henley march outlook hk

Monthly Market Outlook March 2012

The Henley OutlookMarch 2012

THE WEALTH MANAGEMENT PROFESSIONALS

Another month, another cliff hanger. I don’t know about you, but I have a bad case of cliff-hanger fatigue, and crisis fatigue. But imagine how the Greeks must feel: Perhaps as if they are on the losing side of a twenty-first-century Treaty of Versailles? Perhaps we should just forget having have a crisis “mind set”, and realise that crisis, at least for the foreseeable future, is the new normal?

2The Henley Outlook: Hong Kong, Singapore & Shanghai


2The Henley Group LimitedAn SFC Licensed investment adviser in Hong KongSuite 2004-08, 20/F, St George’s Building, 2 Ice House Street, Central, Hong [email protected] www.thehenleygroup.com.hk

Fixed Income Investment Grade

High Yield

Property

Equities US

Japan

UK

Europe Ex UK

Australia

ASEAN

Greater China

India

Other Emerging Markets

Commodities Energy

Precious Metals

Industrial Metals

Agriculture

Alternative Investments

Key: Positive Neutral Negative

Overview

Student accommodation only

Selective strategies only

ASSET CLASS HOUSE VIEW REMARKS

Broad equity exposure including the region preferred

The Henley Outlook




Global Overview

Another month, another cliff hanger. I don’t know about you, but I have a bad case of cliff-hanger fatigue, and crisis

fatigue. But imagine how the Greeks must feel as their economy implodes around them. Perhaps as if they are on the

losing side of a twenty-first-century Treaty of Versailles? Perhaps we should just forget having have a crisis “mind set”,

and realise that crisis, at least for the foreseeable future, is the new normal?

The object of our current fascination, as we peer over the cliff yet again, is whether the minimum required 75% of Greek

bondholders will accept the proposed 53.5% “haircut” (or “loss” as it used to be called in more straightforward times)?

At the time of going to press, it is still not clear whether the haircut, with or without a retrospective collective action clause

(which binds everybody to accept the terms of the haircut if the 75% acceptance threshold is reached), will constitute a

credit event (and therefore trigger payouts on credit default swap haircut insurance), or not. The decision will be taken

by the International Securities Dealers’ Association (ISDA). Since the ISDA is controlled by the same banks that would

have to pay out on the credit-default swaps, after a decision in favour of a credit event, so guess which way the decision

is likely to go?!

However, there remains the intriguing possibility that the 75% threshold will not be reached, and the terms of the haircut

are that if 75% do not accept, there will be no bond swap and; therefore, no bailout for Greece. Greece would then default,

exit the euro, devalue its currency, regain some competitiveness and start to re-build – a bit like Iceland is doing now.

I say “intriguing possibility” because this may be what Germany actually wants. It is clear that some members of the

German government want it. They may have decided that enough is enough and have imposed impossible conditions

on Greece for its bailout and creditor haircut. For example, there is a demand for a constitutional change, which under

the current constitution, cannot even be voted on until 2013. Greece’s failure to comply would be seen as its own failure,

rather than the result of a sharp kick with a boot. As a result, Germany would be off the hook, and Greece would be free

to “do an Iceland”. After the European Central Bank’s second long-term re-financing operation on 29 February 2012

(EUR529bn), the banks’ cash defences against default have been bolstered.

So, in the past three months, the European Central Bank has loaded a further trillion euros in debt onto already-insolvent

banks. The Bank of England has added GBP50 billion to its quantitative easing programme, and the Bank of Japan has

printed ten trillion yen. What could possibly go wrong? No wonder gold has risen more than 10%, and silver more than

25%, already this year.

One thing is certain: the landscape is changing: The European Commission is inserting officials into the Greek civil service

to advise, monitor and enforce the will of the creditor nations. If the essence of a nation’s sovereignty is its ability to tax

and spend, then Greece is losing its sovereignty, and is effectively being annexed by the European Union’s technocrats.

Speaking of technocrats, did you know that Mario Monti’s new Italian administration does not include a single elected

politician? Just saying.

