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The "Henley Market Outlook" gives our current assessment of the six Henley asset classes.

The "Henley Market Outlook" gives our current assessment of the six Henley asset classes.

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  • 1. Henley Market OutlookMAY 2013Hong Kong | Singapore | ShanghaiTHE WEALTH MANAGEMENT PROFESSIONALSThe emperor has no clothes
  • 2. The Henley Outlook May 2013Hong Kong, Singapore & ShanghaiEquitiesGlobal Overview .............................................................................................................................................. 3Cash & Currencies .............................................................................................................................................. 5Fixed Income ...............................................................................................................................................6Property .............................................................................................................................................. 7Equities US ...................................................................................................................................... 8 Japan ................................................................................................................................. 8 UK ........................................................................................................................................9 Europe Ex UK .................................................................................................................. 9 Australia ........................................................................................................................ 10 ASEAN ........................................................................................................................... 10 Greater China................................................................................................................ 11 India .............................................................................................................................. 11 Other Emerging Markets ......................................................................................... 12Commodities Energy...............................................................................................................................13 Precious Metals.............................................................................................................13 Industrial Metals.......................................................................................................... 13 Agriculture.............................................................................................................. 14Alternative Investments .............................................................................................................................................152ContentThe Investment CommitteePeter Wynn WilliamsInvestment Director& PartnerAndrew KellyPartnerDavid ReynoldsPartnerGeorge RipponPartnerSimon LiuHead of InvestmentResearchPaul BradyPartnerChris SkinnerPartnerThe Henley Investment Committee combines more than 110 years’ experience andis unique in being backed by a full-time team of five investment professionals tooptimise asset allocation and manager selection.
  • 3. Equities3The Emperor Has No Clothes!There has been no end of conjectureabout the cause of April’s correctionfor the precious metals. It wasChina’s disappointing GDP figures,or it was the Federal Reserve talkingabout easing off the QE gas pedal,or it was sales of European monetarygold flooding the market, or it wassomething else.However,thefactisthatthecorrectionwas started by someone dumping onehundred tonnes of gold into the thinly-traded pre-market on that fateful Friday morning. Whoit was we will probably never know, but we can infer that they cared little about the price theyachieved, otherwise they would have sold when the market was at its most liquid, not least liquid.A further nine hundred tonnes followed during the day, equivalent in total to about forty percentof global annual mine production. Quite a day – and the following Monday was just as torrid, ifnot more so.It is thought by some that the blue touch paper which ignited the crisis was the proposed Cypriotbailout and bank re-structurings. It is said that deposit confiscation in particular promptedrenewed concerns about counterparty risks across the system, which in turn prompted largeamounts of cash and paper gold to be converted into physical. Since the paper (or “unallocated”)gold is said to be leveraged 100:1 or more, the stockpiles in the warehouses ran down significantly.Reliable and well-placed sources claim that by the Friday, the London Bullion Market Associationwas in imminent danger of default and that, to prevent us from seeing that