the henley group's market outlook - september 2013

Hong Kong | Singapore | Shanghai | LondonTHE WEALTH MANAGEMENT PROFESSIONALS

Henley Market OutlookSeptember 2013

Patience will be rewarded

The Henley Outlook September 2013Hong Kong, Singapore, Shanghai & London

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Global Overview .............................................................................................................................................. 3

Cash & Currencies ............................................................................................................................................. 5

Fixed Income ....................................................................................................................................... 6

Property ............................................................................................................................................. 7

Equities US ....................................................................................................................................... 8

Japan ................................................................................................................................ 8

UK ....................................................................................................................................... 9

Europe Ex UK ................................................................................................................. 9

Australia ........................................................................................................................ 10

ASEAN ........................................................................................................................... 10

Greater China ............................................................................................................... 11

India .............................................................................................................................. 11

Other Emerging Markets ........................................................................................ 12

Commodities Energy ..............................................................................................................................13

Precious Metals ............................................................................................................13

Industrial Metals ......................................................................................................... 13

Agriculture ............................................................................................................. 14

Alternative Investments ............................................................................................................................................15

2

CONtENt

tHE INvEStMENt COMMIttEE

Peter Wynn WilliamsInvestment Director

& Partner

Andrew KellyPartner

George RipponPartner

Simon LiuHead of Investment

Research

Paul BradyPartner

Chris SkinnerPartner

the Henley Investment Committee combines more than 110 years’ experience and is unique in being backed by a full-time team of six investment professionals to optimise asset allocation and manager selection.

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“Have you ever feared flying more after hearing of a plane crash? If the answer is yes, you are a normal human. But you also risk misunderstanding, or missing altogether, plausible outcomes.” Michael Mauboussin, Think Twice

We are seeing thinly traded markets across asset classes without clear direction in the summer months. Low liquidity and complacency leave markets open to extreme ups or downs in the event of any surprise. One of such many events is ‘tapering’ or cutting back on the USD85bn monthly bond-buying programme by the US Federal Reserve. Mere speculation about tapering sent asset prices tumbling at the end of June and early July. In fact, yields on 10-year US Treasury bond have doubled to 2.88% from their low in July last year in anticipation of smaller purchases of bonds by the US government.

Coping with VolatilityIn an uncertain period like today, it can sometimes appear safer to park your investments away from the storm than to watch your investments lose their short-term value. Yet timing future market movements can be very challenging and costly.

Investors who make decisions in anticipation of performance for short time periods are often vulnerable to monthly fluctuations and lose sight of the bigger picture: growing their wealth over the long term. It is very difficult to grow your core asset by timing the market. Trends in stock markets are driven by momentum in the short run as hype picks up and eventually fades.

We live in an interesting time where markets are reacting to policy risks all over the globe. Some central banks are flooding the world with liquidity while others are trying to scale back on their easing. It is more important than ever, that investors learn to cope with short-term volatility exacerbated by uncertainty. the table above shows an important point – the more we focus on short-term performance, the more risk we will mistakenly believe we have taken on. It should be remembered that it is the long-term potential of investing and compounding that creates wealth, not trend following.

Stay Diversified and Think Total Return of PortfolioAt THG, we believe a diversified portfolio is the most effective tool in managing risks. Diversifying your portfolio with assets that have uncorrelated returns can improve the relationship between return and risk over the long run by reducing the average risk in a portfolio while keeping the same return!

GLOBAL OvERvIEW

Simon Liu Head of Investment Research

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Investors have a strong tendency to focus on investment decisions fund by fund, without considering the impact on our overall portfolio. This could mean missing out on diversification opportunities, making new investments that cancel out existing ones, or declining opportunities that look too risky on their own, but would be a good addition to the overall portfolio. We cannot overstate the importance of strategic asset selection to build a low-risk portfolio from a collection of risky assets.

Emotions can often cloud the judgment of even the most proficient investors. In a market downturn, investors tend to flock to lower-risk investment options, which can lead to missed opportunities during ensuing market recoveries. To avoid this, increased risk in the market must be dealt with intelligently and with discipline, and thus through diversification over the long term. Financial objectives and motivations of investors may change over time. Please speak to your tHG consultant if you want to know more about our latest thoughts.

