Henley December Outlook 2012

Monthly Market Outlook
December 2012
As the home straight to the holidays looms rapidly into view, the
markets are crying out for some Christmas magic to provide solutions
for some of the many uncertainties to have bedevilled them (again)
this year. Will a fairy godmother wave her magic wand and take us
to the ball, or will 2013 turn out to be the year when we find out the
markets are a pumpkin pulled by mice?

The Henley Outlook
December 2012
THE WEALTH MANAGEMENT PROFESSIONALS

The Henley Outlook
December 2012

Overview

ASSET CLASS HOUSE VIEW REMARKS

Fixed Income Investment Grade

High Yield
Student accommodation only.
Property

High dividend stocks preferred.
Equities US

Japan

UK

Europe Ex UK

Australia

ASEAN
Broad equity exposure
Greater China including the region preferred.

India

Other Emerging Markets

Commodities Energy

Precious Metals

Industrial Metals
Agribusiness equities.
Agriculture
Selective strategies only.
Alternative Investments

Key: Positive Neutral Negative

The Henley Group Limited The Henley Outlook: 2
An SFC Licensed investment advisor in Hong Kong Hong Kong, Singapore & Shanghai
Suite 2004-08, 20/F, St George’s Building, 2 Ice House Street, Central, Hong Kong
info@thehenleygroup.com.hk www.thehenleygroup.com.hk

The Henley Outlook
December 2012

Global Overview
As the home straight to the holidays looms rapidly into view, the markets are crying out for some Christmas magic to
provide solutions for some of the many uncertainties to have bedevilled them (again) this year. Will a fairy godmother
wave her magic wand and take us to the ball, or will 2013 turn out to be the year when we find out the markets are a
pumpkin pulled by mice?

This month, our American friends are consumed with the fight about how to avoid their fiscal cliff. No doubt the argument
will continue until the clock is striking twelve and probably beyond. Which taxes are going to increase? Which spending
is going to be cut?

Does any of it actually matter?

The US federal budget is divided into “discretionary” and “mandatory” categories. There is also a third category: interest
payments on existing debt; but that is also mandatory. For a while now, the government has not been able to collect
enough revenue to meet its mandatory payments and debt servicing – even at today’s minuscule interest rates. That
means even if the government cut the discretionary portion of its budget to zero, there would still be a deficit.

Please note here that the discretionary portion of the budget includes military spending (USD0.5tn). Even if that were cut
to zero, there would still be a deficit.

Even if income tax were raised to 100%, there would still be a deficit.

There is absolutely no prospect of any reduction in the debt of the US government (or most governments, come to that)
unless and until a hatchet is taken to “entitlements”. This would involve dismantling the welfare state, something that
neither side of US politics wants even to discuss. The situation is that simple.

In the New Year, the debate about the US’s debt ceiling will re-open. Perhaps not so much this time about how much to
raise the debt ceiling, but whether to have a debt ceiling at all. Now that quantitative easing has been made unlimited
and open ended, a debt ceiling (in place since 1917) seems a rather quaint idea, an anachronism from the days when
fiscal discipline mattered. Many, including the Secretary of the Treasury, are advocating abolition.

There are, however, those who think that the debt ceiling does continue to provide the world’s reserve currency with at
least a fig leaf of propriety, a pretence of decency. Now re-elected for his final term, President Obama might choose
to short circuit the whole debate and raise the debt ceiling by executive order, circumventing Congress altogether –
something many powerful figures were urging him to do last year. Take the debt ceiling away, however, and the fiction
that US sovereign debt is sustainable would be much harder to maintain. Absurdities abound in history, and the more
abject the absurdity, the more tenacious it tends to be. Today, a US Treasury debt limit is a very necessary absurdity.

