The Henley Market Outlook July 2013

Henley Market OutlookJuly 2013

Hong Kong | Singapore | Shanghai | United KingdomTHE WEALTH MANAGEMENT PROFESSIONALS

The Henley Outlook July 2013Hong Kong, Singapore, Shanghai & United Kingdom

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

George RipponPartner

Simon LiuHead of Investment

Research

Paul BradyPartner

Chris SkinnerPartner

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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Since the developed world reached the limit of its capacity to borrow in 2008, our central banks have reduced interest rates to zero to allow us to borrow yet more money (about USD15tn, give or take). Needless to say, this has not addressed the fundamental problem of excessive debt; but it has bought some time, in which it was hoped that economies would somehow overcome the crushing weight of debt and skip back into the Elysian Fields of consumption and growth.

It is now becoming clear, even to the central banks, that the policy has not worked. In its annual report published last month, the Bank of International Settlements (a sort of head office for the central banks) said essentially that the risks of quantitative easing (primarily hyperinflation) outweighed the benefits (no, I don’t know either).

It is also becoming clear, from the noises now coming from the US Federal Reserve, that it would like to wean the global economy from its teat before it is too late. Whether it can is a completely different matter. From the markets’ reaction (rising bond yields and falling asset prices), it would seem that either the markets believe what the Fed says, or the Fed is finally losing control of bond yields to market forces (interest rates are rising even though the Fed is buying nearly all of the treasury’s new debt issuance). If the latter were true, for the Fed to re-gain control would be very difficult and would probably require a dramatic increase in quantitative easing rather than the desired tapering. the genie is out of the bottle.

Either way, it would seem that this six-year-old crisis has advanced to a new phase in recent weeks. Perhaps the powers that be realise that they are running out of road and that it is time to stop kicking the can? Since April, the bullion banks have flipped from being massively short gold futures to being massively long. This is the first time they have been long since 2001. We can all speculate about what the reason for that might be; but, whatever it is, in the context of a monetary crisis, I bet it is significant.

the other change that has been going on quietly in the background relates to bailouts. In 2008, tax payers were volunteered to spend trillions bailing out failed financial institutions by boosting the asset side of their balance sheets. Now, the financial and political capacities to do more of this is exhausted. Now, the plan is to slash the liabilities’ side of the balance sheet instead, á la Cyprus: deposit confiscation.

Over the last couple of years many major jurisdictions have passed new laws to allow bail-ins – the US, the UK, Japan, Australia, New Zealand and Denmark among them. the European Union is also putting the finishing touches to its new directive. Bail-ins allow the authorities to use creditors’ assets (including deposits, equities and bonds) to put the institution back on its feet, just like they did in Cyprus in March.

If you think this could not happen to your bank – wherever it is – think again. In the real world, most banks are already insolvent, or close to it; but, in the “mark-to-make-believe” world in which we have been living since the credit crunch, the authorities have allowed the banks to value the assets on their balance sheets at cost instead of at their market value, masking losses. With bond yields now rising, those losses will be rising, too.

The bail-in mechanism gives the authorities the means finally to recognise the curse of excessive debt and toxic assets and, at the same time, preserve the banks and the system (albeit smaller). the problem is that, as in Cyprus, the banks’ investors and customers (ie you!) will be thrown to the lions.

GLOBAL OvERvIEW

Peter Wynn WilliamsInvestment [email protected]

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GLOBAL OvERvIEW

Peter Wynn Williams Investment Director

Please do not make the same mistake that too many customers of banks in Cyprus made by leaving their money in the banks, even though deposit haircuts were being widely discussed in advance.

I do not know when the banks will suddenly choose to recognise that they are in fact insolvent and need to be re-structured; but it is clear that time is running out and the ducks are moving neatly into a row. Please do not make the same mistake that too many customers of banks in Cyprus made by leaving their money in the banks, even though deposit haircuts were being widely discussed in advance.