the emperor has noclothes, the price was deliberately smashed down to allow the banks to re-stock their warehouseswithout pushing prices (and losses on shorts) upwards.Perhaps we will never know what really happened, whodunnit and why. But a funny thinghappened. Instead of intimidating outsiders to stay out of gold and holders to sell it, the smashsparked even higher demand for physical than the already elevated levels of demand beforeit. Perhaps the most important result of the smash has been the growing awareness of whata corrupt and manipulated farce the COMEX and its regulators have become. Part of thatgrowing awareness has come from a new documentary broadcast by the Canadian BroadcastingCorporation, one of the first mainstream media outlets to discuss gold and silver manipulation,and even to name names.Global OverviewPeter Wynn WilliamsInvestment Directorpww@thehenleygroup.com.hkSource: BullMarketThinking.com
  • 4. EquitiesThe Henley Outlook May 2013Hong Kong, Singapore & Shanghai4Global OverviewPeter Wynn Williams Investment Director “The budget should bebalanced, the Treasury shouldbe refilled, public debt shouldbe reduced, the arroganceof officialdom should betempered and controlled,and the assistance to foreignlands should be curtailed, lestRome will become bankrupt.People must again learn towork instead of living on publicassistance.”Marcus Tullius Cicero, 106 BC – 43 BC,Roman politician, lawyer, orator andphilosopher.The physical and paper markets have become bifurcated. If this continues, there is hope that thephysical market will assert itself and start setting prices (as the law requires), and that the papershorts will finally capitulate as a result of growing physical shortages.Hope is one thing. What we can be sure of going forward is more volatility. Please be prepared.Long-term precious metals’ investors are used to it. In 2011, we endured two corrections in silverof more than thirty percent each in less than six months. It never feels good; but, if you sold, whatwould you buy? Answers on a postcard, please!Lastly, talk of the European sovereigns selling their gold strikes me as most unlikely. First of all,they probably have very little gold available for sale. Germany proved that for us earlier thisyear when they announced it would take them seven years to repatriate three hundred and fiftytonnes from the vaults of the Federal Reserve in New York. No doubt it has all been lent, leasedor swapped long ago. Far more likely is an official upward re-valuation of gold to re-liquefy boththe bullion banks and the troubled sovereigns. As I have written in these pages before, it is whatthe Americans did the last time they were in a similar position, in January 1934. Those who didnot own gold would be hurt, but it could get governments and banks off the debt hook. It mustbe very tempting!
  • 5. Equities5HENLEY ASSESSMENTStrongly NegativeMostly negative GBP, followed byJPY. USD and EUR to still fare poorlyover medium-to-long term against atrade-weighted basket of currenciesgiven that these currencies aredebasing and devaluing throughsignificant quantitative easing (QE).We still favour SGD as a safe haven,and commodity currencies for yield.Summary■■ The JPY is just below 100 to the USD. This is a significant psychological threshold and itsresistance to being breached has been severely tested in the last month. Widely expect thislevel to break and the JPY to weaken further through Abenomics. Over the next couple ofyears there is a great expectation of moves as high as 140.■■ After a poor March for GBP, the limelight was taken off it by the events in Greece, againshowing the flaws in the EUR. Economic indicators all over Europe look weak and the prospectof a rate cut grows with the ever more painful austerity measures taking hold.■■ AUD remains rangebound with the USD.■■ EUR has pulled back from its strength against the USD post the Cyprus debacle.■■ SGD remains steadily strong ahead of the MAS meeting. Expectations are that the currentgradual appreciation policy will continue as it is.Cash & CurrenciesSource: www.fxstreet.com
  • 6. EquitiesThe Henley Outlook May 2013Hong Kong, Singapore & Shanghai6Points of General Interest■■ PIMCO, the world’s biggest bond fund, is cutting its exposure to Spanish and Italian debthighlighting that despite the protestations of the likes of Lagarde and the IMF that Europe isrecovering, there are still significant risks within the euro zone. PIMCO highlighted that theybelieve the current easing in pressure for these nations to borrow from international markets isas a result of liquidity from central banks that has overshadowed the economic fundamentalsof these countries. Fundamental risks still remain given that the ECB has not been tested asthe lender of last resort and that European politicians have made little progress in workingtowards a fiscal and monetary union.