henley outlook july 2012 hong kong

Monthly Market Outlook July 2012

The Henley OutlookJuly 2012

THE WEALTH MANAGEMENT PROFESSIONALS

At the time of writing, the umpteenth crisis meeting of the Council of Europe has just finished and the markets are being ramped upwards into the half-year close. The European Union smoke-and-mirrors merchants want us to believe that a game-changing agreement to solve the euro crisis has been reached; but there is no agreement, any more than there is a plan to bail out the Spanish banks. They just say they have a plan. There is no plan; no formalised, agreed plan.

2The Henley Outlook: Hong Kong, Singapore & Shanghai


2The Henley Group LimitedAn SFC Licensed investment advisor 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 OverviewAt the time of writing, the umpteenth crisis meeting of the Council of Europe has just finished and the markets are being ramped upwards into the half-year close. The European Union smoke-and-mirrors merchants want us to believe that a game-changing agreement to solve the euro crisis has been reached; but there is no agreement, any more than there is a plan to bail out the Spanish banks. They just say they have a plan. There is no plan; no formalised, agreed plan.

What we have is a Memorandum of Understanding, the weakest form of non-binding document possible. We have EUR120bn of (mostly) previously announced spending being amalgamated and trumpeted as a new growth package. We have no new bailout money. We do have some technical changes to the European Stability Mechanism, which are to be applauded. We also have a central supervisory authority for banks to be run by the European Central Bank. But we will really have all this only if that wish list can be converted into a legally-binding agreement. As usual, the devil will be in the detail, in the camels which have to be squeezed through the eyes of needles and in the time and money which it is all going to take. Déjà vu, anyone?

In conceding even to the Memorandum, Chancellor Merkel has opened the floodgates on a torrent of hostile legal challenges within Germany. (Perhaps, now that the chips are down, Germany is reverting to her old ways, seeking a German Europe, rather than the European Germany we have seen her pursue since the Second World War? Probably not, but who could blame her)? The constitutional consequence of the litigation may have to be a German referendum on the way forward; so Italy’s victory at the summit (as on the championship soccer field!) may prove short lived – but at least a referendum would allow Merkel to wash her hands of Europe’s fate. Is that her game?

So far, Merkel has been saying that, if Germany is expected to take on liability for other countries’ debts, Germany must be given control over other countries’ taxing and spending. However, if you believe that control over your taxing and spending is the essence of your sovereignty, it is no wonder that other nations are unwilling to succumb; but, although Germany may have blinked on a debt union, she won on banking supervision. In that sense, perhaps Italy’s success was even less than it appeared at first?

In reality, however, conceding that already insolvent banks may borrow even more money from previously forbidden sources will not help, except perhaps for a few days. The debt crisis continues to deteriorate, and the rate of deterioration continues to accelerate.

After months of posturing and denial, Spain and Cyprus have become the fourth and fifth countries formally to request aid from Europe’s bailout funds. In doing so, these governments have officially confessed to their own insolvency and to the insolvency of their respective banking systems. In response, Spain’s ten-year bond yield jumped to over 7% again, and Moody’s downgraded many Spanish banks to junk.

Meanwhile, Slovenia’s prime minister said that his country may soon ask for a bailout. Italy cannot be far behind. Where is that money going to come from?

In the US, the Californian city of Stockton filed for bankruptcy – the largest US municipal bankruptcy so far. JP Morgan Chase admitted that the USD2bn credit derivatives loss announced in May has already increased to USD9bn and rising. Some analysts opine that a USD50bn loss would bring the bank down.




The confetti war is also intensifying.

Foreigners are reducing their holdings of US Treasuries, while countries from Ukraine to Kazakhstan to Turkey announced that they have purchased gold in recent months to bolster their growing reserves. The Bank of International Settlements and US regulators are both moving forward with proposals that allocated gold bullion be treated as a risk-free cash equivalent on banks’ balance sheets, alongside US Treasury securities.

Chile has joined a growing list of countries that has agreed to bypass the US dollar and settle all of its trade with China in yuan. China itself has just announced plans to create an experimental zone (in Qianhai, just on the other side of Shenzhen Bay from Hong Kong) where full exchange and convertibility of the yuan will be allowed.

So, there appear to be a number of (not necessarily new) takeaways from recent developments:

• European governments are insolvent.• European banks are insolvent.• US governments (federal and local) are not far behind.• Even the best US banks are not as strong as believed.• Foreigners are abandoning the US dollar and seeking alternatives.• Gold remains at the heart of the monetary system.

