Henley November Outlook 2012

Monthly Market Outlook
November 2012
Brits of a certain age will remember the children’s television series,
“Stingray,” in whose opening credits a voice intones: “Anything can
happen in the next half hour!” Such a sentiment could equally apply
to the next couple of months.

The Henley Outlook
November 2012
THE WEALTH MANAGEMENT PROFESSIONALS

The Henley Outlook
November 2012

Overview

ASSET CLASS HOUSE VIEW REMARKS

Fixed Income Investment Grade

High Yield
Student accommodation only.
Property

High dividend stocks preferred.
Equities US

Japan

UK

Europe Ex UK

Australia

ASEAN
Broad equity exposure
Greater China including the region preferred.

India

Other Emerging Markets

Commodities Energy

Precious Metals

Industrial Metals
Agribusiness equities.
Agriculture
Selective strategies only.
Alternative Investments

Key: Positive Neutral Negative

The Henley Group Limited The Henley Outlook: 2
An SFC Licensed investment advisor in Hong Kong Hong Kong, Singapore & Shanghai
Suite 2004-08, 20/F, St George’s Building, 2 Ice House Street, Central, Hong Kong
info@thehenleygroup.com.hk www.thehenleygroup.com.hk

The Henley Outlook
November 2012

Global Overview
Stein’s Law: “If something cannot go on forever, it will stop.”
Herbert Stein (USA, 1916-1999)

Brits of a certain age will remember the children’s television series, “Stingray,” in whose opening credits a voice intones:
“Anything can happen in the next half hour!” Such a sentiment could equally apply to the next couple of months. US
Treasuries are at record prices despite massive new supply. The S&P500 index is close to record levels despite disappointing
earnings, earnings guidance and declines in both trading volumes and private-client participation. Nominal interest rates
are extremely low and even negative in some key markets. In real terms, interest rates are negative in many markets.
Sovereign debts continue to pile up, as do the government deficits which cause them. Social unrest over austerity and high
unemployment is growing. Armies and navies continue to mass in the Middle East, and Israel appears to have conducted
a rehearsal for an attack on Iran’s nuclear facilities by dropping four one-ton bombs on an Iranian-run munitions factory
in Sudan. The list goes on and on.

I suspect that, once the American and Chinese leadership questions are out of the way in a few days, we will be in a
position to start making progress, however slow and in whatever direction, with some of these issues.

America will be grappling with the twin devils of its debt ceiling (again) and its “fiscal cliff”, a large predicted reduction in the
budget deficit and a corresponding projected slowdown of the economy if specific laws are allowed to expire automatically
or come into effect at the beginning of 2013. These laws include tax increases due to the expiration of certain tax cuts on
the one hand, and spending cuts, (or “sequestrations”) under the Budget Control Act of 2011 on the other.

Everyone assumes that the debt ceiling will be raised, and the fiscal cliff will be fudged to buy more time. Heaven forfend
that they should actually seek fundamental solutions to fundamental problems. Meanwhile, in October – the first month
of the new fiscal year – America slipped USD195bn deeper in debt; that’s USD262m every single hour.

Also in a few days, the PRC is preparing to hand power to its fifth generation of leadership. There is clearly a really
boisterous competition in progress behind the scenes, with mud flying in all directions, including in that of Premier
Wen and his prosperous family. That the new
leadership may have plans for reform is one thing.
Whether China’s factions and deeply-rooted
vested interests will allow them to be implemented
is quite another.

In Europe, both time and money continue to run
out. Now that the shiny new permanent bailout
fund, the European Stability Mechanism (ESM), is
up and running, Germany has dropped a bombshell,
saying that the fund may not be used to deal with
existing sovereign debt or bank re-capitalisation
needs. This must have been something of a
disappointment to the PIIGS, who appear to have
been hung out to dry and sent back to square one,
as though in a particularly slippery game of snakes
and ladders.


The Henley Outlook
November 2012

With Portugal, Spain and Greece fast running out of cash, Germany is clearly reluctant to refuse outright to rescue its
southerly neighbours. It likes having them in the euro zone so that they can afford Germany’s exports; but the political
realities both at the Bundestag and at the popular levels are that German-taxpayer-funded bailouts are politically
explosive. For Chancellor Merkel to cough up in the current environment would risk her coalition, her government and her
power. So, instead, in the interests of being a good European, Germany will place impossible conditions on bailouts, as
with the ESM, in the hope of making the consequences appear a failing on the part of the supplicant, rather than a lack
of bruderliebe on Germany’s part.