■■ A significant public statement from PIMCO – and one that is supported by the below graph– is that the reduction in borrowing costs for Italy and Spain is not mirrored by improvedeconomic data and is simply a product of central bank liquidity. The most logical questionthat then needs to be asked is: when the liquidity dries up, what will be left to support thesenations and what will then be the knock-on effect on their ability to borrow? In this writer’smind at least, it will be very negative.Government Bonds■■ Australia, in a significant move to tighten its ties to its biggest trading partner, China,committed to buy almost USD2bn of government debt. The Australian government now has5% of its reserves invested in Chinese debt.Corporate Bonds■■ Corporate debt had a good month in April with investors looking for apparent yield over thepotential appreciation and volatility of the stock market with corporate debt ETFs reportingsignificant inflows.Offshore Bank Accounts- Best Buys GBP■■ No Notice Account- Britannia International – 1.50%pa■■ 60 day Notice- Britannia International- 1.75%paWe have seen a drop in rates offered by banks in the offshore market this month, which suggeststhere is no threat to an increase in interest rates in the near future from the Bank of England.Britannia continues to offer the best rates.Fixed IncomeSource: The Wall Street JournalHENLEY ASSESSMENTNegativeWhile there may be some short-term relief in fixed income from thevolatility seen in equity marketsand also a comparative positivereturn when compared to holdingstraight cash in the short term,we are of the opinion that suchshort-term relief has the potentialto come at a costly price in themedium-to-long term. With thedeveloped economies committedto the path of continued monetaryeasing, we believe that inflationwill become a serious concern in thefuture. Such an environment wouldsee the relatively low yields enjoyedby fixed interest overrun by the costof goods. As we are in the businessof managing our clients’ wealth, forthe medium-to-long term we arestill bearish on the opportunity costversus inflationary concerns of thisasset class.However with a more short-termview there may be an argumentto seek safety in specific emergingmarket bonds, but we see seriousdanger in accepting the debt of thedeveloped economies, both on asovereign default front (especiallywithin Europe) and on a return vsinflation front.
  • 7. Equities7Positives■■ US residential property prices jumped 8.1% in January YOY, the biggest one month movesince June 2006, according to the S&P/Case-Shiller index of property values in 20 cities. In2013 ground is expected to be broken on 613,000 single-family homes to meet rising demand,the most in four years, compared to around 500,000 per annum having been built in the pastfour years. The chart below demonstrates the “affordability” of US housing. Affordability is afunction of 1. home prices, 2. mortgage rates and 3. income (with 1. and 2. obviously havingfallen steeply over the past five or so years).■■ Rightmove Plc has reported London home sellers raising their asking prices by 1.9% in MarchMOM. One cause of this may be a result of sterling falling around 5% against a basket ofinternational currencies since the start of 2013, which is likely to attract further foreign buyers.Gains in London during March were led by a 6.2% surge in Kensington and Chelsea, the city’smost expensive district, to a GBP2.3m average. Part of this increase was thought to be due tofalling supply, with 12% fewer properties for sale as compared with March 2012.■■ In response to tighter lending rules imposed by the Hong Kong Monetary Authority, lendersare raising their home loan mortgages rates by 25 basis points. Hong Kong’s currency peg tothe USD has kept interest rates in the city at near record lows for many years, underpinning amore than 110% gain in home prices since the start of 2009. With all the rising property pricecooling measures introduced recently, Midland Holding (the city’s biggest publicly tradedestate agency) has suggested that transactions may fall and property prices drop as muchas 10% in 2013.■■ Property analysts in Kuala Lumpur are optimistic that Malaysia will be the new hot spot forAsian foreign property investors, as they seek to avoid the high costs associated with propertypurchases in Singapore and Hong Kong.Negatives■■ Property researcher Hometrack Ltd has reported that house prices in England and Wales rose0.3% in March MOM, the most in three years. However, this was mainly led by a surge inLondon property prices, as demand outstripped supply. The UK government announced twoprogrammes in the March budget to assist Britons in buying homes, as the recovery in thebroader property market struggles to gain traction. Firstly, the government pledged GBP3.5bnto help Britons purchase newly built property. Secondly, there is also a plan to guaranteeGBP130bn of new mortgages to help reduce the deposit needed to purchase existing andnewly-built homes. The program begins in 2014 and will run for three years.