henley november outlook hk

The markets had their Road Runner moment in September. In October, it was the turn of Europe’s politicians. Only then did they seem to start to come to terms with the simple arithmetic of their predicament. Since then the scene has degenerated into a tragic farce played by headless chickens.

Monthly Market Outlook November 2011

The Henley OutlookNovember 2011

THE WEALTH MANAGEMENT PROFESSIONAL

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

Brazil

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





Global Overview

“Humpty Dumpty sat on a wall,Humpty Dumpty had a great fall.All the king’s horses and all the king’s menCouldn’t put Humpty together again.”

OLD ENGLISH NURSERY RHYME – thought to date from English civil war (c.1648) or possibly earlier.

The markets had their Road Runner moment in September. In October, it was the turn of Europe’s politicians. Only then

did they seem to start to come to terms with the simple arithmetic of their predicament — and the scene degenerated

into a tragic farce played by headless chickens.

Just as we are going to press, the European Union has announced a 50% haircut on about EUR 200bn of Greece’s

EUR 350bn debt. It will be interesting to see how this is presented as “not a default” (to avoid triggering credit default

swaps). Probably because it is voluntary. The banks of course wish to avoid insolvency, and therefore nationalisation, as a

result of the haircuts. The rest of us just wish they would stop postponing the inevitable and grasp the nettle.

Some already have. The FT Deutschland is already being priced in deutschmarks once again.

There is also a plan to leverage the borrowed money financing the European Financial Stability Fund, to raise its firepower

to EUR 1.4tn, and another to raise the banks’ core capital to 9%. The European Banking Authority reckons this will cost

some EUR 106bn. The IMF say EUR 200bn, Credit Suisse opine EUR 400bn and Goldman Sachs posit EUR 1tn.

Our initial assessment is that, once again, the euro zone is firing a pea shooter at an elephant, doing too little, too late.

So far, the talk is mainly of Greece. But there

is an understanding in Dublin and Lisbon, to

name but two, that whatever Greece gets,

Ireland and Portugal also get. And will the

latest package be enough to keep the market

vigilantes away from Spain, Italy, Belgium and

France? I mean, if your country is having some

of its debts written off, why should not mine?

Defaults are messy, painful and very,

very expensive. But not hopeless. In

December 2001, Argentina defaulted on

USD 100bn in debt – the largest default in

history. The move ushered in an era of utter

chaos: five presidents in two weeks, cash and




food shortages, deadly riots and dire poverty. Since then, however, South America’s second-largest economy has bounced

back from the brink. Argentina has enjoyed eight straight years of near 8% economic growth, and looks poised for more

gains in 2012. How many euro zone economies can look forward to anything like that in their present circumstances?

They say you can’t make an omelette without breaking eggs. Well, Humpty has done his bit, but we still have no omelette

— just a scramble.

The social and political dimensions of the crisis continue to grow. The “Occupy Wall Street” protest movement is spreading

like wildfire across the globe. The mainstream media demonise it as “anti-capitalist”; but a more accurate characterisation

would surely be “anti-greed, anti-corruption and anti-mismanagement”, which are not necessarily synonymous with

capitalism.

While the world’s focus has been turned on Europe, there have been some worrisome developments in the US: Bank of

America has transferred some USD 53tn (notional value) in derivatives from the uninsured books of its Merrill Lynch

subsidiary to the federally insured books of Bank of America NA, suggesting that extra collateral might have been

needed for the derivatives concerned. Who better to provide the collateral than the bank’s depositors and their taxpayer

guarantors?

Meanwhile, in case you were wondering (humour me!), the US federal deficit for the year ended September did not fall. It

rose. To USD 1.3tn, from USD 1.29tn the year before. This was the third successive year of deficits of USD 1tn plus – the

largest, USD 1.42tn, was in 2009. At least the debt as a proportion of GDP fell to 8.7% from 9% the previous year, and

10% in 2009.

Despite that, however, the proportion of the US population living below the official poverty line rose to 15.1% this year,

from 14.3% last year. According to Gallup, at times in the past twelve months 19% of Americans did not have enough

money to buy food for themselves or their family, up from “only” 9% three years ago. Interestingly, the comparable

figures from China are 6% in the last year, and 16% three years ago. How the tables have turned.

