Henley outlook feb 2013 web

Henley Market Outlook
FEBRUARY 2013

Off and away!

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THE WEALTH MANAGEMENT PROFESSIONALS

The Henley Outlook February 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 Mattias Hoijer
Partner Partner Head of Investment Associate Investment
Research Director

2

Global Overview
Equities

Peter Wynn Williams Year of the Snake? Or Year of the Ladder?!
Investment Director
pww@thehenleygroup.com.hk Chocks away, Biggles! Equity-market indices in New York, Tokyo and London are all up
over 7% so far this year; and, while silver is keeping up with them, gold was unchanged in
January and US Treasury prices are at nine-month lows. Governments and the mainstream
media would have us believe that sentiment is positive, confidence is rising and recovery
is just around the corner. Hard data, however, present a very different picture. Why have
markets and fundamentals de-coupled so much?

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

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

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

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

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

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

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

3


Global Overview
Equities

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

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

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

Peter Wynn Williams
Investment Director

4

Equities
Cash & Currencies
USD Index (Source: Bloomberg)

HENLEY ASSESSMENT Summary
Strongly Negative ■■ All eyes were on the JPY at the start of January as Prime Minister Abe’s announced his new
monetary policy which focuses on higher inflation and a weaker JPY. This may also impact
USD, GBP and EUR over the AUD and NZD due to their roles in carry trades, if JPY weakens, AUD and NZD may gain
medium-to-long term against until we start to see higher inflation and rate increases in Japan. Then we may see weakness.
a trade-weighted basket of ■■ Over the past few years the SGD has been the new safe haven currency due to the strength
currencies given that all of these of the city state’s economy, and also the way the currency is managed. We expect this to
currencies are debasing and continue, and in particular, to attract those who previously held JPY.
devaluing through significant ■■ The EUR has gained more than 12% against the USD since July, and is now above 11 month
quantitative easing. AUD is to highs.
remain volatile based around ■■ It has been a very poor month for USD Index too, for the reasons outlined above.
the Chinese data. We still ■■ Ultimately, despite the bullish data and the resolution of the fiscal cliff, the US economy is
favour SGD as a safe haven, and still far from meeting the Federal Reserve’s conditions for concluding monetary stimulus. The
commodity currencies for yield. current unemployment rate is 7.8%, and recovery from this level is expected to be slow. At this
rate we don’t expect the Federal Reserve’s target jobless rate of 6.5% to be achieved any time
soon. Second, the recent improvements in hiring and home sales suggests that US economy
reacts positively to the monetary stimulus – perhaps encouraging this support to be held in
place for longer.

5


Equities
Fixed Income

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 Points of General Interest
emerging market bonds but we see ■■ It has emerged that for the first time in 40 years, pension funds hold more of their assets in
serious danger in accepting the bonds than shares.
debt of the developed economies,
both on a sovereign default front
(especially within Europe) and on Government Bonds
a return vs. inflation front. ■■ Japan plans to cut its reliance on government bonds as Prime Minister Abe tries to demonstrate
determination to repair the state’s stretched finances.
Also, as the graph below accurately ■■ Portugal returned to debt markets, with the hugely successful sale of EUR2.5bn of bonds due
demonstrates, inflows into bonds Oct17.
have become somewhat excessive ■■ The yield on the 10-year US Treasury bond, which affects many other borrowing rates, briefly
and with the allure of dividends popped above 2% for the first time since April 2012 in January.
and the current short-term respite
from the US and Euro debt crisis, a
shift from bonds into equities may Corporate Bonds
burst the bubble that has been ■■ Sales of corporate bonds in the US dropped 57% in late January and relative yields narrowed
growing since the global financial as foreign borrowers dominated dollar-denominated issuance.
crisis.