Ho hum. Better a list of five ghastly certainties (plus one golden ray of light) than a Memorandum of Understanding, I suppose!

Peter Wynn Williams Investment Director [email protected]




USD Index (Source: Bloomberg)

Summary

• Not a lot of activity this month across the board.• JPY was flat but remained weaker YTD against the USD for the first reversal in trend in a long time. It did however

rebound slightly from strong support at 84.• GBP/EUR was also range bound but since December 2008 the GBP has gradually been regaining strength against the

EUR, but not at a strong pace. Focus for the euro turned to Spain throughout April.• AUD weakened further against the USD, but remains above parity.• The trading band for the SGD was altered to ‘stronger’ by the Monetary Authority of Singapore (MAS) following their

biannual meeting; this was due to an increased GDP and increased inflationary pressure.

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. If the risk appetite remains strong, then we should start to see funds flowing out of the ‘safe haven’ USD thus weakening its positions.

Cash & Currencies




Fixed Income

Positives• China reduced borrowing costs (25bps) for the first time in four years. UK also announced a plan to provide the banking

system with more than GBP100bn (USD155.43bn) to help its struggling economy. At THG, we are expecting more central banks to flood the market with liquidity in order to cushion coming shocks from Europe.

• Inflation pressures are well contained. US cost of living fell in May by the most in more than three years. CPI declined by 0.3% to 1.7% YOY. Similarly, inflation in the euro zone hit a 15-month low at 2.4% (May) from 2.6% (April), allowing room for further easing measures.

Negatives

• US Federal Reserve expanded the maturity of its Operation Twist program for an estimated USD267bn. To keep long-term borrowing costs down, US Federal Reserve will continue to sell short-term securities and buy longer-term ones till the end of 2012.

• ECB continues to increase its exposure to the peripheral countries and their banks. As shown in graphs above, Spain and Italy have borrowed heavily from ECB in recent months. Under the provision of Emergency Liquidity Assistance (ELA) program, ECB also lent directly to peripheral banks as their deposit base eroded. Spanish 10-year bonds hit euro record of 7% despite the pledge of EUR100bn (USD125bn) funding by IMF. Moody’s also downgraded Spain’s credit rating to Baa3, one step above junk, citing the bailout contributing to the Spanish government’s debt load.

• Lack of AAA sovereigns drove investors to Australian government bonds. Yields on all Australian notes maturing in two years or longer fell to record lows in June. Even with its 10-year bond dipping below 3% for the first time, Australia still offers higher yields than comparables of Germany and Canada.

HENLEY ASSESSMENT:Negative. We saw a large selloff in emerging market bonds last month: JPMorgan GBI-EM Global Diversified Index (Local Currency Denominated): -7.5% and JPMorgan EMBI Global Diversified Index (Hard Currency): -2.5%. Risk premium widened 75bps, ending the month at 414bps vs US Treasuries. We believe valuation of the emerging market debt is not cheap, but strong fundamentals and stable commodity prices will remain favourable to the asset.

Sources: Bloomberg, Standard Chartered Research




Property

Positives• Prime central London property prices rose 0.7% in May 2012, contributing to

an annual growth of 10.7%. Prices are up 47.3% since the post credit crisis low in March 2009, and are now 12.1% higher than the price peak in March 2008. Prices in the sub-GBP2m and the GBP2m+ bracket rose 2.7% and 1.6% respectively in the two months to the end of May following the imposition of the new 7% GBP2m+ Stamp Duty Land Tax. Prime central London property prices continue to be supported by growing tensions within the euro zone, leading to the flight of capital to safer locations.

• Home prices in major Indian and Brazilian cities continue to surge following strong economic growth over the last decade. Data reflects that Delhi home prices surged 24.4% in 1Q12 but have been flat since. In Sao Paulo, prices climbed by 18.7% in 1Q12, followed by 2.6% in the latest quarter. There are concerns that both markets are overvalued. For example, in Sao Paulo and Rio de Janeiro, prices may be 50% overvalued after rising 140% since 2008.

• In Singapore, sales of new private homes rose in April to a near a three-year high, and transactions exceeded 2,300 units for a third consecutive month amid resilient demand. If prices continue to rise, further government intervention to curb price rises is expected.

