The henley group outlook march

Henley Market Outlook
MARCH 2013

Alice would be proud!

Hong Kong | Singapore | Shanghai
THE WEALTH MANAGEMENT PROFESSIONALS

The Henley Outlook March 2013
Hong Kong, Singapore & Shanghai

Content
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

The Investment Committee
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.

Peter Wynn Williams George Rippon Paul Brady Chris Skinner
Investment Director Partner Partner Partner
& Partner

Andrew Kelly David Reynolds Simon Liu
Partner Partner Head of Investment
Research

2

Global Overview
Equities

Peter Wynn Williams “Why, sometimes I’ve believed as many as six impossible things before breakfast.”
Investment Director The White Queen, Through the Looking-Glass (Lewis Carroll, England, 1832-1898)
pww@thehenleygroup.com.hk
After a rollicking, if Alice-in-Wonderland start to the Gregorian year, the dawning of the Year
of the Snake ushered in an end to the markets’ scramble up the ladder, borne aloft by a rising
confetti soufflé of freshly-printed dollars and yen. Whether this slither down the snake will prove
terminal for the markets’ revived animal spirits remains to be seen, but it seems to me that for as
long as they keep printing, asset prices will keep inflating. Until they do not.

The supposed cause of the correction initially was the release of the minutes of the February
meeting of the US Federal Reserve’s Federal Open Markets’ Committee (FOMC). The committee
reportedly discussed stopping or slowing the programme of quantitative easing (QE), currently
running at USD85bn per month.

There is clearly a significant degree of disagreement and confusion at the Federal Reserve. Some
committee members clearly believe that open-ended and unlimited QE is a mistake and should
be rectified as soon as possible. Others believe that aggressive QE could be continued indefinitely,
until the economy can prosper under its own steam.

This reflects the fact that the world is now monetarily in uncharted waters. Zero interest rates
and QE have never been tried like this before. Ever.

What last month’s correction should have made clear to everyone was that the Federal Reserve
is trapped. There is no way that they can dispose of their Treasury bond holdings in an orderly
manner. Any hint of them doing so in FOMC minutes or anywhere else will result in a stampede
of investors trying to front run the Federal Reserve and sell first.

There is also no way that central banks can break records for the amount of money being
printed without it leading to rising consumer prices. Self evidently, we already have rising asset
prices. It ought to be equally obvious that central banks cannot exit QE because to do so would
lead to rapidly-rising interest rates, which would strangle whatever economic growth survived
at that point.

In this context, it is also important to realise that, when it comes to interest rates, it is not the
central banks who are in charge, it is the bond market. When the bond markets raise interest
rates, the printing presses will have to go into overdrive to cover governments’ rising interest
costs. Ask the PIIGS!

That means it is the paper currencies which will be left to take the strain through debasement/
inflation. ‘Twas ever thus, in fact, and recently we have seen sterling and the yen take their turns
to be on the receiving end. Every cloud has a silver lining, however, and for clients intending to
relocate to the UK sooner or later, who own gold (or silver!), or who are planning to use foreign
currency to buy UK property, their situation is improving. There is no need to rush, however. The
debasement of sterling (and the yen) will be an enduring phenomenon.

Which takes us neatly on to the monetary metals, gold and silver. After five years of money
printing, it ought to be obvious to everyone, except perhaps the most ardent Keynesians, that it
is not working.

That really leaves gold and silver as the only way out of re-balancing the books. One Sunday
evening in Basel, Switzerland, before the markets open in Japan on their Monday morning, the
Bank of International Settlements will announce that, henceforth, it will agree to buy unlimited
quantities of gold at, say, USD10,000 per ounce. Hey presto, balance sheets re-balanced. Banks
and sovereigns re-liquefied.

3


Global Overview
Equities

Far fetched? Well, not really. It’s been done before. In April 1933, during the Great Depression, US
presidential Executive Order 6102 criminalised the possession of more than five ounces of gold
by any US person or entity. Within a three-week period, gold had to be surrendered to the Federal
Reserve in exchange for then market price of USD20.67 per ounce. In January 1934, the US Gold
Reserve Act re-valued gold by 70% to USD35 per ounce, where it stayed until 1971. Incidentally,
it was not legal for Americans to own gold again until 1975!