Meanwhile, in Europe, there appears to be no limit to the creativity of bankers and officials when it comes to papering
over cracks in The Project. Two and a half years after Greece’s first bailout, a new package of a few tens of billions in
subsidies and backhanders has been painstakingly crafted to keep the country solvent for a while longer. If it were not
so sad, it would be funny to watch all that highly-paid help tying itself in ever-more complicated knots in an attempt to
perpetuate their failed experiment.


The Henley Outlook
December 2012

The Japanese, on the other hand, now in their third decade of post-bubble financial funk, seem poised to re-elect the
Liberal Democratic Party (LDP) in this month’s general election. The LDP is apparently determined to do something
about Japan’s rolling deflations and recessions (these used to be called a “depression”). Only this time they really mean
it. Apparently. They’re promising us 3% nominal GDP growth and 2% inflation, while at the same time promising Japan’s
first ever primary surplus by 2020. Now that’s what I call Christmas magic!

And on that exciting note, I’d like to wish all our readers “Happy Holidays!” and a 2013 that is even more interesting than
2012. There again, perhaps we should be more careful about what we wish for…

Peter Wynn Williams
Investment Director
pww@thehenleygroup.com.hk


The Henley Outlook
December 2012

Cash & Currencies

USD Index (Source: Bloomberg)

Summary
• A month of very little trend in the FX markets.
• After a much stronger October and early November for USD (post election), the greenback has retraced a little.
• The UK has announced the successor to Sir Mervyn King, in the form of the current head of the Bank of Canada, Mark
Carney. The first time in the bank’s 318-year history a foreigner has been appointed and he is the youngest too.
Carney is very highly regarded and has performed the role in Canada to great acclaim. However the role at the BoE is
a much greater challenge. Notoriously hawkish, he may find it tough to maintain the BoE’s current policies.
• Cable (GBP/USD) has been steady and UK Economic Growth for Q3 was confirmed at 1%. However they are not out
of the ‘woods’ yet.
• AUD still range bound with USD, but remains strong.
• EUR has recovered form weakness based on the ever present discussions on short-term solutions for Greece.
• SGD has been flat against USD.
• JPY has some respite as it has weakened against the USD.

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


The Henley Outlook
December 2012

Fixed Income
Positives
• Equity markets behaved erratically as a result of the concerns over the ‘fiscal cliff issue’ in the US leading to investors
looking towards fixed income assets to place their cash while waiting on the side lines
• US corporate bonds were reported to have returned 10.2% YTD, while high-yield or so-called junk corporate debt is up
12.8%, according to Barclays indices.
Negatives
• France’s credit rating was cut to Aa1 from AAA by Moody’s. It also maintained a negative outlook for Europe’s second-
largest economy, citing what it called a worsening growth outlook. Although French borrowing costs have tumbled
since Hollande took office, the economy has failed to grow in three quarters and unemployment is currently at a 13-
year high.
• Spain’s 10-year yield has climbed for four consecutive weeks, the longest run of increases since June, signalling that
markets are worried about Spain. The causes of these new fears are as a result of the Spanish government refraining
from asking for aid from the ECB’s outright monetary transactions program.
• On the other end of the spectrum German bonds were sold at a negative rate for the second time on record on 14Nov,
the first time since July. German two-year notes yielded minus 0.034%. A negative yield means investors who hold the
security until it matures will receive less than they paid to buy it.
• US treasuries continue to behave in a manner that is utterly non-reflective of the financial position of America. While
the likes of Spain and Ireland have had their bonds attacked by the CDS market and ratings agencies, which has in turn
resulted in them having to continue to pay more and more to borrow money, America has gotten off scot-free despite
its sovereign balance sheet not being that much better than those of its European neighbours.

USD 10 Yr Bond Yield (Source: Bloomberg)

HENLEY ASSESSMENT:
Negative. 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.