One piece of good news for all – all except market manipulators, that is: the US Commodity Futures Trading Commission,

which regulates futures trading, has at long last announced position limits on metals traders on the New York COMEX.

Although the position limits announced are not as low as we should have liked, and although no date has been given

for their introduction (probably a year or two away), the announcement is at least a step in the right direction. Effective

position limits mean no huge positions concentrated in few hands, and no concentration should mean no manipulation.

The sooner, the better.

Peter Wynn Williams

Investment Director

[email protected]




USD Index (Source: Bloomberg)


Cash and Currencies

Summary• The JPY, USD and CHF strengthened as the uncertainty in Europe spurred demand for safe-haven currencies.

• The EUR is in state of seesaw as traders attempted to get more clarity on the evolving EFSF deal ahead of the EU

summit.

•AUD is poised to drop against the USD after commodity prices fell, sapping demand for riskier assets. Along with the

NZD, they are set to decline against the JPY on concern that European leaders will struggle to resolve the debt crisis.

• The GBP advanced against the EUR after a deadline for a solution to the euro zone debt crisis was pushed back to

26Oct11 after Germany and France said they needed more time to seal a proper accord.

• The SGD weakened against the USD at end-Oct11. Efforts to expand the euro zone fund and shore up its banks have

helped fuel a SGD rally for most of Oct11 but that appears to have stalled as investors are less keen to take on risk. In

addition to the lack of encouraging news from Europe, the worsening flood in Thailand and a selloff in Chinese equities

have contributed to a bleak view on Asian currencies.

• Japanese Finance Minister announced that Japan was ready to take decisive action in the currency markets, raising

the possibility of official intervention to weaken the JPY. The statement was made after the USD hit a record low of

JPY75.78.

HENLEY ASSESSMENT: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.


The 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

Positives• BoE launched a further round of quantitative easing to protect its struggling economy from the impact of the euro

zone debt crisis. BoE expanded its asset purchase program by GBP 75bn to total GBP 275bn. The move was aggressive

in terms of size and timing when inflation is well above the BOE’s 2% target, and hit 5.2% in September.

• Probability of US to come up with more easing measures by Christmas has increased given the worsening economies

in Europe and UK. US Fed admitted to possibility of large-scale purchases of mortgage-backed securities in support of

the housing market directly.

Negatives•October marked a series of European downgrades which include two sovereign countries (Italy and Spain), fourteen UK

banks and building societies, and nine Portuguese banks. Financial strength in Europe continues to deteriorate while

Germany and France struggled to come up with any specifics to rescue Greece and recapitalise banks in case of severe

write-downs. Credit spread between 10-Yr government bonds of France and German widened to 100bp, the largest

since 1992. If France loses its AAA credit rating, it will jeopardise the entire rescue operation.

• Indonesia unexpectedly cut interest rates by 25bp to 6.5% following the surprise reduction by Brazil last month. Like

many emerging markets, Indonesia now faces increasing pressure after a slide in its bonds and stocks in September. We

have been on inflation alert and expecting more easing from around the world as policymakers move in fear of slowing

global economic outlook and growing market turmoil.

HENLEY ASSESSMENT:Negative. Persistent high funding costs as a direct result of tightening measures are taking their toll in China. Many small- and medium-size companies are in risk of bankruptcy and there are reports that entrepreneurs are abandoning their businesses. Premier Wen has recently called for stronger financial support for small businesses and better regulation of the private lending market. Even though small and medium enterprises (SMEs) create 80% of China’s jobs and generate 60% of China’s industrial output, SMEs have long complained about difficulties in securing loans from banks. Many cash-strapped businesses have turned to the underground lending market, which pools money from individuals and firms and lends it out at annual interest rates at an average of 70%, as shown in the graph below. Yet, the number is believed to be understated!

China is also vulnerable to global downturn and needs all its resources to avoid a serious slump. Current inflation may have peaked but remains uncomfortably high (September CPI +6.1%, year-on-year) and food prices continued to rise with pork prices hitting a record high. China’s policymakers are acutely conscious of its growing pains; pumping more money into the economy is simply out of the question. THG is closely monitoring the liquidity situation in China as any deterioration can easily spill over to the local economy.




