The Henley Group's Market Outlook June 2013

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The "Henley Market Outlook" gives our current assessment of the six Henley asset classes. For more information please email ts@thehenleygroup.com.hk

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The Henley Group's Market Outlook June 2013

  1. 1. Henley Market OutlookJune 2013Hong Kong | Singapore | ShanghaiTHE WEALTH MANAGEMENT PROFESSIONALSWhen it gets serious,you have to lie
  2. 2. The Henley Outlook June 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 KellyPartnerGeorge 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. 3. Equities3“May you live in interesting times.” Well, we all know there is no shortage of interesting thesedays. What there is a shortage of, however, is honesty – honesty in our politicians, our mainstreammedia, our financial institutions, our markets and our regulators – to name but a few. As assetallocators, we are left as best we can to see through the smoke and mirrors and offer prudentadvice to our clients.At a conference in April, 2011, Jean-Claude Junker, President of the Eurogroup of ministers, saidinto a microphone (referring to touchy economic subjects): “When it gets serious, you have to lie.”Referring to Europe’s debt crisis, he once also said: “We all know what to do, we just don’t knowhow to get re-elected after we’ve done it.” Since he is the longest-serving democratically electedcurrent head of any government in the world, I guess he has not been doing what needs to bedone for a long time. But I digress.One of the biggest lies doing the rounds at the moment is the idea that the US Federal Reservecan “taper” or exit its quantitative easing (QE) program. Last month, both the InternationalMonetary Fund and the Bank of International Settlements (BIS) issued reports saying that therisk/return profile of QE was no longer in its favour and that the risks of continuing were growing.The BIS even went as far as to say in effect that QE does not work. These reports follow theFederal Reserve’s own report, “Crunch Time,” published in February, which said that rising bondyields could wipe out the Federal Reserve’s capital base many times over, and that the risks wouldgrow substantially if QE continued into 2014.It was against this backdrop that Federal Reserve Chairman Bernanke testified to Congress lastmonth. As far as I could tell, he said the Fed may begin to “taper” or they may instead choose toincrease the size of QE. It could be soon but maybe not. It would be “data dependent,” althoughthose data may be the unemployment rate or GDP or CPI or something else. When the Fedeventually decides to “taper,” they may then decide to reverse course depending, again, onvarious factors that no one can clearly articulate because there is no consensus view as to how tomanage this phase of the monetary experiment. Sir Humphrey would have been weeping tearsof pride!The Fed knows it is trapped and cannot exit QE without precipitating precisely the disorderlycollapse to which QE was supposed to be the solution. As soon as the market detects any whiffthat the flow of freshly-printed confetti will diminish or stop, bubbles will pop left, right andcentre as everybody else rushes to sell before bond yields rise any further and before equitymarkets crater. A bad thing.Meanwhile over in Japan, they expect us to believe that their bold monetary experiment willlead them to the Elysian Fields and not to bankruptcy. Given the government’s commitment toincrease the rate of inflation from the current rate of minus 0.9% per annum to plus 2% (and todouble the size of the monetary base) in two years, it is logical to expect bond yields to rise tobetween 2% and 3%.As the Texan hedge fund manager, Kyle Bass, said recently, the rational thing to do would be tosell. There is an awful lot of selling to be done: there are about one quadrillion yen worth of bondsout there – most of them held by Japanese institutional and retail investors. Japanese banks, thelargest of them on a par with some of America’s largest, hold bonds worth about 900% of theircore capital. If the yield on the Japanese national debt rose to 2.8%, then the cost of servicingthat debt would equal 100% of Japanese tax revenue. Has your mind boggled yet?!Global OverviewPeter Wynn WilliamsInvestment Directorpww@thehenleygroup.com.hk
