Henley Market Outlook
January 2014

“But how unique are
they - really?”
Hong Kong | Singapore | Shanghai | London
THE WEAL...
The Henley Outlook January 2014
Hong Kong, Singapore, Shanghai & London

Content
Equities
Global Overview	

	

..............
Global Overview
Equities
Martin W. Hennecke
Group Chief Economist
mwh@thehenleygroup.com.hk

“To understand the world full...
The Henley Outlook January 2014
Hong Kong, Singapore, Shanghai & London

Global Overview
Equities

So, relative to propert...
Equities
Cash & Currencies
HENLEY ASSESSMENT
Neutral
USD Index spot touched a near-term
high in two weeks after the US Fed...
The Henley Outlook January 2014
Hong Kong, Singapore, Shanghai & London

Equities
Fixed Income
HENLEY ASSESSMENT
Neutral/N...
Property
Equities
HENLEY ASSESSMENT
Neutral
Property prices generally, after
significant falls in 2009, stabilised
in 2010...
The Henley Outlook January 2014
Hong Kong, Singapore, Shanghai & London

Equities
EQUITIES
UNITED STATES 	
HENLEY ASSESSME...
EQUITIES
Equities
UNITED KINGDOM 	
HENLEY ASSESSMENT
Neutral
As alluded to in December 2013, and
is now official, Britain ...
The Henley Outlook January 2014
Hong Kong, Singapore, Shanghai & London

Equities
EQUITIES
AUSTRALIA

	

HENLEY ASSESSMENT...
EQUITIES
Equities
GREATER CHINA	
HENLEY ASSESSMENT
Neutral
The Chinese Government released
the details of the post-Plenum ...
The Henley Outlook January 2014
Hong Kong, Singapore, Shanghai & London

Equities
EQUITIES
Other Emerging Markets (South K...
COMMODITIES
Equities
Energy	
HENLEY ASSESSMENT
Neutral
The key word this month was tapering
but oil prices reacted relativ...
The Henley Outlook January 2014
Hong Kong, Singapore, Shanghai & London

Equities
Commodities
Industrial Metals 	
HENLEY A...
Alternative Investment
Equities
HENLEY ASSESSMENT
Neutral

Positives
■■ The Hedge Fund Research Index gained 1.0% in Novem...
The Henley Outlook January 2014
Hong Kong, Singapore, Shanghai & London

Henley Market Outlook

Equities

January 2014

Th...
Upcoming SlideShare
Loading in...5
×

Monthly Outlook - Jan 2014

99

Published on

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
99
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
1
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Transcript of "Monthly Outlook - Jan 2014"