The Henley Outlook
December 2012

Property
Positives
• Central London luxury home prices rose at the fastest rate in four months in October, with a MOM rise of 0.8% from
September and YOY increase of 10.1%, according to Knight Frank. Luxury home values are now 16% above their prices
peak in Mar08, and have risen 52% since the post credit crisis low in Mar09. With all the global uncertainty, prime
central London residential property continues to be viewed as a safe haven asset and in September, international
investors accounted for 41% of all London purchases in excess of GBP1m. However, some buyers are still wary of
the recently introduced increased government transaction taxes and possible proposals to introduce from Apr13 an
annual charge on luxury property above GBP2m owned by “non-natural persons”.
• The Hong Kong government has announced
further measures to discourage speculators
and therefore control the rise of residential
property prices, as non-local and corporate
buyers will now have to pay a 15% purchase
tax. Additionally, the government also
raised a re-sale tax on property by 5% (now
up to a maximum of 20%) and extended
the period during which it applies from two
to three years. Hong Kong is imposing its
third set of property curbs in two months
after residential property prices have almost
doubled in three years, due to record low
mortgage rates, a lack of supply and an Source: JPMorgan
influx of buyers from overseas.
• In Singapore, flat sales in September reached a total 2621 units, a rise of 84% from August, which represented the
highest monthly total in more than three years. Home prices hit record levels in the third quarter, raising further
government concerns of a housing bubble.
Negatives
• After an almost uninterrupted period of decline over the past four years, US home prices at present have some
positive momentum. For example, the S & P / Case–Shiller index of property values in 20 cities has seen its highest
increase in more than two years. Additionally, the National Association of Realtors has reported that the inventory of
homes for sale has dropped to its lowest level since Mar06. However, whilst there are positive signs, it remains to be
seen whether the recovery is sustainable over time. For example, more than 20% of US residential mortgages were still
in negative equity at the end of June, amounting to 10.8m homes.
• UK home prices in October dropped for a fourth consecutive month, falling 0.7% MOM and 2.8% YOY, according
to Lloyds Banking Group. The British property market (ex-London) remains under pressure as economic uncertainty
undermines consumer confidence, and banks continue to restricting lending in order to repair their balance sheets.

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. 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.


The Henley Outlook
December 2012

Equities
US
Positives
• The US economy is highly flexible, resilient and leads the world in technology and innovation.
• The Federal Reserve has forecast rates to remain unchanged until at least 2015.
• In the long term, demographics and returned energy self-sufficiency bode well.
Negatives
• National debt is at USD16.3tn and rising; debt to GDP is at 105%and rising. This is absurdly unsustainable.
• QE to infinity promises currency debasement, rising prices and lower discretionary spending.
• Foreigners were net sellers of US treasuries in September.
• The political system remains dysfunctional while fiscal cliff and debt ceiling require immediate resolution.

HENLEY ASSESSMENT:
Negative. The reality is that the economy never recovered from its collapse from early 2006 into 2009, but
rather stagnated at a low level of activity from 2009 into 2012. The official recovery simply has been a
statistical illusion created by the government’s use of understated inflation in deflating the GDP, which
overstates deflated economic growth. Consumer liquidity remains severely impaired, preventing growth in
consumption. As real incomes continue to fall for many consumers, so too has the level of consumption
resumed its decline. There has been no recovery and none is pending. Instead, economic activity is turning
down anew.

JAPAN
Positives
• Prime Minister Noda will dissolve parliament and new
elections will likely hand power to the opposition party
which advocates an even more aggressive monetary
stimulus.
• JPY declined to a 6-month low at JPY81.2 vs USD on
prospect of more easing. This will help Japan’s export
industry.
Negatives
• The Japanese government announced it will tap into
reserve funds from fiscal budget for JPY1tn (USD12.3bn)
of stimulus in attempt to revive its economy. Japan
reported its steepest decline (-0.9% in Q3) in output
since the tsunami hit in 2011. Many economic indicators
Sources: Bank of Japan, Moody’s Analytics
have deteriorated since September, leading economists
to predict that the nation has entered its fifth technical
recession in the past 15 years.