  4. 4. EquitiesThe Henley Outlook June 2013Hong Kong, Singapore & Shanghai4Global OverviewPeter Wynn Williams Investment Director TheChargeOfTheYenBrigadeCannon to right of them,Cannon to left of them,Cannon in front of them Volley’d and thunder’d;Storm’d at with shot and shell,Boldly they rode and well,Into the jaws of Death,Into the mouth of Hell Rode the six hundred.Alfred, Lord Tennyson, Poet Laureate,1854.There appears to be no turning back. Given Japan’s commitment to raising bond yields, its debttrajectory, its ageing demographics and shrinking tax base, it is hard to see how Japan can avoiddefault, probably in the form of a hyperinflation – just like the last time it tried something similarin the 1930s. The Japanese government is aware of the risks but, after twenty years of deflation,believes there is no choice. Now that’s a dilemma with some big pointy horns!In just one week at the end of last month, the yield on the ten-year Japanese government bonddoubled to 1%. That may not sound like a big deal, but the last time the world saw a bond marketcrash, in 1994, it was caused by a rise in bond yields of “only” 50%. So it is by no means a surpriseto see volatility of the kind we have recently seen in Japanese markets. Expect more, and worse.Into the valley of death rode the six hundred!Gold mining funds are already there. Sentiment is bearish to an extraordinary degree. Inrecent months, investors have preferred to invest in the mirage of economic recovery and astrengthening dollar, leaving the gold-mining funds to plunge. It feels extremely unpleasant forthose who have bought in the last couple of years; but these are the sorts of bargain-basementopportunities which the sector sometimes provides for long-term investors. Looking forward,the fundamentals have not changed. Patience will be rewarded, but it is ironic that we have toendure so much short-term volatility to secure our long-term peace of mind.
  5. 5. Equities5HENLEY ASSESSMENTNegativeMostly 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■■ 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. Expectations are that the current gradual appreciation policywill continue as it is.Cash & Currencies
  6. 6. EquitiesThe Henley Outlook June 2013Hong Kong, Singapore & Shanghai6Points of General Interest■■ US investors will pull an estimated USD1tn — or 13.5% of US assets professionally managedin fixed income — out of core, core-plus, government and fixed-income index funds over thenext three to five years because of fears over rising interest rates, according to Casey, Quirk& Associates.Government Bonds■■ ECB head Mario Draghi is defending a central bank program that has been credited withcalming market turmoil over the continent’s debt crisis, ahead of closely watched hearingsin a court challenge to the program in the second week of June with Germany’s Bundesbankbeing one of the most outspoken critics of this policy.■■ In the last week of May13, Italian bonds advanced, with 10 year yields dropping from a six-week high, after the nation met its target amount at a debt auction, signaling higher demandfor the securities.■■ The US Treasury stopped re-investing in a retirement fund, a major step in its efforts to avoidexceeding the debt ceiling, according to a letter to lawmakers from Treasury Secretary JacobLew.■■ On May 23, the yield on ten-year Japanese government bonds touched 1%, three times higherthan before the BoJ’s April announcement of shock and awe and on the same day Japanesestocks plunged, with the Nikkei 225 index dropping by 7%.Corporate Bonds■■ Global bond markets posted their biggest monthly losses in nine years in May as the USDrallied and stocks reached record highs amid speculation a strengthening US economy willallow the Federal Reserve to reduce its monetary stimulus.Offshore Bank Accounts- Best Buys (at the time of writing)■■ Interesting to note that these rates are steadily dropping which is an indication that generalconsensus is that rates in the UK will remain flat or even go lower under the new BoE regimeunder new incoming governor, Mark Carney.