Property

Positives•As a result of the continued uncertainty over the global economic recovery, luxury London property continues to attract

interest from overseas buyers. Residential property prices of GBP 3.7m and above rose 11.4% YoY with international

buyers accounting for 55% of the market. Knight Frank has estimated that luxury home prices will increase by 12% over

the next year. However, MoM prices rose by just 0.6%; this is the slowest growth rate since October last year.

• In Singapore, prices of both private homes and government built apartments rose between July and September.

Although the price rises are slowing, it demonstrates strong underlying demand for Singaporean property. The

Singapore Government has been trying to stem the rise in prices by increasing land supply for housing, and reducing

the amount that can be borrowed for second properties.

• Property values continue to be supported by low interest rates, often providing a positive yield against the cost of

finance.

Negatives • In Hong Kong, developers may slow or delay the launch of new flats after disappointing sales. Only 157 new flats

were sold in August, a decrease of more than 75% versus the 667 sales in July. Secondary sales, according to the

Land Registry, showed a decrease of more than 50% compared with the same period last year. Market sentiment has

weakened due to a new round of mortgage rate hikes (bringing the cost to a 28 month high), and stock market plunges.

•US house prices fell 5.9% in 2011 from a year

earlier, the biggest drop since 2009. US 30-year

mortgage rates, at around 4%pa, have reached

their lowest levels since 1949. While a number

of home owners are refinancing, the low rates

do not assist those borrowers who need help

most; there are around 11 million homes in

negative equity in the US, and they are all stuck

with higher mortgage rates.

• The slump in Spain’s residential property

market continues, as mortgage approvals fell

44.2% to the lowest level in eight years.

•Hometrack, a UK property company, has stated

that UK house prices fell for a fifth successive

month in September, and that the decline may

accelerate in the coming months. As Europe’s debt crisis undermines confidence, the availability of credit continues

to be a problem, and global growth prospects weaken. The average cost of a home slipped 0.1% from August and was

down 3.5% from a year earlier. New property listings rose 22% in the nine months to the end of September, double the

pace of demand growth.

HENLEY ASSESSMENT:Neutral.Propertypricesgenerally,aftersignificantfallsin2009,stabilisedin2010and2011.Propertyvalueshaverecovered in selected areas such as Asia but fundamentals remain weak elsewhere. However, we still consider some specialised property assets – such as student accommodation/ground-rent income – to merit inclusion in our portfolios. Other than these investments, we would suggest that clients do not invest further at this time.




Equities

US

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

• Federal Reserve has publicly committed to keeping rates unchanged until 2013.

Negatives•Deterioration of US fiscal position accelerates (national debt: USD 14.875tn).

•Housing market is in a depression, foreclosures rising again.

• Inflation is rising (CPI: 3.9%); GDP growth and real incomes are falling.

• Political system dysfunctional.

HENLEY ASSESSMENT:Negative. There is no way to ignore the mounting evidence that the US economy has slowed from its 2010 growth rate, which was largely QE-induced. If it is not already in one, the US will soon be in recession again. A disastrous lossofconfidenceintheworld’sreservecurrencycouldoccuratanytime,althoughfornowthedollariswinningtheugly-dogcompetition.Therootsofhyperinflationandcurrencycollapseremainembeddedinthesystem.

JAPAN

Positives•After adding JPY10tn (USD 130bn) to the stimulus budget in August, BoJ said it is still open to any options of monetary

tool given the uncertainty in global economy.

• Ruling Democratic Party of Japan picked Yoshihiko Noda as the sixth prime minster in five years. Noda, Kan’s former

finance minister, vowed to raise taxes to pay for the rebuilding from March’s disasters and reduce the country’s debt.

Challenges to structural reform remain enormous given the divisions within Japan’s political system.

• Possible sharp economic recovery in the next few months due to resumption of electricity, re-stocking and

re-construction expenditure.

Negatives• Exports rose only 2.8% in August from a year earlier, much less than a median forecast for an 8.0% annual increase.

Strong JPY put a drag on overall export growth with exports of electronic parts falling 16.4%, extending annual declines

since the beginning of 2011.