The idea of using gold to re-liquefy balance sheets is at last gaining traction in the mainstream
(the idea of confiscating gold is not – gold is owned globally these days, but it was not in 1933).
Indeed, the World Bank suggested it two years ago.

Before this can happen, however, the Chinese must be allowed to hedge their huge dollar position,
and back the yuan in preparation for its full convertibility by accumulating a respectable reserve
of monetary gold. To re-value gold before this had happened might be thought, in Beijing, to be
inconsiderate.

When push comes to shove (as it is doing, slowly) and growing deficits need to be financed,
governments always trump central banks. Witness what is happening now in Japan, with the
government ordering massive monetisation and inflation targeting, while dispensing with the
services of its uncooperative central banker, Masaaki Shirakawa, and replacing him with the more
congenial Haruhiko Kuroda. Other central banks are likely to see their hard-won independence
eroded, too.

In a nutshell, politicians are unwilling to raise taxes or cut spending. They will wave their magic
golden wand instead.

The Italians, too, must be tempted to wave the golden wand following the result of their General
Election, which was effectively a referendum on austerity. Fifty-seven percent of the votes went
to parties who want to turn their backs on austerity. The largest single party (25%) wants to
leave the euro.

Of all the nations in the euro, Italy is perhaps in the best position to leave. It has low private debt
and about EUR9tn in private wealth. Its total debt level is 265% of GDP, lower than in France,
Holland, the UK, the US or Japan. Its budget is near primary balance, and so is its international
investment position (in contrast to Spain and Portugal). It could in theory return to the lira
without facing a funding crisis, and this may be the only way to avoid a crisis if the European
Central Bank (ECB) withdraws support.

The great fear is that the ECB will find it impossible to prop up the Italian bond market under its
Outright Monetary Transactions (OMT) scheme if there is no coalition in Rome willing or able to
comply with the tough conditions imposed by the EU at Berlin’s behest. Europe’s rescue strategy
could start to unravel. Will Berlin now have to re-think its strategy? German leaders need to
keep up the appearance that the euro-zone crisis has been solved, at least until their elections
in September.

With the fourth largest gold reserves in the world (2452 tonnes) after the US, Germany and the
IMF (oh – and probably China by now, but they prefer to keep everybody in the dark), the magic
wand of gold re-valuation must be appealing to Italy, too (assuming, of course, that their gold is
not held at the Federal Reserve and has not already been secretly sold to China!).

Alice would be proud!

Peter Wynn Williams
Investment Director

4

Equities
Cash & Currencies
GBP/USD (Source: Dailyfx.com)

HENLEY ASSESSMENT Summary
Strongly negative ■■ Of all currencies, the GBP has had the worst start to the year, trading at its lowest level to
USD since June 2010. Confidence in the GBP has fallen sharply since Christmas and this was
Mostly negative GBP, followed compounded by February’s inflation report from the BoE. Negative real interest rates and
by JPY. USD and EUR to still fare huge additional supply through QE has left the GBP undesirable. This is however exactly
poorly over medium-to-long term what the BoE needs in order to devalue for growth and inflate away the debt. This new
against a trade-weighted basket trend is set to continue, but expect short-term corrections along the way. The GBP has much
of currencies given that all of further to fall.
these currencies are debasing ■■ Although aiming for similar results as the GBP, the USD has the benefit of being the world’s
and devaluing through significant reserve currency and indeed the currency for the trade of commodities globally. It will take
quantitative easing (QE). We still a much greater crisis of confidence to impact its value in the same way as we have seen with
favour SGD as a safe haven, and the GBP.
commodity currencies for yield. ■■ The JPY is losing value steadily against the USD as expected, totally in line with the increase
of the Nikkei. This is Abe’s fundamental strategy, pushing for inflation rather than deflation,
as well as export growth through a cheaper JPY.
■■ The SGD remains the new safe haven currency as a result of the strength of the city
state’s economy, and also the way the currency is managed. We expect this trend to
continue, and do not expect policy change from the Monetary Authority of Singapore
(MAS) meeting in April.

