The Henley Group's Market Outlook for February 2013

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The Henley Group's Market Outlook for February 2013

  1. 1. Henley Market OutlookFEBRUARY 2013Off and away!Hong Kong | Singapore | ShanghaiTHE WEALTH MANAGEMENT PROFESSIONALS
  2. 2. The Henley Outlook February 2013Hong Kong, Singapore & ShanghaiContentEquitiesGlobal 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 .............................................................................................................................................15The Investment CommitteeThe 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. Peter Wynn Williams George Rippon Paul Brady Chris Skinner Investment Director Partner Partner Partner & Partner Andrew Kelly David Reynolds Simon Liu Mattias Hoijer Partner Partner Head of Investment Associate Investment Research Director 2
  3. 3. Global Overview EquitiesPeter Wynn Williams Year of the Snake? Or Year of the Ladder?!Investment Directorpww@thehenleygroup.com.hk Chocks away, Biggles! Equity-market indices in New York, Tokyo and London are all up over 7% so far this year; and, while silver is keeping up with them, gold was unchanged in January and US Treasury prices are at nine-month lows. Governments and the mainstream media would have us believe that sentiment is positive, confidence is rising and recovery is just around the corner. Hard data, however, present a very different picture. Why have markets and fundamentals de-coupled so much? Sorry, there are no prizes for guessing: excess debt and money printing. In the lead up to the credit crunch in 2008, the developed world essentially reached the limit of its capacity to borrow. Markets have their own very efficient ways of dealing with excessive debt (default, insolvency and write-offs); but governments want to avoid the political, economic and social consequences – not to mention an implosion of the quadrillion-dollar derivatives universe, of whose problems most mere mortals like us are largely unaware. So, in 2008, governments started printing money. So far, they have printed about USD15tn and thrown this liquidity at the world’s insolvency problems, using various pretences such as boosting economic growth or reducing unemployment. The real reason for the money printing has been to fund government deficits, to keep the banks solvent and the system afloat. That US GDP growth turned negative in the quarter after QE to infinity was announced last September was deliciously ironic. But now, the crisis has entered a new phase, which smells of desperation. American QE is now unlimited in size and open-ended in duration. Europe has announced (although not yet activated) a similar programme; and, last month, Japan announced its own open-ended QE programme alongside a fiscal stimulus equivalent to USD225bn. The UK is also considering re-activating its QE programme. As an aside – pardon me for being my usual cynical self – but I had to chuckle when the US announced last month the “temporary suspension” of their debt ceiling. Those were exactly the same two words President Nixon used when he announced in 1971 that he was ending the convertibility of dollars into gold. “Temporary suspension” of the debt ceiling has removed the last statutory restriction on the printing and spending of the US government. Where is all this leading? The problems in Europe so far have centred around the risk of sovereign default. For the US, the UK, Japan (and China), the problem is different. They all have their own currencies and their own printing presses, so the risk of repudiation is negligible. No, the certainty for them is that, sooner or later, if they remain on unsustainable fiscal courses, they will experience a currency crisis – probably in the form of a hyperinflation (a collapse in confidence in a currency caused by printing too much of it). What would be the trigger for such a collapse? Well, that is pretty much the only variable in the equation we do not know. Black swans are by definition difficult (or impossible) to forecast. It could be a political assassination, a default on the COMEX, a bomb dropped on Iran, or any number of other triggers. Perhaps in anticipation of the currency crisis (or capital controls?), it was interesting to see Germany announcing last month the repatriation from Paris and New York of 674 tonnes of its gold reserves; about 20% of the total. 37% of Germany’s total reserves will remain in New York, for the time being. Even more interesting will be whether other countries follow Germany’s example. If they do, the German move will be the most important event in the gold market since President de Gaulle exercised his right to demand gold in exchange for France’s dollar reserves, which led to the collapse of the London Gold Pool in 1968. I wonder whether the currency crisis will arrive before Germany finishes the repatriation in 2020? Most forecasters say we have about two years, plus or minus one year! 3