•Despite recent intervention, JPY jumped to fresh new record high of JPY75.58 vs USD on prospects of further easing

in US. JPY has rallied 6.5% vs USD year-to-date. Japan’s cabinet was forced to announce JPY 2,000bn (USD 26bn) of

subsidies to encourage companies to keep factories and jobs in the country.

• Japan’s unemployment rate remains high at 4.3% (August), but it is already lower than 4.7% in July. Monthly trade

deficit unexpectedly widened to JPY 294.4bn, after July’s shortfall of JPY 160.2bn.

HENLEY ASSESSMENT:Negative. Recent data on August was less than spectacular on the Japanese economy. Monthly trade deficitunexpectedly widened to JPY 294.4bn, after July’s shortfall of JPY 160.2bn. Consumer expenditures in August dropped 4.1% from previous year. Public demand supported the economy as the Japanese government increased its spending on disaster relief, but the outlook is highly uncertain due to strong JPY and fading external demand.




UK

Positives• The BoE announced an increase in the size of its bond purchases, expanding the program to GBP 275bn from

GBP 200bn, the biggest increase since the first round of QE in Mar09.

•UK trade deficit on goods narrowed in Aug11 as exports rose to a record high. The trade deficit fell sharply from

GBP 2.3bn in Jul11 to GBP 1.9bn in Aug11.

Negatives•Moody’s downgraded 12 financial institutions in the UK. This included a one-notch downgrade of the three major

UK Banks: Lloyds, Co-operative Bank and the British arm of Santander, as well as a two-notch downgrade of RBS and

Nationwide Building Society. Seven smaller banks were downgraded by one to five notches.

• This was followed by a long-term issuer default grades cut by Fitch Ratings on UBS, Lloyds and RBS. It also put more

than a dozen other financial institutions on watch negative as part of a global review.

• UK unemployment rose to a 15-year high of 8.1% in the three months through Aug11, from 7.9% in the quarter ended Jul11.

• Economic growth slowed to 0.1% in the 2Q11 from the previous three months, lower than the 0.2% previously published.

HENLEY ASSESSMENT:Negative. The overall trade deficit may have narrowed in the past two months but it remains wider than it was at the start of the year. With the euro zone near recession and growth slowing in China and India, the outlook for UK is still negative. David Cameron has insisted: “the only way out of a debt crisis is to deal with your debts… And it means governments – all over the world – cutting spending and living within their means.” However, without economic growth, it is almost impossible to deleverage an economy.

EUROPE EX UK

Positives•German Chancellor Angela Merkel and French President Nicolas Sarkozy said they were working on a coordinated plan

to recapitalise European banks that would be completed by the end of the month.

• The ECB will spend EUR 40bn on covered bonds starting next month and offer banks two additional unlimited loans of

12- and 13-month durations.

• Ireland is seeing better-than-expected growth – its economy expanded 1.6% in the second quarter after growing 1.9%

during the previous quarter.

Negatives•Moody’s cut Italy’s credit rating by three notches and assigned it a “negative outlook”.

• S&P cut Spain’s credit rating by one notch to AA-, with the outlook remaining negative. Fitch also downgraded Spain to

the same level earlier, when it cut its rating on Italy.

• The Belgian state will buy the national subsidiary of Franco-Belgian Dexia Bank for EUR 4bn. On top of the

nationalisation, the governments of Belgium, France and Luxembourg together will provide an additional EUR 90bn in

funding guarantees for the bank for up to 10 years.

HENLEY ASSESSMENT:Strongly negative. The measures from the ECB and BoE are helpful but they are not large enough in isolation to transform the macro economy. It is estimated at least 66 of Europe’s biggest banks would fail a revised EU stress test and need to raise about EUR 220bn of additional capital. Interesting news to emerge from Europe was the economic growth in Ireland and this has prompted some to wonder if the country’s path is something others should follow. It was less than a year ago that the nation was on the brink of default and forced to take a bailout with deep austerity measures attached. And already, it is showing signs of stability.




AUSTRALIA

Positives•US commitment to keep interest rates at virtually zero for some time are creating a clear drag on USD. With risk

appetite buoyant, commodity prices remain strong and equities climb, encouraging traders to invest in high-risk, high-

yield assets such as AUD.