  1. 1. Henley Market Outlook January 2014 “But how unique are they - really?” Hong Kong | Singapore | Shanghai | London THE WEALTH MANAGEMENT PROFESSIONALS
  2. 2. The Henley Outlook January 2014 Hong Kong, Singapore, Shanghai & London Content Equities 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 Other Emerging Markets ......................................................................................... 12 Commodities Energy...............................................................................................................................13 Precious Metals.............................................................................................................13 Industrial Metals.......................................................................................................... 13 Agriculture...................................................................................................................... 14 Alternative Investments .............................................................................................................................................15 The Investment Committee The Henley Investment Committee combines more than 110 years’ experience and is unique in being backed by a full-time team of seven investment professionals to optimise asset allocation and manager selection. Peter Wynn Williams Investment Director & Partner George Rippon Partner Martin W. Hennecke Group Chief Economist 2 Paul Brady Partner Andrew Kelly Partner Robert Chapman Consultant Simon Liu Head of Investment Research
  3. 3. Global Overview Equities Martin W. Hennecke Group Chief Economist mwh@thehenleygroup.com.hk “To understand the world fully and clearly, you should look at the whole picture before drilling down into detail.” I Ching (3rd to 2nd millennium BC), one of the oldest Chinese classical texts One of the major pieces of news in December was the “budget deal” reached in the US by Democrats and Republicans that was celebrated as a supposed breakthrough and major step towards a solution, not only of political infighting but also the US debt problem. In reality, what actually happened was that a previously agreed policy of budget cuts known as sequestration – designed, it should be emphasised, to “reduce the speed of debt growth” of the US rather than reduce the debt itself – was partially reversed, basically allowing for debt growth to continue on roughly the same unsustainable trajectory it was on before the start of the fiscal cliff debate. Clearly, the rise in US Treasury yields back to almost 3% does not help against this backdrop, as the country already struggles to keep servicing interest payments at low rates – and therefore in our view it is most likely that the Federal Reserve will have little choice but to largely maintain inflationary easy-money policies, even if market chatter following the face-saving exercise of a USD10bn taper to “only” USD75bn per month of quantitative easing may tempt some to think otherwise. Over in Europe meanwhile, with France’s sovereign rating cut by Standard & Poor’s in November followed by very weak manufacturing and employment numbers last month, as well as Spanish bad loans and national debt levels breaking new highs, the European Central Bank (ECB) likewise seems forced to keep bailout funds flowing. China though is holding up relatively well so far, having just posted the highest trade surplus since 2009, which may further support the strength of the renminbi (CNY). Since holding a large exposure to the currency itself (ie CNY deposits) would still be subject to globally rising inflationary risks, inflation protected CNY income-producing assets such as property and stocks come into the picture. In this regard it is important to take note that, since late 2007, property prices have roughly doubled both in Hong Kong and in the Chinese mainland (and in some cities like Beijing even almost quadrupled), while mainland listed equity prices have lost about 2/3rd of their value. In other words, property prices relative to equities are now six times more expensive (Beijing property 12 times), or in turn we can say that equities have dropped well over 80% relative to property prices. In fact, Hong Kong and Chinese property prices, as measured in relation to average household income (and also as measured per square foot in the case of Hong Kong), have become the most expensive in the world, while equities are now among the cheapest. 3
  4. 4. The Henley Outlook January 2014 Hong Kong, Singapore, Shanghai & London Global Overview Equities So, relative to property, it appears that the equity market has become relatively more attractive again from a value perspective, and hence especially for investors currently focused only on (Hong Kong or mainland) direct property exposure, it would seem wise to consider diversifying some holdings (back) into the equity market at this point. Such equity exposure may well include listed property equities and Real Estate Investment Trusts (REITs) as well, since many of these are trading at attractive prices below book value, as they underperformed the physical properties together with other listed equities, following the stock market. And talking about potential buying opportunities, we have recently received a number of inquiries about the outlook for Bitcoin. Our answer is that we are staying away from it because while the supply of Bitcoins may be limited, the supply of virtual currencies as such is not. There are already well over 50 similar currencies being traded on the market such as Litecoin, Megacoin, BetaCoin and Junkcoin to name but a few. Many have been launched over the past several months, and they may well dilute each other’s values going forwards. Unlike gold, by the way, Bitcoins do not protect against heat and radiation either (i.e., they do not have intrinsic value derived from unique physical properties rendering it useful in real world applications), which is why we don’t see them on lunar rovers. Martin W. Hennecke Group Chief Economist 4