■■ Many European housing markets continue to be very depressed with price falls in 2012accelerating in Greece, Spain, Netherlands, Portugal, Slovenia and Croatia. The steepest fallsoccurred in Greece and Spain, which in 2012 were 14.22% and 12.73% lower respectively.PropertyHENLEY ASSESSMENTNeutralProperty prices generally, aftersignificant falls in 2009, stabilisedin 2010 and 2011. Property pricesin many areas have weakened in2012 and 2013 YTD, as economicconditions remain difficult.Property values have, however,recovered in selected areas suchas Singapore, Hong Kong andLondon. Additionally we are seeingearly signs of a recovery in the UShousing market. We still considersome specialised property assets,such as student accommodation,to merit inclusion in our portfolios.Other than these investments, wewould suggest that clients do notinvest further at this time.Source: Bloomberg
  • 8. EquitiesThe Henley Outlook May 2013Hong Kong, Singapore & Shanghai8Positives■■ The stock market has responded well to new measures which try to lift Asia’s second largesteconomy out of deflation. Nikkei 225 Stock Average gained 20% in the first quarter of 2013(left graph above).■■ JPY extended its weakening trend to near JPY100 per USD after Kuroda announced boldpolicies that include purchase of longer maturity Japanese government bonds (JGB) in earlyApril. JPY fell to its lowest level in three years vs USD (right graph above). Some investorsinterpret the announcement as BoJ funding the government by printing more JPY.Negatives■■ JGB trading has shown unusual volatility as a result of uncertainty over monetary stimulus inearly April. Dealing in JGB futures was halted after the sell-off in JGB contracts, causing pricesto plunge and pushing yields higher by 8bps to 60bps.■■ Japan remained in technical recession through Q4, with GDP falling 0.1% QOQ and 0.4%annualised.EQUITIESUNITED STATES JAPAN HENLEY ASSESSMENTNegativeChances of Congress and theWhite House addressing thelong-term solvency issues of theUS government in a meaningfulmanner remain nil. The changesrequired to balance the system aretoo politically painful, so a currencycrisis within the next couple of yearsseems the most likely outcome –especially if there is a black-swanevent, such as an assassination,a COMEX default or a bomb onIran, for example. Meanwhile theeconomy continues to bottombounce, fundamentals continue todeteriorate, and markets continuenot to care, buoyed by a rising tideof confetti (and nothing else).Positives■■ QE to infinity will inflate asset prices for the time being.■■ The US 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 and rising; debt to GDP: 107% and rising. This is absurdlyunsustainable.■■ QE to infinity promises currency debasement, rising prices and lower discretionary spending.■■ Data continues to disappoint almost across the board.■■ Debt ceiling “temporarily suspended” plus QE to infinity may result in a currency crisis in acouple of years.HENLEY ASSESSMENTNeutralWith a new prime minister as well asa new governor at the central bank,the markets expect more stimulusmeasures together with aggressivemonetary policy to further weakenthe JPY. The new president of BoJ,Hiroki Kuroda, has long been criticalof the central bank for not buyingmore assets to revive the economy.Consumer confidence reached itshighest level since the end of 2007.The economic outlook index has alsoreturned to its peak of early 2006.While Japan may begin to recover onthe back of a weaker JPY, this wouldhurt other exporting countries in Asiaand rest of the world.Source: IHS Global Insight and Wells Fargo Securities, LLC
  • 9. Equities9UNITED KINGDOM EUROPE EX UNITED KINGDOM EQUITIESHENLEY ASSESSMENTNegativeGeorge Osborne’s month went frombad to worse last week when a secondcredit rating agency stripped the UKof its prized AAA credit rating. Theaction by the Fitch rating agencyfollowing hot on the heels from thedowngrade by Moody’s in February,leaving Chancellor George Osborneagain defending the government’sausterity plan. Fitch said itsdowngrade primarily reflected aweaker economic and fiscal outlook.And it ends a disastrous period forGeorge Osborne’s economic policyafter the IMF downgraded its UKeconomic forecasts again andwarned Britain it needs a plan B forjobs and growth. In its twice-yearlyWorld Economic Outlook publishedon Wednesday, the IMF slashed itsforecast for growth to 0.7% in 2013after saying in January that thecountry’s economy could expect1% growth.Positives■■ The Conservative government is currently sticking with its plans to help support the housingmarket and help first-time buyers into this market. Capital spending is being made availableto support shared equity loans of 20% of the value of the new homes, with the buyer onlyneeding to raise a 5% deposit. A major issue people have had to date is the fact that manybanks are now demanding a 30% deposit which is out of reach for many people and as such,has had