• Interest rates likely to start rising again to curb increasing inflation due to demand pressures, and skilled labour scarcity

driving up the pace of price rises.

•Mining boom remains alive and well and, if anything, is strengthening with the terms of trade continuing to rise, and

set to further boost mining sector profits. Impact is feeding through economy via higher wealth levels and dividend

payments, higher employment, higher tax receipts and higher business investment.

Negatives• Strong AUD making it very difficult for tourism, agriculture, wine and other exporters to compete. As a result, the

economy is now very reliant on one industry.

•Any slowdown in Chinese and Indian growth (and related commodity demand) will send base metal prices and the AUD

tumbling.

•As interest rates rise to address inflation, it may very well result in the highly-leveraged Australian property bubble

bursting putting bank balance sheets under a lot of pressure.

•Australian immigration policy hasn’t allowed the economy to keep up with rising demand for its commodities and has

caused wage inflation.

HENLEY ASSESSMENT:We downgrade to negative. The global economy is now cooling and this will hurt Australia’s economy which is highly linked with the rest of the world. Falling commodity prices are not making matters any better and in particular, Chinese demand for raw materials looks set to moderate near term.

ASEAN

Positives• Bank Indonesia surprised markets by announcing a 25bp

ratecutto6.5%.IthasbecomethefirstAsiancountryto

cut rates. Statement notes suggest that the central bank

sees inflation pressures easing and will remain under

control below 5% in 2012.

• Indonesia’s credit investment grew by 30.0% YoY

in Aug, increasing contribution of this year’s credit

investment to total loans from 19.4% in Jan to 20.6%

by Aug. This may suggest pick up in higher investment

growth as well as contribution to GDP. Indonesia Jakarta Composite is the ASEAN star delivering -4.2% YTD.

• Malaysia’s industrial production surprised on upside at six month high of 3.0% YoY in August compared to a decline of

0.5% YoY in July. Petroleum and chemical products surged 12.0% YoY in August against a decline of 2.0% YoY in Jul.

Though domestic demand remains strong, weak global economic growth may raise uncertainty.

• The Aquino administration of Philippines made progress to reduce budget deficit from 3.5% GDP in 2010 to 3.2% in

2011, and projected 2.0% by 2013.

• Singapore’s real GDP expanded 1.3% QoQ annualised and 5.9% YoY in 3Q11 against a decline of 6.3% QoQ and a

marginal increase of 1.0% YoY, better than market expectation, due to surge in biomedical output. Manufacturing GDP

rebounded 8.9% QoQ and 13.2% YoY compared with a decline of 23.7% QoQ and a decrease of 5.8% YoY.




Negatives•Malaysia’s exports increased by 10.9% YoY in August against 7.1% YoY in Jul above markets’ expectations. However,

exports declined sharply by 4.9% MoM compared to a surge of 2.3% in Jul. Exports present significant downside risks

to growth due to softening US demand.

•Government of Malaysia presented its 2012 budget targeting a deficit of 4.7% of GDP against a deficit of 5.4% in

2011. Operating expenditure now forms around 80% of total expenditure but it remains overly dependent on volatile

oil and gas receipts. We believe there is lack of substantial structural measures to bring deficit on track.

• Thailand’s Finance Ministry cut its 2011 GDP growth forecast from 4% to 3.7% and said that the flooding disaster may

cost USD 3.9bn. Cabinet ordered all state agencies to cut 10% from their regular budgets to fund USD 2.6bn worth of

flood relief and rehabilitation. Deputy Prime Minister for Economic Affairs stated that a supplementary budget may be

required later in 2012, potentially pushing fiscal deficit higher to USD14bn.

HENLEY ASSESSMENT: Neutral. We are seeing fluctuations in terms of various economic indicators from ASEAN countries MoM. However, policymakers are in unison in terms of expecting slower growth in the next few years and remain vigilant against resurgence in inflation. The challenge is to maintain a stable currency while supporting domestic growth. Recent floods in Thailand may pose upside risk to core inflation due to higher rice prices with an early estimate of 1.5m ha of padi fields destroyed.