HENLEY ASSESSMENT:
Neutral. Reuters Tankan survey reported business sentiment had worsened and the risk of recession is rising.
Many large manufacturers are cutting production due to slower global demand. The lacklustre job market is
also dragging down the services industry. The economy remains on the edge of deflation, with core consumer
prices falling 0.3% YOY in August. The Bank of Japan’s 1% inflation target still distant given the falling prices
in clothing, food and household goods.


The Henley Outlook
December 2012

UK
Positives
• Britain’s labour market is flexible and unemployment is at 7.8% of the workforce, down from 8.45 at the end of last
year. Even if it creeps back up, it is unlikely to reach the peaks seen after the past two recessions – a postwar high of
11.9% in 1984 and 10.6%in 1993.
• Investors in UK stock market listed companies enjoyed a record GBP23.2bn total dividend payouts in the third quarter.
Capita’s quarterly dividend monitor reveals that the payout is up 10.4%on last year, although underlying growth has
started to slow.
• In a surprise move, Sir Mervyn King’s successor at the Bank of England has been named as Mark Carney, present
Governor of the Bank of Canada. Canada has the best record for fiscal stability in the G7. Carney is credited with
shielding Canada’s economy the global financial crisis.
Negatives
• As a result of quantitative easing the UK government owes the Bank of England a lot of money. Since March 2009, the
Bank has printed enough money to buy up around a quarter of the government’s total outstanding debt. It now holds
£375bn in British government IOUs (gilts). Regarding the interest payments on this money the bank will have racked
up £35bn by March next year – but George Osborne the UK Chancellor has decided to take this money back.

HENLEY ASSESSMENT:
Negative. The logic of George Osborne’s raid on the interest accrued in the Bank of England accounts is that
rather than pay interest on the loans today, it makes more sense to use that money now to reduce the overall
debt. Whilst that might seem like common sense, it’s taking the UK down a dangerous path.“The point of QE,”
we’re told, “is to get more money flowing around the economy somehow, and so prevent deflation. The point
is, it’s just an extension of what the Bank of England tries to do with interest rates.” But this latest move is
different. It’s been driven by the Treasury. It’s money-printing done to benefit the government’s finances,
not the economy, and that’s a policy that can only end badly – Zimbabwe and Argentina are the first two
countries that spring to mind.

EUROPE EX UK
Positives
• Euro zone finance ministers and the IMF reached an agreement on a revised Greek bailout plan involving lower interest
rates and extended payment terms on bailout loans and a debt buyback program.
• Greece must stick to its adjustment program to continue receiving bailout aid, but the latest deal gets Greece stabilised
into early 2013 and presents a more realistic plan for Greece to eventually recover.
Negatives
• Euro zone Q3 GDP fell -0.1% QOQ (-0.4% QOQ annualized), which was in line with market expectations but confirmed
that the euro zone economy remains in a recession. Euro zone GDP on a quarter on quarter basis has been either flat
or negative for the last four consecutive quarters and has been negative for the last two quarters.
• The euro zone debt crisis is taking its toll on Germany, Europe’s largest economy. Germany’s economy grew a mere 0.2%
in the July to September period compared to the previous quarter. Unlike most of its recession-wracked partners in the
17-nation euro zone, Germany has until now escaped the worst effects of the three-year crisis that has threatened to
tear the bloc apart.

HENLEY ASSESSMENT:
Strongly negative. The financial crisis, the extent to which the problem is rooted in the banking system, was
particularly acute in the case of Spain and Ireland. Across the euro zone, banks were hit by investments
in flawed financial assets or by lending to financially-stressed governments. However, recovery is also
exacerbated by austerity, spending and taxation policies pursued by many European governments seeking
to reduce their borrowing needs. Membership of the euro means they don’t have the option of allowing
their currency to depreciate to readdress that problem. Instead, they have been hoping that reforming their
economies, notably their labor markets, would do the job.