  5. 5. Equities Cash & Currencies HENLEY ASSESSMENT Neutral USD Index spot touched a near-term high in two weeks after the US Fed announced it would continue with its bond purchase programme, but trim its monthly purchases by USD10bn (~12%) to USD75bn. Summary ■■ We estimate that the positive domestic (combined fiscal and monetary stimuli) and external factors driving JPY strength over the past few months will be reversed and that the Japanese currency will revert to a weakening trajectory by the end of 2014 as growth dynamics lose momentum and the Bank of Japan (BoJ) struggles to meet its 2% inflation target. ■■ The appreciatory fixing trend in the CNY remains in play while October saw new record highs in the CNY against USD. External surpluses have been sustained while the record level in FX reserves indicates appreciatory pressures remain on the CNY, helped by a resurgence in growth momentum and positive credit dynamics. ■■ SGD remains steadily strong. Expectations are that the current gradual appreciation policy will continue as it is. 5
  6. 6. The Henley Outlook January 2014 Hong Kong, Singapore, Shanghai & London Equities Fixed Income HENLEY ASSESSMENT Neutral/Negative The fixed income sector demonstrated comparative restraint after the Federal Reserve finally announced that they would be tapering their quantitative easing (QE) program; especially given the volatile reaction demonstrated within this asset class when the idea was initially mooted in the summer. That said, yields have risen throughout the year and 2013 will doubtless be remembered as significant for this asset class; maybe not for what happened in the year but for what the events within this asset class will signify for the years to come. In the US, we are seeing US Treasury yields approaching the 3% figure and it appears conventional wisdom is now suggesting that the 30-year bull market within this asset class that was created by a decrease in rates from over 14% on a 10-year bond in 1981 to under 2% at the start of 2013 is coming to an end. Rates seem set to rise and the mantra that has dictated fixed income strategy for investors over this period must now also be challenged, with the long-term and unchallenged investment wisdom within this asset class now needing to be reassessed and the often-mentioned risks of increased rates needing to be managed. Most strategies being offered currently within this sector for 2014 appear to recommend increased diversification within the fixed interest asset class to reduce the risk and maximise the reward. What must also be remembered is that while a rate increase in the US will provide new questions for investors to answer it may also have a far greater significance for the foreign exchange markets as well as the emerging market sovereign bonds as well. In recent times, the minimal rates being offered by US Treasuries has seen global investors looking to allocate their fixed interest exposure to the more attractive rates being offered by emerging markets such as Indonesia; a trade that has also been increased by a carry trade of borrowed USD. With rates looking more appealing in the US or concerns that the borrowed money that has been used so rampantly via the afore mentioned carry trade may now cost more money, we could see money flee away from these emerging markets and back into USD. The potential for this reaction was demonstrated briefly in the summer after tapering was first mooted; a potentially scary signal of the devastation that could be seen in the likes of Asia; please refer to the graph below. When considering all of these afore mentioned eventualities, it would seem that 2014 could in fact see the most steady of investments have an uncharacteristically volatile year. 6
  7. 7. Property Equities HENLEY ASSESSMENT Neutral 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 and UK housing markets. Positives ■■ The UK government plans to impose a capital-gains tax on sales of investment properties by non-residents from April 2015, as it seeks to raise revenue and control home price increases in London. Knight Frank have commented that the tax would bring UK in line with other key investor markets, such as New York and Paris, where an equivalent tax is charged. Savills has forecast that prime residences in central London will appreciate by around 23% over the next five years, assuming that there are no other significant tax changes. ■■ UK house prices rose by 1.1% MOM in November and 7.7% annually. The Bank of England took action last week to cool down strengthening UK residential property prices by ending incentives for mortgage lending under its “Funding for Lending Scheme”. ■■ In the US, the S&P/Case-Shiller 10- and 20-City Home Price Indices rose 0.73% and 0.7% MOM in September, with annual gains being 12.27% and 12.29%. However, applications for mortgages have dropped, suggesting that rising mortgage rates are affecting the US housing market. ■■ Despite recent cooling measures, analysts are predicting further home price rises in the main Chinese cities for the rest of this year, although volume is expected to fall. Annual increases are in excess of 20%, exceeding local leaders’ targets of below 10% for the year. Negatives ■■ An influx of wealthy mainland buyers and record-low mortgage rates resulted in a 250% increase in Hong Kong luxury home prices from 2003 to the beginning of last year, outpacing the 150% gain in mass market homes, according to Savills. However, cooling measures introduced by the Hong Kong Government over the last three years have taken the heat from the property market, with luxury property (normally defined as in excess of HKD15m) demand most affected. It is reported that mainland buyers only represent 8% of current private home sales, down from a record 25% in 4Q11. Savills predicts a fall of 5% in 2H13 luxury home prices after a drop of 3.2% in the first three months of the year. ■■ Singapore government reported that the property price index dropped by 1.2% but remained at an elevated level. Measures by the Singapore government to curb property prices rises may be working. 7
  8. 8. The Henley Outlook January 2014 Hong Kong, Singapore, Shanghai & London Equities EQUITIES UNITED STATES HENLEY ASSESSMENT Negative Some headline economic data appears positive – for example, the 3Q13 GDP revision (+3.6%). These are enough for the trading robots, which scan the headlines and account for the majority of what passes for trading these days, to power the markets to new alltime highs almost on a daily basis. Digging a little below the headlines however usually tells a different story. In the case of the GDP revision, for example, growth was largely due to a build-up of unsold inventories and falling consumer spending - hardly bullish signs. The disconnect between rising asset prices and deteriorating fundamentals grows ever more stark. Meanwhile, the Federal Reserve now owns one-third of the entire US bond market, and its balance sheet has broken through USD4tn. Even if the Federal Reserve does attempt a QE taper of some sort, by the end of this year it will be printing more money than it is this month. You cannot taper a Ponzi scheme. Such is the US’s economic weakness that the Federal Reserve cannot increase interest rates and the politicians can neither increase taxes nor cut spending. So, as has been obvious for years, the USD is being left to take the strain. It is likely that there will be a dollar crisis of some sort this year, perhaps sparked by the growing shortage of bullion to back the paper gold market. The catalyst could be one of many, but the risks remain more important than the returns. Positives ■■ Not tapering would allow asset prices to continue to rise, subject to rising bond yields. ■■ The 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: USD17.2tn; debt-to-GDP: 107%. Absurdly unsustainable. ■■ A significant attempt to taper QE could cause asset prices to correct sharply. ■■ The possible collapse of paper gold market would collapse the USD. ■ ■ QE to infinity promises currency debasement, rising consumer prices and lower discretionary spending. JAPAN HENLEY ASSESSMENT Neutral Abenomics has improved the outlook of exporters yet there exists a gap between improving sentiment and the state of the real economy. While it all seems to be one-way traffic for now, the litmus test will be the sales tax hike in spring. By then, the BoJ and Prime Minister Shinzo Abe will also know the outcome of annual pay negotiations between companies and workers. Boosting basic salaries, which have been falling for years (see graph), is a key measure for the success of reviving consumption. Positives ■■ BoJ is open to more government bond purchases to achieve its inflation target. Apparently, fiscal deficits are of secondary concern. We believe JPY will weaken further in 2014. ■■ BoJ managed to suppress real rates to the lowest levels in history while concerns about tapering pushed real yields significantly higher in the US and in other G4 economies. Negative real interest rates are a key feature of Mr Abe’s war on deflation. The aim is to encourage bond-heavy investors to seek higher returns through domestic stocks, loans or property, or even buying assets abroad. Negatives ■■ Mr Abe struggled with a rapid decline in his approval ratings. Several opinion polls showed Mr Abe’s popularity plunged below 50% for first time after his ruling coalition passed a controversial bill for tougher penalties in breaches of national security intelligence. ■■ Japan reported a larger-than-expected trade deficit of JPY1.35tn for November. Imports climbed 21.1% from a year earlier while exports rose 18.4%. 8