GLOBAL OvERvIEW

Simon Liu Head of Investment Research

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HENLEY ASSESSMENtNeutral

Emerging market currencies fall to their lowest against the USD since 2010 on concern a paring of stimulus under the Fed’s quantitative-easing strategy would intensify outflows from the currencies. Mexico’s peso dived 1.8% against the USD, which bought MXN13.1827. Indonesia’s IDR lost 3.8% within a week — the most of the USD’s 24 emerging-market counterparts — amid a record current-account deficit in the second quarter and worse-than-estimated economic growth. Brazil’s BRL tumbled 14% over the past three months. things could get even uglier as the US recovers and global interest rates rise.

Summary ■ the INR touched an all-time low of 65.94. INR is likely to continue to be under pressure given

rising oil and gold prices. India imports about 80% of its oil and is the world’s largest consumer of gold, the price of which has advanced 13% this quarter.

■ SGD remains steadily strong. Expectations are that the current gradual appreciation policy will continue as it is.

CASH & CURRENCIES


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Points of General Interest ■ Investors yanked USD43.8bn from taxable-bond funds and USD16.4bn from municipal-bond

funds in June, making the month the worst on record for bond fund outflows. ■ Detroit defaulted on its debt and highlighted fundamental issues within America at present,

and the likely scenario should the Fed stop buying its own debt. ■ the fallout from Detroit resulted in further scrutiny to municipal debt in the US; scrutiny

that is likely to highlight the significant issues facing a number of other cities in the US, and highlights that municipal debt can no longer be viewed as a risk-free asset class.

Exodus from Emerging Market Debt

FIXED INCOMEEqUItIES

HENLEY ASSESSMENtNeutral/Negative

the summer has been a very tough period for this asset class as the fears of qE tapering in the US have seen rates rise and there are genuine worries with regards the viability of long-dated government debt. However, as is the case with so many asset classes, the story could be very different if the tapering in the US is not as significant as first thought.

With economic data from the US underwhelming forecasts in recent weeks, tapering may not be as significant as expected and we could see an extension of the 30-year bull run that we have seen in fixed interest.

Without question, the long-term view within this asset class is negative. However, in the short term a world that could still benefit from continued qE may see renewed upside in the final quarter of the year. The current exodus (in particular within emerging market debt) could continue apace if the tapering is implemented in September.

this catch 22 situation and the knock-on risks associated clearly demonstrate the risks currently associated with this traditional “safe haven” investment. Government Bonds

■ China’s banking regulator told lenders to be “cautious” when investing in bonds issued by local government financing vehicles.

■ Bond prices could rise again if the Syrian crisis spins out of control, say traders. ■ the rupiah-denominated bonds issued by the government on tuesday received strong

demand from investors, although worries over the tightening of the global liquidity continued to hit the local stock and debt markets.

Cash on Deposit ■ As is often the case, speculation within the financial markets has not been translated into the

retail sector. Despite concern that interest rates offered by the banks to retail savers would rise, there has been no such spike.

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Positives ■ the Chesterton Humberts Prime London Capital value Index recorded a 2.3% increase in

1q13. Given a more favourable mortgage market and an economy forecast to return to growth this year, the prime London property market is likely to continue rising, with Chesterton Humberts predicting a total gain of 8.2% for 2013. Further momentum will be provided by overseas purchasers, who in some cases are enjoying a 30% currency discount due to GBP weakness relative to their home currencies.

■ the S&P/Case-Shiller US Home Price Indices increased 11.6% and 12.1% for 10 and 20 cities respectively in the 12 months ending Apr13. MOM gains were 2.6% and 2.5% respectively. However, both indices are still 26-27% lower than the Jul06 housing peak, with current market values at their early 2004 levels.

PROPERtY


Property prices generally, after significant falls in 2009, stabilised in 2010 and 2011. Property prices in many areas have weakened in 2012 and 2013 YtD as economic conditions remain difficult. Property values have, however, recovered in selected areas such as Singapore, Hong Kong and London. Additionally we see signs of a recovery in the US housing market. We still consider some specialised property assets, such as student accommodation, to merit inclusion in our portfolios. Other than these investments, we would suggest that clients remain cautious.

One area of concern in the continued recovery of US home prices is further mortgage rate rises. After the US Federal Reserve suggested in June that it is considering scaling back its bond buy-ing programme, bond prices fell sharply pushing the cost of a 30-year fixed mortgage up from 3.5% to 4.5%, roughly a two-year high.

■ In China, new home prices rose in 69 of the 70 cities tracked by the government in July from a year earlier. Gains were highest in the biggest metropolitan areas amid expectations that the government will not currently introduce any more property market restrictions.