5


Equities
Fixed Income

HENLEY ASSESSMENT Points of General Interest
Broadly negative, ■■ It was undoubtedly a significant moment in Feb13 when the outgoing Governor of the BoE,
however we see opportunity Mervyn King, was outvoted in his desire to add more QE to the UK Economy. This has set
in some emerging market and the scene for an interesting battle when the incoming chairman, Mark Carney, arrives as he
corporate debt. has publically stated his willingness to do what it takes to stimulate the economy. This new
rhetoric and presence at the head of the bank along with the recent topics discussed in the
While there may be some short- UK Monetary Policy Committee minutes suggests that the BoE is going to allow inflation to
term relief in fixed income from rise above the targeted 2% in order to give the economy the best possible chance to grow.
the volatility seen in equity
markets and also a comparative
positive return when compared to
holding straight cash, 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.
This fear appears to have been
proven right by the rhetoric from
the most recent G20 meeting in
which world leaders appeared to
vindicate further monetary easing
without too much regard to the
potential inflationary pressures
that such a policy will likely create. Source: ONS
Such an environment would see
the relatively low yields enjoyed Government Bonds
by fixed interest overrun by severe ■■ After the previous rush away from the perceived safe haven of US Treasury bonds at the start
inflationary pressures. Following of the year, the concerns over the outcome of the Italian election at the end of February saw
this argument a stage further we these outlays return to being inflows; a stark reminder of how the political outcomes of Europe
feel that traditional fixed interest still have the ability to derail the positive momentum enjoyed at the start of this year. This
has transferred from being a serves to remind us that however counterintuitive it may seem given time of panic, investors
safe haven asset class to one still see US debt as a safe haven.
that in the post-GFC world holds ■■ February also saw the UK finally join the long list of previous sovereign heavyweights who have
significant risk for the medium to had their AAA rating downgraded by one of the ratings agencies; an act that will not endear
long term. Moody’s to the current coalition government. However, if previous recent downgrades are
anything to go by, it is a move that will not create too many issues with regards to increasing
the rate at which the UK borrows money from international markets.
Corporate Bonds
■■ With the concern surrounding the Italian election it was not only US Treasury bonds that
benefited from a temporary move away from equities, but also corporate bonds, with the final
Monday of February seeing the corporate bond markets having to digest nearly USD10b of
new corporate bonds being purchased.
Offshore Bank Accounts- Best Buys GBP
■■ No Notice Account- Nationwide International 1.60%pa.
■■ 95-day Notice- Nationwide International- 1.80%%pa.
Offshore Bank Accounts- Best Buys USD
■■ No Notice Account- Lloyds TSB International 1.51% (inclusive of a 1% bonus paid at month 12).

6

Property
Equities

HENLEY ASSESSMENT Positives
Neutral ■■ US residential property is rebounding as traditional homebuyers compete with investors for
a shrinking inventory of homes. The S&P/Case-Shiller index of property values in 20 US cities
Property prices generally, after increased 5.5% in November YOY, the biggest gain since August 2006 (19 of the 20 cities in
significant falls in 2009, stabilised the index posted gains). Prices were up 0.6% MOM. A plunge in US house listings to a 12-year
in 2010 and 2011. Property prices low is helping to drive prices up, as sellers are delaying until property values rise further.
in many areas have weakened in ■■ Prime central London property prices are up 53% since the market trough in 2009. It is
2012 and 2013 YTD as economic estimated that overseas buyers purchased GBP2.2bn of central London property in 2012, up
conditions remain difficult. 22% from GBP1.8bn in 2011. Knight Frank has identified three major factors underpinning
Property values have, however, demand for London property: first capital growth potential; secondly, a weak currency for
recovered in selected areas such foreign investors; and thirdly London’s continued leadership in top-flight education.
as Singapore, Hong Kong and ■■ Singapore home sales rose 43% MOM in January as buyers rushed in after the government
London. Additionally we are seeing announced its seventh round of cooling measures since 2009 to control the rise of residential
early signs of a recovery in the US property prices. The latest cooling measures include increased stamp duty on purchases and
housing market. We still consider higher deposits. Singapore home prices reached a record level in Q412.
some specialised property assets
Negatives
such as student accommodation
■■ UK residential property prices will not reach their 2007 peak until 2019, representing the
to merit inclusion in our portfolios.
longest housing market recovery on record according to Knight Frank. UK housing transactions
Other than these investments, we
are predicted to rise 2% in 2013 but will remain well below the peak levels for the rest of the
would suggest that clients do not
decade. Transaction levels have roughly halved since the last market peak in 2007 and are
invest further at this time.
35% below the 20-year average. House prices in UK have been flat or modestly declining since
2010; this reflects the continued economic uncertainty and tight mortgage lending rules from
the banks.