Please also be aware that the paper published jointly by the Bank of England and the (insolvent!) US Federal Deposit Insurance Corporation last December (http://www.fdic.gov/about/srac/2012/gsifi.pdf) did not even mention exempting insured deposits from bail-ins, nor did the original plan proposed for Cyprus. It was only the popular outcry in Cyprus that persuaded the authorities to relent and respect the insured deposits.

For Cyprus, the alternative to agreeing to be bailed-in was national bankruptcy. I wonder what options will be presented to you to make a bail-in appear the lesser of two evils?

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HENLEY ASSESSMENt Neutral

Quantitative easing programmes in Japan and the US have caused considerable volatility in currencies in recent weeks. Although not in the headlines so much these days, the stresses plaguing the EUR are still very much in play. the Chinese banking system and the credit bubble it supports are also under considerable stress. In other words, all the major trading blocs are faced with a variety of major fiscal and monetary challenges at the same time. Despite the currency volatility that is being created, the volatility in other asset classes could easily be more severe in the short and medium term, making cash an attractive, if low-yielding, hedge. We still favour SGD as a safe haven, and commodity currencies for yield.

Summary ■ Capital flows out of Asian and emerging markets have caused considerable stress, espcially in

Brazil and China, and have affected the JPY carry trade. ■ JPY strength makes it clear that, unlike the Americans, the Japanese cannot print like crazy,

have a weak currency and low interest rates at the same time. ■ Proposals to allow money funds to gate (to prevent runs) will put a damper on a sector already

damaged by zero interest rates. ■ SGD remains steadily strong. Expectations are that the current gradual appreciation policy

will continue as it is.

CASH & CURRENCIES

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Points of General Interest ■ June represented a tough time for fixed income which has culminated in many commentators

suggesting the 30-year bull run that this asset has enjoyed is coming to an abrupt end. ■ the root cause for this sudden drop was the fact that the Fed made a slightly hawkish

statement with regards to the potential of the winding down of that most comforting of status quo’s, QE. The reaction in the fixed interest market was dramatic, especially when one considers that the main body of the afore mentioned statement was only 20 words changed from the previous month’s report, which did not elicit the same reactions.

■ the idea of an end to monetary stimulus, or a reduction, has fed the narrative that there is going to be a systematic rotation away from fixed interest and into equities as a result of bond yields, as a result of the subtle change in narrative from the Fed.

■ Selling has been most visible among retail investors, who have sold a record USD48bn worth of shares in bond mutual funds so far in June.

■ On the flip side, it is important to note that all may not be as simple as it first appears. With rising yields comes higher income on new bonds, and that may bring buyers, which can pull yields down again.

Government Bonds ■ After a 5-year hiatus, Japan has again committed to offering inflation-linked bonds. ■ Italy sold EUR1bn inflation-linked bonds in Jun13. ■ US treasury yields crept upwards throughout the month, as highlighted in the graph below.

Corporate Bonds ■ High-grade corporate bonds also suffered at the hands of continued speculation that the Fed

will pull back their monetary stimulus.

Cash on Deposit ■ As is often the case, speculation within the financial markets has not been translated into

the retail sector. the concern that rates will rise has caused no such spike in the interest rates offered by the banks to retail savers.

FIxED INCOMEEQUItIES

HENLEY ASSESSMENt Neutral/Negative

the past month has validated our long-term view with regards to the threat within this traditionally cautious asset class.

However, it must be noted that much of the current negative rhetoric may in fact be somewhat overblown in the short term, should there be no imminent tapering off of QE by the Fed.

the past month has highlighted that extreme volatilies can beset fixed income in the same way as any other asset classes and while there is a case for holding certain types of fixed interest within a cautious portfolio, remembering the lessons from the reactions that occurred following suggestions that QE would be tapered, is vital.

We would not suggest totally rejecting this asset class. However, recognising that it now represents a great deal more risk than has been the case before is vital; in short we can no longer assume that this most traditional of safe havens will behave as it has done for the past 30 years.