Negatives• Recent data on global home prices from a Global Property Guide survey,

reflects that home prices fell in 24 countries and have risen in only 12 during the 1Q12. The rate of decline has since accelerated with 26 countries now in decline and only 10 countries showing price gains.

• Home prices fell in a record 46 of 70 Chinese cities in April and the People’s Bank of China cut it’s benchmark interest rate in June for the first time since 2008. China’s property curbs continue to work. Jones Lang LaSalle recently reported that many speculators have left the market, and of all residential property purchases, 93% of them are for owner occupation, and only 7% are speculative.

• UK property company Rightmove reports that asking prices for British homes were unchanged in May as the European crisis and the end of a tax break for first time buyers dampened demand. This is the first time since the survey began in 2002 that home prices have failed to rise in May. The Council of Mortgage lenders reported that in April, UK gross mortgage lending dropped 19% to GBP10.2bn. The UK government has just announced plans to lend GBP140bn to UK banks to stimulate lending, part of which it is required to be used for residential property purchase.

• After rising 7.7% for the first four months of the year, sales of secondary Hong Kong homes have experienced a sharp drop due mainly to falling share prices, and the euro zone debt crisis. There are warnings of price falls of between 5 and 10% in the mass residential market over the next year, based upon the government’s plans to improve affordability by increasing supply.

HENLEY ASSESSMENT: Neutral. Property prices generally, after significant falls in 2009, stabilised in 2010 and 2011. Property values have recovered in selected areas such as Asia and London 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.

Source: Knight Frank Residential Research




Equities

USPositives• US economy highly flexible, resilient and leads world in technology and innovation.• Federal Reserve has forecast rates unchanged until at least late 2014.• Further monetary easing in 2H12 will boost asset prices in nominal terms.

Negatives• National debt: USD15.8tn and rising; debt to GDP: 104%and rising. Absurdly unsustainable.• Housing market in depression. Prices at 10-year lows.• Real incomes falling, only 41.6% of working-age Americans have a full-time job.• Political system dysfunctional, possible fiscal cliff and debt ceiling to negotiate at end of 2012.

HENLEY ASSESSMENT:Negative. The latest consumer earnings and credit numbers show ongoing structural deterioration in consumer liquidity. With lack of positive, real (inflation-adjusted) growth in income, there can be no sustainable growth in real personal consumption (71% of GDP). Temporary consumption gains could be fuelled by debt expansion, but that option is not available to most consumers. Broad economic activity remains likely to bottom bounce for the foreseeable future.

JAPANPositives• JPY was little changed at JPY79.5 from four weeks ago. We are still expecting Japan’s currency to further weaken on

the medium term over prospects of more interventions. The expectation of easing has heightened after IMF said JPY was overvalued and Bank of Japan should consider further stimulus.

Negatives• Japan reported a trade deficit of JPY907.3bn (USD11.5bn) for May. Japan has its first shortfall in trade with EUR

(JPY11.1bn) since its Finance Ministry keeping track of record in 1979. Shipments to Europe fell 0.9% while those to the US surged 38%, highlighting the European crisis as an eminent threat to Japan’s recovery.

• Fitch cut Japan’s sovereign rating to A-plus citing Japan’s spiralling debt problem.

HENLEY ASSESSMENT:Neutral. Japan made its first step toward reducing its record high debt burden. Prime Minister Noda overcame significant resistance as he pushed the bill through the lower house to double Japan’s consumption tax to 10% by 2015. The Organisation for Economic Cooperation and Development (OECD) has recently predicted that Japan’s debt will reach 223% of GDP next year and urged the country to be more aggressive in tackling its debt.

UKPositives• The BoE is offering money to high-street banks to kick start mortgage and small business lending to prevent loans

being rationed for many families and entrepreneurs.• The ‘funding for lending’ scheme would provide funding to banks for an extended period of several years, at rates

below current market rates and linked to the performance of banks in sustaining or expanding their lending.• BoE will also activate an emergency scheme that offers six-month liquidity to banks in tranches of no less than

GBP5bn a month.




Negatives• The Office for National Statistics (ONS) said the UK’s trade-in-goods deficit widened from GBP8.7bn in March to GBP

10.1bn in Apr12, with car exports down markedly because of weaker demand from buyers outside the euro zone. • The services index, published by Markit Economics, fell to a six-month low of 52.4 in May12 from 53.3 in Apr12.• The study by the Institute For Fiscal Studies (IFS), an independent think-tank, showed that median income fell 3.1% in

2010-11, from GBP432 / wk to GBP419 / wk. Mean household income fell 5.7% from GBP542 to GBP511, said the IFS. Using either measure, this meant that average living standards were now below the level in 2004-5.

