the henley group november outlook 2012

Monthly Market Outlook November 2012

The Henley OutlookNovember 2012

THE WEALTH MANAGEMENT PROFESSIONALS

Brits of a certain age will remember the children’s television series, “Stingray,” in whose opening credits a voice intones: “Anything can happen in the next half hour!” Such a sentiment could equally apply to the next couple of months.

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.

High dividend stocks preferred.



Selective strategies only.

Agribusiness equities.

ASSET CLASS HOUSE VIEW REMARKS

Broad equity exposure including the region preferred.

The Henley Outlook




Global Overview

STEIN’S LAW: “IF SOMETHING CANNOT GO ON FOREVER, IT WILL STOP.”Herbert Stein (USA, 1916-1999)

Brits of a certain age will remember the children’s television series, “Stingray,” in whose opening credits a voice intones: “Anything can happen in the next half hour!” Such a sentiment could equally apply to the next couple of months. US Treasuries are at record prices despite massive new supply. The S&P500 index is close to record levels despite disappointing earnings, earnings guidance and declines in both trading volumes and private-client participation. Nominal interest rates are extremely low and even negative in some key markets. In real terms, interest rates are negative in many markets. Sovereign debts continue to pile up, as do the government deficits which cause them. Social unrest over austerity and high unemployment is growing. Armies and navies continue to mass in the Middle East, and Israel appears to have conducted a rehearsal for an attack on Iran’s nuclear facilities by dropping four one-ton bombs on an Iranian-run munitions factory in Sudan. The list goes on and on.

I suspect that, once the American and Chinese leadership questions are out of the way in a few days, we will be in a position to start making progress, however slow and in whatever direction, with some of these issues.

America will be grappling with the twin devils of its debt ceiling (again) and its “fiscal cliff”, a large predicted reduction in the budget deficit and a corresponding projected slowdown of the economy if specific laws are allowed to expire automatically or come into effect at the beginning of 2013. These laws include tax increases due to the expiration of certain tax cuts on the one hand, and spending cuts, (or “sequestrations”) under the Budget Control Act of 2011 on the other.

Everyone assumes that the debt ceiling will be raised, and the fiscal cliff will be fudged to buy more time. Heaven forfend that they should actually seek fundamental solutions to fundamental problems. Meanwhile, in October – the first month of the new fiscal year – America slipped USD195bn deeper in debt; that’s USD262m every single hour.

Also in a few days, the PRC is preparing to hand power to its fifth generation of leadership. There is clearly a really boisterous competition in progress behind the scenes, with mud flying in all directions, including in that of Premier Wen and his prosperous family. That the new leadership may have plans for reform is one thing. Whether China’s factions and deeply-rooted vested interests will allow them to be implemented is quite another.

In Europe, both time and money continue to run out. Now that the shiny new permanent bailout fund, the European Stability Mechanism (ESM), is up and running, Germany has dropped a bombshell, saying that the fund may not be used to deal with existing sovereign debt or bank re-capitalisation needs. This must have been something of a disappointment to the PIIGS, who appear to have been hung out to dry and sent back to square one, as though in a particularly slippery game of snakes and ladders.




With Portugal, Spain and Greece fast running out of cash, Germany is clearly reluctant to refuse outright to rescue its southerly neighbours. It likes having them in the euro zone so that they can afford Germany’s exports; but the political realities both at the Bundestag and at the popular levels are that German-taxpayer-funded bailouts are politically explosive. For Chancellor Merkel to cough up in the current environment would risk her coalition, her government and her power. So, instead, in the interests of being a good European, Germany will place impossible conditions on bailouts, as with the ESM, in the hope of making the consequences appear a failing on the part of the supplicant, rather than a lack of bruderliebe on Germany’s part.

It remains only a matter of time until Greece leaves the euro. Perhaps only a very little time. As a reminder, Greece has total debt of about USD1.3tn, while patience, money and options appear to be exhausted. Will the ECB and euro-zone nations relent and agree to a debt haircut, or are the exhaustion and the political risks just too great?