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21.91.81.71.61.51.41.3

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Positives ■ In the US, data continues to reflect an improving residential property market. The S&P/Case-

Shiller index of property values increased 10.8% in March YOY, the largest 12 month gain since Apr06, after rising 9.4% in February YOY. Sales of new homes climbed in April to an annual pace of 454,000, an increase of 2.3% MOM and the second highest level in almost five years. Also, the median selling price of new homes rose 14.9% YOY. Consumer confidence, low borrowing costs and a shortage of properties - the housing stock for sale remains near the

lowest level in a decade – are factors expected to keep prices rising. ■ In China, rising property prices are putting pressure on the government to cool the market, but

at the same time the government needs to support economic expansion. New home prices increased during April in 68 of 70 cities (the same figure as in March). New home prices rose on average 4.9% YOY (after an increase of 3.6% in March YOY). Notable rises over the last year were 10.3% in Beijing and 8.5% in Shanghai, these rises being the sharpest since Apr11.

■ Prime central London residential property prices increased by 0.3% in May MOM and by 7.2% YOY, according to Knight Frank. Demand remains strong with a rise in sales of 17% in the first four months of 2013, compared to the same period in 2012. the rise was concentrated in the lower price brackets, with a 28% rise in sales of homes with a value below GBP2m.

■ According to Jones Lang LaSalle, luxury home prices across nine markets in Asia showed an average 2.2% gain in 1Q13 and 6.1% YOY. Jakarta recorded the highest property price rises at 8.7% in 1Q13 and 32.9% YOY. Property cooling measures in Hong Kong and Singapore have proved effective in reducing price growth.

Negatives ■ Home prices in England and Wales rose 0.4% to GBP233,061 in May MOM and 2.7% YOY. It

is thought that recent government measures to improve lending are supporting the market. It should, however, be remembered that the red hot London property market is giving the market data a deceptively healthy glow, as UK housing demand remains weak in many areas.

■ According to Knight Frank, the property market in Europe continues to be depressed, with prices continuing to fall the most in southern Europe. the weakest markets were in Greece (-11.8% YOY), Spain (-7.9% YOY) and Portugal (-6.9 YOY). In these locations, unemployment has soared, whilst wages have stagnated or fallen in real terms, putting pressure on property prices.

PROPERtY


Property prices generally, after significant falls in 2009, stabilised in 2010 and 2011. Property prices in many areas have weakened in 2012 and 2013 YtD as economic conditions remain difficult. Property values have, however, recovered in selected areas such as Singapore, Hong Kong and London. Additionally, we are seeing signs of a recovery 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 remain cautious.

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Residential real estate is nearall-time high affordability

US Housing Affordability

Source: Bloomberg

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Positives ■ Japan’s economy grew faster than expected. GDP grew at annualised rate of 3.5% on the back

of private consumption and a rise in exports after aggressive monetary and fiscal stimulus. Gain is mainly a result of improved expectations behind rising domestic demand.

Negatives ■ Abe has yet to deliver structural reforms promised as part of his three-pronged growth strategy.

A high support in the July upper house poll would help his bid for an economic reform in Japan.

EQUItIES

UNITED STATES

JAPAN

HENLEY ASSESSMENt Negative

Real incomes in the US stubbornly refuse to rise. Without real growth in incomes, and without the ability or willingness to take on meaningful new debt, the consumer simply cannot sustain real growth in retail sales. the outlook for broad US economic activity remains dismal, particularly for consumer activity, which directly accounts for more than 70% of the GDP. Consumer liquidity remains in severe structural constraint. the sharp percentage jump in USD bond yields in recent weeks has only added to the gloom, and to the feeling that the markets are transitioning to a new phase of higher inflation and lower growth. Better to be out of this market a long time early than one minute late.