The desperation caused by the rolling global financial crisis has led to some even more worrying changes to the landscape

in the US: Last month, it was announced that US authorities and major banks had reached a USD40bn settlement in the

so-called “fraudclosure” settlement arising from a pervasive failure to execute mortgage paperwork correctly. This out-

of-court settlement was reached following pressure from the White House. Now federal securities regulators intend to sue




banks over mortgage-related actions linked to the financial crisis. No doubt, this

case will also be settled out of court for a few measly billions. In these potentially

multi-trillion dollar cases, the American taxpayer and – perhaps more importantly

– justice herself, are the big losers. But don’t worry, I’m sure President Obama will

receive his campaign contributions shortly.

It gets worse: According to the Financial Times, Obama’s fraudclosure settlement

will be subsidised by those same US taxpayers. As US TARP inspector general, Neil

Barofsky, said, “It turns the notion that this is about justice and accountability on

its head,” and yet again gives the clear impression that the banks are above the law.

The Bush administration’s savaging of the Bill of Rights via the Patriot Act (2001);

the National Defense Authorization Act (Dec11), which allows the military to

detain citizens indefinitely without trial; the health care law that forces citizens

to buy insurance; and the attempted takeover of the internet (through the Stop

Online Piracy Act and the Protect Intellectual Property Act), have all gained

considerable attention lately (and in a few rare cases has generated some

effective push-back). Some people, including presidential candidate Dr Ron Paul,

believe the US is heading towards fascism.

The scandal surrounding the MF Global insolvency last October, in which client losses are now estimated to have increased

to USD1.6bn, is another case in point. The CME Group (the self-regulatory organisation responsible for regulating MF

Global) failed in its duty, firstly, to audit MF Global to prevent bankruptcy and, secondly, to make whole any customer

who lost as a result of the bankruptcy. That JP Morgan (a CME shareholder) was made whole before the customers was

a travesty of due process. Though long overdue, we have finally heard that a Grand Jury and the Commodity Futures

Trading Commission has subpoenaed CME Group in the matter.

All of us who care about the hard-won liberties necessary for (among other advantages) free, fair and open markets

(remember those?) should be vocal about the dangers posed by desperate measures, attempted by desperate people, in

desperate times. Some prices are too high to pay.

Peter Wynn Williams

Investment Director

[email protected]

George Orwell must be spinning in his grave




USD Index (Source: Bloomberg)

Cash & Currencies

Summary

• ‘Risk on’ saw the USD weaker against all major pairs.

• The Long Term Refinancing Operation creating liquidity in European banks has a weakening effect of the EUR

and in turn is more positive for GBP, as it helps control the long-tail risk flowing into the UK’s banking sector.

• AUD is approaching long-term highs against the USD with ‘risk on’ meaning the yield play carry trades are in full

flow, and continued commodity purchasing. Any pull back in the S&P 500 could weaken the AUD.

• The SGD strengthened against the USD, approaching the levels that triggered intervention from the Monetary

Authority of Singapore (MAS) in 2011 trying to keep the SGD from gaining against the USD.

HENLEY ASSESSMENT:Unchanged: Negative USD, GBP and EUR over medium-to-long term against trade-weighted basket of currencies. The euro is unlikely to continue in its current form.




Fixed IncomePositives• China expanded monetary policy even as its inflation remained at a three-month high and global equity markets

surged. The PBOC announced a cut to its required reserve ratio by 50bp, which is estimated to release CNY400bn

(USD63bn) of deposits, available for lending, in the banking system. China followed Japan in easing after the BoJ

added JPY10tn (USD128bn) to purchase more long-term Japanese government bonds.

• The market is anticipating for another round of long-term refinancing operations (LTRO) by the ECB in end of February.

We believe the two rounds of easing will provide the much-needed cash for European banks and reduce systemic risk

fears in the near term. The BoE announced it would inject another GBP50bn (USD80bn) into the economy by buying

its sovereign debt to boost commercial banks’ lending.

• Prices of US Treasuries rallied after the Fed issued guidance that the benchmark interest rate would remain low until

at least late 2014, pushing back a previous date of mid-2013. Fed officials also lowered their projections for economic

expansion and inflation for this year and next.

•Overall, credit quality of Asian and emerging markets remains intact, with low levels of debt and record-high reserve

cushions.

Negatives•US investment-grade corporate debt fell to a record low of 3.3%. Risk premiums, or spreads on corporate debt have

also narrowed. High-grade US debt has already priced in benefits from ultra-low US Treasury yields, following the US

Fed’s purchases of long-dated government bonds and its pledge to keep interest rates near zero.