The Spanish are hesitating to ask for a bailout for both the country and its banks. Prime Minister Rajoy does not want to relinquish sovereignty to Brussels. Who can blame him? Spain is a great country with a proud history. But their regional debt and banking problems are such that in reality they have no choice. Their true debt to GDP is probably over two hundred percent. It is only a matter of time for Spain, too.

On a brighter note, I should like to draw your attention to Stein’s Law, quoted above, and to a working paper published by the International Monetary Fund (IMF) in August: “The Chicago Plan Re-Visited.” If there is one word which encapsulates the current era of monetary crisis, it is “unsustainable.” Hopefully, the IMF has realised that the crisis cannot go on for ever and is preparing the ground for when it stops.

The Chicago Plan was first put forward in 1936 during the ferment of creative thinking in the late Depression. It discusses a return to fully-reserved banking systems, as opposed to the fractional reserve system we have today. Debts could be wiped out through legislation, using money created by the state to replace bank credit, taking away from the banks the privilege of creating money out of thin air.

It’s a complex concept to grasp, but perhaps more important than the details of the concept is that the IMF is working on potential replacements for our current, broken monetary system.

Peter Wynn WilliamsInvestment [email protected]




Cash & Currencies

USD Index (Source: Bloomberg)

Summary• The USD was initially weaker on Unlimited QE, recovering slightly on heightened risk aversion shown by a short spike

in VIX index.• HKMA intervened in the HKD peg with the USD. Introduced in 1983, with the range set in 2005, the HKD needed

weakening to stay in the range against the USD. We are unlikely to see an end to the peg in the near future until full internationalisation of the RMB.

• Cable (GBP/USD exchange rate pairing) pulled back to 1.59 from a previous high of 1.62 due to slightly better US data.• AUD still range bound with USD; expectations of a further RBA rate cut were reduced on CPI data showing higher than

expected QOQ inflation.• EUR has gained against the USD for three months, largely thanks to the QE in the US. This is likely to continue until

ECB start bailing out the PIIGS through their QE.• SGD stronger against the USD, continuing the trend.• JPY has maintained its strength, and as a safe haven will continue to attract cash as the USD loses its appeal. This is

not desirable, but continued even after the BoJ increased its Asset Purchase Fund.• The SGD has seen little change on the month.

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




Fixed Income

Positives• Spain’s government bonds advanced, pushing 10-year borrowing costs to the lowest in more than six months, after

Moody’s said it would keep the nation’s credit rating at investment grade.• UK inflation decelerated further from 2.5% in Aug12 to 2.2% in Sep12, the lowest rate since Nov09. It has thus stood

below 3%, the upper bracket of the Bank of England’s inflation target, since last May.• The commitment from the developed economies to maintain interest rates at historic lows, and the comparative

financial stability within emerging markets, combined with the desire to find ‘yield’, has resulted in some ‘strategists’ labelling certain emerging market bonds as ‘safe havens’.

Negatives• It has been warned that the sovereign credit rating of the US will be cut as “fiscal theatre” plays out in the world’s

biggest economy. The Congressional Budget Office has warned the US economy will fall into recession if USD600bn of government spending cuts and tax increases take place at the start of 2013.

• While the short-term view may suggest inflation can be controlled, the medium- to long-term chances of this occurring are becoming less and less likely with every dollar printed through central bank intervention.

• The announcement in the UK of a consultation on potentially changing the calculation of the RPI would suggest that the government recognises inflation will be an issue and is following the mantra of ‘if the figures don’t add up, change the arithmetic’.

• Ultra-low interest rates may persist for a rather long time. As in the case for Japan, its rates have remained stable at an extraordinarily low level for over a decade. Yet we are concerned about the current dynamic which is not entirely stable; rates can possibly unwind quickly with history suggesting that the long-term commitment to print money will eventually result in a stark rise in inflation that once started, can rocket without warning.