  4. 4. The Henley Outlook February 2013Hong Kong, Singapore & ShanghaiGlobal OverviewEquities However, in all this desperation lies opportunity. By and large, the money being printed is not being lent to consumers or corporates to spend or invest. Instead, the banks are using it to speculate in the markets, which is why asset prices are inflating even while the economic fundamentals deteriorate. The money being printed in the US, Japan and elsewhere is leaking into asset prices all over the world, and will continue to do so. Unfortunately, this is only a window of opportunity rather than the start of a long-term bull market. I do not know how long the window will stay open (how I wish I did!); but it could be a couple of years, plus or minus a year – if we are lucky! The spectacular QE2 equity- market rally, which began in March 2009, lasted five calendar quarters. Since the money printers have no option but to keep printing, this party could have legs, until that black swan paddles into view! Lastly, lest some of you think I am out of love with gold and silver after all these years, not at all. We still recommend a large core holding with an eye on that currency crisis, but not everybody has the patience for the long game. For some, it’s about the thrill of the chase! Tally ho! Peter Wynn Williams Investment Director 4
  5. 5. Equities Cash & CurrenciesUSD Index (Source: Bloomberg) HENLEY ASSESSMENT Summary Strongly Negative ■■ All eyes were on the JPY at the start of January as Prime Minister Abe’s announced his new monetary policy which focuses on higher inflation and a weaker JPY. This may also impact USD, GBP and EUR over the AUD and NZD due to their roles in carry trades, if JPY weakens, AUD and NZD may gain medium-to-long term against until we start to see higher inflation and rate increases in Japan. Then we may see weakness. a trade-weighted basket of ■■ Over the past few years the SGD has been the new safe haven currency due to the strength currencies given that all of these of the city state’s economy, and also the way the currency is managed. We expect this to currencies are debasing and continue, and in particular, to attract those who previously held JPY. devaluing through significant ■■ The EUR has gained more than 12% against the USD since July, and is now above 11 month quantitative easing. AUD is to highs. remain volatile based around ■■ It has been a very poor month for USD Index too, for the reasons outlined above. the Chinese data. We still ■■ Ultimately, despite the bullish data and the resolution of the fiscal cliff, the US economy is favour SGD as a safe haven, and still far from meeting the Federal Reserve’s conditions for concluding monetary stimulus. The commodity currencies for yield. current unemployment rate is 7.8%, and recovery from this level is expected to be slow. At this rate we don’t expect the Federal Reserve’s target jobless rate of 6.5% to be achieved any time soon. Second, the recent improvements in hiring and home sales suggests that US economy reacts positively to the monetary stimulus – perhaps encouraging this support to be held in place for longer. 5
  6. 6. The Henley Outlook February 2013Hong Kong, Singapore & ShanghaiEquitiesFixed IncomeHENLEY ASSESSMENTNegativeWhile there may be some short-term relief in fixed income fromthe volatility seen in equitymarkets, and also a comparativepositive return when comparedto holding straight cash in theshort term, we are of the opinionthat such short-term relief hasthe potential to come at a costlyprice in the medium to long term.With the developed economiescommitted to the path ofcontinued monetary easing, webelieve that inflation will becomea serious concern in the future.Such an environment would seethe relatively low yields enjoyedby fixed interest over-run by thecost of goods.There may be an argument toseek short-term safety in specific Points of General Interestemerging market bonds but we see ■■ It has emerged that for the first time in 40 years, pension funds hold more of their assets inserious danger in accepting the bonds than shares.debt of the developed economies,both on a sovereign default front(especially within Europe) and on Government Bondsa return vs. inflation front. ■■ Japan plans to cut its reliance on government bonds as Prime Minister Abe tries to demonstrate determination to repair the state’s stretched finances.Also, as the graph below accurately ■■ Portugal returned to debt markets, with the hugely successful sale of EUR2.5bn of bonds duedemonstrates, inflows into bonds Oct17.have become somewhat excessive ■■ The yield on the 10-year US Treasury bond, which affects many other borrowing rates, brieflyand with the allure of dividends popped above 2% for the first time since April 2012 in January.and the current short-term respitefrom the US and Euro debt crisis, ashift from bonds into equities may Corporate Bondsburst the bubble that has been ■■ Sales of corporate bonds in the US dropped 57% in late January and relative yields narrowedgrowing since the global financial as foreign borrowers dominated dollar-denominated issuance.crisis. Offshore Bank Accounts- Best Buys ■■ No Notice Account- Britannia International – 2%pa. ■■ 60 Day Notice- Britannia International- 2.25%pa.6