  9. 9. EQUITIES Equities UNITED KINGDOM HENLEY ASSESSMENT Neutral As alluded to in December 2013, and is now official, Britain will impose a capital gains tax on foreign property investors from 2015 in a bid to allay fears that wealthy foreign buyers are inflating a London-led property bubble which is pricing locals out of the market. The acquisition of housing ranging from opulent mansions to modest apartments mainly by overseas purchasers has helped fuel a London-led rise in prices. That has stoked concerns ahead of the 2015 election that many Britons may never be able to afford their own homes. To roars of approval in the British parliament, finance minister George Osborne said that from April 2015 he would introduce a capital gains tax on future gains made by non-residents who sell a residential property in the United Kingdom. Positives ■■ Inflation has fallen back to its slowest pace in four years thanks to steadying food prices and the fact that energy price hikes have yet to come in. The consumer prices measure of inflation slowed to 2.1% in November from 2.2% in October and was the lowest since November 2009, according to the Office for National Statistics. The move closer to the Bank of England’s government-set target of 2% will give policymakers more headroom to leave interest rates at their record low. It will also ease the pressure on households that have been grappling with living costs rising at a faster pace than average wages for several years. ■■ Official figures out in December 2013(?) showed the jobless rate fell 0.3% points to 7.4% in the three months to October, meaning there were 2.39m out of work over the period. Unemployment in Britain is now at a four-and-a-half-year low, with 2.39m people out of work, down 99,000 on the previous three-month period – the biggest cut in over a decade. Compared with the same period a year ago 121,000 fewer people were seeking jobs in 3Q13. Negatives ■■ The political row over falling living standards was stoked this month as it emerged that earnings-squeezed and pension-poor Britons born in the 1960s and 70s need inherited wealth to be better off in retirement than people born in earlier decades. After an autumn in which the cost of living has dominated Westminster debate, the Institute for Fiscal Studies (IFS) said its research showed the days when each generation could expect to be better off than their predecessors might be ending. The IFS said living standards for those currently considered to be in the prime of their working lives were now dependent on wealth passed down the generations, and that this was heavily skewed towards the already better off. EUROPE EX UNITED KINGDOM HENLEY ASSESSMENT Neutral The eurozone may no longer be suffering an acute crisis since ECB President Mario Draghi made his “whatever-it-takes” pledge to save the euro in the summer of 2012. It is not all doom and gloom at the moment. However, the feeble recovery will do little to alleviate the economic hardship being experienced especially in southern Europe, which could prompt a political backlash against ruling parties that have pushed through harsh austerity programmes. This could trigger fresh investor doubts about the willingness of hard-hit countries to stay the course and cause the region to suffer a relapse. Positives ■■ Europe has been trading at large discounts to historical valuation levels because risk-averse investors have shunned the region. The price of European equities as a whole was recently at a 40-year low relative to US equities. Negatives ■■ The EUR’s strength, recently at a five-year high against the JPY, complicates the task for policymakers trying to support a fragile eurozone recovery while the bloc’s biggest economies diverge – with the latest data suggesting that German growth is accelerating but French business activity is at a seven-month low. Upward pressure on the EUR is exacerbated by a surge in early repayments to the ECB of the cheap long-term loans banks took out to weather the eurozone crisis. ■■ A German-backed deal on Europe’s banking union suffered a blow after the ECB warned it would fail the test of market credibility without streamlined decision-making and better funding. The intervention from Vitor Constâncio, the ECB vice-president, came hours after eurozone ministers emerged with a compromise that they thought would clear the path for a deal on a single system for winding up banks in trouble. 9 9
  10. 10. The Henley Outlook January 2014 Hong Kong, Singapore, Shanghai & London Equities EQUITIES AUSTRALIA HENLEY ASSESSMENT Neutral The decision by the Federal Reserve to reduce bond purchases by USD10bn in Jan14 to USD75bn should help the Australian economy. One of the reasons the AUD was above parity with the USD for most of the past three years was the Federal Reserve’s economic stimulus program. The AUD has dropped to below 89 US cents and the fall would please Royal Bank of Australia governor Glenn Stevens, who has stated that the currency should not be over 90 US cents and should be close to 85 US cents. This would be a boost to the non-mining sectors of the economy at a time when a major driver, mining investment, is expected to tail off. Positives ■■ Consumption, which comprises about two-thirds of GDP, is poised to drive the economy in coming years for the fact that Australia’s population growth is among the fastest in the world. It is expected to outpace the Organisation for Economic Co-operation and Development (OECD) average growth rate by four to five times over the next decade. This will be the most important consumption driver for Australia. ■■ Australia’s gross government debt, at 27%, is also much lower than many other developed economies, including the US, Japan, and Germany. Allowing for cash held, net debt is only 12%. Negatives ■■ Australian treasurer Joe Hockey said that the budget deficit will balloon to AUD47bn in the fiscal year through June 30, 2014, up from an August estimate of AUD30.1bn, as the mining boom wanes and the nation’s currency remains “uncomfortably high”. ■■ The OECD has stated that among its 34 members, Australia, along with Chile, are the most exposed to a downturn in emerging economies, which it sees as the biggest threat to the world economy in 2014. It notes that Australia’s terms of trade have risen by almost 70% over the past decade with the potential for many of these gains to be reversed. It also sees other sources of risk to Australia, including elevated housing prices and labour costs. ASEAN HENLEY ASSESSMENT Neutral As a review of year 2013, the general ASEAN markets have produced satisfactory YTD performance amid volatility. Malaysia, by the time this section is written, is one of the best performers. Moving forward, for emerging markets including ASEAN, the risk is further capital outflow to North America and developed markets that in turn can generate even higher volatility. 