It remains only a matter of time until Greece leaves the euro. Perhaps only a very little time. As a reminder, Greece has
total debt of about USD1.3tn, while patience, money and options appear to be exhausted. Will the ECB and euro-zone
nations relent and agree to a debt haircut, or are the exhaustion and the political risks just too great?

The Spanish are hesitating to ask for a bailout for both the country and its banks. Prime Minister Rajoy does not want to
relinquish sovereignty to Brussels. Who can blame him? Spain is a great country with a proud history. But their regional
debt and banking problems are such that in reality they have no choice. Their true debt to GDP is probably over two
hundred percent. It is only a matter of time for Spain, too.

On a brighter note, I should like to draw your attention to Stein’s Law, quoted above, and to a working paper published by
the International Monetary Fund (IMF) in August: “The Chicago Plan Re-Visited.” If there is one word which encapsulates
the current era of monetary crisis, it is “unsustainable.” Hopefully, the IMF has realised that the crisis cannot go on for
ever and is preparing the ground for when it stops.

The Chicago Plan was first put forward in 1936 during the ferment of creative thinking in the late Depression. It discusses
a return to fully-reserved banking systems, as opposed to the fractional reserve system we have today. Debts could be
wiped out through legislation, using money created by the state to replace bank credit, taking away from the banks the
privilege of creating money out of thin air.

It’s a complex concept to grasp, but perhaps more important than the details of the concept is that the IMF is working on
potential replacements for our current, broken monetary system.

Peter Wynn Williams
Investment Director
pww@thehenleygroup.com.hk


The Henley Outlook
November 2012

Cash & Currencies

USD Index (Source: Bloomberg)

Summary
• The USD was initially weaker on Unlimited QE, recovering slightly on heightened risk aversion shown by a short spike
in VIX index.
• HKMA intervened in the HKD peg with the USD. Introduced in 1983, with the range set in 2005, the HKD needed
weakening to stay in the range against the USD. We are unlikely to see an end to the peg in the near future until full
internationalisation of the RMB.
• Cable (GBP/USD exchange rate pairing) pulled back to 1.59 from a previous high of 1.62 due to slightly better US data.
• AUD still range bound with USD; expectations of a further RBA rate cut were reduced on CPI data showing higher than
expected QOQ inflation.
• EUR has gained against the USD for three months, largely thanks to the QE in the US. This is likely to continue until
ECB start bailing out the PIIGS through their QE.
• SGD stronger against the USD, continuing the trend.
• JPY has maintained its strength, and as a safe haven will continue to attract cash as the USD loses its appeal. This is
not desirable, but continued even after the BoJ increased its Asset Purchase Fund.
• The SGD has seen little change on the month.

HENLEY ASSESSMENT:
Strongly Negative USD, GBP and EUR over medium-to-long term against trade-weighted basket of currencies,
given that all of these currencies are debasing and devaluing through significant QE. We expect the AUD
to remain volatile based around the Chinese data. We still favour the SGD as a safe haven, and commodity
currencies for yield.


The Henley Outlook
November 2012

Fixed Income
Positives
• Spain’s government bonds advanced, pushing 10-year borrowing costs to the lowest in more than six months, after
Moody’s said it would keep the nation’s credit rating at investment grade.
• UK inflation decelerated further from 2.5% in Aug12 to 2.2% in Sep12, the lowest rate since Nov09. It has thus stood
below 3%, the upper bracket of the Bank of England’s inflation target, since last May.
• The commitment from the developed economies to maintain interest rates at historic lows, and the comparative
financial stability within emerging markets, combined with the desire to find ‘yield’, has resulted in some ‘strategists’
labelling certain emerging market bonds as ‘safe havens’.
Negatives
• It has been warned that the sovereign credit rating of the US will be cut as “fiscal theatre” plays out in the world’s
biggest economy. The Congressional Budget Office has warned the US economy will fall into recession if USD600bn
of government spending cuts and tax increases take place at the start of 2013.
• While the short-term view may suggest inflation can be controlled, the medium- to long-term chances of this occurring
are becoming less and less likely with every dollar printed through central bank intervention.
• The announcement in the UK of a consultation on potentially changing the calculation of the RPI would suggest that
the government recognises inflation will be an issue and is following the mantra of ‘if the figures don’t add up, change
the arithmetic’.
• Ultra-low interest rates may persist for a rather long time. As in the case for Japan, its rates have remained stable at
an extraordinarily low level for over a decade. Yet we are concerned about the current dynamic which is not entirely
stable; rates can possibly unwind quickly with history suggesting that the long-term commitment to print money will
eventually result in a stark rise in inflation that once started, can rocket without warning.