  7. 7. Property EquitiesHENLEY ASSESSMENT PositivesNeutral ■■ Prime London Central property continues to be viewed as a safe haven investment area. Prices rose 15.3% in 2012, bringing the average property price to GBP1.024m according toProperty prices generally, the Land Registry. Property transactions fell by 9% over the year, which was thought to beafter significant falls in 2009, a combination of owners holding onto their best performing assets and the adoption of astabilised in 2010 and 2011. “wait and see” attitude in the face of further UK government property tax announcements inFurther weakness of property relation to properties owned by “non-natural persons” above GBP2m.prices in many areas is now ■■ In Singapore home prices in Q412 climbed to a record high and prices have now risen for fourapparent in 2012 as economic straight years. As a result the government has just introduced yet more cooling measures toconditions remain difficult. control property price rises. Homebuyers will have to pay between 5% and 7% more in stampProperty values have recovered duty and there is a now a tax of up to 15% for sellers of industrial buildings if properties arein selected areas such as sold within one year.Singapore, Hong Kong and ■■ Recent US housing data continues to be mixed but reflects that the housing market may haveLondon. Additinally we are found a bottom during 2012, after falls of 35% from the 2006 peak. The S&P/Case-Shillerseeing early signs of some 10 and 20 City Indices reflected gains of 3.4% and 4.3% respectively in October 2012 YOY.stability in the US housing However, bank repossessions remain a problem. 59,134 houses were repossessed in NOV12 upmarket. We still consider some 5.4% MOM, as lenders seek to manage the flow of distressed properties without disruptingspecialised property assets such any recovery.as student accommodation to Negativesmerit inclusion in our portfolios. ■■ Land Registry data on average home prices in England and Wales for 2012 reflected a largelyOther than these investments, static market, with an increase of only 0.75% to GBP249,958. Estimates of UK home prices forwe would suggest that clients do 2013 are showing a flat to slightly negative return. All of this reflects the uncertain economicnot invest further at this time. outlook and difficulty in obtaining finance, with the result that the number of transactions is lower. Bank of England data shows mortgage approvals of approximately 54,000 for November 12, which is only about half the monthly average of mortgage approvals for the decade ending 2007, ie, before the financial crisis. ■■ Australian residential property loan applications unexpectedly fell 0.5% MOM in November reflecting reduced demand because of a soft economic outlook. This comes after six central bank interest rate cuts over the last year, with current interest rates matching a 50 year low. ■■ In Europe the housing slump continues with Standard & Poor’s estimating that prices will continue to slide for another two years. House prices in Spain are likely to fall another 7.9% this year and may need to fall an additional 20% or more to clear an overhang of one million homes. Dutch and French property prices are forecast to fall 6% and 5% in 2013 respectively. Germany is the standout market, with home prices expected to rise 3% in 2013. 7
  8. 8. The Henley Outlook February 2013Hong Kong, Singapore & ShanghaiEquitiesEQUITIESUNITED STATES HENLEY ASSESSMENT PositivesNegative on ■■ QE to infinity will inflate asset prices.Fundamentals, ■■ The US Federal Reserve has forecast rates will remain unchanged until at least 2015.Positive on Markets short term ■■ In the long term, demographics and returned energy self-sufficiency bode well. NegativesChances of Congress and the ■■ National debt: USD16.5tn and rising; debt to GDP: 106% and rising. This is absurdlyWhite House addressing the unsustainable.long-term solvency issues of theUS government in a meaningful ■■ QE to infinity promises currency debasement, rising prices and lower discretionary spending.manner remain nil. The changes ■■ Foreigners are buying fewer and selling more US Treasury bonds.required to balance