a dragging effect on the sector.Negatives■■ The redistribution of the UK economy is happening much more slowly than envisaged,especially to the faster-growing emerging markets. Not enough British companies are tappinginto this market; Brazil, Russia, India and China accounted for just 7% of total UK exports,compared with 54% for the EU, according to the business lobby group, the Confederation ofBritish Industry. As an example, Belgium currently exports dramatically more to India thanthe UK, despite the obvious cultural ties between the two nations.HENLEY ASSESSMENTStrongly negativeGermany dealt a blow to plans for abanking union at an informal meetingof European finance ministers lastweek,sayingtheproject wouldrequirechanges to the European Uniontreaty. ECB’s very accommodativemonetary policy was only partlypassed on to the financing conditionsfaced by firms and households insome euro area countries. Small- andmedium-sized enterprises (SMEs), thebackbone of the euro zone economy,are particularly hard hit by thisdevelopment and the ECB is studyingoptions to address the issue.Positives■■ ECB President Mario Draghi said the bank stands ready to cut interest rates if the economydeteriorates further. The ECB is looking at a range of measures including lower rates, morelong-term loans to banks and a program to encourage lending to small- and medium-sizedcompanies.Negatives■■ The IMF has stated that as much as 20% of non-bank corporate debt in the weakest euro-area economies is unsustainable and may force companies to cut dividends and sell assets.Businesses in Italy, Spain and Portugal have the largest debt overhang. Firms in the euro-areaperiphery have built a sizable debt overhang during the credit boom, on the back of high profitexpectations and easy credit conditions.■■ ECB/EU/IMF troika revised upwards the size of Cyprus’s “debt sustainability” package by 35%from EUR17bn to EUR23bn (120% of Cypriot GDP) after a bigger-than-expected hole wasfound in Cypriot banks. Cyprus will have to find this money itself without help from the troika,including the sale of 10 of its 14 tonnes of gold reserves (cEUR400m).■■ Germany’s economy slowed to “near stagnation” last month, while France’s economyrecorded its biggest contraction for four years. The Markit composite purchasing managers’index (PMI), which measures both the manufacturing and services sectors, declined to 50.6 inGermany last month (Feb13: 53.3).
  • 10. EquitiesThe Henley Outlook May 2013Hong Kong, Singapore & Shanghai10ASEAN AUSTRALIA EQUITIESHENLEY ASSESSMENTNeutralBoth the global backdrop and localdataflow have been significantly lesspositive since the April board meeting.US and Chinese economic updateshave disappointed, commodityprices and equity markets have soldoff. Locally, consumer sentiment hasfaltered, business confidence hasremained subdued and labour marketdata suggests the Feb jobs gain wasoverdone with the unemployment raterise from 5.4% to 5.6% suggestingunderlying conditions are soft.Positives■■ Australian Prime Minister Julia Gillard said that her government’s “tight” fiscal stance leavesroom for the central bank to cut interest rates as manufacturers try to cope with sustainedcurrency strength.■■ Fitch Ratings affirmed Australia’s AAA credit rating, saying it highlighted the economy’sunderlying strength. In its report Fitch said it made its decision because the country had builtup the capacity to absorb shocks thanks to low public debt, a free-floating exchange rate anda liberal trade and labour market.Negatives■■ The improved consumer mood in 2013 encountered a significant setback in April. After astrong rally in the first three months, the Westpac–Melbourne Institute Consumer SentimentIndex stumbled, falling 5.1%.■■ Australia’s unemployment rate climbed in March to the highest level in more than three years.The jobless rate rose to 5.6% from 5.4%.■■ Australian industry has been squeezed by the currency’s record stretch above parity withthe USD since it was freely floated in 1983, and that has made tourism more expensive andexposed local manufacturers to cheaper imports.HENLEY ASSESSMENTPositiveWe have seen corrections in Marchacross the region due to concernthat valuations are too expensiveafter reaching record levels. It isthose markets that have a verygood run and where valuationsare above historical levels that arevery susceptible to profit taking.They have rebounded quickly goinginto April. ASEAN economies are ingeneral outpacing bigger nationsin the Asia-Pacific region as well astheir western counterparts.Positives■■ Steady economic growth continues across the region in general.■■ Thailand, Vietnam and the Philippines will see the strongest increase in private-equitytransactions this year as buyouts in the region struggle to recover, according to Bain &Company.Negatives■■ Factories in ASEAN are battling rising costs as governments in Asia increase minimum wages,which could lead to worldwide inflationary pressure.
