Monthly Market Outlook June 2012 The Henley Outlook June 2012 THE WEALTH MANAGEMENT PROFESSIONALS Being an asset allocator is all about risk, and sometimes reward; but now it feels more like juggling hand grenades. Never a dull moment! The short-term focus remains on Europe, where much has happened in the last month. As expected, the day of the French presidential election and the Greek parliamentary elections, 6th May, will probably go down as the day Europe changed profoundly.
1. Monthly Market OutlookJune 2012Being an asset allocator is
all about risk, and sometimes reward; butnow it feels more like
juggling hand grenades. Never a dull moment!The short-term focus
remains on Europe, where much has happenedin the last month. As
expected, the day of the French presidentialelection and the Greek
parliamentary elections, 6th May, will probablygo down as the day
Europe changed profoundly.The Henley OutlookJune 2012THE WEALTH
MANAGEMENT PROFESSIONALS
2. The Henley OutlookJune 2012 Overview ASSET CLASS HOUSE VIEW
REMARKS Fixed Income Investment Grade High Yield Student
accommodation only Property Equities US Japan UK Europe Ex UK
Australia ASEAN Broad equity exposure Greater China including the
region preferred India Other Emerging Markets CommoditiesEnergy
Precious Metals Industrial Metals Agriculture Selective strategies
only Alternative Investments Key: Positive Neutral NegativeThe
Henley Group Limited The Henley Outlook: 2An SFC Licensed
investment adviser in Hong Kong Hong Kong, Singapore &
ShanghaiSuite 2004-08, 20/F, St Georges Building, 2 Ice House
Street, Central, Hong [email protected]
www.thehenleygroup.com.hk
3. The Henley OutlookJune 2012 Global Overview Being an asset
allocator is all about risk, and sometimes reward; but now it feels
more like juggling hand grenades. Never a dull moment! The
short-term focus remains on Europe, where much has happened in the
last month. As expected, the day of the French presidential
election and the Greek parliamentary elections, 6th May, will
probably go down as the day Europe changed profoundly. It was the
day people were heard in several languages to say No! to austerity;
but it was also the day the crisis in Europe mushroomed from being
largely financial into a fully-fledged political crisis. The G8 and
European Union summits, which took place shortly afterwards, were
acrimonious affairs in which Germany refused to join the
cheerleaders for growth, knowing full well who would have to foot
the bill. Suddenly, instead of being in control of Europe, Germany
seems isolated and on the back foot. It is tempting to think that
Germany will decide that its best interests lie in being the first
to leave the euro itself, after which the new deutsche mark would
revalue against the euro and help the euro zone economy rebalance.
Doing so might even get Angela Merkel re-elected in 2013. Theres a
thought! Of more immediate concern, however, is that Greece could
run out of money before the end of the month if bailout funds are
cut off after the election. The Greek banks already have run out
and are on various forms of life support after a long, slow-motion
run on deposits. The run on the Spanish banks is also continuing.
They lost another EUR31bn of deposits in April. In addition to
deposit flight, it is estimated that they will need a further
EUR200bn to cover loan losses, mainly on real estate. At the same
time, Spains seventeen regional governments need to refinance some
EUR36bn of debt this year, and have nowhere to go for it but the
central government. Just one bank, Bankia, is already costing the
Spanish government EUR23.5bn it does not have. We dont need
jugglers. We need conjurers! The proposal from Germany for a
EUR2.3tn European Redemption Pact offers one possible route to
salvation. Euro zone member sovereign debts in excess of 60% of
gross domestic product would be transferred to a separate, pooled
fund and paid off jointly over twenty years using designated
tithes. This is akin to Germanys Solidarity Surcharge which was
used to pay for the reunification with East Germany in the 1990s.