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

6

Property
Equities

HENLEY ASSESSMENT Positives
Neutral ■■ Prime London Central property continues to be viewed as a safe haven investment area.
Prices rose 15.3% in 2012, bringing the average property price to GBP1.024m according to
Property prices generally, the Land Registry. Property transactions fell by 9% over the year, which was thought to be
after significant falls in 2009, a combination of owners holding onto their best performing assets and the adoption of a
stabilised in 2010 and 2011. “wait and see” attitude in the face of further UK government property tax announcements in
Further weakness of property relation to properties owned by “non-natural persons” above GBP2m.
prices in many areas is now ■■ In Singapore home prices in Q412 climbed to a record high and prices have now risen for four
apparent in 2012 as economic straight years. As a result the government has just introduced yet more cooling measures to
conditions remain difficult. control property price rises. Homebuyers will have to pay between 5% and 7% more in stamp
Property values have recovered duty and there is a now a tax of up to 15% for sellers of industrial buildings if properties are
in selected areas such as sold within one year.
Singapore, Hong Kong and ■■ Recent US housing data continues to be mixed but reflects that the housing market may have
London. Additinally we are found a bottom during 2012, after falls of 35% from the 2006 peak. The S&P/Case-Shiller
seeing early signs of some 10 and 20 City Indices reflected gains of 3.4% and 4.3% respectively in October 2012 YOY.
stability in the US housing However, bank repossessions remain a problem. 59,134 houses were repossessed in NOV12 up
market. We still consider some 5.4% MOM, as lenders seek to manage the flow of distressed properties without disrupting
specialised property assets such any recovery.
as student accommodation to
Negatives
merit inclusion in our portfolios.
■■ Land Registry data on average home prices in England and Wales for 2012 reflected a largely
Other than these investments,
static market, with an increase of only 0.75% to GBP249,958. Estimates of UK home prices for
we would suggest that clients do
2013 are showing a flat to slightly negative return. All of this reflects the uncertain economic
not invest further at this time.
outlook and difficulty in obtaining finance, with the result that the number of transactions
is lower. Bank of England data shows mortgage approvals of approximately 54,000 for
November 12, which is only about half the monthly average of mortgage approvals for the
decade ending 2007, ie, before the financial crisis.
■■ Australian residential property loan applications unexpectedly fell 0.5% MOM in November
reflecting reduced demand because of a soft economic outlook. This comes after six central
bank interest rate cuts over the last year, with current interest rates matching a 50 year low.
■■ In Europe the housing slump continues with Standard & Poor’s estimating that prices will
continue to slide for another two years. House prices in Spain are likely to fall another 7.9%
this year and may need to fall an additional 20% or more to clear an overhang of one million
homes. Dutch and French property prices are forecast to fall 6% and 5% in 2013 respectively.
Germany is the standout market, with home prices expected to rise 3% in 2013.

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 ■■ Debt ceiling “temporarily suspended” plus QE to infinity may result in currency crisis in a
are too politically painful; so 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 ■■ Nikkei touched 10,900 and set for best yearly rise since 2005.
■■ JPY has tumbled 12% in the last three months. USD touched JPY90 as Bank of Japan bowed
Japanese has accumulated debts to the pressure for further easing.
worth some USD14.6tn, or 230%
Negatives
of GDP. A quarter of Japan’s
■■ In a joint statement with the government, the Bank of Japan (BoJ) officially introduced a
budget now goes to servicing
2% inflation target, replacing its previous price goal of 1%. BoJ also introduced an open-
debt. So far Tokyo has done little
ended asset-buying plan in 2014, setting monthly purchases at JPY13tn including JPY2tn
to change its course. To make
for Japanese government bonds and JPY10tn for short-term bills. But stocks and foreign
matters worse, we have seen a
exchange markets were disappointed that stimulus does not come sooner.
deterioration in the balance of
trade in 2012. Japan had a record
trade deficit of JPY1,476.9bn in
January and has been reporting
deficits of over JPY500bn in
recent months. Japan’s standoff
with China over the disputed
islands also contributed to
declines in Japan’s shipments
to China for six months through
November. We doubt if Japan
waiving the debt limit of JPY44tn
(USD514bn) for the fiscal year
and targeting higher (2%)
inflation are sound economic
policies in the medium term.
Source: Der Spiegel