HENLEY ASSESSMENT:Negative. While there may be some short-term relief in fixed income from the volatility seen in equity markets and also a comparative positive return when compared to holding straight cash in the short term, we are of the opinion that such short-term relief has the potential to come at a costly price in the medium-to-long term. With the developed economies committed to the path of continued monetary easing, we believe that inflation will become a serious concern in the future. Such an environment would see the relatively low yields enjoyed by fixed interest over-run by the cost of goods. There may be an argument to seek short-term safety in specific emerging market bonds but we see serious danger in accepting the debt of the developed economies, both on a sovereign default front (especially within Europe) and on a return versus inflation front.

Source: www.tradingeconomics.com / UK Office for National Statics




PropertyPositives• Hong Kong home prices have risen 15% in 2012, and 87% since Jan 09. Prices seem set to go higher as buyers seek a

hedge against rising inflation (which reached 4.2% YOY in July). The Hong Kong Government continues to try and limit price rises; the latest plan being to tighten lending conditions on second mortgages and also limiting the repayment period on all new mortgages to 30 years. It is thought that the government will have a low tolerance to any further surge in home prices, and will very likely impose further restrictions to slow down price increases.

• The Monetary Authority of Singapore has announced further measures aimed at slowing down the rise in residential property prices. The government has been trying to reign in property prices since 2009. The most recent measures adopted include limiting all loans to a maximum of 35 years, with loans exceeding 30 years subject to significantly tighter loan-to-value limits.

• The recent announcements by various governments in terms of further rounds of quantitative easing are likely to keep interest rates low for an extended period, which will support property prices. Additionally, as we expect this money printing to be inflationary over time, it will also reduce the value of the mortgage debt owed in real terms.

Negatives• Many indicators still point to a bottom forming in the US residential housing market. For example, the Standard

& Poors/Case-Shiller 20-city national home price index rose 1.6% MOM in July. The annual rise was 1.2% YOY and represented the largest 12 month increase since Aug10. There are clearly signs of an improving housing market but it should also be remembered that bottom forming is not a recovery. The US economy is still shaky and there is low consumer confidence, which may still cause prices to rise and drop erratically over the next few years.

• Rightmove, an online UK property company, has reported a sharp rebound in UK home prices for October with asking prices rising by around 3.5% MOM to GBP243,162. However, Rightmove suggests that price rises are more likely a result of the continued shortage of new property supply, as opposed to representing a recovery in the housing market. The property market, excluding London, remains under pressure as the economy struggles to recover from a double dip recession, and the euro zone debt crisis drags on. Prospective buyers continue to be put off by big deposit demands from risk adverse lending institutions, rising borrowing costs and a lack of job security.

• Australianhomeloanapprovalsunexpectedlyfell1%MOMinJuly.Thiswasthemostinfivemonths,ashighinterestratesand poor sentiment continue to discourage residential property buyers. The Reserve Bank of Australia recently cut interest rates again. As a result it is hoped that this will encourage buyers, but at present home prices continue to move sideways.

HENLEY ASSESSMENT:Neutral. Property prices have generally, after significant falls in 2009, stabilised between 2010 and 2012. 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.

Sources: S&P/Case-Shiller; FHFA; US Department of Commerce via Federal Reserve Bank of St. Louis




Equities

USPositives• The US economy remains highly flexible, resilient and leads world in technology and innovation.• The Federal Reserve has forecast rates unchanged until at least 2015.• In the long term, demographics and returned energy self-sufficiency bode well.

Negatives• National debt is at USD16.2tn and rising; debt-to-GDP is at 105% and rising. This is absurdly unsustainable.• QE to infinity promises currency debasement, rising prices and lower discretionary spending.• Labour force participation rate is at a 30-year low of 63.5%.• Political system is dysfunctional, fiscal cliff and debt ceiling to be negotiated in short term.