Source: Land Registry House Prices in Feb 2013

■■ New home prices in China rose 1% in January MOM representing the biggest gain for two
years, according to SouFun Holdings Limited (the country’s biggest property website owner).
This was based on its survey of 100 cities, and the increase was the biggest since January
2011. Chinese developers have turned optimistic because the government did not impose
additional measures to curb the property market last month. However, the markets remain
uncertain as there is speculation that the government will introduce further cooling measures
in March.
■■ According to Eurostat (the European Union’s Statistics office), housing prices in Ireland have
fallen by 50% since their 2007 peak, while in Spain prices are down around a third. At the
present time there is little likelihood of a recovery in either market.

7


Equities
EQUITIES
UNITED STATES
Negative on ■■ QE to infinity will inflate asset prices.
fundamentals, ■■ The US Federal Reserve has forecast rates will remain unchanged until at least 2015.
positive on markets short term. ■■ In the long term, demographics and returned energy self-sufficiency bode well.
Negatives
Chances of Congress and the
■■ National debt: USD16.5tn and rising; debt to GDP: 106% and rising. This is absurdly
White House addressing the
unsustainable.
long-term solvency issues of the
US government in a meaningful ■■ QE to infinity promises currency debasement, rising prices and lower discretionary spending.
manner remain nil. The changes ■■ Foreigners are buying fewer, and selling more US Treasury bonds.
required to balance the system ■■ The debt ceiling “temporarily suspended” plus QE to infinity may result in a currency crisis in
are too politically painful, so a a couple of years.
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).

JAPAN
Neutral ■■ The Secretary General of OECD defended Japan’s monetary easing. He argued Japan is
aiming to beat deflation rather than simply weakening JPY against currencies of other
We doubt if “Abenomics” are competitor economies. The incident was seen as an endorsement of a weaker JPY by the
sustainable and sound economic developed countries led by the US.
policies in the medium term; that ■■ JPY further weakened to Y93 after the Governor of Bank of Japan (BoJ) announced that
is Japan waiving the debt limit of he will step down on 19 March, three weeks prior to his official term ends. The market is
JPY44tn (USD514bn) for the fiscal expecting a fundamental shift in Japan’s monetary policy as Prime Minister Abe stepped up
year and targeting higher (2%) his pressure on BoJ.
inflation. Japan has accumulated
Negatives
debts worth some USD14.6tn,
■■ Japan remained in technical
or 230% of GDP. A quarter of
recession through Q4, with GDP
Japan’s budget now goes to
falling 0.1% QOQ and 0.4%
servicing debt. So far Tokyo has
annualised. Private investment fell
done little to change its course.
sharply over the last quarter. Both
exports and imports fell sharply
highlighting a case for aggressive
monetary easing.
■■ Japan’s trade deficit nearly tripled
in 2012 to JPY6.93tn (USD77bn).
A sharp expansion of deficit from
JPY2.56tn (2011) highlights the
increasingly complex challenges Source: Der Spiegel

faced by Japan which has promised aggressive measures to end two decades of disappointing
growth.