About EUR115bn a year, plus interest. Hmmm. The fact that nations
would have to pledge their gold reserves as collateral against
default reinforces our conviction that gold will be at the heart of
the outcome of the global mess. Perhaps an even bigger development
for gold is that the Bank of International Settlements, which sets
capital-adequacy rules for banks globally, is considering raising
gold from Tier 3 (which wears a 50% haircut when calculating
capital adequacy) to Tier 1 (which suffers no haircut). This could
be a game changer for gold. It would be a major endorsement of its
role in preserving wealth and as a store of value from the highest
financial authority. It would lead to significant purchases of gold
by major financial institutions; to a reappraisal of its value with
respect to other Tier 1 capital (such as sovereign debt), and
provide diversification from US dollars and US treasuries. An
upward revaluation of gold would seem like the logical next
step!The Henley Group Limited The Henley Outlook: 3An SFC Licensed
investment adviser in Hong Kong Hong Kong, Singapore &
ShanghaiSuite 2004-08, 20/F, St Georges Building, 2 Ice House
Street, Central, Hong [email protected]
www.thehenleygroup.com.hk
4. The Henley OutlookJune 2012 Amid all this hand wringing
about Europe and its failed experiment, it would be a mistake to
take ones eyes off the other hand grenades. In China, bank data
suggest that a major credit slowdown has begun. Demand for cars and
homes has fallen, and inventories of both are rising. Manufacturing
growth and house prices have both fallen for seven consecutive
months. Manufacturing is actually contracting. We can expect more
monetary loosening and a lower yuan. Lest I be accused of being
perennially negative (stuff and nonsense!), US consumer confidence
last month hit the highest level since October 2007, when the
S&P500 peaked. This is a somewhat puzzling piece of news. Real
incomes are falling and job creation is not keeping pace with the
rising population, more of whom than ever forty-six million are on
food stamps. The markets are jittery as at the end of this month we
approach the conclusion of Operation Twist (the Federal Reserves
current method of keeping longer-dated yields repressed). Asset
prices are crying out for more stimulus and the time for announcing
what form it will take is running out. It would be considered too
overtly political for the Federal Reserve to make an announcement
too close to the November elections; but, no doubt falling stock
markets and one or two weak employment reports will trip the money
printing presses back to life in the next couple of months. The US
only raises forty-six cents out of every dollar it spends from
taxes. The other fifty-four cents have to come from other sources.
The Bank of England, the European Central Bank and the Bank of
Japan will also print, but not necessarily in that order. China
will also print once the leadership transition is out of the way.
All will deny it, until they actually do it. Another hand grenade
(Warren Buffett called them financial weapons of mass destruction)
is the derivatives universe. There have been numerous explosions
over the years (Long-term Capital Management (LTCM) in 1998 and the
train wreck that was 2008, to name but two). Now we have JP Morgan
Chase struggling to contain a detonation. So far they have admitted
to USD2bn of damage, but it is thought to have risen since to
USD8bn (some say an awful lot more). Last week came the
announcement that a US government committee chaired by the
Secretary of the Treasury is to declare the COMEX and the ICE (two
New York derivatives exchanges) systemically important, ie, too big
to fail. This would mean that, in the event of the commodity
futures default, we have been postulating for some time, the
Federal Reserve would pay cash to the defaulted party. Why are they
preparing for a default, and why now? Something to do with Iran, I
wonder? Or Morgan? But the real cliff hanger this month is of
course the fate of Greece and the euro. Neither the Greeks nor the
technocrats nor the politicians nor the bankers want Greece to
leave the euro. The Greek people are still in denial about the euro
being at the root of their ills. They associate the common currency
with easy credit, low interest rates, low inflation and good times.
They associate the drachma with the bad old days of scarce credit,
high interest rates and high inflation. Unfortunately, that Greece
will leave the euro this month is not a foregone conclusion.