HENLEY ASSESSMENT:Negative. There is a growing risk that QE3, by debasing the currency, will trigger a massive dollar selling crisis and begin the process of a rapid upturn in domestic consumer price inflation. The QE3 boost in asset prices was over as soon as the QE3 announcement was made. The disconnect between confetti-soufflé asset prices and an economy at stall speed is startling. As during QE1 and QE2, broad economic activity remains likely to bottom bounce for the foreseeable future.

JAPAN

Positives• Strong JPY is backing corporates in mergers and acquisitions overseas. Softbank has agreed to take over Sprint, the

third-largest US mobile carrier, for USD20.1bn. It is the largest ever foreign acquisition from Japan. JPY hit a post-war high of JPY76 vs USD in February and remains at around Y80 level.

Negatives• Bank of Japan stepped up its asset buying programme

with a further JPY11tn (USD138bn). It is the second month in a row BoJ acted upon concerns over Japan’s persistent deflation.

• Japan’s economy seems to be losing its steam. GDP in Q2 grew by an annualised 0.7%, half of government’s initial estimate.

• Nikkei 225 Average erased some of earlier gain and returned 4.6% year-to-date. Apparently, investors are not keen – even Japanese stocks are trading near or below book value.

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

Sources: Bank of Japan, Moody’s Analytics




UKPositives• It’s official – Britain is no longer in recession. The economy grew more rapidly than expected in the third quarter of

the year, rising by 1% rather than the 0.6% everyone had expected. Of course, these figures probably over-exaggerate the bounce, just as earlier figures over-exaggerated the decline. The growth is virtually all assigned to isolated factors such as the summer Olympics.

• Investors in UK stock market listed companies enjoyed a record GBP23.2bn total dividend payouts in the third quarter. Capita’s quarterly dividend monitor reveals that the payout is up 10.4%on last year, although underlying growth has started to slow.

Negatives• George Osborne’s drastic deficit-cutting programme will have sucked GBP76bn more out of the economy than he

expected by 2015, according to estimates from the International Monetary Fund. In a huge about turn, Christine Lagarde, the IMF’s managing director, recently caused consternation among governments that have embarked on controversial spending cuts by arguing that the impact on economic growth may be greater than previously thought.

• Adair Turner, chairman of the Financial Services Authority, said that the Treasury should have pumped even more into Britain’s banks during the credit crisis to leave them in a stronger state. “The recovery from recession has been far slower than most commentators and all official forecasts anticipated in 2009,” he said. “That reflects our failure to understand just how powerful the deflationary effects created by deleveraging in the aftermath of financial crises.”

HENLEY ASSESSMENT:Negative. There is no doubt the average person in the UK is hurting, as a combination of nonexistent wage increases and higher-than-targeted inflation has led to a drop in “real” and disposable income. There is “reason for some optimism” for the UK economy, the Bank of England’s deputy governor Charlie Bean has said. He cautioned against “getting over-excited” after new GDP data showed the recession was over - pointing out the Olympics had given a one-off boost. But Mr Bean said there were “signs of progress” from the euro zone, and banking crises and inflation should be lower.

EUROPE Ex UKPositives• The yield on Spanish 10-year bond plunged by 26bp to 5.55% after Moody’s left Spain’s rating unchanged at the

investment grade of Baa3 due to expectations that Spain would benefit from the ECB/ESM bailout program.• The EU will seek to agree on a framework that makes the ECB the main supervisor by 1st January. The new system,

intended to break the link between banks and governments at the root of the region’s financial crisis, will phase in over the next year and could cover all 6,000 euro zone banks by 1Jan14.

Negatives• Spain’s debt rating was cut to one level above junk by Standard & Poor’s, which cited mounting economic and political

risks as the government considers a second bailout. The country’s rating was lowered two levels to BBB- from BBB+.• Bad loans in Spanish banks as a proportion of total lending jumped to a record 10.5% in Aug12 from a restated 10.1%

in Jul12 as EUR9.3bn of loans were newly classified as being in default. The ratio has climbed for 17 straight months from 0.72% before Spain’s property boom turned to bust.