Negatives ■ In Hong Kong, the US Federal Reserve’s plan to consider cutting stimulus is affecting sentiment

in residential property prices as investors fear rising interest rates. Property consultants believe prices could fall another 5 to 10% over the next six months and transaction volumes are falling sharply as buyers withdraw from the market. this uncertainty comes on top of many property market cooling measures brought in by the Hong Kong government over the last few years.

■ Following the Singapore governments new curbs on property loans, home sales in July were 73% lower MOM. the new rules require lenders take a borrower’s debt into account when granting loans and that home loans should not exceed a total debt-servicing ratio of 60%.

■ In the UK, recent house reports suggest a stronger property market, as demand from new buyers picks up. In addition to a strengthening economy, housing is getting a lift from the UK government’s program to increase mortgage availability and the Bank of England’s Funding for Lending Scheme. However, it should be remembered that the UK economy is still weak, so any prices increases are likely to be modest.


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Positives ■ Prime Minister Abe cemented control of government with his party, taking the majority in

the upper house of Japan’s National Diet. It will provide much needed support for Abe to overcome resistance in deregulation and reestablish order in government finances.

■ Japan business sentiment turned positive given a weaker JPY and stronger domestic demand. Business confidence among large manufacturers rose to +4, from -8 in March, the first positive figure since Sep11.

Negatives ■ the slowed economy grew at just 2.6% annualised in the three months through June and

this is clouding prospects for a planned sales-tax increase that would help Japan to rein in its massive public debt.

■ Abe has yet to deliver structural reforms promised as part of his three-pronged growth strategy. Investors are focused on the continuing sales tax debate.

EqUItIES

UNITED STATES

JAPAN

HENLEY ASSESSMENt Negative

Financial markets are dangerous, unstable, short of collateral and drowning in debt. Growth is largely a mirage. Corporate revenues and profit margins are in recession. the doubling of the yield on the US treasury ten-year note (to 2.86% at the time of writing) since the low in May presents a significant threat to equity prices, as well as to bond prices themselves, mortgage rates and the whole house of cards. With the double spectacle of debates on the federal budget and the debt ceiling to look forward to this month, it is going to be fun, fun, fun. Both at home and abroad, the US is on the back foot economically, politically and militarily to an extent we do not remember seeing before. With the Federal Reserve seemingly losing control of both the bond and the gold markets, the risks of a collapse of the USD grow larger by the day. the G20 summit should provide a better indication; but better to be out of this market a long time early than one minute late. the risks continue to be more important than the returns.

Positives ■ Any experiment with tapering qE will be short-lived and likely lead to resumption at even

higher levels. ■ Federal Reserve has forecast rates will remain unchanged until at least 2015. ■ In the long term, demographics and returned energy self-sufficiency bode well.

Negatives ■ National debt: USD16.8tn (fudged, at limit); debt-to-GDP: 107% and rising. Absurdly

unsustainable. ■ QE to infinity promises currency debasement, rising consumer prices and lower discretionary

spending. ■ Possible imminent collapse of paper gold market would collapse the USD.


Concerns over tapering of asset purchases by the US Fed rekindled strengthening of JPY. Abenomics was tested by correction in stocks and rising yields in Japanese government bonds. Recent market reactions suggest the “three-arrow” policies by Prime Minister Abe are not foolproof! Implementation of economic restructuring has so far been disappointing in terms of timing and scope.

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UNITED KINGDOM

EUROPE EX UNITED KINGDOM

EqUItIES


In the UK, there were further signs that the economic recovery was strengthening. the preliminary reading of second quarter GDP growth was 0.6%, double the 0.3% first quarter increase. Activity indicators such as manufacturing and services Purchasing Managers Index (PMI) delivered further gains while consumer confidence picked up from low levels. the Monetary Policy Committee (MPC) left interest rates unchanged and, following Mark Carney’s first meeting as governor, the MPC revised up its near-term GDP growth forecasts significantly.

Positives ■ Mark Carney, the governor of the Bank of England, sought to convince a sceptical city that

borrowing costs will remain on hold for the next three years, as he warned that UK needs a prolonged period of low interest rates to make up the ground lost during the recession. In his first big speech since taking charge in July, Carney left the door open for fresh stimulus measures if adverse market reaction to the bank’s new forward guidance regime threatened the UK’s “fledgling recovery”.