  • 11. Equities11Positives■■ The business climate index from theNational Bureau of Statistics of Chinawas 125.6 in Q1, up from the 124.4 forQ4 of 2012.■■ China’s inflation fell to 2.1% YOY inMarch. This reduces the possibilityof the PBoC tightening monetaryand credit policies in the coming fewmonths.Negatives■■ China’s Q1 GDP slowed to 7.7% YOYfrom 7.9% YOY in Q4 due to weakMarch industrial production.■■ Chinese stocks saw a sell-off again this month, mainly due to PBoC’s continuous liquiditywithdrawal and disappointing annual results and a conservative guidance from Chinesecorporates.■■ Fitch cuts China’s long-term local currency rating one notch down to A+, citing a lack oftransparency in increased local government borrowing.India GREATER CHINA EQUITIESHENLEY ASSESSMENTPositiveRather than strengthen modestlyas had been expected, China’s GDPgrowth slowed in Q1. Most of thedisappointment could be traced to amuch weaker than expected Marchindustrial production report, wheregrowth slowed significantly comparedto last quarter. After the congressmeeting in early March, investorswere in little doubt that the newadministration is focused on creating asustainablegrowthmodelforthefuture.Also, the latest regulations from theChina Banking Regulatory Commission(CBRC) attempt to define and tightenthe use of non-standard credit assetswhich wealth management firms caninvest in. This indicates Beijing mightfeel potential risks in the shadowbanking system and take actions toregulate the area. Policy reforming isthe primary driver of the market thisyear and we firmly believe China’seconomic recovery is still on track.HENLEY ASSESSMENTNeutralMarkets reacted to the withdrawal ofan ally (DMK) last month but showedno signs of euphoria after the RBIrate cut. It seems India is now in astagflation-like situation whereinthe growth stagnates but inflationremains at an elevated level.Positives■■ The fall in gold prices is expected to bring down the current account deficit from 4.3% to 3.9%of GDP; USD100/oz fall will compress the deficit by about USD3bn.■■ The country’s central bank, the RBI, cut the repo rate by 25 basis points to 7.5%.Negatives■■ Owing to the power outage and fall in new business orders, the manufacturing sectorwitnessed the slowest growth in 16 months with the PMI in March standing at 52, down from54.2 in February.■■ CPI inflation climbed to 10.9% in February with wholesale price inflation at 11.4%.Source: Bloomberg Finance LP
  • 12. EquitiesThe Henley Outlook May 2013Hong Kong, Singapore & Shanghai12HENLEY ASSESSMENTNegativeThe assessment has beendowngraded to negative as thenations of South Korea, Brazil andRussia faced increasing globalheadwinds. Particularly for SouthKorea, the weakening JPY andheightened tensions over thepeninsula have a detrimentaleffect on business confidence andits exporting economy. In Brazil,inflation is becoming more of aworry to the administration. In asign that inflation worries trumpgrowth concerns, Brazil’s centralbank raised its benchmark rate forthe first time since July 2011. Thisis in stark contrast to other centralbanks which have maintained orlowered their interest rates.Other Emerging Markets (South Korea, Russia, Brazil) EQUITIESPositives■■ South Korea unveiled a KRW17.3tn supplementary budget to support the stalling economyas domestic consumption remains sluggish while exports slow because of the weaker JPY andcooling global demand. The bulk of the supplementary budget is aimed at compensating forlower revenues this year. Around KRW5.3tn will be spent on creating 40,000 jobs, providingfinancial support for low-income households, expanding childcare services and stabilisingprices of agricultural products. It predicted this would boost this year’s growth by 0.3%.Negatives■■ The rising tension on the Korean peninsula is finally having an impact on Seoul’s financialmarkets, as investors worry that the current tension is likely to be prolonged, unlike in the past.The KOSPI benchmark index fell 0.4% to 1,918.69, its lowest closing since November 2012.