the system ■■ Debt ceiling “temporarily suspended” plus QE to infinity may result in currency crisis in aare too politically painful; so a couple of years.currency crisis within the nextcouple of years seems the mostlikely outcome – especially ifthere is a black-swan event, suchas an assassination, a COMEXdefault or a bomb on Iran,for example. Meanwhile theeconomy continues to bottombounce, fundamentals continueto deteriorate, and marketscontinue not to care, buoyedby a rising tide of confetti (andnothing else).JAPAN HENLEY ASSESSMENT PositivesNeutral ■■ Nikkei touched 10,900 and set for best yearly rise since 2005. ■■ JPY has tumbled 12% in the last three months. USD touched JPY90 as Bank of Japan bowedJapanese has accumulated debts to the pressure for further easing.worth some USD14.6tn, or 230% Negativesof GDP. A quarter of Japan’s ■■ In a joint statement with the government, the Bank of Japan (BoJ) officially introduced abudget now goes to servicing 2% inflation target, replacing its previous price goal of 1%. BoJ also introduced an open-debt. So far Tokyo has done little ended asset-buying plan in 2014, setting monthly purchases at JPY13tn including JPY2tnto change its course. To make for Japanese government bonds and JPY10tn for short-term bills. But stocks and foreignmatters worse, we have seen a exchange markets were disappointed that stimulus does not come sooner.deterioration in the balance oftrade in 2012. Japan had a recordtrade deficit of JPY1,476.9bn inJanuary and has been reportingdeficits of over JPY500bn inrecent months. Japan’s standoffwith China over the disputedislands also contributed todeclines in Japan’s shipmentsto China for six months throughNovember. We doubt if Japanwaiving the debt limit of JPY44tn(USD514bn) for the fiscal yearand targeting higher (2%)inflation are sound economicpolicies in the medium term. Source: Der Spiegel8
  9. 9. EQUITIES EquitiesUNITED KINGDOM HENLEY ASSESSMENT PositivesNegative ■■ The man hand-picked by George Osborne to run the Bank of England has fuelled speculation that he will order a policy revolution to jump-start the stalled British economy. Speaking at theThe UK economy and the World Economic Forum in Davos, the Canadian Mark Carney, who will take over in July, hintedchancellor in particular, have strongly at a new approach when he said that central bankers should be prepared to takeagain had a grim time in the aggressive measures to help economies achieve what he called “escape velocity”.past few weeks. As George, ■■ David Cameron has rebuffed criticism at home and abroad of his commitment to hold aDavid and Boris were munching referendum on the UK’s future in Europe if he wins the next election. In a savvy politicalon fondue in Davos, figures were move, he has neutralised the threat of UKIP, thrown the ball back to the Labour party andreleased showing a contraction significantly increased the Conservatives chances of being reelected for a further term.in the economy, increasing thelikelihood of an unprecedented Negativestriple dip recession. Borrowing ■■ Jim O’Neill, the chairman of Goldman Sachs Asset Management, criticised the chancellor’stargets are also unlikely to be hit, continued pursuit of austerity despite signs that the economy was stagnating, includingwhich raises the probability that worse than expected GDP figures, and that the chancellor risked a lost decade for the Britishat least one of the credit rating economy with low growth and increasing public debt.agencies will downgrade the UK ■■ Figures unveiled on Friday showed that the British economy shrank in the last quarter of 2012.from its coveted triple A rating. If the economy shrinks again in the first quarter of 2012, Britain will be in recession for theThis will be particularly hard for third time since the economic crash of 2008. The government insists that its policy of cuttingGeorge Osborne as he has staked expenditure is the only course available but critics insist that the absence of growth washis political credibility on this. In increasing the deficit rather than cutting it.the short term this is likely to leadto downward pressure on sterling,and this has already dippedbelow the neutral 1.60 mark toUSD.EUROPE EX UNITED KINGDOM HENLEY ASSESSMENT PositivesStrongly negative ■■ The euro zone finance chiefs gave the green light for the payout of EUR9.2bn to Greece this month. Of the funds, EUR7.2bn in bonds are for the further recapitalisation of Greek banks,Financial conditions have improved and EUR2bn in cash are to cover the government’s budget needs.enormously since the ECB promised ■■ Spanish two-year bond yield – one of the maturities the central bank could target – hasto do whatever it takes to preserve plunged from a peak of more than 7% last year to 2.59%. The decline in Madrid’s borrowingthe