8

EQUITIES
Equities
UNITED KINGDOM
Negative ■■ The man hand-picked by George Osborne to run the Bank of England has fuelled speculation
that he will order a policy revolution to jump-start the stalled British economy. Speaking at the
The UK economy and the World Economic Forum in Davos, the Canadian Mark Carney, who will take over in July, hinted
chancellor in particular, have strongly at a new approach when he said that central bankers should be prepared to take
again had a grim time in the aggressive measures to help economies achieve what he called “escape velocity”.
past few weeks. As George, ■■ David Cameron has rebuffed criticism at home and abroad of his commitment to hold a
David and Boris were munching referendum on the UK’s future in Europe if he wins the next election. In a savvy political
on fondue in Davos, figures were move, he has neutralised the threat of UKIP, thrown the ball back to the Labour party and
released showing a contraction significantly increased the Conservatives chances of being reelected for a further term.
in the economy, increasing the
likelihood of an unprecedented Negatives
triple dip recession. Borrowing ■■ Jim O’Neill, the chairman of Goldman Sachs Asset Management, criticised the chancellor’s
targets are also unlikely to be hit, continued pursuit of austerity despite signs that the economy was stagnating, including
which raises the probability that worse than expected GDP figures, and that the chancellor risked a lost decade for the British
at least one of the credit rating economy with low growth and increasing public debt.
agencies will downgrade the UK ■■ Figures unveiled on Friday showed that the British economy shrank in the last quarter of 2012.
from its coveted triple A rating. If the economy shrinks again in the first quarter of 2012, Britain will be in recession for the
This will be particularly hard for third time since the economic crash of 2008. The government insists that its policy of cutting
George Osborne as he has staked expenditure is the only course available but critics insist that the absence of growth was
his political credibility on this. In increasing the deficit rather than cutting it.
the short term this is likely to lead
to downward pressure on sterling,
and this has already dipped
below the neutral 1.60 mark to
USD.

EUROPE EX UNITED KINGDOM
Strongly negative ■■ The euro zone finance chiefs gave the green light for the payout of EUR9.2bn to Greece this
month. Of the funds, EUR7.2bn in bonds are for the further recapitalisation of Greek banks,
Financial conditions have improved and EUR2bn in cash are to cover the government’s budget needs.
enormously since the ECB promised ■■ Spanish two-year bond yield – one of the maturities the central bank could target – has
to do whatever it takes to preserve plunged from a peak of more than 7% last year to 2.59%. The decline in Madrid’s borrowing
the euro. Yields on the bonds of highly costs also reflects slightly better fundamentals, not just the ECB backstop. The banking sector
indebted peripheral countries have – long the biggest weight around Spain’s neck – is being restructured and recapitalised.
fallen sharply, bank funding strains
Negatives
have eased and stock markets have
■■ Italy, Spain, Portugal, Ireland and Greece shrank their combined current account deficit to
rallied. Countries on the southern
an estimated 1.5% of GDP in 2012 from 7% in 2008, and look set to balance their external
rim of the euro zone have made big
accounts this year. However, this “rebalancing” has been mostly achieved by slashing imports,
strides in reducing their budget and
more so than increasing exports.
trade deficits. They are no longer
■■ The long-delayed bailout of Cyprus is set to be pushed back at least two months amid
living way beyond their means. But
mounting disagreement over how to bring down the cost to a manageable level for the debt-
demand is likely to remain weak, while
laden country. The IMF was insisting on significant amounts of debt relief before it agreed to
unemployment, already at a record
participate in the programme.
11.8%, is forecast to rise further before
it comes down. Recovery will be slow ■■ The IMF cut global growth forecasts and now projects a second year of contraction in EUR
and serious risks remain. The euro zone region as progress in battling Europe’s debt crisis fails to produce economic recovery. 7 out of
needs growth in its major markets 17 euro zone economies are now in recession – others are not far behind.
abroad and the political patience to
stay the course at home.

9


Equities
EQUITIES
AUSTRALIA
Neutral ■■ The Westpac Melbourne Institute Index of Consumer Sentiment rose by 0.6% from 100.0 in
Dec12 to 100.6 in Jan13. This is the third consecutive month when the Index has been at or
Despite recent rate cuts by the above the 100 level. That compares with 14 of the previous 16 months when the Index had
Reserve Bank, manufacturing and registered below 100.
construction industries continue ■■ Australian consumer prices gained less than economists forecast last quarter on cheaper food
to report weak performance and and health care, pushing down the AUD and giving the central bank scope to reduce interest
declining business sentiment. rates.
Business outlook for sales, profit Negatives
and economic conditions worsened ■■ Prices of iron ore may tumble by the end of the year as global supply increases, undermining a
between September and December, rally that pushed the price of the steel-making raw material to a 15-month high.
according to a survey of 600
■■ Fitch warns that Australia risks losing its coveted triple-A credit rating as the nation’s ageing
construction and manufacturing
population drains government coffers. In the same report, it estimates Australia’s public debt
firms compiled by the Australian
will explode from 2020 onwards if current productivity and workforce participation remains
Chamber of Commerce and
static.
Industry. Sales and profits have
seen no sign of rebounding since
early 2010 and business hiring
intentions for the next six months
have declined to the lowest level
since the survey began in 1998.
It is widely expected expect that
there is a clear case for at least
one more rate cut in this cycle and
the target has been the February/
March “window”, especially
with the lower consumer prices.