■■ No Notice Account- Britannia International – 2%pa■■ 60 day Notice- Britannia International- 1.75%paFixed IncomeHENLEY ASSESSMENTNeutral/NegativeWhile 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 inthe future. Such an environmentwould see the relatively low yieldsenjoyed by fixed interest assetsover-run by the cost of goods.There may be an argument toseek short-term safety in specificemerging market bonds but we seeserious danger in accepting thedebt of the developed economiesboth on a sovereign default front(especially within Europe) and on areturn vs inflation front.There is also potential in the shortterm for growth within these assetsas retail investors look to hedgetheir equity exposure through fixedinterest investments; sadly thisis probably not the safe locationthat economic text books suggestand could well be the catalyst foranother global economic crisiswhen investors begin to believethat the current debt levels areutterly unsustainable.It is for this reason that we areneutral on these assets in the veryshort term but strongly negative inthe long term.Source: Japan Department of Treasury
  7. 7. Equities7Positives■■ According to Hometrack, London homes changed hands at the fastest pace since 2007, at anaverage of 4.6 weeks, with prices also rising 0.7% MOM. Investors from regions such as theMiddle East and the euro area continue to drive residential property prices up as they seek ahaven from economic and political unrest at home. Foreign money seems to regard Londonproperty as an appropriate place for investment during a crisis.■■ In the US, Bloomberg reported that the medium price of existing homes rose 11.8% YOY (fromUSD164,800 to USD184,300), the most since November 2005. The upward trend in prices islikely to continue due to factors as a lack of supply, high demand, low prices and record lowmortgage rates.■■ In Singapore, home sales rose to 2,793 in Mar13, rebounding from a 14-month low of 712sales in Feb13 and the highest since the Urban Redevelopment Authority started releasinginformation in Jun07. As a result, there is concern that the government could introduce aneighth round of cooling measures (the last round of curbs in Jan13 included an additionalincrease in homebuyer stamp duty of 5% to 7%; the total stamp duty cost for foreignersto purchase residential property is now 18%). However, it is worth bearing in mind that thehousing supply will be doubled in 2013 from 2012, which may limit price rises, although thelow interest rate environment and global liquidity will also continue to support prices.■■ In Australia, confidence is returning to the residential property market after several interestcuts by the RBA. Westpac reports that its index of house price expectations (meaningexpectations of house price rises less falls), has risen from 26.7% in Jan13 to 53.9% in Apr13,the highest reading since 2010.Negatives■■ In Hong Kong transaction volumes for residential and commercial property have fallen steeplyafter some banks raised interest rates on mortgages and also as a result of the latest anti-speculation measures effective from Feb 13. Sales of second-hand homes have fallen 70%and prices by 5% so far. Under the new measures, the stamp duty payable by most buyers ofproperty valued in excess of HKD2m has doubled. This change was in addition to the 15% taxlevied on non-local and corporate property buyers that came in at the end of 2012. As a resultof the government actions to curb property prices, Savills have predicted a 20% fall in prices.■■ In the UK, home sellers have raised asking prices for a fourth consecutive month for a totalincrease of 6.9% amid a shortage of homes for sale. Rightmove reports that home prices rose2.1% MOM, and 0.4% YOY. Although the scarcity of homes for sale is supporting prices, thevery slow economic growth in the UK is masking weak demand in many areas. As a result ofthis the UK government pledged GBP3.5bn of loans, plus GBP130bn of loan guarantees in theMar13 budget to spur housebuilding and assist residents struggling to afford a home.Source: U.S Housing AffordabilityPropertyHENLEY 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. Propertyvalues have, however, recovered inselected areas such as Singapore,Hong Kong and London. AdditionallyweareseeingsignsofarecoveryintheUS housing 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.