Source: www.tradingeconomics.com / UK Office for National Statics

HENLEY ASSESSMENT:
Negative. While there may be some short-term relief in fixed income from the volatility seen in equity markets
and also a comparative positive return when compared to holding straight cash in the short term, we are
of the opinion that such short-term relief has the potential to come at a costly price in the medium-to-long
term. With the developed economies committed to the path of continued monetary easing, we believe that
inflation will become a serious concern in the future. Such an environment would see the relatively low yields
enjoyed by fixed interest over-run by the cost of goods. There may be an argument to seek short-term safety in
specific emerging market bonds but we see serious danger in accepting the debt of the developed economies,
both on a sovereign default front (especially within Europe) and on a return versus inflation front.


The Henley Outlook
November 2012

Property
Positives
• Hong Kong home prices have risen 15% in 2012, and 87% since Jan 09. Prices seem set to go higher as buyers seek a
hedge against rising inflation (which reached 4.2% YOY in July). The Hong Kong Government continues to try and limit
price rises; the latest plan being to tighten lending conditions on second mortgages and also limiting the repayment
period on all new mortgages to 30 years. It is thought that the government will have a low tolerance to any further
surge in home prices, and will very likely impose further restrictions to slow down price increases.
• The Monetary Authority of Singapore has announced further measures aimed at slowing down the rise in residential
property prices. The government has been trying to reign in property prices since 2009. The most recent measures
adopted include limiting all loans to a maximum of 35 years, with loans exceeding 30 years subject to significantly
tighter loan-to-value limits.
• The recent announcements by various governments in terms of further rounds of quantitative easing are likely to keep
interest rates low for an extended period, which will support property prices. Additionally, as we expect this money
printing to be inflationary over time, it will also reduce the value of the mortgage debt owed in real terms.
Negatives
• Many indicators still point to a bottom forming in the US residential housing market. For example, the Standard
& Poors/Case-Shiller 20-city national home price index rose 1.6% MOM in July. The annual rise was 1.2% YOY and
represented the largest 12 month increase since Aug10. There are clearly signs of an improving housing market but
it should also be remembered that bottom forming is not a recovery. The US economy is still shaky and there is low
consumer confidence, which may still cause prices to rise and drop erratically over the next few years.

Sources: S&P/Case-Shiller; FHFA; US Department of Commerce via Federal Reserve Bank of St. Louis

• Rightmove, an online UK property company, has reported a sharp rebound in UK home prices for October with asking
prices rising by around 3.5% MOM to GBP243,162. However, Rightmove suggests that price rises are more likely a result
of the continued shortage of new property supply, as opposed to representing a recovery in the housing market. The
property market, excluding London, remains under pressure as the economy struggles to recover from a double dip
recession, and the euro zone debt crisis drags on. Prospective buyers continue to be put off by big deposit demands
from risk adverse lending institutions, rising borrowing costs and a lack of job security.
• Australian home loan approvals unexpectedly fell 1% MOM in July. This was the most in five months, as high interest rates
and poor sentiment continue to discourage residential property buyers. The Reserve Bank of Australia recently cut interest
rates again. As a result it is hoped that this will encourage buyers, but at present home prices continue to move sideways.

HENLEY ASSESSMENT:
Neutral. Property prices have generally, after significant falls in 2009, stabilised between 2010 and 2012.
Property values have recovered in selected areas such as Asia and London but fundamentals remain weak
elsewhere. However, we still consider some specialised property assets (such as student accommodation/
ground rent income) to merit inclusion in our portfolios. Other than these investments, we would suggest that
clients do not invest further at this time.


The Henley Outlook
November 2012

Equities
US
Positives
• The US economy remains highly flexible, resilient and leads world in technology and innovation.
• The Federal Reserve has forecast rates unchanged until at least 2015.
• In the long term, demographics and returned energy self-sufficiency bode well.
Negatives
• National debt is at USD16.2tn and rising; debt-to-GDP is at 105% and rising. This is absurdly unsustainable.
• QE to infinity promises currency debasement, rising prices and lower discretionary spending.
• Labour force participation rate is at a 30-year low of 63.5%.
• Political system is dysfunctional, fiscal cliff and debt ceiling to be negotiated in short term.