The Henley Outlook
December 2012

AUSTRALIA
Positives:
• The Westpac-Melbourne Institute Index of Consumer Sentiment increased by 5.2% from 99.2 in Oct12 to 104.3 in
Nov12. This shows that the RBA’s 150bps of interest cuts has had a positive impact, after a long 16-month period when
the Index held below 100 for 14 of those months.
• Australia is forecasted to have a healthy budget surplus this year, through a mix of spending cuts and tax changes.
However, in the event of deterioration in the economic outlook, it can choose to delay the return to surpluses, given
its modest debt-to-GDP ratio.
Negatives:
• Inflationary pressures, fuelled by the carbon tax brought in on 1 July, prompted the RBA to keep the key rate at 3.25%.
As such, Australian government bonds, rated AAA, are set for their first two-month slide since 2010.
• Reports by Ernst & Young and PwC show that deal value in the Australian mining and metals sector fell by up to 50%
in the first nine months of the year while deal numbers were down 17
• Household debt levels remain near all-time highs.

HENLEY ASSESSMENT:
Positive. Amid weaker Chinese demand for iron ore and coal, and falling commodity prices, the mining sector
has slowed down considerably. Thus, the non-mining sectors were expected to pick up the slack. However, the
AUD has failed to fall in line with commodity prices, hurting export industries like manufacturing, tourism and
education. Notwithstanding, the RBA has the clout to further reduce interest rates to stimulate the economy
and we believe that they will do so at the next meeting. Furthermore, China’s situation appears to have
stabilised. While annual GDP growth dropped to 7.4% in the third quarter, the slowest pace since 2009, Oct12
data on exports, factory production and retail sales improved.

ASEAN
Positives:
• Thailand’s investment in infrastructure and water management projects is planned over the next seven years to boost
growth and prevent a repeat of last year’s flood disaster, which cost the economy an estimated THB1.4Ttn.
• Nissan Motor Co. announced a plan to invest THB11bn to build a second factory in Thailand. Other Japanese
corporations like Mitsubishi may follow to invest within the region.
• Malaysia has risen to become the world’s fourth largest IPO centre in 2012, and it expects the spree of IPOs in the
nation to continue into 2013.
Negatives:
• Thailand’s GDP in 3Q12 slowed down as compared to last 2Q12; weak overseas demand dampened exports. The
interest rate cut last month is yet to show any effect.
• Ongoing dispute over Senkaku or Diaoyu island has imposed regional political risks on trade within South-east Asia.
Anti-Japan protests have reduced China sales at Toyota, Nissan and Honda.

HENLEY ASSESSMENT:
Neutral. The region’s growth prospects are helping attract overseas companies, with Japan’s foreign direct
investment in Southeast Asia surpassing that in China, according to Japan External Trade Organization’s
figures using finance ministry data. Japan’s investment in the ASEAN more than doubled to USD19.6bn in
2011 from the previous year, while that in China was USD12.6bn, according to the organisation. The prospects
for developing Asian nations contrast with the fiscal and demographic challenges faced by more advanced
economies, as higher public spending and younger populations support domestic demand and lure investment
even as global expansion weakens.


The Henley Outlook
December 2012

GREATER CHINA
Positives
• HSBC/Markit Flash China manufacturing PMI shows the first expansion in a year – 50.4 in Nov from 49.5 in Oct– after
staying below 50 for 12 consecutive months.
• China infrastructure investments growth picked up from negative territory early this year to positive.
• In October, China export growth accelerated to 11.6% on YOY basis, up from 9.9% YOY in September, and above
market estimate of 10.0% YOY.
• China’s CPI inflation continuously fell in October.
Headline CPI inflation fell from 1.9%YOY in September to
1.7%YoY in October. Looking into individual components,
food prices were up 1.8% YOY, the lowest since late 2009.
Negatives
• One of the most important fundamental reasons why
Chinese equities underperformed for the last year or
two has been that Chinese companies are seeing falling
profits despite seemingly “strong” economic growth.
• China Banking Regulatory Commission (CBRC) published
figures showing total non-performing loans (NPLs) rose
from RMB456.4bn to RMB478.8bn, while the NPL ratio
rose from 0.94% to 0.95%.