GREATER CHINA

Positives•HK Chief Executive Donald Tsang’s policy address on subsidised housing said that the scheme is to target households

with monthly income under HKD 30,000. From 2016 to 2020, the government plans to supply 17,000 subsidised housing

units averaging approximately 2,500 to 6,500 every year. Government plans to link pricing of subsidised housing to

income for eligible households instead of benchmarking at a discount to prices of private housing units.

• China’s CPI inflation was at 6.1% YoY in September, in line with market consensus, compared with 6.2% YoY in August.

Food inflation rose 13.4% YoY same as in August. Pork prices jumped 43.5% YoY which did not slow much from the rise

of 45.5% YoY in August.

Negatives• China’s exports grew a seventh month low at 17.1% YoY in September, below market consensus compared with a decline

of 24.5% YoY in August which may suggest the weakening of China’s export momentum. Growth of iron ore imports

slowed to 40.1% YoY in September against a decline of 64.0% YoY in August.

• China’s monthly trade surplus narrowed to USD 14.5bn down further from USD 17.8bn in August and USD 31.5bn in

July. On a 12-month rolling sum basis, trade surplus has moderated to USD 173.8bn (2.5% of GDP), down from this

year’s peak of USD 177.6bn in July.

•New RMB loan was weaker than expected at RMB 470bn in September against RMB 548.5bn in August. During the

first nine months of 2011, the Chinese banking system has lent out RMB 5.7tn of new loans. M2 rose 13.0% YoY in

September compared with 13.5% growth in August.

HENLEY ASSESSMENT: Neutral. China’s exports gains may continue to soften in the coming months as concerns over the deterioration of US economy and Europe’s sovereign debt crisis persist. However, domestic investment and consumption growth remain resilient growing at 25.0% and 17.0% in August respectively. This paints a very mixed picture as to whether China is in for a hard or soft landing. Nevertheless, core inflation may stay high in the foreseeable future in Greater China economies with not much room for monetary policy easing.




BRAZIL

Positives•While most people were observing the ratings agencies analysis on the state of European countries’ finances, both

Standard & Poor’s and Moody’s raised Brazil’s credit rating in view of the country’s solid growth prospects and progress

in government spending cuts.

• Retail sales in July jumped 1.4% versus August and is up 7.1% year on year.

• Property market is booming, fuelled by rising incomes and significant rise in mortgage lending. Unlike US before the

sub-prime crisis, loan-to-value ratios are typically less than 80%, and mortgages on second homes are not available.

Negatives• BRL remains very strong versus USD based on historical levels, which has caused the central banks to respond with

various measures making investments into BRL more expensive.

• Like its fellow BRIC countries, Brazil is sensitive to capital flows should the global macro outlook deteriorate further.

•High inflation (7.33%) remains a concern.

HENLEY ASSESSMENT:We remain neutral on Brazil. The country is in the enviable position of being self sufficient in many commodities and has a large and growing middle class. However, Brazil is reliant on commodity prices and evidence suggests emerging markets are far from immune when the going gets tough in the developed world.

OTHER EMERGING MARKETS (SOUTH KOREA, INDIA, RUSSIA)

Positives• Bank of Korea kept its benchmark rate unchanged at 3.25% in line with market expectations after October meeting.

Statement said that Committee judges that downside risks to growth have expanded and the unrest in international

financial markets is continuing.

• Russia’s inflation eased in September and will not exceed 7% this year, the lowest rate since 1991, according to central

bank. CPI slowing to 8.20% YoY in August, down from a 9.00% reading a month earlier. On a YTD basis, consumer prices

were just 4.7% higher YoY as of end August, compared to 8.7% for the whole of 2010.

Negatives• Russia’s Manufacturing Purchasing Managers Index (PMI) continued shrinking from 55.6 points in March to 49.9 in

August, a sign that the nation’s manufacturing sector is contracting. Economy Ministry predicts industrial output will

expand 4.8% this year, less than initial forecast of 5.4%. Economy may accelerate in 2H11 after growth slowed to 3.4%

YoY in 2Q11 from 4.1% in the January-March period.

• India’s inflation exceeded 9% for ten consecutive months as wholesale price index, which was at 10.36% in March 2010

has only managed to be reduced to 9.72% as at September 2011. Central bank governor expects inflation to ease by

March 2012 to a short-term comfort range of 4% to 6%.