euro. Yields on the bonds of highly costs also reflects slightly better fundamentals, not just the ECB backstop. The banking sectorindebted peripheral countries have – long the biggest weight around Spain’s neck – is being restructured and recapitalised.fallen sharply, bank funding strains Negativeshave eased and stock markets have ■■ Italy, Spain, Portugal, Ireland and Greece shrank their combined current account deficit torallied. Countries on the southern an estimated 1.5% of GDP in 2012 from 7% in 2008, and look set to balance their externalrim of the euro zone have made big accounts this year. However, this “rebalancing” has been mostly achieved by slashing imports,strides in reducing their budget and more so than increasing exports.trade deficits. They are no longer ■■ The long-delayed bailout of Cyprus is set to be pushed back at least two months amidliving way beyond their means. But mounting disagreement over how to bring down the cost to a manageable level for the debt-demand is likely to remain weak, while laden country. The IMF was insisting on significant amounts of debt relief before it agreed tounemployment, already at a record participate in the programme.11.8%, is forecast to rise further beforeit comes down. Recovery will be slow ■■ The IMF cut global growth forecasts and now projects a second year of contraction in EURand serious risks remain. The euro zone region as progress in battling Europe’s debt crisis fails to produce economic recovery. 7 out ofneeds growth in its major markets 17 euro zone economies are now in recession – others are not far behind.abroad and the political patience tostay the course at home. 9
  10. 10. The Henley Outlook February 2013Hong Kong, Singapore & ShanghaiEquitiesEQUITIESAUSTRALIA HENLEY ASSESSMENT PositivesNeutral ■■ The Westpac Melbourne Institute Index of Consumer Sentiment rose by 0.6% from 100.0 in Dec12 to 100.6 in Jan13. This is the third consecutive month when the Index has been at orDespite recent rate cuts by the above the 100 level. That compares with 14 of the previous 16 months when the Index hadReserve Bank, manufacturing and registered below 100.construction industries continue ■■ Australian consumer prices gained less than economists forecast last quarter on cheaper foodto report weak performance and and health care, pushing down the AUD and giving the central bank scope to reduce interestdeclining business sentiment. rates.Business outlook for sales, profit Negativesand economic conditions worsened ■■ Prices of iron ore may tumble by the end of the year as global supply increases, undermining abetween September and December, rally that pushed the price of the steel-making raw material to a 15-month high.according to a survey of 600 ■■ Fitch warns that Australia risks losing its coveted triple-A credit rating as the nation’s ageingconstruction and manufacturing population drains government coffers. In the same report, it estimates Australia’s public debtfirms compiled by the Australian will explode from 2020 onwards if current productivity and workforce participation remainsChamber of Commerce and static.Industry. Sales and profits haveseen no sign of rebounding sinceearly 2010 and business hiringintentions for the next six monthshave declined to the lowest levelsince the survey began in 1998.It is widely expected expect thatthere is a clear case for at leastone more rate cut in this cycle andthe target has been the February/March “window”, especiallywith the lower consumer prices.ASEAN HENLEY ASSESSMENT PositivesPositive ■■ Singapore will increase spending on population-growth measures by 25%, rolling out incentives ranging from government-paid time off for adoption and paternity leave, to funding for fertilityJapan’s drive to revive growth may treatments. An annual budget of SGD2bn (USD1.6bn) will be set aside for measures includingboost ASEAN as rising demand in state-funded childcare leave, healthcare costs and financial support for housing to marriedthe world’s No. 3 economy spurs couples. The government will pay 75% of the cost of reproduction technology treatments fororders and Japanese companies couples. Those with more than one child will also be eligible for the funding. Singapore will alsotake advantage of cheap funding provide four weeks of government-paid leave for working mothers of adopted children in theto invest in the region. Indonesia, first year as well as introduce a week of paternity leave for fathers.Thailand and Malaysia are ■■ Thailand’s export growth quickened to a 15-month high in Nov12 as factories returned to fullidentified by HSBC Holdings Plc capacity after floods in 2011 and global demand improved. Overseas sales rose 26.9%YOYand Credit Suisse Group AG to be after climbing a previously reported 15.6% in Oct12.among the biggest beneficiaries