• Credit-ratings agencies continued to

undermine rescue efforts in the euro

zone. Though hardly a surprise, Standard

& Poor’s downgraded nine sovereign

countries, which include stripping France

and Austria of their triple-A ratings.

Investors will continue to scrutinise the

credit worthiness of the EFSF bailout fund

and commercial banks in the region.

•Negotiations on debt restructuring

between Greek government and its private

creditors broke off after parties failed to

agree over how much money investors

will lose by swapping bonds. A disorderly

default by Greece remains an imminent

threat.

HENLEY ASSESSMENT:Negative. Though we expect quantitative easing by the major central banks will keep interest rates at ultra-low levels in the foreseeable future, the balance between risk and reward in the bond markets has shifted against investors given the low yields, poor economic fundamentals and inflationary prospects. We believe equity is a more attractive asset class than fixed income, given that there is ample liquidity in the system and fundamental distortion in the markets.




PropertyPositives•HM Land Registry reports that Central London property prices increased 12.2% in 2011. However, sales transactions

in 2011 fell to an all-time low of 5,551, as owners held onto one of their best performing assets. This represents a 40%

fall compared to the 9,111 transactions recorded in 2006. As a result of the lack of supply in Central London, combined

with overseas buyers seeking a refuge from global economic and political problems, prices are likely to continue to

rise for the foreseeable future. The price of an average flat in the Royal Borough of Kensington and Chelsea broke the

GBP1.0m barrier in 2011, increasing in price by GBP418 per day.

Negatives • In Singapore, Jones Lang LaSalle predicted that luxury property prices may fall by as much as 15% in 2012, with

mass-market housing retreating as much as 10%. The recent introduction of additional taxes on foreigners purchasing

property is likely to significantly reduce demand, as they constituted 36% of transactions within the prime market in

2011. This also comes at a time when there is an oversupply of new stock in the luxury market.

•HM Land Registry reported that property prices in England and Wales fell by 1.25% in 2011 and 5.4% in the last quarter.

Downward pressure on prices seems set to continue with the underlying trend of tightening supply and weakening

demand. For example, in the second half of 2011 the supply of property fell 7%, while demand dropped by 11%.

• China’s Central bank pledged support for first-home buyers as the recent government crackdown on property

speculation threatens to trigger a further slump in prices. Home prices declined in 52 of 70 major cities in December,

with several analysts estimating that home prices in major Chinese cities could drop by a further 15% to 20% this year.

Currently, supply of completed units is outstripping demand by a wide margin. Property agent DTZ has estimated that

although construction commenced on 5.26bn sqm of homes in the last five years, only 4bn sqm were sold in the same

period, leaving a net surplus of 1.26bn sqm. As a result, developers are expected to cut prices sharply to clear stock.

• Property prices in Hong Kong continue to fall; however, Midland Realty believes that the number of Chinese nationals

acquiring property will continue to rise this year. Mainlanders spent HKD62.3bn on Hong Kong residential properties

last year. This was 20% of individual purchases compared with 10.8% in 2010. Midland Realty expects this figure to

jump to 25% in 2012. However, Hong Kong residents, who still represent the majority of buyers, are expected to be less

inclined to purchase flats because of uncertainties in the global economy and the local property market, which is likely

to weigh heavily on prices.

• In the US, the Case-Shiller Index of 10 major metropolitan areas and the 20-city index were both down 1.3% in

November from October. Year-on-year, the 10-and 20-city indexes dropped 3.6% and 3.7% respectively. Nomura

Economic Research believes that tighter lending polices and widespread expectations of further declines in home

values have been depressing prices. In addition, a growing proportion of distressed home sales, typically sold at a

20% discount, are also exerting downward price pressure. The Economist has suggested that US houses are good value

relative to US incomes, but while prices may have reached a floor, there is no guarantee of an imminent bounce-back.

Our view is that the depressed prices are more likely to represent an opportunity for local and overseas investors. As for

home owners, the labour market is still uncertain and there are high levels of personal debt.

HENLEY ASSESSMENT: Neutral. Property prices – after significant falls in 2009 – generally stabilised in 2010 and 2011. Property values have recovered in selected areas, like Asia, but fundamentals remain weak elsewhere. Nevertheless, we still believe some specialised property assets (such as student accommodations and ground-rent income) merit inclusion in our portfolios. Apart from these investments, we would suggest that clients do not invest further at this time.