HENLEY ASSESSMENT:
Neutral. November 2012 was a big month for China, even for the region. Now, you have the brand new Politburo
Standing Committee of the Communist Party of China (CPC); Xi will succeed Hu as CPC General Secretary and
Central Military Commission Chairman, while Li will take over Wen’s role as State Council Secretary. If all
goes according to plan, after the National People’s Congress (NPC) next March the two will go on to become
president and premier of China respectively. The new leadership will lead the party and the nation over the
next decade. In China, political influence is always far more important than any other factor when it comes to
making an impact on the economy and the market. We will hopefully, therefore, see positive signals sent out
by the new standing committee in the next few months.

INDIA
Positives
• Moody’s backed a stable outlook on India’s Baa3 sovereign rating.
• The Government of India has cut the withholding tax on Rupee-denominated infrastructure bonds from 20% to 5%.
• New reforms were announced by the government on 4 October: 26% FDI will now be allowed in pensions whilst the cap
on FDI in insurance is raised from 26% to 49%.
Negatives
• The inflation rate for October is 7.45%.
• The INR tumbled Friday to its lowest level in 11 weeks.
• Contrary to the widely anticipated announcement of interest cuts in the half-yearly monetary policy decision on 30
October, the country’s central bank, Reserve Bank of India (RBI), kept the interest rate unaltered at 8%.

HENLEY ASSESSMENT:
Neutral. The pace of price rise in India is the fastest amongst emerging markets. Despite the recent ‘big bang’
reforms, the inflationary pressure has left little room for the RBI in monetary policy easing. The central bank
is still awaiting a “little more detail” for government’s roadmap for implementation of these fiscal reforms.


The Henley Outlook
December 2012

OTHER EMERGING MARKETS (SOUTH KOREA, RUSSIA, BRAZIL)
Positives
• The inflation rate in Russia fell to 6.5% in Oct12 from a year earlier, compared with 6.6% in Sep12. Russia, the biggest
emerging economy to raise interest rates this year, is trying to keep a lid on consumer prices after droughts in the US
and locally drove up food costs.
• Russia’s entry to the World Trade Organisation (WTO), after an 18-year wait, is a huge positive for the economy. While
it may be several years before the full benefits of membership become evident, it offers the prospect of raising the
economy’s long-term sustainable trend growth rate, and marks an important milestone in the country’s economic
history.
• Exports in Korea rose 1.2% from a year earlier, its first increase in four months, while output also rose for the first time
in four months in Sep12 on firmer sales of cars and electronics.
Negatives
• South Korea’s consumer confidence index fell to a nine-month low in Oct12 as the economy feels the pinch of the
protracted European debt crisis and the economic slowdown in its major trading partners such as the US and China.
The Korean economy grew just 1.6% in the third quarter, the slowest pace in four years.
• South Korea faces a growing need to rebalance its economy away from exports and towards domestic consumption to
secure sustainable growth, regardless of changes in external conditions.
• Brazil’s economy continues to struggle, with still precious little to show for government efforts to kick-start growth. The
Latin regional heavyweight’s GDP grew by just 0.4%QOQ in the three months to June, and by 0.5%YOY, weighed down
by a 0.7% fall in investment and sluggish growth in consumer spending and exports.

Source: www.tradingeconomics.com

HENLEY ASSESSMENT:
Neutral. As financial markets continue to react to the re-election of Barack Obama, emerging markets globally
have a keen eye on the developments surrounding the upcoming US Fiscal Cliff. The impacts of automatic
spending cuts and tax increases would be seen worldwide, as declining US demand would affect export-
dependent economies across the globe. Lower aggregate demand would also yield downward pressure on
commodity prices as global manufacturing decelerates, further damaging economies that are dependent on
commodity exports. On the other hand, emerging markets are now better positioned to be resilient in the face
of crisis compared with 2008, due to policy improvements in the fiscal and monetary space.