  8. 8. EquitiesThe Henley Outlook June 2013Hong Kong, Singapore & Shanghai8Positives■■ Japan’s economy grew faster than expected in Q1. GDP grew at annualised rate of 3.5% onthe back of private consumption and rise in exports after aggressive monetary and fiscalstimulus. Gain is mainly a result of improved expectations behind rising domestic demand.Negatives■■ Abe has yet to deliver structural reforms promised as part of his three-pronged growthstrategy. A high support in the July upper house poll would help his bid for an economic reformin Japan.EQUITIESUNITED STATES JAPAN HENLEY ASSESSMENTNegativeChances of Congress and the WhiteHouse addressing the long-termsolvency issues of the US governmentin a meaningful manner remain nil.The changes required to balance thesystem are too politically painful,so a currency crisis within the nextcouple of years seems the most likelyoutcome, especially if there is a black-swan event, such as an assassination,a COMEX default or a bomb on Iran.Meanwhile the economy continuesto bottom bounce, fundamentalscontinue to deteriorate, and markets– for the time being – continue notto care, buoyed by a rising tide ofconfetti (and nothing else). Better tobe out of this market a long time earlythan one minute late.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 continue to disappoint almost across the board.■■ QE to infinity may result in a currency crisis in couple of years.HENLEY ASSESSMENTNeutralTopix Index (TPX) shares tumbled3.8%, a week after plungingdown 6.9%, the most since Mar11earthquake and tsunami. TPX gainsover past six months pared to 45%,from as much as 63% earlier inMay. Sliding prices in stocks andrising yield in Japanese GovernmentBonds (JGB) raise the stakes for theprime minister’s restructuring plan asofficials sought to sustain confidence.  IHS Global insight and wells Fargo Securities, LLC
  9. 9. Equities9UNITED KINGDOM EUROPE EX UNITED KINGDOM EQUITIESHENLEY ASSESSMENTNeutralWhilst there has been slightly morepositive macro news for the UKeconomy this month, the major storyhas been the GBP5bn bid the watercompany Severn Trent received andrejected, stating it undervalued thecompany. This bid actually valued thecompany at 20 times earnings, andshows how desperate investors arefor yield. The potential takeover camefrom a consortium of the state ofKuwait’s investment arm, a Canadianinfrastructure investor and one of theUK’s largest pension funds, all lookingfor long-term inflation linked returns,exactly what water companies offerand exactly what UK Gilts do notoffer in the current environment. Thistype of activity could help to drive theFTSE much higher than its currentposition.Positives■■ Bank of England Governor Mervyn King declared a UK recovery is now “in sight” as hepresented his final forecasts with an improved outlook for the economy. “Of most significancetoday is that there is a welcome change in the economic outlook,” King said as he presentedhis 89th press conference at the central bank in London. “This hasn’t been a typical recession,and it won’t be a typical recovery.” King said that the more optimistic outlook on economicgrowth and inflation was the first such improvement he has been able to forecast since thefinancial crisis struck.Negatives■■ High inflation has cost the UK economy GBP10bn over the last three years, says an influentialreport. And with inflation averaging 3.5%, instead of the government’s target 2% rate, highinflation will remain “a permanent fixture”, says the Ernst & Young ITEM Club. This has had a“corrosive impact on the UK economy”, the report concludes, as household spending powerhas shrunk. The group does not expect inflation to dip below 2.5% before 2017. Consumershave been struggling to cope with food prices that have risen 40% since 2007, as well as risingfuel and education costs, whilst real take home salaries have simply not kept up this pace.HENLEY ASSESSMENTStrongly negative“It’s like opening the windowsin a convertible when the top’salready down”. That is howone market commentator hasdescribed the ECB’s widelyanticipated rate cut. Welcome,maybe, but unlikely to bring a bigchange in the weather for theperiphery economies currentlylocked in the boot. Official figuresshowed the euro zone is now inits longest recession on record.Nine of the 17 EU member states,including Spain, are mired inrecession. As a whole, the eurozone economy contracted for itssixth straight quarter betweenJanuary and March, shrinking by0.2%.Positives■■ ECB lowered its benchmark interest rate to 0.50% from 0.75%, the first cut in 10 months. Itsaid it was “ready to act if needed”, should more be required to boost the euro zone’s economichealth. The ECB also extended its cheap loans to banks until at least July 2014.■■ Mario Draghi stated that the ECB was “technically ready” to take the interest rate on itsdeposit facility into negative territory – in other words, to charge banks to park their cash withthe central bank.Negatives■■ Euro zone GDP fell 0.2% in 1Q13, after a 0.6% drop in the previous three months. Recession ineuro zone continued into record sixth consecutive quarter.■■ Heads of Portugal’s two biggest banks – Millennium BCP and Banco Espírito Santo – said theywere concerned that the precedent set by Europe’s treatment of Cyprus’s recent troubles hadincreased nervousness across the euro zone to dangerous levels.■■ France has entered its second recession in four years after the economy shrank by 0.2% in1Q13. The French unemployment rate is running at 10.6% and is forecast to rise further nextyear.