Negativesof Japanese monetary easing ■■ Singapore’s citizen workforce will begin shrinking in 2020 for the first time in its history, whileand Abe’s JPY10.3tn (USD115bn) land and labour limits will constrain its economic competitiveness.stimulus plan. Lower borrowing ■■ The Philippine central bank will also struggle to manage inflation without sacrificingcosts at home may add momentum competitiveness or economic stability. Its growth is attracting funds that pushed the peso toto plans for overseas expansion, a four-year high in Nov12, even as Bangko Sentral ng Pilipinas lowered rates four times thiswith Toyota Motor Corporation year and introduced measures to curb inflows.announcing in Nov12 it willincrease production in Indonesia. ■■ North Jakarta is still stranded while more than 18,000 have been evacuated from their homes,Japan’s dispute with China over as floods that started 15Jan13 submerge areas of the city. Jakarta accounts for a huge part ofthe sovereignty of islands has also Indonesia’s GDP (16% in 3Q12). Jakarta sits in a low-lying area with 13 rivers and more thanhelped shift Abe’s focus toward 1,400 km (870 miles) of man-made waterways, making it prone to flooding.Southeast Asia and prompted ■■ Rubber production in Indonesia, the second-biggest grower, may drop for the first time incompanies to add investments four years in 2013 as the country limits output and shipments in coordination with otherelsewhere in the region. producers.10
  11. 11. EQUITIES EquitiesGREATER CHINA HENLEY ASSESSMENT PositivesPositive ■■ Potential upside for China stocks, especially A-shares, is huge given the last a few years’We believe the Chinese underperformance and cheap valuation. MSCIeconomy bottomed out in China is still traded at 10.3x forward P/E, which3Q 2012 and a recovery was is far below the historical average of 12.6x.sustained throughout 4Q. Since ■■ Xi Jinping, the newly elected party secretary,September, several positive admitted that official corruption is one of thechanges have contributed to a most serious challenges that the CCP faces. Themodest acceleration in industrial party discussed the anti-corruption campaignproduction. In October and in a recent meeting and decided to use the most Source: Bloomberg Finance LP/Deutsche BankNovember, the raw material effective measures and observe a materialinventory and PMI showed impact going forward.In the long-run, it is definitely an encouraging sign for social stabilitycontinuous improvement. however these actions will likely lead to revenue deceleration in sectors including MacauAlso, demand has recovered gaming, luxury consumption, as well as gift card sales in department stores in the short term.modestly in the past two ■■ While the current real estate policy is unlikely to change, the real demand for property remainsmonths, the rebound in export healthy as urbanisation is expected to speed up in 2013 and affordability has improved. It isgrowth suggested the external certain that the upward pressure on property prices in major cities will benefit mainland realsentiment of developed markets estate developers.turned for the better. Hence, we Negativesalmost have witnessed the “Hard ■■ The key downside risks for the Chinese economy in 2013 include a stalemate on the US debtLanding” of China economy and ceiling, geopolitical risks in the Middle East and an escalation in tensions between China andnow 2013’s cyclical recovery will Japan.be led mainly by investment and ■■ The biggest worry among investors is that China’s banking system nonperforming loansexports. (NPLs) will rise substantially; expectations are that they will continue to rise in the coming two to three quarters, but will peak later in the year.India HENLEY ASSESSMENT PositivesNeutral ■■ To reduce the current account gap, India increased import tax on gold for the second time in 10 months; the figure now stand at 6%.With the Supreme Court’s diktat ■■ With an increase in the diesel price by 45 paise per litre, the government has decided to doto the government of India to away with the subsidy thereby allowing the state-owned oil companies to charge the marketexplain the underlying reasons rate.for the ‘daredevil reforms’ – ■■ Purchasing activity in the manufacturing sector increased for 45th successive month reflectingread foreign direct investments in a healthy PMI of 54.7 in December, compared to 53.7 in November(FDI) in retail – the euphoria Negativesover these recent reforms seem ■■ Reserve Bank of India, the country’s central bank, reduced the benchmark interest rate toto be fading away. Indeed, 7.75% from 8% thanks to the easing of India’s Wholesale Price Index (WPI ) at 7.18% inthe government’s political December 2012 against 7.24% in November.posturing cannot last long sinceit would be imperative for them ■■ India revised their GDP growth to 5.5% for the year ending March 2013, a sharp decline fromto announce populist measures the last 10 years’ average of 7.8%.ahead of the general elections ■■ The ruling Indian National Congress suffered a humiliating defeat in the State of Gujaratscheduled in 2014. and with nine more states going for election this year, speculations are rife about the implementation of some of the unpopular reforms. 11