10 Positives: ■■ The governments are in better fiscal positions as compared to that of western countries. ■■ Myanmar, a place with massive resources and potential, is facilitating its progress in opening up its economy. Negatives: ■■ Emerging-market currencies fell after the Federal Reserve reduced stimulus while pledging to hold interest rates near zero. ■■ Indonesia’s IDR fell to a five-year low and government bonds dropped after the Federal Reserve said it is reducing stimulus that has spurred fund flows into emerging markets.
  11. 11. EQUITIES Equities GREATER CHINA HENLEY ASSESSMENT Neutral The Chinese Government released the details of the post-Plenum reform plan. The details present a picture that is even more aggressive than the already bullish expectations, with reforms occurring in all sectors. The decisions on state-owned enterprise (SoE) reforms, including promoting mixed membership, and the introduction of a two-child policy for couples where one member is an only child, are particular positive surprises compared to the market expectations. We believe the stimulus measures that have been announced will increase excitement regarding the market for the next 12 months. These plans will guide China’s second-half journey towards a market-based economy, lift China’s growth potential, and reduce macroeconomic risk. Positives: ■■ China’s central bank will “basically” end normal intervention in the currency market and broaden the CNY’s daily trading limit, governor Zhou Xiaochuan said, without giving a specific timeframe. ■■ Foreign direct investment (FDI) into the Chinese mainland rose 2.4% YOY in November to USD8.48bn, up from a 1.2% YOY increase in October. Capital inflows are expected to increase in 2014 as government reforms and policies on opening up of key sectors are implemented. Negatives: ■■ The liquidity crunch, even despite cash injections by the People’s Bank of China of CNY200bn (USD32.9bn) at the time of writing. The seven-day bond repurchase rate, a gauge of funding availability in banking system, increased 100bps to a six-month high of 7.60%. Borrowing costs climbed in recent weeks as the government shifted toward allowing market-determined interest rates. ■■ China’s inflation rose 3% YOY in November. Price increases in food remained the main driver of overall inflation. ■■ Housing prices continue to climb which will probably trigger another round of tightening measures. Low interest rates and cheap credit has fuelled a surge in property prices in China since 2000. Real estate accounts for about 1/5 of Chinese investment. A combination of high prices and overbuilding in China has raised concerns that the nation has a real estate “bubble” that is about to burst. 11 11
  12. 12. The Henley Outlook January 2014 Hong Kong, Singapore, Shanghai & London Equities EQUITIES Other Emerging Markets (South Korea, Russia, Brazil) HENLEY ASSESSMENT Negative, except for Russian equities Differences among the countries are pronounced in terms of resilience towards an external capital freeze as well as in terms of equity market valuations. Both factors should have great importance for the near-term outlook. On the resilience score, China has a current account surplus with reasonably limited financing needs (maturing debt and budget deficit) and good forex reserve coverage. India, on the other hand, has current account deficits, sizeable financing needs and relatively bad reserve coverage of their short-term external debt. Brazil has the highest financing needs of the group in 2014 but also has the best reserve coverage. 12 Positives ■■ Russia currently is an overlooked/shunned yet very attractively valued market, to a large extent as a result of the prevailing negative image and consensus. The likely generally positive developments ahead for the country such as the external Asian export potential and the likely internal pension reform, coupled with good macro-economic and equity valuation numbers, plus the embedded inflation and geo-political crisis hedge, would suggest the market be considered as a potential investment opportunity in diversified portfolios. ■■ Brazilian President Dilma Rousseff’s popularity continued to recover in November thanks to her government’s social programmes and a slowdown in inflation, making her the clear favourite in next year’s presidential vote. An initiative implemented this year brought thousands of Cuban doctors to the most desolate areas of Brazil as part of a programme to improve the country’s public health system. Negatives ■■ India’s central bank kept the “repo” lending rate steady at 7.75% and the cash reserve ratio at 4%, which went against the expectations of analysts and economists who thought Raghuram Rajan, the governor of the RBI, would raise interest rates once to fight inflation. In its monetary policy review the central bank notes that industrial activity remains weak and as the government tightens government spending in the rest of the fiscal year to meet its fiscal deficit targets, economic growth will be hit further. ■■ President Vladimir Putin’s gamble to bail out Ukraine with USD15bn in credits is seen to many that Russia is putting geopolitical interests ahead of financial concerns. Not everyone at the finance ministry, which manages the National Welfare Fund from which money will be taken to buy Ukrainian eurobonds, is happy that cash supposed to be kept for helping Russia’s growing population of pensioners will be used to aid an impoverished neighbour.