8

EQUITIES
Equities
UNITED KINGDOM
Negative ■■ The Chancellor George Osborne has ordered Treasury officials to draw up plans for a
government “give-away” of Royal Bank of Scotland shares to boost the economy – and the
The pressure continues to coalition’s electoral prospects – by 2015. Mr Osborne has concluded that continued taxpayer
intensify on the Chancellor ownership of the bank is politically “untenable” amid rows over bankers’ bonuses, interest-
George Osborne. As predicted in rate manipulation and the mis-selling of financial products. Advisers also believe that there
our Outlook last month, Moody’s is no realistic prospect of the government recouping its full GBP45bn investment in the bank
became the first of the major and are proposing a scheme to “hand it back to taxpayers” as early as 2015. Under one plan
agencies to remove the UK from being developed, every taxpayer or voter in Britain would be given shares in RBS that would
the elite club of AAA countries, be worth, according to one Treasury insider, between GBP300 and GBP400 at current prices. If
blaming “subdued growth” and a this was to proceed, it would certainly help to stimulate the economy in the short term.
“high and rising debt burden” for Negatives
the decision to cut the rating by ■■ Britain has been through the “Winter of Discontent”, the miners’ strikes, the recessions of the
one notch to AA1. The rating is 1980s and 1990s, the implosion of the banks and five years of the euro zone debt crisis to
significant because it can affect boot – yet has never lost its AAA credit rating, until now. Entering into these uncharted waters,
a country’s cost of borrowing and Britain’s economic skipper George Osborne has insisted he will not change course. However
is also symbolic to governments the chancellor will now come under intense pressure to re-think his austerity plans ahead of
determined to prove their next month’s Budget. One things markets hate is uncertainty.
economic credentials. Within the
G7 economies, only Germany
and Canada currently still hold
the coveted AAA rating. In the
short term sterling will continue
to come under pressure on foreign
exchange markets.

EUROPE EX UNITED KINGDOM
Strongly Negative ■■ The euro zone December unemployment rate was unchanged at 11.7%; better than expected.
The report from the EU’s statistics office provided some much needed positive news that the
The GDP data from the euro euro zone labour market at least did not get any worse in Dec12.
zone show that the 17 countries Negatives
have not expanded as a group ■■ The economy across the 17-nation shared-currency bloc shrank 0.6% in 4Q12, compared to
since the autumn of 2011; a vivid analysts’ expectations of a 0.4. The German economy, Europe’s largest, shrank 0.6% over the
reminder that the more optimistic same period while economic activity shrank 0.3% in the quarter.
mood in European financial
■■ Barclays’ analysis of ECB data suggests that companies based in the “core” of the bloc have
markets – and recent meetings of
been the main beneficiaries of the central bank’s promise last June to do “whatever it takes”
European governments – has yet
to save the euro zone. Companies based in France, Germany, Belgium and Holland were able
to leave much of a mark on the
to borrow a net EUR37bn of ultra-cheap debt from the markets in the second half of last year
real economy. For the likes of Italy
following the announcement. Companies based in Italy, Spain, Portugal and Greece added
and Spain, the 4Q figures are the
only about EUR12bn of market borrowing, with only the biggest companies such as Telecom
culmination of a dismal year, which
Italia and Telefonica able to access the capital markets.
has seen their economies shrink
■■ A strong appreciation of the single currency has fuelled fears that a nascent recovery for the
by upwards of 2%. Portuguese
bloc may be in jeopardy. The EUR’s relative strength comes amid heightened tensions that
national output shrank by nearly
loose monetary policy adopted by major central banks around the world could spill over into
that much in 4Q12 alone, ending
a series of competitive devaluations.
2012 nearly 4% smaller than at the
end of 2011. Even the optimists are
not expecting the crisis economies
to actually grow for many months
yet. The worry for European
policymakers right now ought to
be how that continued gloom is
going to play out politically.

9


Equities
EQUITIES
AUSTRALIA
Neutral ■■ The RBA decided to leave interest rates unchanged, following rate cuts in May, June, October
and December 2012.
The RBA’s assessment of the need ■■ The bank also announced that it is encouraged that interest-rate sensitive parts of the
for additional rate cuts will be economy had shown some signs of responding to these lower rates, which were well below
shaped by the housing sector’s their longer-run averages, and further effects could be expected over time.
response to lower interest rates, ■■ The Westpac–Melbourne Institute Index of Consumer Sentiment posted a strong 7.7% rise in
developments in the labour February, moving from “neutral” to “optimistic” territory.
market and prospects for non- ■■ Australian house prices rose last quarter by the most since Jun10 as lower rates lured buyers
mining business investment. back into the market. The nation’s benchmark stock index climbed 4.9% last month.
The CAPEX survey, published
28Feb13, provides a critical input Negatives
into this assessment. We see the ■■ In the Australian government monthly financial statements for Dec12 released 15Feb13, the
risk that the pending downturn government revealed a material slippage in its 2012/13 budget position over the initial six
in mining investment will not be months of the financial year, centred on lower-than-expected company tax revenues, and a
offset sufficiently by an upturn in shortfall in resource rent taxes.
non-mining business investment ■■ In its quarterly statement released 8Feb13, the RBA predicted “below trend” 2013 growth of
(and housing activity). Current about 2.5%, compared with the around 2.75% forecast in November.
domestic economic conditions are ■■ A government report showed retail sales unexpectedly fell for a third month in Dec12, the
patchy and the risks to the RBA’s longest stretch of declines in 13 years.
central case forecast are to the
downside – hence the need for
additional stimulus.