ASEAN
Positive ■■ Singapore will increase spending on population-growth measures by 25%, rolling out incentives
ranging from government-paid time off for adoption and paternity leave, to funding for fertility
Japan’s drive to revive growth may treatments. An annual budget of SGD2bn (USD1.6bn) will be set aside for measures including
boost ASEAN as rising demand in state-funded childcare leave, healthcare costs and financial support for housing to married
the world’s No. 3 economy spurs couples. The government will pay 75% of the cost of reproduction technology treatments for
orders and Japanese companies couples. Those with more than one child will also be eligible for the funding. Singapore will also
take advantage of cheap funding provide four weeks of government-paid leave for working mothers of adopted children in the
to invest in the region. Indonesia, first year as well as introduce a week of paternity leave for fathers.
Thailand and Malaysia are ■■ Thailand’s export growth quickened to a 15-month high in Nov12 as factories returned to full
identified by HSBC Holdings Plc capacity after floods in 2011 and global demand improved. Overseas sales rose 26.9%YOY
and Credit Suisse Group AG to be after climbing a previously reported 15.6% in Oct12.
among the biggest beneficiaries
Negatives
of Japanese monetary easing
■■ Singapore’s citizen workforce will begin shrinking in 2020 for the first time in its history, while
and Abe’s JPY10.3tn (USD115bn)
land and labour limits will constrain its economic competitiveness.
stimulus plan. Lower borrowing
■■ The Philippine central bank will also struggle to manage inflation without sacrificing
costs at home may add momentum
competitiveness or economic stability. Its growth is attracting funds that pushed the peso to
to plans for overseas expansion,
a four-year high in Nov12, even as Bangko Sentral ng Pilipinas lowered rates four times this
with Toyota Motor Corporation
year and introduced measures to curb inflows.
announcing in Nov12 it will
increase production in Indonesia. ■■ North Jakarta is still stranded while more than 18,000 have been evacuated from their homes,
Japan’s dispute with China over as floods that started 15Jan13 submerge areas of the city. Jakarta accounts for a huge part of
the sovereignty of islands has also Indonesia’s GDP (16% in 3Q12). Jakarta sits in a low-lying area with 13 rivers and more than
helped shift Abe’s focus toward 1,400 km (870 miles) of man-made waterways, making it prone to flooding.
Southeast Asia and prompted ■■ Rubber production in Indonesia, the second-biggest grower, may drop for the first time in
companies to add investments four years in 2013 as the country limits output and shipments in coordination with other
elsewhere in the region. producers.

10

EQUITIES
Equities
GREATER CHINA
Positive ■■ Potential upside for China stocks, especially
A-shares, is huge given the last a few years’
We believe the Chinese underperformance and cheap valuation. MSCI
economy bottomed out in China is still traded at 10.3x forward P/E, which
3Q 2012 and a recovery was is far below the historical average of 12.6x.
sustained throughout 4Q. Since ■■ Xi Jinping, the newly elected party secretary,
September, several positive admitted that official corruption is one of the
changes have contributed to a most serious challenges that the CCP faces. The
modest acceleration in industrial party discussed the anti-corruption campaign
production. In October and in a recent meeting and decided to use the most Source: Bloomberg Finance LP/Deutsche Bank
November, the raw material effective measures and observe a material
inventory and PMI showed impact going forward.In the long-run, it is definitely an encouraging sign for social stability
continuous improvement. however these actions will likely lead to revenue deceleration in sectors including Macau
Also, demand has recovered gaming, luxury consumption, as well as gift card sales in department stores in the short term.
modestly in the past two ■■ While the current real estate policy is unlikely to change, the real demand for property remains
months, the rebound in export healthy as urbanisation is expected to speed up in 2013 and affordability has improved. It is
growth suggested the external certain that the upward pressure on property prices in major cities will benefit mainland real
sentiment of developed markets estate developers.
turned for the better. Hence, we
Negatives
almost have witnessed the “Hard
■■ The key downside risks for the Chinese economy in 2013 include a stalemate on the US debt
Landing” of China economy and
ceiling, geopolitical risks in the Middle East and an escalation in tensions between China and
now 2013’s cyclical recovery will
Japan.
be led mainly by investment and
■■ The biggest worry among investors is that China’s banking system nonperforming loans
exports.
(NPLs) will rise substantially; expectations are that they will continue to rise in the coming two
to three quarters, but will peak later in the year.