  10. 10. EquitiesThe Henley Outlook June 2013Hong Kong, Singapore & Shanghai10ASEAN AUSTRALIA EQUITIESHENLEY ASSESSMENTNeutralEconomic data has been mixed. Thekey business confidence measure,which is clearly a very importantfactor for the Board, remains soft.On the other hand there was anencouraging boost to housing financeapprovals largely consistent with thetwo competing forces described inthe minutes. The employment reportis best described as “neutral” whereasthe wage inflation pressures easedfurther in the March quarter.Positives■■ RBA Governor Glenn Stevens indicated that he has scope for further reductions after loweringthe key rate to a record 2.75%. Meeting minutes showed that surprise drop in inflation andongoing weak business sector prompted the decision to cut rates.Negatives■■ Governmentdatareleasedthismonthshowedretailsalesandbuildingapprovalsunexpectedlydropped in Mar13, while a private report revealed that business confidence dropped to -2 inApr13 with sentiment in the mining industry at its lowest since the GFC.■■ Australia’s benchmark bond yield is offering the smallest premium over US notes in 11 monthsas the sharpest predicted growth slowdown in four years spurs bets on further interest ratecuts.■■ The government also forecast slower growth last week when it released federal spendingplans for the fiscal year starting Jul13. Treasurer Wayne Swan is seeking to raise more moneyfrom businesses after lower tax revenue led the government to scrap plans to return thebudget to surplus this year.HENLEY ASSESSMENTPositiveJapan is strengthening ties withcountries in the region as it tries torevive growth and as tensions withChina escalate over a territorialdispute. Japanese companies areincreasing investment in the 10members of the ASEAN group as theyseek to counter the fallout from therow with China that’s damaged aUSD340bn trade relationship.Positives■■ Thailand may seek to cut rates to halt THB gains.Negatives■■ The IMF lowered its projection for Vietnam’s growth to 5.2% this year from 5.8% previously,and to 5.2% in 2014 from 6.4% in its report on 29Apr13 . The reduction of this year’s forecastis the biggest cut among Southeast Asian countries after Singapore, while the 2014 cut is thebiggest downward move for any Asian country. This cut is mainly due to slow restructuring ofVietnam’s banks and state companies.■■ Unemployment rate in the Philippines climbed to 7.1%in Jan13 from 6.8% the previous month.About 660,000 positions have been lost since Oct11, even as the economy expanded 6.6%last year. Tackling unemployment has become the prime objective of Aquino’s government.