Positives ■ QE to infinity remains in place, although suggestions of tapering have been mooted. ■ 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: USD16.8tn and rising; debt-to-GDP: 107% and rising. this is absurdly

unsustainable. ■ QE to infinity promises currency debasement, rising prices and lower discretionary spending. ■ QE to infinity may result in a currency crisis in couple of years.


Been here, done that! We have seen upsurges (as well pullbacks) in stock prices referring to the graphs above. Japan’s topix Index shares gain pared to 30%YtD, from as much as 50% earlier in May. Abenomics involves not just monetary and fiscal policies, but also structural economic reform. Any disappointment will likely trigger further reversal in weakening JPY and in rising stocks. the stakes for restructuring are high as Japan sought to sustain confidence. Equity valuations however remain attractive and below trend at 1.2x Price-Book. If Abeconomics proves effective, Japanese stocks may have more upside over the medium to long term.

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Jun 94 - Sep 98

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Source: t.Rowe Price

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TOPIX recovery Mar 1989 - Apr 2013Cumulative returns in US$

Months

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UNITED KINGDOM

EUROPE EX UNITED KINGDOM

EQUItIES


UK Prime Minister David Cameron has announced plans for what could be “the biggest bilateral trade deal in history” between the EU and the US. He announced the start of formal negotiations on a trade deal worth hundreds of billions of GBP, aimed at boosting exports and driving growth. Mr Cameron said a successful agreement would have a greater impact than all other world trade deals put together. the talks were announced ahead of the G8 summit in Northern Ireland in June.

Positives ■ the UK could be the biggest winner in Europe from a transatlantic trade deal between the

EU and the US. Prime Minister Cameron said that an EU-US pact would “turbocharge the transatlantic economy” by delivering up to GBP10bn a year to the UK, or GBP380 to every British household. Luckily for Cameron, the UK could outshine the rest of Europe, with a 10% boost to economic output per head and 400,000 jobs in the long term, according to the Germany-based Bertelsmann Foundation.

Negatives ■ the UK market has had a very volatile month, with the vIx (volatility Index – also known as

the Fear Index) up almost 50% in the past 2 months. this has been driven by how and when the US central bank starts to unwind the incredible support it has been giving to the US and global economy. there will surely be many more bumps on this road. But for now, at least, investors and analysts do not seem to think the US central bank will let the panic in the US bond market get out of hand - or go too far ahead of the recovery in the real economy.

HENLEY ASSESSMENt Strongly negative

Although the outlook for the euro zone economy shows signs of mild improvement as wage growth picked up in the first quarter of the year, we are still highly skeptical whether this growth can be sustained in the long term. Unemployment in the euro zone was at a high in Apr13 with 19.4m people out of work. Even the traditionally stronger core economies like the Netherlands and Belgium are facing budget cuts and a sharp rise in unemployment.

Positives ■ German wages rose at their fastest pace in almost four years at the start of 2013 and euro

zone exports jumped in Apr13. ■ ECB President Draghi said the ECB has an “open mind” on non-standard monetary policy tools

and will deploy them if circumstances warrant.

Negatives ■ The euro zone’s malaise was visible in a 0.5% drop in employment in the first three months of

the year from the previous quarter. Data from Eurostat reflected an unemployment rate that reached a record high in Apr13, with 19.4m people out of work.

■ With the euro zone mired in its longest recession in decades, even the so-called core northern countries are increasingly feeling the pain. The Belgian government needs to find EUR500m in budget savings this year to be sure of avoiding EU sanctions. Netherlands, euro-zone’s fifth-largest economy, fell into recession last year for the third time since 2009 and is showing scant signs of improvement.

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ASEAN

AUSTRALIA

EQUItIES


the rate cuts and sharp drop in the AUD may have come too late to avert a steep downturn in the economy, with official forecasts indicating resources investment will likely peak this year, sooner, and at a lower level, than previously expected. Still, more rate cuts are expected this year, particularly as concern mounts over the economic outlook for China, Australia’s biggest trading partner and a large consumer of the country’s raw materials such as coal and iron ore.