Negatives ■ Since the MPC adopted its new policy of forward guidance in July, contrary to what the

monetary policy committee would have wanted, investors have brought forward their expectations of a rate rise amid strong economic data for the UK, and fears about the knock-on effects if the US Federal Reserve phases out its own USD85bn-(GBP55bn)-a-month programme of qE. this has driven short-term interest rates higher.

HENLEY ASSESSMENtStrongly negative

Notwithstanding the positive growth in the second quarter, economic fundamentals in most countries remain grim. While domestic consumption finally appears to be on the rise in Germany, many markets further afield remain fragile. The peripheral countries continue to lag far behind the wealthier core, with several still in recession and many saddled with eye-watering rates of unemployment: Greece 26.9%, Spain 26.3%, and Ireland 13.5%. Lastly, progress on many of the most pressing political problems, including completing a banking union, are unlikely to be resolved until after the German elections in September.

Positives ■ GDP in the euro zone area rose 0.3% in the April-June period after a 0.3% contraction in the

previous three months. Germany (+0.70%) and France (+0.50%), the euro area’s two largest economies, both showed faster-than-projected expansions in the last quarter.

■ Europe’s economy emerged from a record long recession in the second quarter, expanding for the first time since 2011.

■ ECB will reduce the risk premium, or haircut, applicable to asset-backed securities to 10% from 16%. It will also lower the quality threshold for six ABS classes that are subject to loan-level reporting requirements to two A- ratings from two AAA ratings.

Negatives ■ Four of the euro area’s 17 member countries remain in recession, including Italy and Spain.

The jobless rate stands at 12.1%, the highest since the euro’s inception, ECB President Draghi this month described progress as “tentative”.

■ Dutch GDP shrank both QOQ and YOY, by 0.2 and 1.8% respectively. In July, 25 companies were declared bankrupt every day, the highest reading since 1981. Unemployment hit another record high in the month, reaching 8.7% of the workforce.


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ASEAN

AUSTRALIA

EqUItIES

HENLEY ASSESSMENt Neutral

the Reserve Bank board next meets on September 3. this is four days before the general election. the board’s minutes for the August meeting stated clearly that rates are likely to be on hold in September but that the board has not closed off the possibility of reducing rates further. We believe that more rate cuts can be expected over the course of the next six months. Also, the weaker AUD should begin to provide support for key sectors of the Australian economy, given its fall in recent months. Tourism, manufacturing and the domestic retail sector should see support.

Positives ■ The RBA took the decision to cut the official interest rate by 25bps to an historic low of 2.5%.

the rate has now been cut by 225bps since Nov11 and is at its lowest level since 1960. ■ The Westpac Melbourne Institute Survey of Consumer Sentiment rose by 3.5% in August,

from 102.1 in July to 105.7. the consolidation of the AUD (15% fall since Apr13) at a lower level may have played a positive role for sentiment.

Negatives ■ Yields on the nation’s 10-year government bonds rose to 4.05%, the highest in 16 months. ■ The consumer sentiment index is still 7% below the average read in 2010, when households

had become quite optimistic that the potential fallout from the global financial crisis (GFC) had passed. Despite the RBA cutting rates by 2.25% so far in this cycle, the index is only 2.3% above the level achieved following the first rate cut of 0.25% back in Nov11.


Near-term volatility is immense due to potential tapering. On the fundamental side, as Myanmar exits decades of isolation and tries to build a healthy economy, it is looking to Thailand for direction and financing. The same goes for Cambodia, Laos and vietnam. the opening up of smaller countries within ASEAN will reverberate around the neighborhood and impact the greater region of south-east Asia.

Positives ■ Indonesia’s budget deficit has stayed under 3% of GDP, unemployment and poverty rates

have fallen and the country has achieved an investment grade rating. ■ Malaysian market offers the lowest volatility among the world’s biggest markets. ■ Myanmar will be given preferential access to the EU market tomorrow for the first time since

1997.

Negatives ■ thai economic growth slowed for a second quarter as exports cooled and local demand

weakened. ■ thailand’s household debt at 80%of GDP limits the scope for further easing. ■ Indonesia’s central bank reported yesterday that 2Q13 current account deficit widened to a

record USD9.85bn, from USD5.82bn in 1Q13. ■ Potential QE tapering poses uncertainty to stock markets, which have taken a big hit over the

last couple of weeks. Indonesia, in particular, has fallen 13% WoW. ■ External shocks from the Fed and China’s slowdown have a huge impact to ASEAN.