Equities US

Positives• The US economy is highly flexible, resilient, and leads the world in technology and innovation.

• The Federal Reserve has forecast rates will remain unchanged until at least late 2014.

•QE3: (estimated at USD800bn) in 2Q12 will boost asset prices in nominal terms.

Negatives•Unsustainable fiscal position continues to deteriorate (national debt is USD15.4tn; debt-to-GDP is 101%).

•Housing market in a depression.

• Real incomes are falling; labour-force participation rate is at a 30-year low (63.7%).

• Political system is dysfunctional; there is no appetite for tax increases or spending cuts, since it is an election year.

HENLEY ASSESSMENT:Negative. Despite improvement in some seasonally adjusted statistics, there has been no change in the underlying fundamentals. There is nothing that would support a sustainable turnaround in retail sales, personal consumption or in general economic activity. There is no recovery, only general bottom bouncing. Accordingly, real retail sales levels in the months ahead should become increasingly negative.

JAPAN

Positives• The BoJ expanded its asset-purchase programme to JPY65tn. The central bank also set an inflation goal of 1% to fight

domestic economic contraction. We still expect more-aggressive easing policies from the Japanese government.

• The Nikkei 225 has crept up above 9,700-level, its highest level since September.

Negatives• Japan’s economy recorded only one quarter of expansion in 2011. On an annualised basis, Japan’s economy shrank

2.3%in Q4, compared with the US’s annualised expansion of 2.8%.

•Major exporters like Sony, Panasonic, Sharp and Honda have trimmed their outlooks to reflect the impact of the Thai

floods, an expensive yen and weaker demand.

• The JPY dropped sharply to a four-month low (JPY80 compared to USD) after Japan announced it had added JPY10tn

(USD128bn) to its asset-purchase programme. We remain sceptical that the JPY could be weakened in any meaningful

way. The government has recently revealed that the BoJ spent a record JPY9.09tn (USD119bn) on currency intervention

after the JPY jumped to a record high of JPY75.31 per USD in 2011.

HENLEY ASSESSMENT:Negative. Japan’s current account surplus fell to JPY9.63tn (USD125bn) last year; it represents the smallest surplus in 15 years and a drop of 44% from 2010. Most observers believe it is a one-time shock attributed to the trade deficit due to the earthquake, floods in Thailand, and problems with nuclear power. However, any trade outflow will raise concerns about Japan’s ability to pay its debts, which are currently twice the size of its GDP. We also note that, should the European debt crisis take a turn for the worse, the BoJ has limited room to maneuver given that its rates are already at virtually zero.




UK

Positives• The BoE expanded its bond-purchase programme to GBP325bn this month, after the economy shrank in the fourth

quarter, bringing Britain to the edge of a recession.

• Inflation is forecasted to slow to its 2% target by the end of this year, and easing to 1.8% in two years, while annual

GDP growth is expected to be at approximately 3% by the end of 2013.

•UK consumer confidence rose in January to its highest in five months on signs of strength in the economy, according

to Nationwide Building Society, which said the increase may be a “temporary bounce”.

Negatives•Moody’s put the UK on negative outlook, raising the prospect that the country would lose its triple-A rating. This is the

first time that the UK has been placed on a negative-credit outlook by a big rating agency since the euro zone crisis

began.

•UK jobless claims climbed higher than economists forecast in January and unemployment held at its highest rate for

16 years in the fourth quarter as the economy contracted.

• In finance and insurance, productivity – the single-largest services sector (where productivity had been rising strongly

just before the recession) – has been contracting by about 1% per quarter over the 2008-11 period. Transport and

storage, professional, technical, and scientific services, wholesale and retail trade, and motor-vehicle repair services

are all showing contracting productivity. Together, these sectors account for almost half of all services output.

HENLEY ASSESSMENT:Negative. The UK economy faces another difficult year. The level of public and private sector de-leveraging is without precedent and will continue to be a powerful drag for years to come. Both supply and demand for credit is likely to remain weak, with households and corporates aiming to cut debt levels, and banks facing regulatory and market pressure to raise capital ratios and shrink balance sheets.