Positives ■ RBA minutes showed the bank was open to lowering its benchmark cash-rate target further

should the waning of a decade-long mining boom place too much strain on the rest of Australia’s economy.

Negatives ■ the AUD has fallen by about 10% since the start of May as traders anticipated further rate

cuts and on speculation the Fed was closer to scaling back its bond-buying program. ■ GDP figures show the economy’s output rose by 0.6% in the March quarter, putting the annual

pace of growth at a below average 2.5% on a seasonally adjusted basis. ■ Falling commodity prices have added to the gloom, forcing some mining companies to focus

increasingly on cost control, leading to investment cutbacks and numerous job losses. ■ the most rate-sensitive sectors of the economy, including consumer spending and construction,

have been slow to respond to the rate cuts, while other industries such as manufacturing and tourism have been struggling for years with a strong AUD.

HENLEY ASSESSMENt Positive

Capital outflows from these regions increased. Foreign selling of ASEAN shares has reached record levels based on the threat of reduced monetary stimulus by the Fed. the drop in stock market is a healthy correction and not owing to domestic factors, in other words, the fundamental growth prospects remain intact.

Positives ■ Indonesian benchmark reference rate was unexpectedly raised to 6% from a record-low

5.75%, in an attempt to tackle an outflow of capital. ■ We believe it is unlikely the Fed will withdraw from QE. Therefore, capital inflows into the

ASEAN region will continue as investors seek higher rates in the region. ■ Demographic structures in these regions, for instance Indonesia, look healthy with majority

of population under the age of 45.

Negatives ■ Profit-taking due to the fickle nature of sentiments and the potential threat of reduced

monetary stimulus by the Fed. ■ It is adversely influenced by the concern of China’s economic slowdown.

Indonesia - 2012Male Female

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Positives ■ China’s retail sales grew 12.9% YOY to RMB1.89tn (USD306.8bn) in May. It suggests there is

a resurgence in the private consuption space compared to last year. ■ China’s industrial production growth accelerated but is still below expectation. Industrial

growth accelerated to 9.3% YOY in April from March’s 8.9%. ■ the value of Hong Kong’s total retail sales in Apr13, provisionally estimated at HKD43.1bn,

increased by 20.7% over a year earlier. For the first four months of 2013, total retails sales increased by 15.5% in value and 15.1% in volume over the the same period a year earlier.

Negatives ■ China’s consumer confidence declined sharply in May13 to 99.0 from 103.7 in Apr13. ■ HSBC said the PMI for China’s manufacturing sector dropped to 49.6 in May13, sinking below

the 50 line for the first time in seven months. ■ Of the 36 Chinese local governments, 24 saw their debt levels rise at the end of 2012 compared

with two years ago while 12 saw their debt swell more than 20% during the period. Esclalating growth in local government debt has raised concerns that hidden debt problems could trigger instability in the banking system, causing the central government to become vigilant against total financial risks.

GREATER CHINA

EQUItIES


With the news of the Chinese bank Everbright defaulting on an interbank loan amid wild spikes in the short-term Shanghai Interbank Offered Rate (SHIBOR) borrowing rates, this again brings the concerns about bad loan issues in China’s banking system as well as the social financing problem back on the table. In the meantime, the China’s stock markets also sold off in the last few weeks (now at a 6-month low). Beijing’s new leaders understand that they must urgently rebalance China’s economy. However, this is not easily done. Problems always abound with the transition of change in leadership, but there is no question that policy makers still have plenty of cards to play and we are expecting the second-half of 2013 will become the criticle point for China and even for the region.

Source: National Bureau of Statistics of China, Markit

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HENLEY ASSESSMENt Negative

the challenge for the Rousseff-led government is how to manage an increasingly complicated macroeconomic environment. Growth is expected to inch back up towards 3% this year with the help of government tax cuts and subsidies. But this stimulus is generating inflation and next year could lead to a rise in net public debt. Investors are also worried that the government is overly-interventionist in its policies. Similarly, Russia is also caught in a predicament of how to best bolster economic growth. total production in key economic sectors, including energy, industry and agriculture, has declined by 4.5% since Oct12. the leading sectors of the economy, responsible for two-thirds of GDP, were all in the red in the first three months of the year.