HENLEY ASSESSMENT:Strongly negative. The misleading impression has been created by Mario Draghi, who stated that he will lend freely to countries in trouble, driving interest rates down. This has led to strong opposition from the Bundesbank. For ECB lending to materalise, a country must first accept tough austerity conditions and which European politician will allow that? Above all, the ECB can provide liquidity, but this does nothing to improve the solvency of states. The euro zone periphery is effectively bankrupt, and the EU policy of austerity is making things worse, especially in Greece.




AUSTRALIAPositives:• Interest rates are falling and the RBA cash rate is now at a lowly 3.25% (and likely to fall further). Lower domestic

interest rates should prompt more domestic investors to put their money to work in ‘riskier’ assets, like shares and property, rather than cash.

• A cut in Chinese interest rates, giving the Chinese government more room to stimulate the economy. Global commodity markets are highly dependent on Chinese demand.

• Government finances are rated triple-A and the budget deficit is relatively small.

Negatives:• Average debt levels of households.• Exposure to base metals sector and reliance on trade with China for this falling consumer spending.• Share market is more than 40% below highs of 2007 (though this can be seen as a positive!).

HENLEY ASSESSMENT: Positive for clients with a long term view and who are prepared to accept short term volatility. Investors in Australia should heed this warning from the chief investment officer of the USD53bn fund manager First Trust Portfolios, Robert Carey: “Individual investors tend to get in when the markets are red hot and they tend to get out when the markets are at the bottom,” he said. “It’s been one series of issues after another, but, ultimately, fundamentals will weigh out and overwhelm any sentiment that people have.” And by that time, much of the early profits will have been made. Trying to time the market – successfully – is immensely difficult. I’m yet to see evidence it can be done in a repeatable way. Instead, riding the market’s waves has successfully provided returns of between 9% - 11% per annum (with dividends reinvested) over the last century. Lumpy, bumpy and uncomfortable waves, I’ll grant you, but a rate that has provided impressive compound returns over time.

ASEANPositives:• Thailand’s central bank voted to cut interest rates to 2.75%, adding to evidence Asia’s outlook has worsened and

supporting a government push to shore up growth. Thailand’s exports have slumped as a growth slowdown in China and austerity measures in Europe hurt demand for Asian goods. Singapore’s central bank this month refrained from policy easing as elevated inflation trumped worries about a shrinking economy.

• Malaysia maintained borrowing costs for an eighth meeting in September and has refrained from joining its neighbors in cutting rates this year. Bank Indonesia kept its benchmark rate unchanged at a record-low 5.75% for an eighth month in October.

Negatives:• Inflation is likely to accelerate in the coming months due to rebounding food prices, strong credit growth, and loose

monetary policy.• Price gains in Indonesia surged to an 11-month high in August before easing last month.• Thailand’s economy expanded 4.2% in the second quarter from a year earlier, after growing a revised 0.4 % in the

previous three months. Inflation accelerated to a six-month high of 3.38% in September.

HENLEY ASSESSMENT: Neutral. Domestic demand so far is very strong and caused by domestic consumption and investment. Consumption increased, partly because of the higher income generated by general good conditions in employment and partly as a result of some stimulating packages set up by the government. And we can see that the governments have started using fiscal or monetary policies to maintain the confidence. As a result, inflation is very likely to accelerate in the coming months, which in turn reduces policy options.




GREATER CHINAPositives• China’s trade data for September is better than expected with export growth surprises on the upside. Export growth

picked up to 9.9% YOY in September, up from 2.7% YOY in August, beating consensus estimate of 5.5% YOY.• China CPI inflation fell to 1.9% YOY in September, in-line with market expectation.• China’s fixed asset investment growth picked up from 19.4% YOY to 23.1% YOY in September.

Negatives• China has reported the 3rd quarter GDP, which grew 7.4% YOY. This is the slowest in years, but given the consistently

disappointing data throughout the year, this has surprised nobody.• Electricity consumption/production data dropped further below 6% YOY. It suggests that even though you can say a

lot about China shifting towards services and China suddenly becoming much more energy efficient, most people still question why growth is not a bit lower.