ASEAN
Positive ■■ Indonesia, Thailand and Singapore have announced airport expansion plans in response to
surging travel demand. Asia Pacific overtook North America as the world’s biggest aviation
Consumer goods companies, market in 2009. The region’s passenger growth, both domestic and international, is expected
retailers, education and health- to add about 380m travelers between 2012 and 2016 to 1.2bn.
care industries are attractive as ■■ Thailand’s fourth-quarter growth accelerated more than economists estimated, joining
urbanisation spurs more people to ASEAN nations from Indonesia to Philippines in showing resilience to the faltering global
move into cities, forming a large economy as local demand rises.
pool of middle class, especially
Negatives
in the bigger economies of
■■ The Indonesian president is under growing pressure to raise the price of subsidised fuel to
Singapore, Malaysia, Indonesia,
curb the current-account deficit as his window to act narrows ahead of elections in 2014. A
Thailand, the Philippines and
44% increase in the minimum wage in Jakarta and a 15% rise in electricity prices this year are
Vietnam. The relative stability and
adding to the inflationary pressure.
continuous growth in the region is
■■ The Philippine central bank is considering measures to counter excessive capital inflows lured
an attractive proposition; ASEAN
by growth, joining Singapore in warning that policy makers need to consider more steps to
look attractive amid global
reduce the impact of such funds.
challenges including low growth
in the US, Europe’s sovereign
debt crisis and limited growth
prospects in China and India.

10

EQUITIES
Equities
GREATER CHINA
Positive ■■ The China economy seems to have
bottomed out – the purchasing
The bullish sentiment continues. manager index (PMI) indicates that
Progress towards a domestic, new orders have climbed substantially
consumption-led economy is since mid 2012.
definitely taking place, and seems ■■ China surpassed the US to become the
likely to continue at a rapid pace, world’s biggest trading nation last year,
a necessary part of the longer- as measured by the sum of exports and
term structural changes in the imports of goods, official figures from
economy, as well as a necessary both countries show. Source: Nomura
step towards correcting global ■■ China’s annual consumer inflation eased from December’s seven-month high in January,
current account imbalances. The despite rising food prices. January inflation slowed to 2% YOY growth.
middle class doubled in the last ■■ An improving economic outlook is set to give retail sales a boost during the biggest buying
five years and will probably double season of the year. The Lunar New Year is a period when consumers splurge on everything
again in the next ten. On the other from beauty products and jewellery to lavish family dinners. China’s retail sales for January
hand, the Chinese government and February may rise 15.4%, the fastest pace in 13 months, according to nine economists
appears to be embracing lower surveyed by Bloomberg.
but more sustainable levels
of economic growth. This Negatives
■■ The key downside risks for China’s economy in 2013 include a stalemate on the US debt ceiling,
provides the opportunity for the
continuation of measures to ease geopolitical risks in the Middle East and an escalation in tensions between China and Japan.
credit conditions and support ■■ The biggest worry among investors is that China’s banking system non-performing loans

expenditure on social housing (NPLs) may rise substantially – it will probably continue to rise in the coming two to three
projects, the development of quarters, but will peak within the year.
infrastructure and the promotion
of domestic consumption.