OTHER EMERGING MARKETS (SOUTH KOREA, RUSSIA, BRAzIL)

EQUItIES

Positives ■ So far in 2013, six companies in Brazil have raised a total of around USD7bn in IPOs. the

numbers show a sharp rebound in Brazil’s IPO market in comparison to 2012 when only three companies went public, raising a total of USD1.8bn.

Negatives ■ S&P’s lowered their outlook on Brazil’s sovereign debt rating to ‘negative’ from ‘stable’, citing

a protracted slowdown in economic growth. the World Bank also cut its forecast on Brazil’s growth in 2013 to 2.9% from 3.4%.

■ A series of student protests against rising bus and metro tickets in São Paulo and other major cities last week turned violent, a rare occurrence for a country unused to civil unrest.

■ there are increasing signs that the Russian economy is headed towards recession. the Kremlin revised downwards its forecasts for economic growth this year on several occasions and now claims the economy will grow by just 2.4%. this represents the lowest level of growth since the crisis year of 2009.

■ Russia’s trade surplus slumped earlier this year by 17%, compared to the start of 2012. Overall profits at Russian companies and banks declined by 21.2% from Jan to Feb this year, the most pronounced decline since the financial crisis of 2009.

■ In a report issued Monday to policymakers, the BoK cited the falling JPY and the possibility of an early end to QE by the Fed as the biggest risks facing the South Korean economy. Weakness in the KOSPI has persisted despite BoK last month lowering interest rates to 2.25% from 2.5%, its first cut in seven months.

INDIA


the INR is the most depreciated currency this year, dropping from 54.69 on Jan 1 to 60.73 on June 26. Despite the headline inflation falling in the target zone of country’s central bank (RBI), the depreciating INR forced RBI to keep the key policy rate unchanged. Indeed, at the back of QE tapering news, India has experienced capital flight from the bond market since May 22. It will be interesting to see if the equity markets suffer from a sell-off in the coming weeks, which may lead the INR to tumble to 63-65 levels.

Positives ■ The current account deficit (CAD) for the quarter ending Mar13 stood at USD18.1bn (3.6% of

GDP), down from USD21.7Bn last year and 6.7% during Oct-Dec12. ■ Although the economy has slowed down considerably, the average rural monthly per capita

spending shot up 35.7% during the last two fiscal years till Mar02, demonstrating the strong domestic consumption.

■ India recorded its lowest annual inflation rate based on the wholesale price index (WPI) in the last three years as the figure slipped from 4.9% in April to 4.7% in May.

Negatives ■ the manufacturing sector nearly stalled in May with the PMI falling for third straight month

to 50.1 in May from April’s 51.0. ■ Indians did not pay heed to the import duty of 8% on gold which is the country’s second

biggest import cost after oil; with the recent decline in gold prices, India imported a record 162 tonnes of gold in May alone.

■ After sliding 8% in May, the INR continued its free fall in June crossing the psychological level of 60 on June 26.

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Seen in this light, the case for precious metals such as gold, silver, and platinum remains extremely positive. While no-one can call the bottom of the current correction, we would anticipate it occurring within the next 6 -12 months and expect to see precious metals bouncing back. Likewise, miners of these precious metals are set to recover. Central banks and Asian consumers continue to buy on the dips, and the fact that mining firms are having to cull unprofitable projects, all of which gives weight to a recovery in the sector.

Key Points ■ there is a need to distinguish between the paper/derivatives market, where the downward

price manipulation takes place, and the physical market, which is strong. ■ The bullion banks are now long in gold futures for the first time in 12 years and going longer. ■ Despite last week’s dash for cash in the markets, the fundamentals for gold continue to

grow stronger.