HENLEY ASSESSMENT: Neutral. Although the September trade data provided some surprises on the upside, even this good number is actually very weak when compared with previous years. With only two months left of the year, no matter how large this round of Christmas orders is, the possibility of meeting the full-year target of 10% growth in total trade is very small. We still remain cautious on the outlook for China and the region. However further political intervention is expected to help the underlying economy after the congress meeting in November.

INDIAPositives• Industrial production in August increased by

2.7% YOY. Industrial production was 0.4% during April to August this year.

• The Government of India has cut the withholding tax on rupee-denominated infrastructure bonds from 20% to 5%.

• New reforms were announced by the government on 4th October - 26% FDI will now be allowed in pension whilst the cap on FDI in insurance is raised from 26% to 49%.

Negatives• CPI (Consumer Price Index) for September

jumped to a nine-month high of 7.81%.• FDI dipped by 20% to USD2.26bn in August 2012 compared to August 2011. This is expected to increase the pressure

on India’s balance of payments.• Contrary to the widely anticipated interest cuts during its half-yearly monetary policy decision on 30th October, the

country’s central bank, RBI (Reserve Bank of India) kept the interest rate unaltered at 8%.

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

Source: www.tradingeconomics.com / Ministry of Statistics and Programme Implementation




OTHER EMERGING MARKETS (SOUTH KOREA, RUSSIA, BRAzIL)Positives• Brazil reduced its benchmark interest rate for the 10th straight time as government officials increased stimulus to

spur economic growth in the world’s second-largest emerging market. Policy makers led by central bank president Alexandre Tombini cut the Selic rate by a quarter-percentage point from its previous record low to 7.25%.

• The Bank of Korea (BOK) cut its base interest rate from 3% to 2.75% for the second time this year in a move designed to shore up Asia’s fourth-largest economy.

Negatives• Brazil’s inflation quickened in Sep12 for the third straight month to 5.28% as food and beverage costs jumped the

most since Dec10. Concerns about the struggling economy will prevent policy makers from meeting the central bank’s 4.5% inflation rate target for the second year in a row.

• Corporate bonds in Brazil are becoming more vulnerable to losses than in any major developing nation as companies exploit record-low borrowing costs to sell the longest-dated overseas debt in three years.

• The slowdown in the Russian economy is now more evident, with data showing industrial output rising just 2% in Sep12, down from 2.1% in Aug12 and short of market forecasts of 2.2%. However, with inflation still high with a 6.6% rise in consumer prices in the last month, the central bank won’t be cutting rates anytime soon.

HENLEY ASSESSMENT:Neutral. Of all the major developing nations, Brazil perhaps gives investors most cause for concern. Its GDP growth in recent years has been below that of India and China, and a populist and interventionist tradition in government has left the country with unusually high taxes, a relatively high minimum wage compared to its peers, and potentially troublesome pension and benefit entitlements for public sector workers. Nationalist policies in some key industries, notably energy, have tended to slow and complicate investment programs. The country may also be more vulnerable than the other BRICs to fluctuations in the prices and demand for commodities, an area which financed its recent growth.

Source: www.tradingeconomics.com / Federal State Statistics Service




CommoditiesENERGyPositives• Continued sabre rattling in the Middle East.• More monetary easing will benefit real assets, including energy.

Negatives• Ongoing debt concerns in Europe and a slowdown in China make the demand situation highly uncertain.

HENLEY ASSESSMENT:We remain neutral. The lack of clear progress in negotiations between Iran and the West continues and the US has sent additional aircraft carriers to the Persian Gulf. On the other hand, we are facing a very uncertain demand picture. OPEC warned recently that next year’s oil demand faces “considerable uncertainties” that could lower its 2013 demand growth estimate by as much as 20%. To conclude, we favour other commodities less sensitive to economic growth risk.