India
Neutral ■■ To reduce the current account gap, India increased import tax on gold for the second time in
10 months; the figure now stand at 6%.
With the Supreme Court’s diktat ■■ With an increase in the diesel price by 45 paise per litre, the government has decided to do
to the government of India to away with the subsidy thereby allowing the state-owned oil companies to charge the market
explain the underlying reasons rate.
for the ‘daredevil reforms’ – ■■ Purchasing activity in the manufacturing sector increased for 45th successive month reflecting
read foreign direct investments in a healthy PMI of 54.7 in December, compared to 53.7 in November
(FDI) in retail – the euphoria
Negatives
over these recent reforms seem
■■ Reserve Bank of India, the country’s central bank, reduced the benchmark interest rate to
to be fading away. Indeed,
7.75% from 8% thanks to the easing of India’s Wholesale Price Index (WPI ) at 7.18% in
the government’s political
December 2012 against 7.24% in November.
posturing cannot last long since
it would be imperative for them ■■ India revised their GDP growth to 5.5% for the year ending March 2013, a sharp decline from
to announce populist measures the last 10 years’ average of 7.8%.
ahead of the general elections ■■ The ruling Indian National Congress suffered a humiliating defeat in the State of Gujarat
scheduled in 2014. and with nine more states going for election this year, speculations are rife about the
implementation of some of the unpopular reforms.

11


Equities
EQUITIES
Other Emerging Markets (South Korea, Russia, Brazil)
Neutral ■■ According to the Economic Development Ministry’s estimates, Russia’s GDP growth for
January-November of 2012 was 3.5%
With the Brazilian presidential ■■ Park Geun-hye won the South Korean presidential election to become the country’s first
election due in 2014, officials female leader. She is the daugther of Park Chung-hee, who ruled for 18 years and transformed
will do whatever it takes to meet the country from the ruins of the 1950-53 Korean War into an industrial powerhouse.
their forecast of 4% growth Negatives
this year. Further stimulus ■■ Brazil’s official IPCA consumer-price index closed out 2012 at 5.84%, down only slightly from
may come partly in the form a 6.5% advance in 2011. The central bank has an inflation target of 4.5%, with a tolerance
of yet more giveaway credits band of two points above and below that, putting the 2011 inflation at the limit.
from state banks. But policy is
■■ At the same time that the inflation outlook has worsened, so have growth expectations in
already very loose. The central
Brazil. The central bank survey of economists showed a consensus figure for 2013 growth of
bank’s benchmark rate is less
only 3.2%, down from 3.26% a week earlier. Growth in 2012 was only about 1.0%.
than 1.5% in real terms. Any
further stimulus is more likely to
push up inflation than growth.
Also, the performance of the
MSCI BRIC Index lagged behind
global equities for a record
third year. This was largely
due to investors’ concern over
government interference in
markets. Mutual funds that
invest in BRIC nations have
posted USD1.65bn of outflows
in 2012, and this trend will
probably persist in 2013

Source: Nomura, IBGE

■■ Russia is pushing for growth of at least 5% in 2013, up from 3.5% in 2012. Russia has not seen
that level of growth since 2008 and official forecasts do not predict that it will be achieved
again soon. Prime Minister Medvedev called for more steps to improve the business climate
and loosen state control, but so far reforms and the privatisation push are stumbling.
■■ South Korea’s central bank on Friday cut its 2013 growth forecast to 2.8% from a previous
estimate of 3.2%, its third downgrade in a year, reinforcing expectations for another interest
rate cut in South Korea in the months ahead.

12

COMMODITIES
Equities
Energy
Neutral ■■ Tension is flaring up in North Africa.
■■ OPEC cut December output to the lowest level since Oct11.
We remain Neutral. The Negatives
situation in the Middle East ■■ On-going debt concerns in Europe and the challenging fiscal situation in the US may weigh
remains complicated and the on sentiment.
latest flare up of tension in
■■ United States is quickly ramping up energy production in a bid to become energy independent
Algeria and Mali is adding to the
by 2020.
geopolitical instability. In Syria,
the civil war rages on with no
end in sight. Chinese GDP came
in above expectations which,
too, adding some support to
energy prices in the short term.
However, our fundamental
assessment remains the same in
that we believe that economic
growth will face headwinds as
nations need to bring debt levels
to a sustainable level. Therefore,
we believe energy prices will be
range bound for the foreseeable
future.