India
Neutral ■■ India’s headline inflation Wholesale Price Index (WPI) decelerated to 6.62% in Jan13 from
7.18% in Dec12, leaving enough room for the central bank, the Reserve Bank of India (RBI),
The powerful monetary response to cut rates and spur growth.
to tame inflation has significantly ■■ Total new business in the private sector increased to a 11-month high with the PMI expanding
impacted consumption; as such sharply from 55.6 in Dec12 to 57.5 in Jan13.
the projected growth rate of 6.1- ■■ In a bid to spread financial services into the rural market – comprising 600,000 villages, 90%
6.7% in 2013-14 is much lower of which do not have a single bank – the RBI has now offered new banking licences.
than expected for a country the
Negatives
size of India. With the threat of
■■ Corporate investment sector declined by 2.8% of the GDP in 2011-12 compared to the earlier
a possible downgrade looming
year thanks to the policy bottle necks and tight monetary policy.
large, all eyes are now set on
28 February when the finance ■■ Annual growth of private consumption expenditure declined to 4% in 2012-13 compared to
minister is expected to address 8% in the previous year while household financial savings too were reduced from 10.4% of
the fiscal deficit and current GDP in 2010-11 to 8% in 2011-12.
account deficit through a prudent ■■ Current account deficit continues to balloon from 2.6% (of the GDP) in 2010-11 to 4.2% in
rather than populist budget. 2011-12 and 4.6% in H1 of this financial year to 5% in Q3.

11


Equities
EQUITIES
Other Emerging Markets (South Korea, Russia, Brazil)
Neutral ■■ Russia will probably refrain from easing borrowing costs this month after inflation surged to
a 15-month high and the central bank indicated it would not yield to government calls for
The scale of fiscal stimulus in lower rates.
South Korea will be limited as ■■ Mexico’s four-year-old expansion, slowing inflation and debt ratios half those in the US are
the new Finance Minister, Hyun factors winning over investors searching for stable returns as Europe’s economy heads for a
Oh Seok, will not compromise contraction. Latin America’s second-biggest economy, which is about half the size of Brazil’s,
on the country’s fiscal healthy outgrew its larger regional peer in each of the past two years, posting annual expansions of
by engaging in aggressive about 4% as construction and auto production jumped.
fiscal spending. The short-term Negatives
challenge will be to find way to ■■ South Korea’s economy expanded 2% in 2012, the slowest pace since annual growth fell
secure a rapid economic growth to 0.3% in 2009. That compares with a potential rate of 3.8% estimated by central bank
without printing more money. governor Choongsoo Kim. Policy makers also face the problem of a working population that’s
Similarly, nations like Russia and expected to start shrinking in 2017, according to a finance ministry report last year.
Brazil are finding it tough to
■■ The Bovespa index fell to an 11-week low as economists covering Brazil reduced their 2014
stoke economic growth without
growth forecasts, rekindling concern that a slower recovery will hurt corporate earnings.
inflation spiking up. Inflation is
at a 15-month high in Russia, ■■ Russia, the largest emerging nation to raise rates in 2012, is facing growing government
while Brazilian consumer prices pressure to ease monetary policy after economic growth last year slowed to 3.4%, the weakest
rose the fastest in Jan13 at the since the 2009 recession.
fastest pace in eight years. Other ■■ Shares of BRIC nations are lagging behind as their economic growth advantage shrinks and
emerging economies are looking investors shift money to smaller emerging markets, including Turkey and the Philippines. GDP
more attractive relative to these in the BRICs probably increased 4.2% on average in 2012, versus 3.2% for the world economy,
nations. according to the IMF. The 1%point gap would be the smallest since 1998.

12

COMMODITIES
Equities
Energy
Neutral ■■ Risk of supply disruption from countries such as Iran has kept oil price high.
■■ Emerging market demand pushed the oil price higher.
We remain neutral. The global Negatives
economy remains in a precarious ■■ Concerns about the euro zone and the Italian election result, and thoughts of growing US
state and with the impending stockpiles.
sequester budget cuts looming in
■■ US sequester budget cuts.
the US, we see better opportunities
elsewhere.

Precious Metals
Positive ■■ 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.
February was a difficult month for Negatives
gold as speculators pushed the ■■ Short-term price volatility as speculation exists about an end to QE in the US.
price down on the minutes of the
Federal Reserve policy meeting,
which showed some members
suggesting that QE should come
to an end sooner than expected.
However, there was a significant
bounce following the comments
of Federal Reserve Chairman
Bernanke during his half yearly
testimony to Congress, when he
signaled that the Federal Reserve
is prepared to keep buying bonds
at its present pace. Central banks
continue to be buyers of gold,
particularly those in developing
countries. The official reserves of
these countries continue to grow
and as these reserves are heavily
biased to the USD and EUR, gold
is an attractive option as they
look for ways to diversify.