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Positives ■ HSBC China flash manufacturing PMI surged to a four-month high of 50.1 in August, beating

expectations and is up from an 11-month low of 47.7 in July. ■ China’s exports rebounded in July, expanding 5.1% YOY, after a 3.1% contraction in June. ■ CPI inflation figures stood at 2.7% in July, the same as the previous month and below target.

The consumer prices are largely driven by food prices, rising at 5%, while non-food prices only rose 1.6%.

Negatives ■ China’s GDP grew 1.7% QOQ in Q2 vs 1.6% in Q1. Annual growth stood at 7.5% YOY, in line

with expectations. ■ In early June this year the National Audit Office (NAO) said a follow-up audit found a total

debt of RMB3.85tn owed by 36 local goverments at the end of 2012, up 12.9% from 2010. Although Beijing still claimed the local government debt situation was under contral, many people believe the systematic risks are increasing due to the unsustainable credit expansion.

GREATER CHINA

EqUItIES

HENLEY ASSESSMENt Neutral

On 16th Aug, China’s stock market experienced another setback to its credibility when Everbright Securities’s trading error causing China’s version of ‘flash crash’. It was actually a ‘flash rally’ generated by the brokerage firm’s massive buy orders (see the chart). The firm also admitted that it had been trading with its proprietary account on the A-share market. the good news is that during the same month China’s manufacturing growth started to stabilise on the back of modest improvements in new business and output. this is mainly driven by the initial filtering-through of recent fine-tuning measures and companies’ restocking activities, despite the continuous extenal weakness. We expect further filtering-through, which is likely to deliver some upside surprises for China’s growth in the coming months.


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HENLEY ASSESSMENtNegative

Emerging-market stocks tumbled to a six-week low on concern that capital outflows will accelerate amid prospects for reduced US stimulus. Investors withdrew USD8.4bn from developing-nation exchange-traded funds this year as weakening economies fueled pessimism in markets already concerned the Fed will start cutting bond purchases.

OTHER EMERGING MARKETS (SOUTH KOREA, RUSSIA, BRAzIL)

EqUItIES

Positives ■ Russian consumer spending accelerated in July. Retail sales accelerated for a second month,

growing 4.3% from a year earlier after a 3.5% increase in June. the central bank held its main lending rates unchanged for an 11th month as policymakers try to hold price growth to this year’s target range of 5% to 6%.

■ the Bank of Korea held rates steady at 2.5% – the third hold in a row. A statement from the bank was a fair bit more optimistic than in previous monetary policy minutes. First is the bank’s view of global growth, which has turned more confident. A subtle shift, but the bank has gone from “expecting” a modest recovery to “forecasting” one in its statement. Next, the bank was more positive on the domestic economy. the description of growth has shifted from “weakly” to “moderately”, led by exports.

Negatives ■ Brazil’s BRL fell more than 5% to trade at its weakest level since Mar09, even as the central

bank sold nearly USD3bn worth of currency swaps. the currency weakness has complicated policymakers’ efforts to rein in inflation, leading many investors to bet the central bank may speed up the pace of monetary tightening.

■ Corporate-lending growth in Russia has plunged as the weaker economy prompts banks to demand more collateral and as borrowers shun interest rates that can top 20%. the economy grew 1.2% from a year earlier in the second quarter, the slowest pace since 2009. That may mean Russia has entered its second recession in five years.

INDIA


Neutral. India is facing a trilemma – slow growth, high inflation and increasing current account deficit. Fuelling the worries on the India story is the recent free fall of the INR, which has lost 23% since the start of May this year. Ex-chief economist of the IMF and the new RBI Governor could not stop the INR from plummeting to new lows, hitting 65.56 against the greenback on 27 August almost every day. Indeed, the RBI could tighten the monetary policy, however that would result in the stalling of the growth engine of the frail economy. the expected tapering of qE is worsening the currency crisis. September is the month to watch out for the INR, which is expected to continue the downtrend to unprecedented levels of 68-70.

Positives ■ the value of Indian exports shot up 11.6% YOY in July 2013 ; this is the best increase over the

last 12 months. ■ On the back of the falling INR and rallying US stocks, Indian IT companies listed in the US

rallied 1 to 5% in August alone.

Negatives ■ Output dropped for the third consecutive month in July with the PMI standing at 50.1

compared to 50.3 in June. ■ Wholesale Price Index (WPI) figures showed that headline inflation, climbed to a five-month

high of 5.79 in July, from 4.86% in June, owing to higher food prices and expensive imports.