  12. 12. The Henley Outlook February 2013Hong Kong, Singapore & ShanghaiEquitiesEQUITIESOther Emerging Markets (South Korea, Russia, Brazil) HENLEY ASSESSMENT PositivesNeutral ■■ According to the Economic Development Ministry’s estimates, Russia’s GDP growth for January-November of 2012 was 3.5%With the Brazilian presidential ■■ Park Geun-hye won the South Korean presidential election to become the country’s firstelection due in 2014, officials female leader. She is the daugther of Park Chung-hee, who ruled for 18 years and transformedwill do whatever it takes to meet the country from the ruins of the 1950-53 Korean War into an industrial powerhouse.their forecast of 4% growth Negativesthis year. Further stimulus ■■ Brazil’s official IPCA consumer-price index closed out 2012 at 5.84%, down only slightly frommay come partly in the form a 6.5% advance in 2011. The central bank has an inflation target of 4.5%, with a toleranceof yet more giveaway credits band of two points above and below that, putting the 2011 inflation at the limit.from state banks. But policy is ■■ At the same time that the inflation outlook has worsened, so have growth expectations inalready very loose. The central Brazil. The central bank survey of economists showed a consensus figure for 2013 growth ofbank’s benchmark rate is less only 3.2%, down from 3.26% a week earlier. Growth in 2012 was only about 1.0%.than 1.5% in real terms. Anyfurther stimulus is more likely topush up inflation than growth.Also, the performance of theMSCI BRIC Index lagged behindglobal equities for a recordthird year. This was largelydue to investors’ concern overgovernment interference inmarkets. Mutual funds thatinvest in BRIC nations haveposted USD1.65bn of outflowsin 2012, and this trend willprobably persist in 2013 Source: Nomura, IBGE ■■ Russia is pushing for growth of at least 5% in 2013, up from 3.5% in 2012. Russia has not seen that level of growth since 2008 and official forecasts do not predict that it will be achieved again soon. Prime Minister Medvedev called for more steps to improve the business climate and loosen state control, but so far reforms and the privatisation push are stumbling. ■■ South Korea’s central bank on Friday cut its 2013 growth forecast to 2.8% from a previous estimate of 3.2%, its third downgrade in a year, reinforcing expectations for another interest rate cut in South Korea in the months ahead.12
  13. 13. COMMODITIES EquitiesEnergy HENLEY ASSESSMENT PositivesNeutral ■■ Tension is flaring up in North Africa. ■■ OPEC cut December output to the lowest level since Oct11.We remain Neutral. The Negativessituation in the Middle East ■■ On-going debt concerns in Europe and the challenging fiscal situation in the US may weighremains complicated and the on sentiment.latest flare up of tension in ■■ United States is quickly ramping up energy production in a bid to become energy independentAlgeria and Mali is adding to the by 2020.geopolitical instability. In Syria,the civil war rages on with noend in sight. Chinese GDP camein above expectations which,too, adding some support toenergy prices in the short term.However, our fundamentalassessment remains the same inthat we believe that economicgrowth will face headwinds asnations need to bring debt levelsto a sustainable level. Therefore,we believe energy prices will berange bound for the foreseeablefuture.Precious Metals HENLEY ASSESSMENT PositivesPositive ■■ Signs of shortage of physical silver are appearing. The US mint suspended sales of silver eagles after running out of inventory.We remain strongly positive on ■■ Gold is a good hedge against currency debasement and future inflation.precious metals for 2013 and ■■ Gold and gold mining shares remain an under-owned asset class compared to financial assets.beyond. The case for precious Negativesmetals remains as solid as ever. ■■ Near-term volatility to persistLittle has been done to bringdown excessive debt levels andpolicy makers continue to treatthe crisis like a liquidity problemrather than a question aboutsolvency. In the US, the fiscalcliff was narrowly avoided butthe increases in taxes, aroundUSD60bn per annum, do verylittle to address the annualdeficit which during 2011 ranat more than USD1,000bn.Overall, we continue to see goldand related mining shares askey building blocks in portfoliosoffering a good hedge againstmany of the risks that we see onthe investment horizon during2013 and beyond. 13