HENLEY ASSESSMENT:Negative. The main problem for UK is that Europe’s banking crisis does not appear to be abating as shown by the miserable results of most EU banks. On the fiscal side, the deficit to GDP has declined over the past three years from 11.5% to 8.3%, but the bulk of the reduction was the result of increased taxes since GDP growth was weak. The overriding concern is whether the country will be able to continue to cut its deficit in the face of weaker economic conditions and a possible deterioration in the country’s financial sector. We expect that the UK’s debt/GDP will continue to rise and the country will remain pressed.

EUROPE EX UKPositives• Greece’s largest pro-bailout parties, New Democracy and Pasok, won enough seats to forge a parliamentary majority,

official projections showed, easing concern the country was headed toward an imminent exit from the euro. The election would give New Democracy and Pasok 163 seats if they agree to govern together in the 300-member parliament.

• Spain asked euro region governments for a bailout worth as much as EUR100bn to rescue its banking system as the country became the biggest euro economy so far to seek international aid.

• The French election results were positive for French President Hollande since his Socialist Party took an outright majority in the National Assembly. This gives the socialists control of the presidency and both houses of parliament.

Negatives• A composite index based on a survey of purchasing managers in euro-area services and manufacturing industries

dropped to 46 from 46.7 in April. While above an initial estimate of 45.9, the May reading is the lowest since June09. The indicator has remained below 50, indicating contraction, for four months.

• European companies are cutting back on hiring and spending as the intensifying fiscal crisis makes the economic outlook more uncertain. While the euro area narrowly avoided falling into a recession in the first quarter, unemployment has reached the highest on record and economic confidence is at the lowest since 2009.

• The 10-year Spanish bond yield rose sharply by 25bp to 7.13%, vaulting the 7.00% level for the first time and increasing the risk that the Spanish government will need a full bailout of EUR 350-450bn euros rather than just up to EUR 100bn for its banks.

HENLEY ASSESSMENT:Strongly negative. The Greek election results mean that Greece will stay in the euro zone (for now) and will continue to pursue severe austerity measures. Although this outcome puts an end to the near-term uncertainty surrounding Greece’s participation in the euro, it does nothing to resolve the ongoing crisis. Spanish bond yields are once again above 7%, implying that markets continue to require a larger European solution. One positive development in France is that, after the Socialist Party gained a strong majority in the legislative elections, President Francois Hollande will now have room to manoeuvre if a market riot occurs and structural reform is demanded by the markets,. The crisis in Europe will not end until policymakers take steps that convince markets of the viability of the euro.




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

unemployment has fallen, the currency is strong, GDP is on trend and holding up, there is a once-in-a-generation investment boom going on and the government is heading back into surplus.

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

so looks higher than earlier thought, 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, a 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 $93,000 to $550,000 now. 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 the commodity sector which we like). The Australian economy is a double-edged sword, it is expected to grow a little below trend, although the makeup of the growth will be heavily tilted towards mining investment. Key headwinds for the non-mining sectors will be: 1) ongoing deleveraging by the household sector; 2) caution by the corporate; 3) maintenance of a relatively high Australian dollar, and 4) fiscal tightening by the authorities.

ASEANPositives:• Indonesia will implement stimulus measures to boost consumption and infrastructure spending as a global slowdown

limits exports. The government will tap last year’s IDR24tn (USD2.5bn) budget surplus to fund building projects, and lift the tax-free annual income level to IDR24mn from IDR15mn.

• Optimism about the region’s economic outlook draws investors to offerings in Malaysia, Thailand and the Philippines.• Thailand’s central bank kept its key interest rate unchanged for a third straight meeting amid rising risks from the

European debt crisis and slowing growth in China.• Bangko Sentral ng Pilipinas kept its benchmark interest rate at a record-low 4% yesterday after the economy expanded

6.4% in the first quarter from a year earlier, the most in Southeast Asia.

Negatives:• Singapore’s May private home sales fell 32% from a month ago, posting the lowest sales this year as the European

crisis damped demand. Sales fell below 2,000 units for the first time in four months.• Indonesia has underperformed Asia ex-Japan & Emerging Markets up to 01June.