■■ Brazil’s central bank’s monthly activity index contracted by 0.52% in February 2013, dashingany hopes that its 1.4% expansion in January 2013 was the start of a sustained recovery. Forthe first time since late 2011, consumer price inflation was above the government’s upper limitof 6.5% a year, at 6.59%.■■ Russia’s USD2tn economy is growing at the weakest pace since a 2009 contraction as Europe’sdebt crisis curbed exports and prompted companies to trim investment as the governmentscaled back spending after elections. According to the Ministry of Economic Development,GDP will rise 2.4% this year. This was downgraded against the earlier projection of 3.6%.Source: IBGE
  • 13. Equities13Positives■■ The Federal Reserve continues to increase the money supply by USD85bn every month,further debasing the dollar by transforming debt into currency.■■ Gold’s fundamental and most important attribute remains unchanged. Because gold is atangible asset, it does not have counterparty risk.Negatives■■ Short-term volatility in markets will unsettle investors.Energy Precious Metals COMMODITIESHENLEY ASSESSMENTNeutralWhile gold has been getting all thenegative coverage, crude oil has alsocome under pressure and Brent Crudefell below the key USD100 mark and isnow down 11% since the start of theyear. Weak growth in China and largesupplies are having a subduing effecton price, although many speculatorsbelieve the worst has passed andare becoming increasingly bullish.Natural gas remains the sole stand-out energy commodity havingreturned over 30% YTD. We remainneutral on the sector.Positives■■ A floor in oil prices appears to be close which may result in a bounce of crude prices.Negatives■■ Supplies are plentiful which is having a dampening effect on current prices.HENLEY ASSESSMENTPositiveIt has been a torrid time for preciousmetals this month as gold plungedthe most in 33 years. At times likethese, it is worth keeping things inperspective. The drop in the priceof gold (note the use of price andnot value) was attributable to somenegative news out of China andthe continuing saga of the Cypriotbailout but fundamentally, nothinghas changed and the rationale forholding gold remains. Although theshort-term graph does not make forpretty viewing, the recent volatilityrepresents a drop back to pricesin February 2011. The HenleyGroup views this as a significantbuying opportunity as we continueto believe that gold remainsundervalued at current levelsand indeed the price has ralliedsignificantly since the 16th April.Source: Goldmoney.com
  • 14. EquitiesThe Henley Outlook May 2013Hong Kong, Singapore & Shanghai14Positives■■ WarrenBuffett’sinvestmentpowerhouseBerkshireHathawayand3GCapitalhaveannouncedthey will take over US tomato sauce and baked beans maker Heinz, in a deal worth USD23bn.This could lead to broad cost-cutting measures across the industry and a possible rerating inthe valuation of similar companies.■■ UN’s Food and Agriculture Organization estimates there will be over nine billion mouths tofeed on the planet by 2050.■■ Middle-class consumers in BRICS economies are increasingly demanding more varied andprotein-rich foods. As affluence increases, protein from sheep, poultry, pigs, cows and fish mayin turn displace grains in diets.■■ Urbanisation and life expectancy is expected to increase.Negatives■■ Prices are subject tomany uncontrollablerisks, e.g., weatherand natural disasters,politics and other pests.■■ Due to recent droughtconditions in theAmerican Mid-Westand Russian BlackSea regions we haveseen corn, wheat andsoy prices increaseon average over 50%within a few months.CommoditiesAgriculture Industrial Metals Source: DWSHENLEY ASSESSMENTNeutralIndustrial metals have not beenimmune from recent declines incommodities. Copper fell belowUSD7,000 per tonne for the first timein almost 18 months on concernthat demand from China to the USand Europe may falter. Tin was alsopoised to enter a bear market. China,which is the world’s biggest consumerof metals, missed growth targetswhich put pressure on the sector.Positives■■ Modest growth in