HENLEY ASSESSMENT:
Negative. There is a growing risk that QE3, by debasing the currency, will trigger a massive dollar selling crisis
and begin the process of a rapid upturn in domestic consumer price inflation. The QE3 boost in asset prices
was over as soon as the QE3 announcement was made. The disconnect between confetti-soufflé asset prices
and an economy at stall speed is startling. As during QE1 and QE2, broad economic activity remains likely to
bottom bounce for the foreseeable future.

JAPAN
Positives
• Strong JPY is backing corporates in mergers and acquisitions overseas. Softbank has agreed to take over Sprint, the
third-largest US mobile carrier, for USD20.1bn. It is the largest ever foreign acquisition from Japan. JPY hit a post-war
high of JPY76 vs USD in February and remains at around Y80 level.
Negatives
• Bank of Japan stepped up its asset buying programme
with a further JPY11tn (USD138bn). It is the second
month in a row BoJ acted upon concerns over Japan’s
persistent deflation.
• Japan’s economy seems to be losing its steam. GDP in
Q2 grew by an annualised 0.7%, half of government’s
initial estimate.
• Nikkei 225 Average erased some of earlier gain and
returned 4.6% year-to-date. Apparently, investors are
not keen – even Japanese stocks are trading near or
below book value.
Sources: Bank of Japan, Moody’s Analytics

HENLEY ASSESSMENT:
Neutral. Reuters Tankan survey reported business sentiment worsened and the risk of recession is rising.
Many large manufacturers are cutting production due to slower global demand. Lacklustre job market is also
dragging down its services industry. The economy remains on the edge of deflation, with core consumer prices
falling 0.3% year-on-year in August. Bank of Japan’s 1% inflation target is still distant given falling prices in
clothing, food and household goods.


The Henley Outlook
November 2012

UK
Positives
• It’s official – Britain is no longer in recession. The economy grew more rapidly than expected in the third quarter of
the year, rising by 1% rather than the 0.6% everyone had expected. Of course, these figures probably over-exaggerate
the bounce, just as earlier figures over-exaggerated the decline. The growth is virtually all assigned to isolated factors
such as the summer Olympics.
• Investors in UK stock market listed companies enjoyed a record GBP23.2bn total dividend payouts in the third quarter.
Capita’s quarterly dividend monitor reveals that the payout is up 10.4%on last year, although underlying growth has
started to slow.
Negatives
• George Osborne’s drastic deficit-cutting programme will have sucked GBP76bn more out of the economy than he
expected by 2015, according to estimates from the International Monetary Fund. In a huge about turn, Christine
Lagarde, the IMF’s managing director, recently caused consternation among governments that have embarked on
controversial spending cuts by arguing that the impact on economic growth may be greater than previously thought.
• Adair Turner, chairman of the Financial Services Authority, said that the Treasury should have pumped even more into
Britain’s banks during the credit crisis to leave them in a stronger state. “The recovery from recession has been far
slower than most commentators and all official forecasts anticipated in 2009,” he said. “That reflects our failure to
understand just how powerful the deflationary effects created by deleveraging in the aftermath of financial crises.”

HENLEY ASSESSMENT:
Negative. There is no doubt the average person in the UK is hurting, as a combination of nonexistent wage
increases and higher-than-targeted inflation has led to a drop in “real” and disposable income. There is “reason
for some optimism” for the UK economy, the Bank of England’s deputy governor Charlie Bean has said. He
cautioned against “getting over-excited” after new GDP data showed the recession was over - pointing out
the Olympics had given a one-off boost. But Mr Bean said there were “signs of progress” from the euro zone,
and banking crises and inflation should be lower.