  14. 14. The Henley Outlook February 2013Hong Kong, Singapore & ShanghaiEquitiesCommoditiesIndustrial Metals HENLEY ASSESSMENT PositivesNeutral ■■ Currency debasement will support real asset prices. NegativesWe maintain our neutral view on ■■ Growth in China for 2012 came in at a 13-year low.base metals. The world economy ■■ Uncertainties in how Europe and US will tackle their debt burden will weight on confidenceis facing headwinds with China and growth.reporting its slowest growthfor 2012 in 13 years. We seebetter value in other commoditysectors at the moment.Agriculture HENLEY ASSESSMENT PositivesPositive and Negative ■■ UN’s Food and Agriculture Organization estimates there will be over nine billion mouths to feed on the planet by 2050.There are two very different ■■ Middle class consumers in BRIC economies are increasingly demanding more varied andmarkets playing out in the protein-rich foods. As affluence increases, protein from beef, sheep, poultry, pigs, cows andagriculture sector –physical fish may in turn displace grains in diets.and equity. Many physical soft ■■ Urbanisation and life expectancy is expected to increase.commodity prices have exploded Negativesdue to changing global weather ■■ Prices are subject to many uncontrollable risks, eg, weather and natural disasters, politics andpatterns over the past few other pests.months, however these sharpprice increases tend to be followed ■■ Prices are subject to many uncontrollable risks, eg, weather and natural disasters, politics andwith just as sharp falls. With many other pests.soft commodity prices at or near ■■ Due to recent droughtrecord highs we have a negative conditions in the Americanview on investing and encourage Mid-West and Russian Blackprofit taking. On the equity side, Sea regions we have seen corn,the largest weighting funds have wheat and soy prices increaseto this sector is via fertilizer and on average over 50% within aseed companies which have a few months.significantly more important roleto play to increase yield and in thecase of seed companies, inventseed which is tolerant to changingglobal weather patterns. Weremain positive agriculture equity Source: DWSfunds.14
  15. 15. Alternative Investment EquitiesHENLEY ASSESSMENT PositivesNeutral ■■ Hedge fund performance was positive in December. The HFRX Global Hedge Fund Index rose 0.6%, bringing the YTD return to 3.5%.Broadly, hedge fund ■■ In 2012, strategy performance, though mixed, was broadly positive as shown in the chartperformance in 2012 was in right-hand side. The top strategies for the year were Credit followed by Equity Long-short andline with investor expectations. Relative Value.However, consolidation of this ■■ A number of fundamentally-oriented managers reported excellent trading profits in 2012.industry continuously goes on. It Managers with longer-term holding periods and higher conviction positions tended to be theis our long-term expectation that winners as equity moves appeared to depend on value-based metrics.delivery of absolute returns with ■■ In September 2012, the asset under management in the hedge fund industry reached an all-little reliance on market beta will time peak of USD2.2tn. We expect this number will continue to grow in 2013 given the moneyconstantly become the core of printing environment worldwide.hedge fund/alternative investingin 2013. Negatives ■■ The worst-performing strategy was Global Macro. In particular, Managed Futures underperformed as momentum factors failed to materialise across markets in 2012. ■■ Looking ahead, the problems with market timing are still difficult for most of managers. The “risk-on”, “risk-off” dynamics which had plagued Source: FRM Viewpoint Nov managers’ return since 2011 were perceived as a persistent threat through 2013. ■■ With some equity markets up double-digit in 2012, it did make it difficult for investors to decide whether they should leave their money with those manager with unsatisfactory performance. Alpha from manager became a dominant factor which leads the market competition more compelling in 2013.General 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 in Hong Kong. Re-distribution or reproduction in whole or in part of this document by any meansis strictly prohibited and The Henley Group accepts no liability for the actions of third parties in this respect.Funds not authorized by the Securities and Futures Commission may involve more risk and distribution or re-distribution of information relating to such funds to the public of Hong Kong may constitute an offence under the Securities and FuturesOrdinance.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 asto 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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