EUROPE Ex UK

Positives• Euro zone finance ministers sealed a EUR130bn bailout for Greece to avoid a disorderly default next month. The

ministers finalised measures to cut Greece’s debt to 120.5% of GDP by 2020, a fraction above the target, to secure its

second rescue in less than two years and meet a bond repayment in March.

• Spain raised more money than targeted at a bond auction as it sold EUR4.07bn of bonds, more than the maximum

target of EUR4bn, while French borrowing costs fell after France sold EUR2.09bn of two-year notes at an average yield

of 0.89%, down from 1.05% at a similar auction last month.

Negatives•On 27Feb, Moody’s Investors Service downgraded the credit ratings of six European nations (Italy, Portugal, Malta,

Slovakia, Spain, and Slovenia). It also warned that its top ratings on Austria, France and the UK could be at risk, casting

a pall over the euro.

• In its monthly report, citing a quarterly survey, the ECB said forecasters lowered their 2012 euro zone GDP forecast to

a contraction of -0.1% from a November projection of +0.8% growth, while they cut their 2013 GDP forecast to 1.1%

from a November estimate of 1.6%.




HENLEY ASSESSMENT:Negative. Despite securing the bailout funds, questions remain over whether Greece can pay off even a reduced debt burden, with some suggesting the deal may only delay a deeper default by a few months. A return to economic growth in Greece could take as long as a decade, while the austerity cuts will deepen a recession already in its fifth year. There are continued concerns that the European economy is struggling to keep its head above water and must face the challenges of tight fiscal policy and a banking system under considerable pressure. It is hard to see a great deal of momentum from Europe over the next few months, and some form of mild recession remains the most likely outcome.

AUSTRALIA

Positives• The Australian economy is in pretty good shape (apart from, perhaps, the wave of sackings announced recently).

Unemployment has fallen, according to the latest national statistics; the currency is strong and the GDP is on trend

and holding up. There is also a once-in-a-generation investment boom going on and the government is heading back

into surplus.

Negatives• The Reserve Bank left interest rates unchanged. While it appears to retain a bias to ease, its hurdle to do so looks

higher than earlier perceived, requiring a ‘material’ weakening in the domestic economy.

•Household debt is 150% of disposable income, up from 50% 25 years ago, and has been stuck at that level for five

years. The key cause is the price of land in Australia; it is one of the least-populated countries on earth, yet land is

about the most expensive.

• The combination of rising population, lack of arable land, and artificial restrictions on residential development in cities

has led to a six-fold rise in the median house price since 1986, from AUD93,000 to the current AUD550,000. Over the

same period, average household incomes have risen 3.5 times.

•Other countries in Australia’s position build massive sovereign wealth funds. Australia has a relatively small one (the

Future Fund) with a specific purpose: to provide for unfunded public-service pensions

HENLEY ASSESSMENT:Negative (except for the commodity sector, which we like). The Australian economy is a double-edged sword. It is expected to grow a little below trend, though the makeup of the growth will be heavily tilted towards mining investments. Key headwinds for the non-mining sectors will be: 1) ongoing deleveraging by the household sector, 2) caution by corporates, 3) maintenance of a relatively high Australian dollar, and 4) fiscal tightening by authorities.

ASEAN

Positives• Indonesia’s central bank unexpectedly cut its benchmark interest rate for the first time in three months, from 6% to

5.75%, taking advantage of easing inflation to support growth in a deteriorating global economy.

•Malaysia’s industrial-production growth accelerated in December as manufacturing and electricity output increased.

Inflation slowed to a nine-month low of 3% in December. The central bank left the benchmark rate unchanged at 3%

for a fourth-straight meeting last month.




Negatives• In Thailand, corporate earnings growth will

rebound dramatically on higher spending

on flood reconstruction and a recovery in

domestic consumption. The possible repeat

of the devastating floods still unnerves

overseas investors, as the government hasn’t

demonstrated a clear prevention plan.

• Philippines’ exports contracted 20.7% YOY,

electronic exports alone fell 32.7% YOY

following a -34.4% YOY in November. It is

expected the BSP will cut the reserve rate next

month to fine-tune the economy.