EUROPE ex UK
Positives
• The yield on Spanish 10-year bond plunged by 26bp to 5.55% after Moody’s left Spain’s rating unchanged at the
investment grade of Baa3 due to expectations that Spain would benefit from the ECB/ESM bailout program.
• The EU will seek to agree on a framework that makes the ECB the main supervisor by 1st January. The new system,
intended to break the link between banks and governments at the root of the region’s financial crisis, will phase in over
the next year and could cover all 6,000 euro zone banks by 1Jan14.
Negatives
• Spain’s debt rating was cut to one level above junk by Standard & Poor’s, which cited mounting economic and political
risks as the government considers a second bailout. The country’s rating was lowered two levels to BBB- from BBB+.
• Bad loans in Spanish banks as a proportion of total lending jumped to a record 10.5% in Aug12 from a restated 10.1%
in Jul12 as EUR9.3bn of loans were newly classified as being in default. The ratio has climbed for 17 straight months
from 0.72% before Spain’s property boom turned to bust.

HENLEY ASSESSMENT:
Strongly negative. The misleading impression has been created by Mario Draghi, who stated that he will
lend freely to countries in trouble, driving interest rates down. This has led to strong opposition from the
Bundesbank. For ECB lending to materalise, a country must first accept tough austerity conditions and which
European politician will allow that? Above all, the ECB can provide liquidity, but this does nothing to improve
the solvency of states. The euro zone periphery is effectively bankrupt, and the EU policy of austerity is
making things worse, especially in Greece.


The Henley Outlook
November 2012

AUSTRALIA
Positives:
• Interest rates are falling and the RBA cash rate is now at a lowly 3.25% (and likely to fall further). Lower domestic
interest rates should prompt more domestic investors to put their money to work in ‘riskier’ assets, like shares and
property, rather than cash.
• A cut in Chinese interest rates, giving the Chinese government more room to stimulate the economy. Global commodity
markets are highly dependent on Chinese demand.
• Government finances are rated triple-A and the budget deficit is relatively small.
Negatives:
• Average debt levels of households.
• Exposure to base metals sector and reliance on trade with China for this falling consumer spending.
• Share market is more than 40% below highs of 2007 (though this can be seen as a positive!).

HENLEY ASSESSMENT:
Positive for clients with a long term view and who are prepared to accept short term volatility. Investors in
Australia should heed this warning from the chief investment officer of the USD53bn fund manager First Trust
Portfolios, Robert Carey: “Individual investors tend to get in when the markets are red hot and they tend to get
out when the markets are at the bottom,” he said. “It’s been one series of issues after another, but, ultimately,
fundamentals will weigh out and overwhelm any sentiment that people have.” And by that time, much of the
early profits will have been made. Trying to time the market – successfully – is immensely difficult. I’m yet to
see evidence it can be done in a repeatable way. Instead, riding the market’s waves has successfully provided
returns of between 9% - 11% per annum (with dividends reinvested) over the last century. Lumpy, bumpy and
uncomfortable waves, I’ll grant you, but a rate that has provided impressive compound returns over time.

ASEAN
Positives:
• Thailand’s central bank voted to cut interest rates to 2.75%, adding to evidence Asia’s outlook has worsened and
supporting a government push to shore up growth. Thailand’s exports have slumped as a growth slowdown in China
and austerity measures in Europe hurt demand for Asian goods. Singapore’s central bank this month refrained from
policy easing as elevated inflation trumped worries about a shrinking economy.
• Malaysia maintained borrowing costs for an eighth meeting in September and has refrained from joining its neighbors
in cutting rates this year. Bank Indonesia kept its benchmark rate unchanged at a record-low 5.75% for an eighth
month in October.
Negatives:
• Inflation is likely to accelerate in the coming months due to rebounding food prices, strong credit growth, and loose
monetary policy.
• Price gains in Indonesia surged to an 11-month high in August before easing last month.
• Thailand’s economy expanded 4.2% in the second quarter from a year earlier, after growing a revised 0.4 % in the
previous three months. Inflation accelerated to a six-month high of 3.38% in September.

HENLEY ASSESSMENT:
Neutral. Domestic demand so far is very strong and caused by domestic consumption and investment.
Consumption increased, partly because of the higher income generated by general good conditions in
employment and partly as a result of some stimulating packages set up by the government. And we can see
that the governments have started using fiscal or monetary policies to maintain the confidence. As a result,
inflation is very likely to accelerate in the coming months, which in turn reduces policy options.