  11. 11. Equities11Positives■■ A recent survey shows the new home prices rose in 68 out of 70 major cities in China despitethe new capital gain tax which the government introduced earlier this year. The survey alsosuggested that 68% of Chinese local residents still consider that price could jump further, asprices climbed 13.5% YOY in Guangzhou, 10.3% YOY in Beijing and 8.5% YOY in Shanghai.■■ China industrial production growth accelerated but is still below expectation. Industrialgrowth accelerated to 9.3% YOY in April from March’s 8.9%.■■ Retail sales growth accelerated slightly to 12.8% YOY in April from March’s 12.6% YOY.Negatives■■ China growth outlook cut by IMF – GDP forecast for 2013 is down to 7.5% YOY from 8% YOYearlier to reflect the risks from a record expansion of credit, with the unexpected economyslowdown in first quarter.■■ China’s official manufacturing PMI fell to 50.6 in April from 50.9 in March, which shows thefoundation for China’s economic recovery is not solid enough.■■ The value of Chinese commercial banks’ outstanding non-performing loans (NPL) reachedRMB525.5bn (USD84.92bn) in the first quarter. The China Banking Regulatory Commission(CBRC) said the NPL ratio of Chinese commercial banks stood at 0.96% in Q113, slightly upfrom the 0.95% in Q412, marking the sixth straight quarter of rises since Q411.India GREATER CHINA EQUITIESHENLEY ASSESSMENTNeutralAlthough China’s Q1 GDP data cameout disappointingly due to slowerthan expected transmission ofgrowth total social financing into realeconomic growth but the recoverytrend remains intact. We continuesto believe that the broad trend ofgrowth recovery in H2 this year willbe more clear and bright, which issupported by on-going destocking,possible credit relaxation and slowerRMB appreciation, a pick-up inreal estate investment, a recoveryin export demand, and improvedlandscape in A-share market.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 sector witnessedthe slowest growth in 16 months with the PMI in March standing at 52, down from 54.2 inFebruary.■■ CPI inflation climbed to 10.9% in February with wholesale price inflation at 11.4%.
  12. 12. EquitiesThe Henley Outlook June 2013Hong Kong, Singapore & Shanghai12HENLEY ASSESSMENTNegativeBank of Korea decided to cut the baserate by 25bps to 2.5%. The latestdrop in the JPY may have pushed thecentral bank into action. There werethree key takeaways from GovernorKim’s press conference – the rate cutwas “appropriate to help governmenteffortstoboosttheeconomy.”Second,the central bank had “considered ratecuts by ECB and Australia”. Third,“Japan’s monetary easing has a bigimpact on South Korea”. All true.But the KRW has risen by 7% againstthe yen in the last six weeks, takingits appreciation over the past sevenmonths to around 20%. The numbersspeak for themselves.Other Emerging Markets (South Korea, Russia, Brazil) EQUITIESPositives■■ Central Bank of Brazil increased the benchmark SELIC rate by 25bps, ending an easing cyclethat lasted nearly two years. Central bank President Tombini reiterated that policy makers will“do what’s needed” to contain inflation.Negatives■■ Russia’s central bank, Bank Rossii, left the refinancing rate at 8.25% for an eighth month,brushing off government calls for lower borrowing costs to stimulate the economy.■■ Russia’s economic growth slowed to 2.1% in the fourth quarter from a year earlier. Thatprompted the Economy Ministry to lower its forecast for expansion this year to 2.4%, downfrom a projected 3.7%. The inflation rate rose to 7.2% in Apr13 from 7% increase in Mar13,remaining more than 1% higher than the central bank’s target.■■ The weaker JPY is slowly hampering South Korea’s growth momentum, with the country’sindustrial output falling 2.6% in Mar13 from Feb13.Source: Thomson Reuters
  13. 13. Equities13Positives■■ The US governmentcontinues to devaluethe USD through QEwhich remains a positivefor precious metals andgold in particular.■■ Consumer demand andcontinued central bankbuying provides supportfor gold prices.