the US and expected growth of 8% in China will provide some support forthe sector.Negatives■■ Curbing policies in China may knock demand in the short term and keep prices low.HENLEY ASSESSMENTPositive and NegativeThere are two very different marketsplaying out in the agriculture sector –physical and equity. Many physical softcommodity prices have exploded dueto changing global weather patternsover the past few months, howeverthese sharp price increases tend to befollowed with just as sharp falls; thereis a very seasonal and cyclical patternwith these movements. Currently withmany soft commodity prices at ornear record highs we have a negativeview on investing at these levels andencourage profit taking. On the equityside, the largest weighting funds haveto this sector is via fertilizer and seedcompanies. These industries are havinga significantly more important role toplay to help increase yield and in thecase of seed companies, invent seedwhich is more tolerant to changingglobal weather patterns. We remainpositive agriculture equity funds.
  • 15. EquitiesPositives■■ Hedge fund performance had another positive month in March 2013: the HFRX Global HedgeFund index rose 0.7%, taking Q1 performance to 3.1%.■■ Equity long/short managers were once again amongst the top performers for the month,with Japanese and US focused managers faring particularly well. European managers werealso positive for the month and generally managed to avoid systemic risks from the Cypriotbailout.■■ In March, Preqin, a leadingalternative asset data provider,interviewed120hedgefundinvestorsto ask whether they believed thatreturns in 2013 would exceed thoseachieved in 2012. As revealed in theright-hand-side chart, the majorityof investors (79%) responded thatthey did believe returns in 2013would exceed 2012, demonstratingoverall optimism among hedge fundinvestors for the year ahead.Negatives■■ Inaggregate,performancefromcommoditymanagerswasnegativeoverMarch.Commoditiesprices moved in a dislocated manner during the month and some managers had to take thedamage from their long positions in precious metals.■■ Investors continuously lost their interests in fund of hedge funds industry. Annual fund ofhedge fund launches fell from 142 in 2010 to 79 in 2011 and to 59 in 2012 – this representsthe lowest level since 2000.Alternative InvestmentGeneral disclaimer and warningThe 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 strictlyprohibited 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 HenleyGroup 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 berelied 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. Neitherthis 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 productsSource: Preqin Investor Interviews–March 2013HENLEY ASSESSMENTNeutralThis year so far, there are nowsignificant discrepancies between therelative strength of major economies.These diverging economic conditions,in combination with the reduction ofrisk-on/risk-off market movements,should increase the opportunity setfor hedge fund managers. In 2011and 2012, both years witnessed acorrelated risk-on/risk-off behavior inQ2 and Q3. However, it is suggestedby a number of factors that a repeat isunlikely in 2013 (better money inflowinto equities, better fundamentaldata in US, more positive andresilient equity market sentiment,etc), and if inter-stock and inter-sector correlations can remain at lowlevels, then we believe that equitylong/short managers will continueto produce attractive risk-adjustedreturns for the rest of the year.
  • 16. The Henley Outlook May 2013Hong Kong, Singapore & ShanghaiEquities16The Henley Investment Advisory Service is all about providing you with a committed, professional partner for your personalfinances. Similar to the service level a private bank would offer, it brings proactive investment advice to our clients in acost-effective manner. Henley Investment Advisory will help ensure your savings are invested in the right asset classat 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.hkHenley Market OutlookMAY 2013