The Henley Outlook
November 2012

GREATER CHINA
Positives
• China’s trade data for September is better than expected with export growth surprises on the upside. Export growth
picked up to 9.9% YOY in September, up from 2.7% YOY in August, beating consensus estimate of 5.5% YOY.
• China CPI inflation fell to 1.9% YOY in September, in-line with market expectation.
• China’s fixed asset investment growth picked up from 19.4% YOY to 23.1% YOY in September.
Negatives
• China has reported the 3rd quarter GDP, which grew 7.4% YOY. This is the slowest in years, but given the consistently
disappointing data throughout the year, this has surprised nobody.
• Electricity consumption/production data dropped further below 6% YOY. It suggests that even though you can say a
lot about China shifting towards services and China suddenly becoming much more energy efficient, most people still
question why growth is not a bit lower.

HENLEY ASSESSMENT:
Neutral. Although the September trade data provided some surprises on the upside, even this good number is
actually very weak when compared with previous years. With only two months left of the year, no matter how
large this round of Christmas orders is, the possibility of meeting the full-year target of 10% growth in total
trade is very small. We still remain cautious on the outlook for China and the region. However further political
intervention is expected to help the underlying economy after the congress meeting in November.

India
Positives
• Industrial production in August increased by
2.7% YOY. Industrial production was 0.4%
during April to August this year.
• The Government of India has cut the withholding
tax on rupee-denominated infrastructure bonds
from 20% to 5%.
• New reforms were announced by the government
on 4th October - 26% FDI will now be allowed
in pension whilst the cap on FDI in insurance is
raised from 26% to 49%.
Negatives Source: www.tradingeconomics.com / Ministry of Statistics and Programme Implementation

• CPI (Consumer Price Index) for September
jumped to a nine-month high of 7.81%.
• FDI dipped by 20% to USD2.26bn in August 2012 compared to August 2011. This is expected to increase the pressure
on India’s balance of payments.
• Contrary to the widely anticipated interest cuts during its half-yearly monetary policy decision on 30th October, the
country’s central bank, RBI (Reserve Bank of India) kept the interest rate unaltered at 8%.

HENLEY ASSESSMENT:
Neutral. The pace of price rise in India is the fastest amongst emerging markets. Despite the recent ‘big bang’
reforms, the inflationary pressure has left little room for the RBI in monetary policy easing. The central bank is
still awaiting a “little more detail” for the government’s roadmap for implementation of these fiscal reforms.


The Henley Outlook
November 2012

Other Emerging Markets (South Korea, Russia, Brazil)
Positives
• Brazil reduced its benchmark interest rate for the 10th straight time as government officials increased stimulus to
spur economic growth in the world’s second-largest emerging market. Policy makers led by central bank president
Alexandre Tombini cut the Selic rate by a quarter-percentage point from its previous record low to 7.25%.
• The Bank of Korea (BOK) cut its base interest rate from 3% to 2.75% for the second time this year in a move designed
to shore up Asia’s fourth-largest economy.
Negatives
• Brazil’s inflation quickened in Sep12 for the third straight month to 5.28% as food and beverage costs jumped the
most since Dec10. Concerns about the struggling economy will prevent policy makers from meeting the central bank’s
4.5% inflation rate target for the second year in a row.
• Corporate bonds in Brazil are becoming more vulnerable to losses than in any major developing nation as companies
exploit record-low borrowing costs to sell the longest-dated overseas debt in three years.
• The slowdown in the Russian economy is now more evident, with data showing industrial output rising just 2% in
Sep12, down from 2.1% in Aug12 and short of market forecasts of 2.2%. However, with inflation still high with a 6.6%
rise in consumer prices in the last month, the central bank won’t be cutting rates anytime soon.

Source: www.tradingeconomics.com / Federal State Statistics Service

HENLEY ASSESSMENT:
Neutral. Of all the major developing nations, Brazil perhaps gives investors most cause for concern. Its GDP
growth in recent years has been below that of India and China, and a populist and interventionist tradition
in government has left the country with unusually high taxes, a relatively high minimum wage compared to
its peers, and potentially troublesome pension and benefit entitlements for public sector workers. Nationalist
policies in some key industries, notably energy, have tended to slow and complicate investment programs.
The country may also be more vulnerable than the other BRICs to fluctuations in the prices and demand for
commodities, an area which financed its recent growth.


The Henley Outlook
November 2012

Commodities
Energy
Positives
• Continued sabre rattling in the Middle East.
• More monetary easing will benefit real assets, including energy.
Negatives
• Ongoing debt concerns in Europe and a slowdown in China make the demand situation highly uncertain.