However, although an unimaginably bitter and expensive pill to
swallow, leaving is what Greece needs to do. The greater tragedy
for them would be if they did not. Perhaps Spain will beat them to
it! Peter Wynn Williams Investment Director
[email protected] Henley Group Limited The Henley
Outlook: 4An SFC Licensed investment adviser in Hong Kong Hong
Kong, Singapore & ShanghaiSuite 2004-08, 20/F, St Georges
Building, 2 Ice House Street, Central, Hong
[email protected] www.thehenleygroup.com.hk
5. The Henley OutlookJune 2012 Cash & Currencies USD Index
(Source: Bloomberg) Summary Not a lot of activity this month across
the board. JPY was flat but remained weaker YTD against USD for the
first reversal in trend in a long time. It did however rebound
slightly from strong support at 84. GBP/EUR was also range bound,
but since Dec2008 the GBP has gradually been regaining strength
against the EUR, but not at a strong pace. Focus for the euro
turned to Spain throughout April. AUD weakened further against the
USD, but remains above parity. The trading band for the SGD was
altered to stronger by the Monetary Authority of Singapore (MAS)
following their biannual meeting. This change was due to increased
GDP and increased inflationary pressure. HENLEY ASSESSMENT:
Unchanged: Negative USD, GBP and EUR over medium-to-long term
against trade-weighted basket of currencies. The euro is unlikely
to continue in its current form. If the risk appetite remains
strong, then we should start to see funds flowing out of the safe
haven USD, thus weakening its position.The Henley Group Limited The
Henley Outlook: 5An SFC Licensed investment adviser in Hong Kong
Hong Kong, Singapore & ShanghaiSuite 2004-08, 20/F, St Georges
Building, 2 Ice House Street, Central, Hong
[email protected] www.thehenleygroup.com.hk
6. The Henley OutlookJune 2012 Fixed Income Positives Interest
rates will remain low for the foreseeable future as economic
recovery is anaemic in most developed economies. We believe the
central banks will come up with more easing measures and the labour
market not inflation holds the key to future. Overall credit
quality of Asian and emerging markets remains intact with low
levels of debt and record high reserve cushions. Negatives Yields
of US treasuries, German bunds and UK gilts all fell to record low
levels (10-yr: 1.74%, 1.36% and 1.76% respectively) as euro zone
sparked further safe-haven buying of top-tier government bonds.
German borrowing costs have plunged to the lowest on record amid
mounting concern that Greece will exit the currency area. Spain is
set to recapitalise Bankia through a
government-bonds-for-share-swap arrangement, which would increase
pressure to debt issuance. More importantly, investors remain
sceptical that Spain has dealt adequately with its distressed
lenders, sending its 10-yr government bond yields up 17bps to 6.48%
(a new record spread vs. German bund). HENLEY ASSESSMENT: Negative.
Recovery rate is the average proportion of bad debt recovered. It
is an important validation of default probabilities and default
correlations which is often neglected in credit risk analysis. In
the past decade, recoveries normally rise in a low default
environment and vice versa. The relationship between higher
recovery rates and lower default has diverged significantly over
the past 24 months. The graph (shown right) is a reflection of the
current challenging environment for raising capital, despite
numerous interventions by the central banks. Given the weakening
trend in recovery, we should be more conservative in analysing
source: Deutsche Bank, M&G Investments, April 2012 corporate
credit and its compensation to investors, even in the face of low
default rates. The Henley Group Limited The Henley Outlook: 6An SFC
Licensed investment adviser in Hong Kong Hong Kong, Singapore &
ShanghaiSuite 2004-08, 20/F, St Georges Building, 2 Ice House
Street, Central, Hong [email protected]
www.thehenleygroup.com.hk
7. The Henley OutlookJune 2012 Property Positives Estate agent
Knight Frank reported that the continuing fear that the euro would
collapse is contributing to the rise in central London property
values as buyers from Greece, Spain and now France are actively
seeking a safe haven for their money. In the first quarter,
overseas buyers accounted for 62% of purchases in central London, a
figure which compares to 55% in Q12011. Prime Central London
property prices increased by 1.1% in March; YOY prices increased by
11.3%. Central London property prices are now 20% above their 2007
peak. A shortage of housing stock for sale in Central London is
pushing buyers out into more peripheral areas. In Singapore, home
sales climbed to 6,458 units in Q12012, the highest quarterly
figure since 1996. Developers have increased sales by offering
smaller units (called shoebox apartments, as they are smaller than
50sqm in size). Shoebox apartments accounted for 27% of new sales
in the first quarter, when private home prices fell for the first
time in almost three years following curbs that included more
stringent mortgage requirements and higher taxes. However, it is
thought that Singapores property market is heading for a soft
landing. The new Hong Kong Financial Secretary John Tsang is highly
concerned about the risk of a price bubble as low interest rates
still persist. His stated intention is to release land supply and
it is thought he will be less likely to support residential
property prices upon price falls. Hong Kong housing prices have
risen more than 70% between the start of 2009 and mid-2011 on
record low mortgage rates and an influx of Chinese buyers.
