The Henley Group’s Market Outlook publication gives our assessment of the six Henley asset classes.

1. The Henley Group
Land of the rising sun debt
For more information, please contact:
Martin W. Hennecke, Chief Economist
T: +852 2824 1083 E: mwh@thehenleygroup.com.hk
www.thehenleygroup.com.hk
Hong Kong Singapore Shanghai London
THE WEALTH MANAGEMENT PROFESSIONALS
“Looking tough on inflation is part of
any central banker’s job description: if
investors believe that inflation is going
to get out of control, you end up with
higher interest rates and capital flight,
and a vicious circle quickly ensues.”
James Michael Surowiecki, American
journalist and writer at ‘The New
Yorker’
It has been another eventful three months, with equity markets generally doing well despite
geo-political turmoil not only in the Ukraine but also in much of the Middle East.
Europe in particular though may be facing a tougher time going forward, as highly indebted Italy
has slipped back into recession, France announced it will be missing its deficit target and even
economic powerhouse and EU paymaster Germany is finally seeing negative growth, as Russian
sanctions start to bite. Hungarian Prime Minister Viktor Orban probably expressed it best when
noting that “the sanctions policy pursued by the West, that is, ourselves… causes more harm to us
than to Russia. In politics, this is called shooting oneself in the foot.”
The United States meanwhile may have shot itself in the foot too, not that it has much trade with
Russia, but it relies on the use of the USD in international trade in order to maintain global influence
and, perhaps more importantly, to
be able to inflate and finance ever
growing deficits without causing
its currency to decline in value. Yet
recent events appear to have brought
the BRICS nations plus a number of
other developing markets only closer
together, resulting in the USD100bn
BRICS development bank launch, as
well as increased use of local currencies
in the respective countries’ bi-lateral
trade.
The Chinese yuan in particular may
benefit in this regard, as China overtook
the United States as the world’s largest
trading nation last year, and it is not just
the BRICS nations that are expanding
Continued…

2. The Henley Group | Land of the rising sun debt September 2014
2
One way to benefit from this scenario can be to seek a safe haven
in the time-honoured default- and inflation-proof precious metals,
led by gold, which happen to be trading at very attractive prices
presently after having witnessed a sharp drawdown over the past
several years.
However, the majority of ordinary Japanese citizens are likely to
be less familiar with gold than with bricks and mortar, i.e. property,
which may come to their mind first when thinking about how to
achieve better inflation protection (and positive real yield) compared
with holding cash in the bank or in bonds.
Japanese property is not really cheap in nominal prices compared
with global averages, but then it never really is because of the limited
land size. When looking at price-to-income and price-to-rent ratios
relative to long term averages though, Japan currently happens to
be the world’s most undervalued property market.
Therefore, a limited exposure to this asset class, as part of a
diversified portfolio, may be an attractive contrarian bet on Japanese
citizens moving a good part of their cash back into real assets on the
expected rising inflationary risks associated with the country’s debt
problem.
Martin W. Hennecke
Group Chief Economist
the use of this currency, but yuan clearing banks have been set up
recently in a number of European countries as well. Commenting on
the establishment of the ECB/PBOC euro/renminbi currency swap,
Christian Noyer, governor of the French National Bank and member
of the ECB, noted that “China has decided to develop the renminbi as
a settlement currency” and “trade between Europe and China does
not need to use the dollar”.
Another interesting development has been taking place recently in
Japan. Although “Abenomics” does not appear to be succeeding
in improving the country’s economy or trade balance, it sure has
“succeeded” to bring up inflation, as Japan’s core CPI has moved
decisively from deflation into inflation, even when excluding the
recent consumption tax hike.
Accordingly, it appears to be only a matter of time before the
Japanese (which presently keep the majority of their savings in cash
and bonds after having gotten burnt by a nearly 30 years long equity
and property bear market) awake from their slumber to realise that
a 0.5% “yield” on 10﹣year Japanese sovereign bonds (JGBs) is not
exactly a very profitable strategy when inflation is notably higher
and rising.
What’s more, inflation may potentially get much worse going forward
due the country’s unsustainable debt burden, which presumably will
necessitate a substantial expansion of quantitative easing (money
printing) policies to prevent a debt crisis.
GENERAL DISCLAIMER AND WARNING
The Henley Group has produced this document for general reference purpose only.
Neither this document nor any content contained herein constitutes, or shall be construed
as, advice or recommendation of any sort; and no reliance should be placed on any of
the contents herein, whether in whole or in part. 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. No content in
this document, including any expression of opinions or estimates, should be relied upon
or used in any way as an aid to make decision of any sort or to embark on, or refrain from,
any course of action. The Henley Group accepts no responsibility, liability or claim arising
from, or in connection with, reliance on any of the contents contained herein..