HENLEY ASSESSMENT:
We remain neutral. The lack of clear progress in negotiations between Iran and the West continues and the
US has sent additional aircraft carriers to the Persian Gulf. On the other hand, we are facing a very uncertain
demand picture. OPEC warned recently that next year’s oil demand faces “considerable uncertainties” that
could lower its 2013 demand growth estimate by as much as 20%. To conclude, we favour other commodities
less sensitive to economic growth risk.

Precious Metals
Positives:
• Gold and silver are a good hedge against financial instability.
• Monetary easing continues unabated across the globe.
Negatives
• Prices could come under short-term pressure as some investors take profits.
• Labour conflicts in South Africa hurt producers’ output.

HENLEY ASSESSMENT:
We remain strongly positive on precious
metals. Monetary easing has set the tone of
policy response not only in the developed part
of the world but also in developing nations. The
People’s Bank of China recently continued to
inject money into the money market, aiming to
lower domestic borrowing costs for companies
grappling with the country’s slowest economic
growth since the financial crisis. Ongoing
debasement of currencies will provide strong
support to precious metals, which in essence
is an alternative currency that cannot be
printed in unlimited quantities. We continue
to see gold and silver, and associated mining
shares, as key assets in portfolio management
to hedge against the many uncertainties that
are facing investors of today.


The Henley Outlook
November 2012

Industrial Metals
Positives
• Currency debasement will support real asset prices.
Negatives
• Economic problems in Europe and US are far from resolved.
• Chinese GDP growth for Q3 slowed to 7.4% from 7.6% in Q2.

HENLEY ASSESSMENT:
We maintain our neutral view on base metals. Given the economic headwinds in China and the associated
slowdown in GDP, it is difficult for us to be bullish on base metals at the moment as China is such an important
demand factor.

Agriculture
Positives
• The 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 BRIC economies
are increasingly demanding more varied and
protein-rich foods. As affluence increases
protein from beef, sheep, poultry, pigs, cows and
fish may in turn displace grains in diets.
• Urbanisation and life expectancy is expected to
increase.
Negatives Source: The Fertilizer Institute
• Prices are subject to many uncontrollable risks,
eg, weather and natural disasters, politics and
other pests.
• Due to recent drought conditions in the American Mid-West and Russian Black Sea regions we have seen corn, wheat
and soy prices increase on average over 50% within a few months.

HENLEY ASSESSMENT:
Positive and Negative: There are two very different markets playing out in the agriculture sector: physical and
equity. Many physical soft commodity prices have exploded due to changing global weather patterns over
the past few months. However, these sharp price increases tend to be followed with just as sharp falls; there
is a very seasonal and cyclical pattern with these movements. Currently with many soft commodity prices
at or near record highs we have a negative view on investing at these levels and encourage profit taking. On
the equity side, the largest weighting funds have to this sector is via fertilizer and seed companies. These
industries are having a significantly more important role to play to help increase yield and in the case of seed
companies invent seed which is more tolerant to changing global weather patterns. We remain positive on
agriculture equity funds.


The Henley Outlook
November 2012

Alternative Investment
Positives
• Hedge funds posted positive returns in September and the
HFRX Global Hedge Fund Index rose 0.4% for the month.
• Most equity-related strategies were able to post a
positive performance in September, owing especially
to the equity market rally leading up to the Federal
Reserve’s announcement. Many equity managers had a
modestly increased directional bias coming into October
and increased long positions in a measured way during
the month.
• MSCI World 30-day volatility declined over 21% in
September, ending the month at 11.29. There was no
change in gross fundamental equity exposure, ending
Source: Deutsche Bank Global Prime Finance Risk
the month at 236%, although net equity exposure was up
5.66% ending September at 47%.
Negatives
• The worst returns, for a second consecutive month, came from Managed Futures/CTA funds. The major detractors for
the month were exposure to bonds, energies and grains.
• The recent “risk on” market moves have been policy driven rather than attributable to any marked improvement in
the fundamental backdrop. Obviously, the political situation across regions is still no better. Therefore, hedge fund
managers have to cautiously position their trading book so as to hedge the “tail risk”.

HENLEY ASSESSMENT:
Cautiously positive. Looking ahead, the structural changes to the competitive landscape are beneficial to
hedge funds, particularly those engaged in liquidity provision of some form. The current environment is not,
however, congenial for all hedge fund strategies. There are problems in CTA space given market direction is so
changeable and the lack of trading volume.

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
in Hong Kong. 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.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 Futures
Ordinance.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.


Henley November Outlook 2012

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