HENLEY ASSESSMENT: Neutral. A cut is an option for ASEAN in the future if the situation deteriorates, and as inflation is not a major issue now. They have the bullets to use when it is necessary. Domestic demand, consumption and investment remain strong while exports may slow because of weakening global demand and commodity prices. Imports will remain high because of growing domestic consumption.




GREATER CHINAPositives• We witnessed the PBoC’s first rate cut of 25bps since 2008 following

last month’s decline of the banks’ reserve requirement ratio, which suggests that the Chinese authorities are becoming more proactive in stimulating the economy.

• It is almost a sure bet that inflationary pressure will continue to abate – China’s CPI increased 3% YOY or decreased 0.3% MOM in May, which the YOY figure hit 23 months’ lowest level.

• Hong Kong Exchange & Clearing (HKEx) reached an agreement to buy all of London Metal Exchange’s (LME) shares for GBP1.39bn. Although the deal seems “extremely expensive”, this bid for LME will give China more power in global commodity trading.

Negatives• China’s growth slid to 8.1% in the first three months of the year

from a year earlier, the fifth quarterly deceleration. HSBC Flash PMI weakened to 48.1 in June, compared to 48.4 in the previous month.

• The major wildcard in China’s cyclical growth outlook is the escalating crisis in Europe and recovery progress in the US economy. Risk factor remains external, and China export sector is suffering in the near term.

• Recent comments from Joseph Yam, the former chief of the HKMA, raised the issue that the city’s decades-old currency board system, peg-to-USD, is no longer serving the best interests of the Hong Kong economy.

HENLEY ASSESSMENT: Neutral. Economic expansion/industrialisation of China is a long-term story driving growth all the way. We have witnessed some slowdown and concerns on recent Chinese economic activities, however it will not derail the overall story. External risks from peripheral euro zone and uncertainty of US economy are still making huge impact on China’s export sectors. But apparently, more stimulation is on the way from the Chinese central government once they make sure inflation is under control.

INDIAPositives• With USD1.68bn inflow in the month of March, the FIIs pumped in a total of USD8.89bn in Q1 which is the highest

for any quarter in the last 10 years.• Country’s central bank – the Reserve Bank of India (RBI) purchased dollars (USD1.1bn) after more than a year to arrest

volatility and prevent further appreciation of the Indian Rupee (INR).• Donald Trump has announced his foray into USD12bn Indian real estate market that is growing annually at 30%.

Negatives• India’s index of industrial production (IIP) grew at 4.1% in February, significantly lower than the expected 6.6%.• Bond yields fell sharply from 8.54% to 8.46% following the release of the IIP data.• Grant Thornton has reported a decline in corporate deals in the first quarter (USD20.4bn) owing to the amendments

proposed at the backdrop of Vodafone tax issue in the recent budget.

HENLEY ASSESSMENT:Neutral. Although high prices of oil and food pose challenges to managing inflation, it is widely expected that RBI would cut down the repo rate for the first time in three years. Whether this reduction will boost the economy remains to be seen.

Source: BCA Proprietary Indicator




OTHER EMERGING MARKETS (SOUTH KOREA, RUSSIA, BRAZIL)Positives• Brazil’s major mobile phone carriers have paid

a total of R$2.6bn (USD1.3bn) for spectrum for high-speed fourth-generation networks as Latin America’s biggest economy prepares for major sporting events in the next four years. Brazil’s telecommunications market is one of the world’s fastest growing as its growing middle class takes to the mobile internet. The country is already one of the biggest markets for social media thanks to the high proportion of young people in its population.

• As the chart right illustrates, many Asian EM economies, in particular via China, Singapore and Korea, are running very large current account surpluses which will in turn increase their standing in global financing in the coming years.

Negatives• Russia’s economy, highly reliant on oil, is under severe pressure. Falling oil prices have sent Russian shares and the

rouble tumbling. The uncertainty is beginning to take its toll even in the rural regions where criticism of the president is mounting. There is currently a creeping crackdown designed to stifle protests sparked by deeply flawed parliamentary elections last year, and Mr. Putin’s stage-managed return to power in May.

• Brazil’s economy barely grew for the first quarter of this year, despite interest rate cuts and government stimulus measures, reinforcing concerns over a broader slowdown in emerging markets. This was primarily driven by the agricultural sector whose crops fell prey to erratic weather in several parts of the country.