Centaline Property Agency has stated that prices have risen almost
4% this year, after falling 5% in 2H 2011. Negatives According to
Nationwide, British home prices edged lower in April and YOY are
down 0.9%. This comes at a time when home loans are becoming more
expensive because of rising funding costs as a result of the
European credit crisis. According to consumer group Which, one in
five of the homeowners they surveyed said that a 100 increase in
their monthly mortgage payment would leave them without money for
essentials like food. Australian home prices fell in the first
quarter of 2012 by 1.1%, and 4.5% YOY. This is the longest losing
streak in almost a decade and leaves Australia with the highest
borrowing costs amongst developed nations. As a result, the Reserve
Bank of Australia cut the benchmark interest rate by 0.5% to 3.75%,
the deepest reduction in three years. In China, the government
continues to strike a delicate balance to slow housing price growth
while also trying to avoid a collapse. Home sales fell 18% in the
first quarter and contributed to the slowest economic growth in
three years. Borrowing costs for first time homebuyers are being
reduced to encourage wider property ownership, but the government
is keeping the curbs in place to stem the speculators who have
helped push up prises by up to 140% since 1998. HENLEY ASSESSMENT:
Neutral. Property prices generally stabilised in 2010 and 2011
after significant falls in 2009. 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 Group Limited The Henley Outlook: 7An SFC Licensed
investment adviser in Hong Kong Hong Kong, Singapore &
ShanghaiSuite 2004-08, 20/F, St Georges Building, 2 Ice House
Street, Central, Hong [email protected]
www.thehenleygroup.com.hk
8. The Henley OutlookJune 2012 Equities US Positives US economy
is highly flexible, resilient and leads world in technology and
innovation. Federal Reserve has forecast that rates will remain
unchanged until at least late 2014. Further monetary easing in 2H12
will boost asset prices in nominal terms. Negatives National debt:
USD15.75tn and rising; debt to GDP: 104%and rising. Absurdly
unsustainable. Housing market is in depression. Prices at 10-year
lows. Real incomes falling; only 41.6% of working-age Americans has
a full-time job. Political system dysfunctional; possible fiscal
cliff and debt ceiling to negotiate at end of 2012. HENLEY
ASSESSMENT: Negative. The latest consumer earnings and credit
numbers show ongoing structural deterioration in consumer
liquidity. With lack of positive, real (inflation-adjusted) growth
in income, there can be no sustainable growth in real personal
consumption (71% of GDP). Temporary consumption gains could be
fuelled by debt expansion, but that option is not available to most
consumers. Broad economic activity remains likely to bottom-bounce
for the foreseeable future. JAPAN Positives Despite its recent
rebound to JPY79, JPY is likely to continue to weaken on prospects
of more easing. Another important shift is the USD-JPY pair is no
longer strongly positively correlated to US stocks and US yields.
We are monitoring critical elements such as overseas direct
investment flows and current account balance. Negatives Fitch
Ratings cut Japans sovereign rating to A-plus citing Japans
spiralling debt problem (now c.230% of GDP). Japans jobless rate
rose for first time in three months to 4.6%, underscoring concern
that an economic recovery will lose momentum in the face of Europes
crisis. HENLEY ASSESSMENT: Neutral. Bank of Japan (BOJ) has been
fighting political pressure and excessive market expectations since
it declared the inflation goal of 1%. The central bank has recently
announced it will buy an additional JPY10tn (USD124.74bn) in
Japanese Government Bonds (JGBs) and extend the maturity of bonds
it buys from two-yr to three-yr. Yet, policymakers are calling for
BOJ to purchase even longer-term JGBs and are threatening to change
laws to reduce the independence of BOJ. In our opinion, politics
can be a distraction from efforts of improving fiscal conditions
and strengthening growth potential in Japan.The Henley Group
Limited The Henley Outlook: 8An SFC Licensed investment adviser in
Hong Kong Hong Kong, Singapore & ShanghaiSuite 2004-08, 20/F,
St Georges Building, 2 Ice House Street, Central, Hong
[email protected] www.thehenleygroup.com.hk
9. The Henley OutlookJune 2012 UK Positives The jobless rate
fell to 8.2% of the workforce, the lowest since Aug11, compared to