Precious Metals
Positive ■■ Signs of shortage of physical silver are appearing. The US mint suspended sales of silver
eagles after running out of inventory.
We remain strongly positive on ■■ Gold is a good hedge against currency debasement and future inflation.
precious metals for 2013 and ■■ Gold and gold mining shares remain an under-owned asset class compared to financial assets.
beyond. The case for precious
Negatives
metals remains as solid as ever.
■■ Near-term volatility to persist
Little has been done to bring
down excessive debt levels and
policy makers continue to treat
the crisis like a liquidity problem
rather than a question about
solvency. In the US, the fiscal
cliff was narrowly avoided but
the increases in taxes, around
USD60bn per annum, do very
little to address the annual
deficit which during 2011 ran
at more than USD1,000bn.
Overall, we continue to see gold
and related mining shares as
key building blocks in portfolios
offering a good hedge against
many of the risks that we see on
the investment horizon during
2013 and beyond.

13


Equities
Commodities
Industrial Metals
Neutral ■■ Currency debasement will support real asset prices.
Negatives
We maintain our neutral view on ■■ Growth in China for 2012 came in at a 13-year low.
base metals. The world economy ■■ Uncertainties in how Europe and US will tackle their debt burden will weight on confidence
is facing headwinds with China and growth.
reporting its slowest growth
for 2012 in 13 years. We see
better value in other commodity
sectors at the moment.

Agriculture
Positive and Negative ■■ UN’s Food and Agriculture Organization estimates there will be over nine billion mouths to
feed on the planet by 2050.
There are two very different ■■ Middle class consumers in BRIC economies are increasingly demanding more varied and
markets playing out in the protein-rich foods. As affluence increases, protein from beef, sheep, poultry, pigs, cows and
agriculture sector –physical fish may in turn displace grains in diets.
and equity. Many physical soft ■■ Urbanisation and life expectancy is expected to increase.
commodity prices have exploded
Negatives
due to changing global weather
■■ Prices are subject to many uncontrollable risks, eg, weather and natural disasters, politics and
patterns over the past few
other pests.
months, however these sharp
price increases tend to be followed ■■ Prices are subject to many uncontrollable risks, eg, weather and natural disasters, politics and
with just as sharp falls. With many other pests.
soft commodity prices at or near ■■ Due to recent drought
record highs we have a negative conditions in the American
view on investing and encourage Mid-West and Russian Black
profit taking. On the equity side, Sea regions we have seen corn,
the largest weighting funds have wheat and soy prices increase
to this sector is via fertilizer and on average over 50% within a
seed companies which have a few months.
significantly more important role
to play to increase yield and in the
case of seed companies, invent
seed which is tolerant to changing
global weather patterns. We
remain positive agriculture equity
Source: DWS
funds.

14

Alternative Investment
Equities

Neutral ■■ Hedge fund performance was positive in December. The HFRX Global Hedge Fund Index rose
0.6%, bringing the YTD return to 3.5%.
Broadly, hedge fund ■■ In 2012, strategy performance, though mixed, was broadly positive as shown in the chart
performance in 2012 was in right-hand side. The top strategies for the year were Credit followed by Equity Long-short and
line with investor expectations. Relative Value.
However, consolidation of this ■■ A number of fundamentally-oriented managers reported excellent trading profits in 2012.
industry continuously goes on. It Managers with longer-term holding periods and higher conviction positions tended to be the
is our long-term expectation that winners as equity moves appeared to depend on value-based metrics.
delivery of absolute returns with ■■ In September 2012, the asset under management in the hedge fund industry reached an all-
little reliance on market beta will time peak of USD2.2tn. We expect this number will continue to grow in 2013 given the money
constantly become the core of printing environment worldwide.
hedge fund/alternative investing
in 2013. Negatives
■■ The worst-performing
strategy was Global Macro.
In particular, Managed
Futures underperformed as
momentum factors failed to
materialise across markets
in 2012.
■■ Looking ahead, the
problems with market
timing are still difficult for
most of managers. The
“risk-on”, “risk-off” dynamics
which had plagued
Source: FRM Viewpoint Nov
managers’ return since
2011 were perceived as a persistent threat through 2013.
■■ With some equity markets up double-digit in 2012, it did make it difficult for investors to
decide whether they should leave their money with those manager with unsatisfactory
performance. Alpha from manager became a dominant factor which leads the market
competition more compelling in 2013.

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.

Henley outlook feb 2013 web

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