  13. 13. COMMODITIES Equities Energy HENLEY ASSESSMENT Neutral The key word this month was tapering but oil prices reacted relatively benignly to the Federal Reserve’s announcement it was to cut its assetbuying programme by USD10bn per month. Initially, oil prices experienced some pressure in the face of a rally in the value of the USD but this was short lived and markets remained relatively unaffected by the full extent of the impact and more attention was focused on US inventories. Key points ■■ During December US oil stocks fell by 18 million barrels. ■■ Libya’s exports have fallen as protesters occupied several fields demanding a greater share of the nation’s oil wealth. Precious Metals HENLEY ASSESSMENT Positive Key points ■■ Indian and Chinese gold demand is strong and hitting record levels. ■■ Gold remains susceptible as investors continue to favour risk assets. In December everything hung on the anticipation of an actualisation of the Federal Reserve’s announcement it was to taper QE. Immediately after announcing a reduction of USD10bn in its monthly asset-buying programme, the USD gained at the expense of gold, which retreated to a six month low. Given that there was a re-emphasis that interest rates will remain low for the foreseeable future, this seems somewhat counterintuitive and once the impact of the tapering announcement settles, it is likely that gold will re-trace its footsteps. Silver, which tends to follow gold in its movements also retreated. On a positive note, central Banks in China and India continue to hoard gold, bulking up their reserves at these depressed prices. As supply is taken out of western markets, this is likely to have a positive effect on prices going forward. 13 13
  14. 14. The Henley Outlook January 2014 Hong Kong, Singapore, Shanghai & London Equities Commodities Industrial Metals HENLEY ASSESSMENT Neutral Key points ■■ Iron ore imports to China have reached record highs as domestic supplies have struggled to meet demand. China continues to drive sentiment on base metals and renewed optimism in Chinese growth helped boost base and bulk metals. The broad metals and mining index rose over 5%, with zinc, nickel and copper all up in the month. Rio Tinto suggested that iron ore would soften in 2014 but that it remains a good market to be in, while Goldman Sachs re-iterated its bearish stance. Agriculture HENLEY ASSESSMENT Neutral 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. 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 that is more tolerant to changing global weather patterns. 14 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 cyclical 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.
  15. 15. Alternative Investment Equities HENLEY ASSESSMENT Neutral Positives ■■ The Hedge Fund Research Index gained 1.0% in November while S&P 500 increased by 3.1%. ■■ With equity markets across major regions recording strong gains (particularly post the temporary resolution of the US debt ceiling), together with earnings season, it was hardly surprising to see equity-based managers having a joyful year. In support of the fact that central banks are still in stimulus mode, we believe that the current market condition will persist into 2014. This could easily lead to the conclusion that the only way is up for most risky assets. Negatives ■■ In the US, managers had slightly more trouble extracting alpha, even with the rally in the market. Several equity managers reported a lack of dispersion through earning season, getting particularly hurt on short stock selections despite the weak earnings season and disappointing data releases. A number of managers have moved away from single stock shorts, taking index level shorts against their long stocks. ■■ Managers focusing on the emerging market space still performed badly this year. Emerging market economies have become very dependent on capital inflows to maintain the levels of consumption and investment. The main risk is that the shifts in US monetary policies will lead to a large reversal of the flows into developed markets. 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 15 15
  16. 16. The Henley Outlook January 2014 Hong Kong, Singapore, Shanghai & London Henley Market Outlook Equities January 2014 The Henley Investment Advisory Service is all about providing you with a committed, professional partner for your personal finances. Similar to the service level a private bank would offer, it brings proactive investment advice to our clients in a cost-effective manner. Henley Investment Advisory will help ensure your savings are invested in the right asset class at the right time, making your hard-earned cash work harder still and propelling you faster towards financial freedom. For more information about the service, talk to your Henley advisor or send an email to hias@thehenleygroup.com.hk 16

×