HENLEY ASSESSMENT: Neutral. Economic growth probably cooled as the European debt crisis hurt exports, dragging full-year expansion to the slowest since the global recession and putting pressure on the central bank to keep interest rates low. The priority of these countries continues to be achieving inflation targets and exchange-rate stability. The chart above illustrates the market performance across countries in 2011. Indonesia, Malaysia and Thailand are among the top performers, while Indonesia has shown positive returns.

GREATER CHINA

Positives• The PBOC announced its first Reserve Requirement Ratio (RRR) cut this year. RRR from financial institutions’ yuan

deposits will be cut by 50bps. This will release approximately RMB400b from the banking system. After this move, RRR

stands at 20.5% for large banks and 18.5% for medium and small financial institutions.

• China’s January inflation climbed from 4.1% in December to 4.5% in January due to an increase in pork and vegetable

prices. Analysts’ consensus forecast was for a slowdown to 4%. This figure was largely distorted by the Lunar New Year

effect. According to the Ministry of Commerce, in the first two weeks of February, pork and vegetable prices fell 0.5%

and 5.8% respectively, compared to the same period in January.

Negatives• Taiwan’s current-account surplus rose to USD12.1b in 4Q11 from USD10.2b in 3Q11, the largest current surplus since

1Q09, as imports were much weaker than expected. Financial accounts reported the largest deficit since 3Q07, of

USD12.3b in 4Q11, compared with a deficit of USD11.6b in 3Q11. This was the result of outflows of FDIs and overseas

lending by domestic banks.

• Inflation in Hong Kong was higher than market’s expectations at 6.7% YOY in January, compared with 6.4% YOY in

December. Cinema entertainment increased significantly by 15.5% in January, from 2.2% YOY in December. Package

tours rose from 23.4% YOY in January, against 12.2% YOY increase in December.

•According to China’s commerce ministry, foreign direct investment fell 0.3% YOY in January due to slumping home

sales, and exports fell for the first time in more than two years.

HENLEY ASSESSMENT: Neutral. As the largest contributors to Taiwanese exports include the US and Europe, both of which are in




recession, they each account for more than 10% of Taiwan’s exports. Unless the economic environment improves in the US and Europe, we remain cautious on investing in Taiwanese equities. As for China and Hong Kong, investors are still defensively positioned although global markets are in a rally.

INDIA

Positives• Compared to 9.47% in January 2011 and 7.47% in December 2011, the inflation rate fell to its lowest in 26 months to

6.55% in Janury 2012.

• Both the Indian stock indices, BSE and NSE, advanced 15%, and INR jumped 8% against the USD in January alone.

Negatives• Confidence among foreign investors is at an all-time low after the 122 mobile phone licenses awarded by Union

Government were revoked by the Supreme Court; amongst others, the decision has affected Norway’s Telenor, Japan’s

NTT DoCoMo, and Russia’s Sistema.

• The Finance Minister warned that the GDP in the current fiscal period (April 2011 to March 2012) would be much lower

than the previous forecast of 7.5%.

HENLEY ASSESSMENT:Neutral. Easing inflation has brought some respite, but the government’s lack of policy initiative, due to coalition politics and a series of corruption scandals, is a major concern. The industry will keenly follow the upcoming budget for the government’s proposal to support the economy; the Reserve Bank of India (RBI) is expected to lower the interest rates thereafter.

OTHER EMERGING MARKETS (SOUTH KOREA, RUSSIA, BRAzIL)

Positives• Russian fixed-investment growth reached 15.6% YOY, which was better than the market’s expectation. The acceleration

is due to strong growth in construction, particularly the housing sector (21.5% YOY). Real disposable income increased

by 2.3% YOY in January, driven by the 9% YOY surge in real wages.

• The BoK held borrowing costs unchanged at 3.25% for eight consecutive months, in line with market consensus, as

exports declined. Overseas shipments unexpectedly fell 6.6% YOY in January and the unemployment rate rose to a

four-month high at 3.2% in January against 3.1% in December.

Negatives•Most emerging markets remain sensitive to a slowdown in western economies through exports.

HENLEY ASSESSMENT:Neutral. The Korean household debt-to-disposable income ratio reached 155% in 2010, exceeding the Organisation for Economic Co-operation and Development (OECD) average of 130%. From 1997 to 2011, household debt grew at an average annual rate of 13%, nearly twice the pace of the annual nominal GDP growth. Unless we see private consumption rebound this year, we expect risks in investing in Korea presently. Turning to India and Russia: In terms of valuation, they are very attractive in the long term. However, until we see an easing monetary policy happening, it is unlikely that any economic activities are sustainable.