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Key points ■ the threat of further EtC divestment requires physical demand to absorb as much supply as

possible. ■ Palladium continues to benefit from a weak US dollar, disrupted South African production and

slowing Russian stockpile sales.

ENERGy

PRECIOUS METALS

COMMODItIES


Oil prices were significantly more positive in July, with Brent crude oil increasing by 5.9%. Strong demand from China, a large upward revision in demand across the OECD, and geopolitical threats to supply pushed prices higher. US natural gas prices finished the month down 3.26% over the period, which can partially be explained by lower-than-expected summer electricity demand. the global liquefied natural gas (LNG) market remains tight, and visible robust demand from Asia will keep European and Asian gas prices supported.

Key Points ■ Oil demand numbers have been relatively weak, especially from OECD Europe. ■ Consensus remains that we are moving into a period of supply surplus. ■ Supply from shale gas will keep natural gas prices rangebound.

HENLEY ASSESSMENtPositive

the gold recovery continued through August and at the time of writing the price is USD1,375/oz., with bullion posting a 5% gain in one week alone. At the same time, silver gained 14% - its biggest weekly increase in almost five years. A more dovish Fed caused speculative short sellers to cover positions, which helped push prices higher. Outflows from global gold exchange traded commodities (EtCs) slowed during the month. While Chinese physical demand remained strong, Indian demand continued to be constrained by Indian Reserve Bank policies. A weak economy and a poor current account deficit saw policymakers attempt to curb gold imports, which represent a significant contribution to total imports. Palladium rebounded strongly in July following a weak performance in June. With a price rise of 10.5%, it was one of the best performing commodities, ending the month at USD728/oz, and at the time of writing was standing at USD754/oz.


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HENLEY ASSESSMENtPositive 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 fertiliser 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.

Positives ■ 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 BRICS economies are increasingly demanding more varied and protein-rich foods. As affluence increases, protein from sheep, poultry, pigs, cows and fish may in turn displace grains in diets.

■ On the supply side, agricultural land in production has barely increased since the mid-1960s. Climate change and depletion of natural resources are powerful secular trends that will restrict future food production.

■ We remain positive on the agricultural equities asset class for 2013 as farmers are incentivised to maximise production by optimising the usage of fertiliser and crop protection and using the best seeds.

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.

COMMODItIES

AGRICULTURE

INDUSTRIAL METALS


Zinc prices fell 0.5% while iron ore prices rose 11.5% in July. the zinc market has been in surplus since the spike in prices in 2006 however, a number of factors suggest that the supply/demand balance for zinc is turning, and with a move into deficit we would expect to see prices rise accordingly.

Key points ■ the decline in silver prices from over USD30/oz to under USD20/oz will have raised costs at

many mines as silver is an important by-product from many zinc mines. ■ Strong Chinese steel production and demand along with a dip in ore shipments from Australia

has allowed prices to recover at a time when prices usually dip.

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Positives ■ Following the first month of negative performance for the year in June, the hedge fund

industry returned to positive performance in July, the HFRX global hedge fund index posting returns of +1%.

■ Commodities managers were generally positive through July, led by a recent rally in precious metals and energies.

■ Correlations between asset classes were less prominent with, for example, a continuing selloff in US treasuries accompanied by rising global equity markets.

■ Event-driven hedge fund managers were among the top performers in July. Despite relative restrained deal-flow in most of 2013, July became the biggest month for M&A activity since Sep08.

Negatives ■ Global macro managers was the worst performiing strategy in July, with both discretionary

macro managers and managed future managers struggling to generate returns in markets that remain somewhat uncertain.

■ It is likely that once earnings season is over, and the uneasy sense of macro picture, investors focus will once again shift to the likehood of tapering, which in the short term we feel that this will be a challenging environment for most of fund managers in alternative space.

ALtERNAtIvE INvEStMENt


July was favorable for hedge fund strategies. Despite the volatility of June, many hedge fund managers were able to regain their footing in the month, readjusting exposure in a nimble fashion to exploit the risk-on background. Our outlook for alternative investment has changed very little through the month, as markets have largely followed a pattern we broadly anticipated. We hope that the earnings season in October 2013 will provide good opportunities for equity long-short managers with an edge in fundamental research.

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. 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.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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Henley Market OutlookSeptember 2013

the henley group's market outlook - september 2013

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