PRECIOUS METALSPositives:• Gold and silver are a good hedge against financial instability.• Monetary easing continues unabated across the globe.

Negatives• Prices could come under short-term pressure as some investors take profits.• Labour conflicts in South Africa hurt producers’ output.

HENLEY ASSESSMENT:We remain strongly positive on precious metals. Monetary easing has set the tone of policy response not only in the developed part of the world but also in developing nations. The People’s Bank of China recently continued to inject money into the money market, aiming to lower domestic borrowing costs for companies grappling with the country’s slowest economic growth since the financial crisis. Ongoing debasement of currencies will provide strong support to precious metals, which in essence is an alternative currency that cannot be printed in unlimited quantities. We continue to see gold and silver, and associated mining shares, as key assets in portfolio management to hedge against the many uncertainties that are facing investors of today.




INDUSTRIAL METALSPositives• Currency debasement will support real asset prices.

Negatives• Economic problems in Europe and US are far from resolved.• Chinese GDP growth for Q3 slowed to 7.4% from 7.6% in Q2.

HENLEY ASSESSMENT:We maintain our neutral view on base metals. Given the economic headwinds in China and the associated slowdown in GDP, it is difficult for us to be bullish on base metals at the moment as China is such an important demand factor.

AGRICULTUREPositives• The UN’s Food and Agriculture Organization

estimates there will be over nine billion mouths to feed on the planet by 2050.

• Middle class consumers in BRIC economies are increasingly demanding more varied and protein-rich foods. As affluence increases protein from beef, sheep, poultry, pigs, cows and fish may in turn displace grains in diets.

• Urbanisation and life expectancy is expected to increase.

Negatives• Prices are subject to many uncontrollable risks,

eg, weather and natural disasters, politics and other pests.

• Due to recent drought conditions in the American Mid-West and Russian Black Sea regions we have seen corn, wheat and soy prices increase on average over 50% within a few months.

HENLEY ASSESSMENT:Positive and Negative: There are two very different markets playing out in the agriculture sector: physical and equity. Many physical soft commodity prices have exploded due to changing global weather patterns over the past few months. However, these sharp price increases tend to be followed with just as sharp falls; there is a very seasonal and cyclical pattern with these movements. Currently with many soft commodity prices at or near record highs we have a negative view on investing at these levels and encourage profit taking. On the equity side, the largest weighting funds have to this sector is via fertilizer and seed companies. These industries are having a significantly more important role to play to help increase yield and in the case of seed companies invent seed which is more tolerant to changing global weather patterns. We remain positive on agriculture equity funds.

Source: The Fertilizer Institute




Alternative InvestmentPositives• Hedge funds posted positive returns in September and the

HFRX Global Hedge Fund Index rose 0.4% for the month.• Most equity-related strategies were able to post a

positive performance in September, owing especially to the equity market rally leading up to the Federal Reserve’s announcement. Many equity managers had a modestly increased directional bias coming into October and increased long positions in a measured way during the month.

• MSCI World 30-day volatility declined over 21% in September, ending the month at 11.29. There was no change in gross fundamental equity exposure, ending the month at 236%, although net equity exposure was up 5.66% ending September at 47%.

Negatives• The worst returns, for a second consecutive month, came from Managed Futures/CTA funds. The major detractors for

the month were exposure to bonds, energies and grains.• The recent “risk on” market moves have been policy driven rather than attributable to any marked improvement in

the fundamental backdrop. Obviously, the political situation across regions is still no better. Therefore, hedge fund managers have to cautiously position their trading book so as to hedge the “tail risk”.

HENLEY ASSESSMENT:Cautiously positive. Looking ahead, the structural changes to the competitive landscape are beneficial to hedge funds, particularly those engaged in liquidity provision of some form. The current environment is not, however, congenial for all hedge fund strategies. There are problems in CTA space given market direction is so changeable and the lack of trading volume.

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: Deutsche Bank Global Prime Finance Risk

the henley group november outlook 2012

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