Commodities

ENERGy

Positives• Long-term supply sources uncertain as several exporters are turning into importers.

• Tension is the Middle East remains high.

• Long-term weakness in the USD will provide support for commodity prices.

Negatives• The macro outlook remains fraught with risk.

• The IEA lowered its global oil-demand forecast to 89.9 million barrels for 2012.

HENLEY ASSESSMENT:Positive. The war of words between Israel, its western allies, and Iran is intensifying. Comments from the US Secretary of Defence suggest that the likelihood of an Israeli strike before the end of April is growing. Meanwhile Israeli Defence Minister, Ehud Barak, said that ”if sanctions don’t achieve the desired goal of stopping (Iran’s) military nuclear program, there will be a need to consider taking action.” While it is difficult to separate fact from rumour and politics, it is clear that the geopolitical situation remains fragile.

PRECIOUS METALS

Positives:• The Greek debt saga continues, adding to equity-

market uncertainty.

•Gold and silver are a good hedge against

financial instability and possible monetisation of

sovereign debt.

• Confidence in the financial system is low.

Negatives• Temporary USD strength will put pressure on the

gold price.

HENLEY ASSESSMENT:Positive on precious metals: Both gold and silver have had a strong start this year, although they suffered from the usual month-end smash down. Global money printing continues unabated with the BoE recently adding to its QE programme and BoJ boosting its asset-buying programme. We believe more easing is in the cards, as printing money now appears to be the only option left for saving the economy. Treasuries are already broke. In an environment like this, holding real assets in general, and precious metals in particular, remains the key to protecting and growing wealth.




INDUSTRIAL METALS

Positives•Ample liquidity will support base metal prices.

Negatives•Macro uncertainty and risk aversion will continue to keep base metals under pressure for some time to come.

• Europe, China’s major trading partner, is likely to experience a recession in 2012.

HENLEY ASSESSMENT:Neutral on base metals: We continue to favour real assets over financial assets and prefer monetary metals over industrial commodities, based on our cautious macro outlook.

AGRICULTURE

Positives• By 2030, the UN estimates that demand for agricultural

products will be about 60% higher than today.

•Developing markets are seeing an increase in annual

protein intake of 11%-15%.

•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.

HENLEY ASSESSMENT:Positive: A rapidly growing global population and rapidly developing emerging world underpin the long-term prospects of the agricultural sector globally. Rising incomes will lead to higher-protein diets, which will require more grain as feedstock. On the other hand, soft commodity prices are subject to many factors that are difficult to forecast, such as drought or flooding. We suggest investors take a diversified approach when investing in this sector.




Alternative InvestmentsPositives•With equity markets on the rise and risk back on the table, the hedge-fund industry posted an impressive January gain

of 2.63%, HFR data revealed, which was a monthly return better than any during 2011. Equity strategies, particularly

emerging markets and energy, topped the chart on the right.

• The macro-economic backdrop has improved over the course of January. Looking ahead, there are several reasons

why the environment may continue to be favourable for risk assets. As a result, equity long and short (L/S) managers

produced some of the best returns: Long-bias managers generally did well, and some trading-oriented managers

generated decent gains after shifting their books to a net-long bias going into the rally.

Negatives• As expected, hedges and short-bias strategies

had a difficult month and suffered losses in

January.

• Following a period of sustained recovered

from the second quarter of 2009 to the first

half of 2011, we saw a sharp adjustment in the

financial environment in the third quarter of

2011. Hedge funds, by their nature, should be

adaptable and we would like to see managers

that display this trait. Unfortunately, however,

we found that few managers reduced

their directional bet to accommodate the

environment to protect the downside.

HENLEY ASSESSMENT:Positive: Undoubtedly, a sustained recovery for the global economy remains troubled. We are far from resolving the problems in the euro zone; therefore, the big picture for most hedge funds is that they are still struggling to for direction amidst political uncertainties. So far, however, the start of 2012 has proved to be great for risk assets. This meant that most market participants, including hedge funds, kicked-off a better year with positive gains. We would like to see some of our equity strategies continue to outperform, while CTAs could provide our portfolio with meaningful hedging over the year.

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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