■■ There is the prospectof future inflationdue to central banks’continuing policy ofprinting money.Negatives■■ Bullish sentiment towards US (and global stock markets) will continue to depress preciousmetals.Energy Precious Metals COMMODITIESHENLEY ASSESSMENTNeutralIncreasing US gasoline stockpilesand weak economic data out ofChina have continued to depressenergy markets in the short term.However, the sector has good upsidepotential in the long term consideringincremental demand from Asia andcontinued expansionary monetarypolicies.Positives■■ A floor in oil prices appears to be close which may result in a bounce of crude prices.Negatives■■ Excess supply over demand keeping energy prices low.HENLEY ASSESSMENTPositiveIt is worth noting the comments ofMarcus Grubb, Managing Director,Investment & Global Strategist atThe World Gold Council. When askedwhether or not if, after 12 years ofoutperformance, a fund managerwould be sacked for one year of poorperformance, he suggested “no”. Incontext, this is the position with gold.After a positive run since 2002, thecurrent drop needs to be viewed inrelation to the longer term. Gold hasbeen pushed below its equilibriumprice by speculators. In an interestingdichotomy, demand for gold fromprivate consumers is extremelybuoyant and it is reasonable toexpect a bounce back. Likewise silver.According to LLoyds TSB, silver hasproduced the best gains since 2002 ofany commodity (source: WealthdailySilver Report 2013). As such, there is aneed to balance short term concernswith longer term positives.Crude Oil PricesPastTrendPresentValue&FutureProjectionWestTexasIntermediate.USDollarsperbarrel.Source: the Financial Forecast CenterSource: Christian A. DeHaemer
  14. 14. EquitiesThe Henley Outlook June 2013Hong Kong, Singapore & Shanghai14Positives■■ Warren Buffett’s investmentpowerhouse BerkshireHathaway and 3G Capitalhave announced they will takeover US tomato sauce andbaked beans maker Heinz,in a deal worth USD23bn.This could lead to broadcost-cutting measures acrossthe industry and a possiblererating in the valuation ofsimilar 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 to many uncontrollable risks, e.g., weather and natural disasters, politicsand other pests.■■ Due to recent drought conditions in the American Mid-West and Russian Black Sea regionswe have seen corn, wheat and soy prices increase on average over 50% within a few months.CommoditiesAgriculture Industrial Metals HENLEY ASSESSMENTNeutralIron ore slumped into a bear marketon concern that slowing economicgrowth in China, the world’s biggestbuyer, will hurt the outlook fordemand. One leading mining firmbelieves prices will decline as suppliesexpand over the long term. In the US,The Fed’s stimulus program has beena major support to growth-relatedassets such as base metals in recentyears.Positives■■ Continuation of QE in the US may help support prices.Negatives■■ Weak numbers out of China having a negative impact on base metal prices.HENLEY ASSESSMENTPositive and NegativeThere are two very different marketsplaying out in the agriculture sector –physicalandequity.Manyphysicalsoftcommodity 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 fundshave to this sector is via fertilizer andseed companies. These industries arehaving a significantly more importantrole to play to help increase yieldand in the case of seed companies,invent seed which is more tolerant tochanging global weather patterns.We remain positive agriculture equityfunds.
  15. 15. EquitiesPositives:■■ The hedge fund industry continuously extended YTD returns – the HFRX index finished Aprilwith +0.6%, taking YTD return to +3.8%. Performance was generated positively across a rangeof styles, strategies.■■ April was another large positive month for the Nikkei 225, strongly outperforming the globalequity indices. Japanese managers with a long bias were the strongest performing managers,capturing profits from the rise in the indices.■■ Long-term trend followers appear to have recorded the strongest returns of any strategies inApril. The increasingly short commodities position plus long positions in equities and bondproduced favorable result this year so far.Negatives■■ Conversely, short-term trend traders held relatively flat positions in commodities, largelymissed the sharp sell-off, but then built a short position too late and suffered in the subsequentrebound.■■ The market conditions for Global Macro managers are getting unattractive due to peoplebacking to fundamental trades.■■ Thebearishsentimentforcommoditiesarecontinuouslyhurtingsomemanagers’performanceif they stick to their long bet accordingly.Alternative InvestmentHENLEY ASSESSMENTNeutralUnder current market conditionsthe outlook for hedge funds looksbetter than half a year ago. With thenormalisation of the US economyasset class correlations, it seems theheadaches of political influence onthe market appears to be reducing.Therefore, the increasing marketsdispersion indicates equities and creditsecurities moving towards company-specific risk, and commodities pricingacting as a result of fundamentalsupply and demand metrics.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. 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 products
  16. 16. The Henley Outlook June 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 OutlookJUNE 2013

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