HENLEY ASSESSMENT:Neutral. India’s foreign institutional investors were almost flat for the month (a marginal USD 6m net inflow). Domestic insurance funds remained a large buyer with a USD 496m net purchase during September (taking net inflow for the year to USD 4bn). Domestic mutual funds sold USD 153mn worth of stock during the month. Russian equities will still be affected by low oil prices in the short term as the Kremlin aims for a deficit-free balanced budget for 2015 at an average price of USD 90 per barrel of oil. Korea’s governor said that it is still on a rate normalisation path and that there has not been any discussion of a rate cut.




Commodities

ENERGY

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

• Emerging markets will continue to grow, and will need more oil to do so.

•Debasement of currencies will support real assets.

Negatives• The macro outlook remains highly uncertain with both Europe and the US in very fragile positions.

HENLEY ASSESSMENT:We remain neutral. Given the uncertainties surrounding the health of the global economy we believe that industrial commodities are vulnerable at the moment. In the longer run we remain constructive on the oil price as future supply sources are likely to struggle to keep up with the decline of current production.

PRECIOUS METALS

Positives:• There are few signs that the European leaders are anywhere

near getting their house in order.

• Short positions on the COMEX for both gold and silver have

fallen dramatically, a bullish sign.

• Inflation is looking as perhaps the most likely way for

governments to reduce their debt burdens.

Negatives•Given the run up in prices, precious metals remain sensitive

to short-term profit taking to cover losses and margin calls

elsewhere.

HENLEY ASSESSMENT:Despite the recent drawdown, we remain strongly positive on precious metals. Gold and silver remain our most preferred asset class. Public confidence in governments, FX markets and the financial system is decreasing by the day. Investors, retail and institutional, are looking for something that they can trust and something that central bankers and politicians cannot ruin. Although we do not know how the crisis will play out, we are certain gold will play an important role in any solution going forward.




INDUSTRIAL METALS

Positives•Ample liquidity will support base metal prices.

• Chinese restocking of copper likely to occur in the coming 12 months.

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

•Growth forecasts have being revised downwards.

HENLEY ASSESSMENT:We maintain our neutral view on base metals. Copper has been sold off very aggressively over the past months amid concerns about the health of the global economy. While commodities will benefit from higher inflation, we believe industrial metals in general remain vulnerable in the near future.

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%.

• In 2030, China’s meat consumption will be

more than double the 1997 levels of 41kg/

person.

•We now have about half the arable land

per person that we had 40 years ago.

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 the rapidly-developing emerging world underpin the long-term prospects of the agricultural sector globally. However, due to the vagaries of weather, politics and acts of God, this will always be a high-risk sector in which diversification is essential.




15

Alternative Investments

Positives• The best-performing hedge fund managers for September

were in directional trading/macro/CTA. Both discretionary and

systematic trading managers capitalised on FX/rates trades

as well as short equity exposure.

• Policy makers are discussing an expansion of the IMF’s

firepower as part of a global G20 agreement next month

in Cannes, France. Again, a lot of hedge fund managers are

putting their eye on whether IMF can work alongside the

European bailout fund to help restore confidence in the zone,

which might be another good month to take advantage of

policy swing to bet on the long side.

Negatives• Spluttering performance and steady inflows has been two

of the industry’s biggest stories in 2011. One of the weakest

months for net flows, March (-0.02%), followed a period of

sustained performance, while August’s impressive asset gains

(2.27%) come off the back of one of the worst summers for performance in the industry’s history.

•As in August, there was significant dispersion in hedge fund returns in September. Overall, hedge funds lost money

as the broad universe of managers struggled to cope with the market swing. The HFRX Global Hedge Fund Index

ended the month with a loss of 3.0. Losses were generally concentrated in the equity long-short space where long bias

portfolio suffered due to the market declines. Early estimates indicate that specialist credit managers, particularly

those with long duration trades, also generated losses.

HENLEY ASSESSMENT:Positive: We stand in the positive territory in terms of our long-term optimistic view in the alternative investment space despite of some current headwinds. We are undergoing review of our hedge fund managers as we firmly believe strategies such as CTA/Marco could provide significant positive hedging in such volatile environment comparing to other asset classes.

GENERAL DISCLAIMER AND WARNINGThe 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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