly become the core of hedge fund/alternative investing in 2013.

Positives ■ Hedge fund performance was positive in December. the HFRX Global Hedge Fund Index rose

0.6%, bringing the YtD return to 3.5%. ■ In 2012, strategy performance, though mixed, was broadly positive as shown in the chart

right-hand side. the top strategies for the year were Credit followed by Equity Long-short and Relative value.

■ A number of fundamentally-oriented managers reported excellent trading profits in 2012. Managers with longer-term holding periods and higher conviction positions tended to be the winners as equity moves appeared to depend on value-based metrics.

■ In September 2012, the asset under management in the hedge fund industry reached an all-time peak of USD2.2tn. We expect this number will continue to grow in 2013 given the money printing environment worldwide.

Negatives ■ the worst-performing

strategy was Global Macro. In particular, Managed Futures underperformed as momentum factors failed to materialise across markets in 2012.

■ Looking ahead, the problems with market timing are still difficult for most of managers. the “risk-on”, “risk-off” dynamics which had plagued managers’ return since 2011 were perceived as a persistent threat through 2013.

■ With some equity markets up double-digit in 2012, it did make it difficult for investors to decide whether they should leave their money with those manager with unsatisfactory performance. Alpha from manager became a dominant factor which leads the market competition more compelling in 2013.

ALtERNAtIvE INvEStMENt

General disclaimer and warningthe Henley Group Limited (“the Henley Group”) has produced this document for your private use only and you must not distribute it to any other person in Hong Kong. Re-distribution or reproduction in whole or in part of this document by any means is strictly prohibited and the Henley Group accepts no liability for the actions of third parties in this respect.Funds not authorized by the Securities and Futures Commission may involve more risk and distribution or re-distribution of information relating to such funds to the public of Hong Kong may constitute an offence under the Securities and Futures Ordinance.Notwithstanding that the information contained herein has been obtained from sources which the Henley Group believes to be reliable, the Henley Group makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy, completeness or correctness. the information in this document, including any expressions of opinions or estimates, should neither be relied upon nor used in any way as indication of the future performance of any financial products, as prices of assets and currencies may go down as well as up and past performance should not be taken as indication of future performance. Neither this document nor any information contained herein shall be construed as an offer, invitation, advertisement, inducement, representation of any kind or form or any advice or recommendation to buy or sell any financial products.

Source: FRM Viewpoint Nov

Economy & Finance

The Henley Group's Market Outlook for February 2013