HENLEY ASSESSMENT:Neutral. Whilst there have been developments in EM to create their own internal markets, at present they do still remain sensitive to a slowdown in western economies through exports. In addition whilst the sector as a whole has much higher forecasted growth rates and a younger more dynamic population, any fall out in the current sovereign debt crisis will undoubtedly affect these markets also.




Commodities

ENERGYPositives• Iran’s nuclear ambitions remain uncertain• OPEC left its output steady at 30 million barrels per day

Negatives• Ongoing debt concerns in Europe and signs of a slowdown in China are adding to negative sentiment

HENLEY ASSESSMENT:We remain neutral. In the absence of any adverse developments between Iran and the West, the oil price will continue to be driven by macro data. Given signs of a slowdown in China and the overall rather bleak picture for sustained world growth as a result of the debt issues on both sides of the Atlantic, we believe that the oil price will struggle to sustain a rally. Further monetary easing will, however, provide some support for prices.

PRECIOUS METALSPositives:• Gold and silver are a good hedge against financial

instability.• Chinese gold imports from Hong Kong in April rose to

101.8 tonnes, +62% MOM, +1300% YOY, just shy of a record

• set in Nov11, when 102.8 tonnes were imported.

Negatives• Temporary USD strength put pressure on the gold price.• Gold is a liquid asset that can easily be sold by investors

to cover losses elsewhere

HENLEY ASSESSMENT:We remain strongly positive on precious metals. Another one bites the dust. Spain finally succumbed and has been offered a EUR100bn bailout; it is unclear if this will be enough. Most probably not, and the number needed is closer to EUR400bn. Despite the bailout, yields on Spanish debt have edged higher. Italian bonds yields are also rising, and of course, everyone knows that the money to eventually bail out Italy does not exist. For gold and silver, the continued stress in Europe is widely bullish and these assets remain at the very core of our asset allocation.




INDUSTRIAL METALSPositives• Currency debasement will support real asset prices.

Negatives• The health of the global economy remains uncertain.• Net speculative length in COMEX Copper High Grade is at a 12 month low.

HENLEY ASSESSMENT:We maintain our neutral view on base metals. Market participants remain worried about just how serious the global economy challenges really are. In the commodity sector we continue to favour other areas.

AGRICULTUREPositives• UN’s Food and Agriculture Organisation estimates there will be over 9bn mouths to feed on the planet by 2050.• Middle class consumers in BRIC economies are increasingly demanding more varied and protein rich foods. As

affluence increases, protein from beef, sheep, poultry, pigs, cows and fish may in turn displace grains in diets.• Urbanisation and life expectancy is expected to increase

Negatives• Prices are subject to many uncontrollable risks, eg, weather and natural disasters, politics and other pests.

HENLEY ASSESSMENT:Positive: A rapidly-growing global population and the rapidly-developing emerging world underpin the long-term prospects of the agricultural sector globally, at the same time the supply of arable land is limited. It is estimated by the World Bank that worldwide 445mn hectares of land are currently uncultivated and available for farming, compared with about 1.5bn hectares already under cultivation. 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 into this sector.

Source: The Fertilizer Institute




Alternative Investment

Positives• Hedge funds were down

1.55% in May, although they beat most market indices by a large margin amid heightened risk aversion and falling global markets.

• CTA/Managed futures funds gained 2.55% on average in a largely negative month according to a Eurekahedge report. Strong returns are provided by their material exposures to the extended moves in fixed income and FX markets. Overall, managers with long-term bearish positioning did well and made up for some of the losses incurred earlier in the year.

Negatives• Recent data is showing

investors lost their patient and interest in hedge fund space. According to both BarclayHedge and TrimTabs reports, there was a USD5.1bn outflow in April 2012 and over USD12bn for the 12 months from May 2011. However, some healthy strategies for the likes of macro and fixed income are still attracting the capital inflows.

HENLEY ASSESSMENT:Positive: Our bet in commodity trading advisors (CTAs) and Global Macro has payoff in May. This is exactly what we called “hedges” to our model portfolios during those “down markets”. We continue to think that the outlook for global growth is still in trouble therefore we believe hedge fund managers, especially those managing CTA and Macro funds, are better equipped to deal with tough market conditions this time around. Also, we are cautiously selecting managers those who could quickly exercise capital protection measures and have tight control of their risks.

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.

Source: HFMWeek




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