The Henley Outlook
December 2012

Commodities
ENERGY
Positives
• Tension in the Middle East is flaring up once again.
• On-going loose money will benefit real assets, including energy.
Negatives
• On-going debt concerns in Europe and a slowdown in China make the demand situation highly uncertain.
• US energy production is increasing rapidly.

HENLEY ASSESSMENT:
We remain neutral. The situation in the Middle East remains complicated. In Syria, the conflict shows few
signs of abating. Israel’s air force struck an Iranian-run missile production facility in the Sudanese city of
Khartoum in what could be a dry run for an attack on sites located in Israel. Geopolitical tension provides
support to energy prices, which based on fundamentals would be under more pressure given the contraction
of GDP in Europe and lackluster growth in the US.

PRECIOUS METALS
Positives:
• Obama’s reelection is likely to lead to more dovish
policies from the Federal Reserve.
• Loose monetary policy is expected to continue across
the world for the foreseeable future.
• Gold and gold mining shares remain an under-owned
asset class compared to financial assets.
Negatives
• Near-term volatility to persist.

HENLEY ASSESSMENT:
We remain strongly positive on precious metals. With
the US election out of the way, and with Obama at Sources: Metals Economics Group - Strategies for Gold Reserves Replacement 2012
the helm for the next four years, the stage is set for
more dovish monetary policy from the Federal Reserve. Next up on the agenda to watch is the negotiations
about the fiscal cliff, USD600bn of tax increases and spending cuts. Regardless of the outcome of this, the
US is expected to run significant deficits for the foreseeable future. The political will and ability to do what is
necessary to bring the budget back to balance is simply not there. We believe that money printing will be an
important measure to fund the deficit leading to higher precious metals prices in the years to come.


The Henley Outlook
December 2012

INDUSTRIAL METALS
Positives
• Currency debasement will support real asset prices.
Negatives
• Europe is back in recession.
• Uncertainties surrounding the fiscal cliff will weigh on prices in the short them.

HENLEY ASSESSMENT:
We maintain our neutral view on base metals. Europe is now back in recession and there are significant
uncertainties of how China will deal with slowing economic growth.

AGRICULTURE
Positives
• UN’s Food and Agriculture organisation 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.
• 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 Source: DWS
average over 50% within a few months.

HENLEY ASSESSMENT:
Positive 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 fertilizer 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.


The Henley Outlook
December 2012

Alternative Investment
Positives
• Investors added to their hedge fund
portfolios in October, according to the
SS&C GlobeOp Capital Movement Index,
which rose 0.54% in October. Overall capital
activity remains consistent with previous
years as hedge funds enter the last quarter
with positive capital flows.
• Discretionary equity and credit managers
were among the best performers in October.
The increase in dispersion in risk assets
helped alpha generation.
• Long positions in the RMB and onshore/
offshore Chinese equities were a strong
source of return for emerging market hedge
fund managers.
Negatives
• Hedge fund performance was broadly negative in October; the HFRX Global Hedge Fund Index lost 0.5%. Managers
who had increased risk on the back of the September rally tended to give back a portion of their beta-driven gains in
October.
• Central bank intervention threatens to constrain the ranges in currency markets, particularly in the emerging markets.
Therefore, markets continue to lack directionary creating challenging conditions for trading/macro managers.

HENLEY ASSESSMENT:
Cautiously positive. This year so far, returns for most of hedge funds are difficult to generate in the absence
of appropriate levels of risk-taking. Since 2011, the hedge fund industry has been struggling for survival by
reducing fees, increasing transparency, improving governanace etc – essentially reflecting a favourable shift
in terms of trade from the perspective of the investors.

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.


The Henley Outlook
December 2012

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Henley December Outlook 2012

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