8.3% in the previous month. In addition, Apr12 jobless claims fell
by 13,700 versus expectations for a 5,000 rise. Concern over UKs
high inflation rate appeared to trump fears of a renewed recession,
as BoE allowed its GBP 50bn programme of gilts purchases to come to
an end. Negatives The Bank of England (BoE) lowered its growth and
inflation forecasts and is tuning its contingency plans for weaker
growth caused by the European debt crisis. Growth forecast for the
year was cut to 0.8% from 1.2%. In its quarterly Inflation Report
the BoE forecast that UK inflation will remain above 2% for longer
than previously forecast, but will drop to +1.6% in two years,
below the 2% inflation target. The same report also said that the
euro zone crisis was not the only issue weighing on the UK economy,
with volatile energy and commodity costs, and the squeeze on
household earnings also having an impact. HENLEY ASSESSMENT:
Negative. There is no doubt the impact of a breakup of the euro
zone on the UK would be bad at least in the short run even if the
longer-run effect of breakup is less clear cut. Short-run hits
would probably include lower exports to Greece and other euro zone
countries; weaker asset prices; a rise in sterling compared with
the current euro zone average; a direct hit to financial sector
output, and a new credit crunch and a drop in confidence. The
broader concern is a sharp fall in market confidence which might
exacerbate the severe shortage of small business lending and
trigger more job cuts in Britains financial sector. EUROPE ex UK
Positives The euro area avoided its second recession in three years
as 0.5% growth in Germany offset contractions in peripheral areas.
Negatives The 6May12 election in Greece left the two parties that
supported the international rescue as part of an interim government
this year, New Democracy and Pasok, short of the seats needed for a
majority in Parliament. The votes also propelled the Syriza party,
which opposes the austerity measures, to second place. The parties
will reconvene for a second election on 17Jun12 and there are fears
that Syriza party will win the majority of the votes. Failure to
form a government that would implement the bailout terms would mean
a probable exit from the currency union. Greeces credit rating was
cut to CCC from B- by Fitch Ratings on concerns the country wont be
able to muster the political support needed to sustain its
membership in the euro zone. Spain was forced to nationalise its
fourth largest bank, Bankia, floated only last year. The bank share
price sank 14% after depositors reportedly withdrew EUR1bn in the
past week. Moodys downgraded 16 Spanish banks, including Banco
Santander, the euro zones largest bank, citing a weak economy and
the governments reduced ability to support troubled lenders. HENLEY
ASSESSMENT: Strongly negative. With the Syriza party gaining
traction in the Greek elections and Francois Hollande voted in as
the French President, the message to the euro governments is clear:
the public is fed up with austerity measures. More importantly, the
idea of a Greek exit from the euro zone has been bandied around
recently. Initial calculations of the cost of a Greek exit has been
put as high as USD1tn. If Greece were to default and leave the
euro, direct costs would include the hit that other European
countries and the IMF would have to take on holdings of Greek debt.
However, what really scares the economists is the spillover effect
of a Greek departure, especially the contagion risks threatening
other fragile economies, such as that of Italy and Spain. The
Henley Group Limited The Henley Outlook: 9An SFC Licensed
investment adviser in Hong Kong Hong Kong, Singapore &
ShanghaiSuite 2004-08, 20/F, St Georges Building, 2 Ice House
Street, Central, Hong [email protected]
www.thehenleygroup.com.hk
10. The Henley OutlookJune 2012 AUSTRALIA Positives The
Australian economy is in pretty good shape (apart from, perhaps,
the wave of sackings announced recently). Unemployment has fallen,
according to the latest national statistics; the currency is
strong; GDP is on trend and holding up; there is a
once-in-a-generation investment boom going on, and the government
is heading back into surplus. Negatives The Reserve Bank of
Australia left interest rates unchanged. While it appears to retain
a bias to ease, its hurdle to do so looks higher than earlier
thought, requiring a material weakening in the domestic economy.