13


Equities
Commodities
Industrial Metals
Neutral ■■ China continues to restock commodities to the benefit of major commodity-exporting
countries.
We remain neutral on this sector. Negatives
The global economy continued ■■ Sluggish global economies and austerity continue to weigh heavily on the sector.
to shrink in 2012 and this took
its toll on producers of base
metals. Prices for copper, iron
ore and aluminium fell sharply
with decreased demand, and the
import price for iron ore in China
has increased by over 75% in the
past five months.

Agriculture
Positive and negative ■■ Warren Buffett’s investment powerhouse Berkshire Hathaway and 3G Capital have
announced they will take over US tomato sauce and baked beans maker Heinz in a deal worth
Two very different markets are USD23bn. This could lead to broad cost-cutting measures across the industry and a possible
playing out in this sector – physical rerating in the valuation of similar companies.
and equity. Many physical soft ■■ UN’s Food and Agriculture Organization estimates there will be over nine billion mouths to
commodity prices have exploded feed on the planet by 2050.
due to changing global weather ■■ Middle class consumers in BRIC economies are increasingly demanding more varied and
patterns over the past few months, protein-rich foods. As affluence increases protein from beef, sheep, poultry, pigs, cows and
however these sharp price increases fish may in turn displace grains in diets.
tend to be followed with just as ■■ Urbanisation and life expectancy is expected to increase.
sharp falls; there is a very seasonal
and cyclical pattern. With many Negatives
soft commodity prices at or near ■■ Prices are subject to
record highs we have a negative many uncontrollable
view on investing and encourage risks, eg, weather
profit taking. On the equity side, and natural disasters,
the largest weighting funds have politics and other pests.
to this sector is via fertilizer and ■■ Due to recent drought
seed companies, which are having conditions in the
a significantly more important role American Mid-West
to play to help increase yield and in and Russian Black
the case of seed companies, invent Sea regions, we have
seed which is more tolerant to seen corn, wheat and
changing global weather patterns. soy prices increase
We remain positive on agriculture on average over 50%
equity funds. within a few months. Source: DWS

14

Alternative Investment
Equities

Neutral ■■ Hedge funds made money in January. The HFRX Global Hedge Fund index ended the month
with a gain of positive 2.0%. Overall, there was a slight increase in gross and net exposure
We have to admit that for the past across managers.
two years it has been unusually ■■ The best return for this year so far came from security selection specialists in equity long-
difficult for active management short space.
styles to generate returns. ■■ A number of fundamentally-oriented managers reported excellent trading profits in 2012.
In hedge fund space, those Managers with longer-term holding periods and higher conviction positions tended to be the
managers, who tend to eschew winners as equity moves appeared to depend on value-based metrics.
traditional sources of return such
Negatives
as static market exposure, have
■■ We are still having concerns that Managed Futures return would be under threat in the event
been particularly problematic.
of a sell-off in the bond market.
A material improvement in the
global economic landscape ■■ Despite total assets under management surpassing its previous high in 2008, managers and
made us believe markets this investors are largely cautious going into 2013. New regulations created an added burden
year will be more reactive to for fund managers, and high-profile SEC enquiries into leading hedge fund names, and
fundamental data rather than continued market volatility which led to performance concerns, resulted in further investor
political influence. Higher level dissatisfaction.
of dispersion within markets and ■■ The chart shows the key
lower systemic risk both give us issues investors and fund
confidence that hedge funds managers feel are facing the
of some strategies should have hedge fund industry in 2013.
huge potential to generate non- Both investors and fund
correlated returns in 2013, more managers are aligned in their
so than they have for the past two agreement that performance
years. is the No1 issue that needs to
be addressed in the following
year. 2013 could prove to be
a vital year for the industry,
and managers will need to
post strong returns in order
to satisfy those investors
Source: 2013 Preqin Global Hedge Fund Report
that have been disappointed
with the industry’s performance over the past few years.

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 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.

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