ENERGy

PRECIOUS METALS

COMMODItIES


the Fed decided yesterday it would continue to buy USD85bn in bonds, despite its own statement that the economy is improving in the US. Energy demand in the US is falling, as it is in the developed world. In the short term as we approach the US holiday season, which historically has seen an increase in demand for oil, we continue to see prices trading within the existing range instead.

HENLEY ASSESSMENt Positive

Fed Chairman Ben Bernanke said the Fed might start buying less than USD85bn in bonds every month. He did not say they would completely end QE but that the Fed would eventually lower, or “taper”, the dollar amount of monthly purchases. the reaction in the markets was severe with the S&P 500 alone falling 2.1%.

the over-riding fear is that when the Fed stops buying bonds, interest rates will skyrocket; the housing market will grind to yet another halt; consumer spending will dry up, and companies will start firing people to cut costs. the whole world could be pushed into recession.

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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 BRICS economies are increasingly demanding more varied and protein-rich foods. As affluence increases, protein from sheep, poultry, pigs, cows and fish may in turn displace grains in diets.

■ Urbanisation and life expectancy is expected to increase.

■ We remain positive on the agricultural equities asset class for 2013 as farmers are incentivised to maximise production by optimising the usage of fertiliser and crop protection and using the best seeds.

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

other pests.

COMMODItIES

AGRICULTURE

INDUSTRIAL METALS


Metal and coal producers retreated amid growing concern over the economic sustainability in China, the world’s largest consumer of commodities. these declines accelerated after pressure was applied to reduce emissions from coal-powered power stations. this was directly a result of the Supreme Court in the US agreeing to consider reviving an Environmental Protection Agency rule aimed at capping emissions of sulphur dioxide and nitrogen oxides. Declines in the region of 7 – 8% were seen across iron ore, coal mining and energy providers. We continue to see better value in other markets.

HENLEY ASSESSMENt Postive 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; there is a very seasonal and cyclical pattern with these movements. Currently with many soft commodity prices at or near record highs we have a negative view on investing at these levels and encourage profit taking. On the equity side, the largest weighting funds have to this sector is via fertiliser and seed companies. these industries are having a significantly more important role to play to help increase yield and in the case of seed companies, invent seed which is more tolerant to changing global weather patterns. We remain positive agriculture equity funds.

Rising Prices for Agriculture& Food related Products?

EquitiEs

Positives ■ the recent positive performance of the hedge fund industry continued in May as the HFRx

Global Hedge Fund Index ended the month +0.75%, a seventh successive positive month for the industry as a whole.

■ Net positive asset flows into hedge funds for 2013 currently stand at USD56.9bn. Total size of the industry reached USD1.88tn.

■ Distressed, event driven and equity long/short strategies continued to gain last month ending up the YTD figure at 8.71%, 7.07% and 6.70% respectively.

Negatives ■ Following a very good month in April, most CtA/managed futures funds declined 1.81% in

May13. ■ Global dispersion of returns across all hedge funds continues to remain high last month, with

funds in the 75th percentile returning 2.40% while those in the 25th percentile lost 1%. ■ the bearish sentiment for commodities are continuously hurting some managers’ performance

if they stick to their long bet accordingly.

ALtERNAtIvE INvEStMENt


the on-going debate around the tapering of QE, and the risks associated with this scenario, continues to be of greater importance than individual macro events. Consequently, sharp spikes in market volatilies are generally symptomatic of higher systematic risks, which might cause damages to those systematic trading managers. However, this also presents greater opportunities for those volatility arbitrage managers. We believe the high degree of price movements will be created globally in the coming few month. Hence, risk management” will become a key element for us to assess and select the right strategy and managers in 2nd half of 2013.

General disclaimer and warning

the 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. 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. 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: Hedge Fund Intelligence (HFI), June 2013

2013 Year to date median performance


EqUiTiES

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Henley Market OutlookJuly 2013

Economy & Finance

The Henley Market Outlook July 2013