Household debt is 150% of disposable income, up from 50% 25 years
ago, and has been stuck at that level for five years. The key cause
is the price of land in Australia; it is one of the least populated
countries on earth yet land is about the most expensive. The
combination of rising population, a lack of arable land and
artificial restrictions on residential development in cities has
led to a six-fold rise in the median house price since 1986, from
$93,000 to $550,000 now. Over the same period, average household
incomes have risen 3.5 times. Other countries in Australias
position build massive sovereign wealth funds. Australia has a
relatively small one (the Future Fund) with a specific purpose: to
provide for unfunded public service pensions HENLEY ASSESSMENT:
Negative (except the commodity sector which we like). The
Australian economy is a double-edged sword: it is expected to grow
a little below trend, although the make up of the growth will be
heavily tilted towards mining investment. Key headwinds for the
non-mining sectors will be 1) ongoing deleveraging by the household
sector; 2) caution by the corporate; 3) maintenance of a relatively
high Australian dollar, and 4) fiscal tightening by the
authorities. ASEAN Positives Bank Negara Malaysia kept the
benchmark overnight policy rate unchanged at 3%, Bank Indonesia
left the rate unchanged at 5.75%, Thailand also refrained from
further rate cuts. Thailands economy unexpectedly expanded in the
first quarter as factories resumed production and domestic
consumption revived after last years floods. Philippines electronic
exports also benefited from a recovery in Thailands exports given
their close linkage. Negatives Asian nations face risks stemming
from Greeces inability to form a new government after an
inconclusive election that could deepen Europes debt crisis, adding
to challenges from a China growth slowdown and an uneven US
recovery. Malaysias overseas sales unexpectedly fell in March as
manufacturers such as Unisem (M) Bhd. and Malaysian Pacific
Industries Bhd. (MPI) shipped fewer electrical and electronics
products, bolstering the case for the central bank to hold off from
interest-rate increases. Henley Assessment: Neutral. Signs of
weakening demand for Asian goods have emerged, with Malaysia,
Thailand and the Philippines all reporting export declines. Weak
European demand is particularly troubling for countries including
Singapore and Thailand, where exports make up the equivalent of
half or more of GDP. Fortunately, inflation is still manageable in
this circumstance, but it also imposes restriction on central banks
policy options.The Henley Group Limited The Henley Outlook: 10An
SFC Licensed investment adviser in Hong Kong Hong Kong, Singapore
& ShanghaiSuite 2004-08, 20/F, St Georges Building, 2 Ice House
Street, Central, Hong [email protected]
www.thehenleygroup.com.hk
11. The Henley OutlookJune 2012 Greater China Positives Peoples
Bank of China (PBoC) cut reserve-rate requirement by 0.5% to 20%.
China accelerated approvals for Qualified Foreign Institutional
Investors. Consumer prices in China now appear more under control.
(Apr: +3.4%). Despite the weak GDP growth, Taiwan is expected to
enter a stronger cyclical upturn. Negatives Chinas current account
surplus has declined from a pre-crisis peak of 10.1% of GDP in 2007
to 2.8% of GDP in 2011. The slowdown in capital inflow that we have
seen is likely to accelerate and the eventual result will be the
current account moving gradually into deficit. Chinas A-share Q1
corporate revenue up 10.4%, earnings increased 0.6%. Wage-based
unit labour costs in China resumed their upward trend at the
fastest pace in at least a decade. A huge amount of
off-balance-sheet debts and the shadow banking system are two time
bombs, providing a massive threat to Chinas fundamental economy.
Henley Assessment: Neutral. The Chinese government has been
uncharacteristically slow to respond to the slowdown in the economy
this spring. One of the possible reasons is the suspension of
Politburo member, Bo Xilai, which may be distracting Chinese
leaders from day-to-day management of the economy. However, looking
forward, if these ongoing structural reforms focusing on raising
household income, boosting consumption and facilitating expansion
of the service sector according to the 12th 5-Year Plan are
implemented, China has the potential for domestic consumption,
rather than investment, to drive future declines in its current
account surplus. INDIA Positives Extension in the income tax
exemption to retirement funds under 2,700 private PF Trusts will
benefit 4.6m investors until March 31, 2013. Countrys central bank,
the Reserve Bank of India (RBI), reduced its policy repo rate by
50bps to 8.00% for the first time in three years. Negatives Indias
industrial output fell 3.5% in March YOY while manufacturing, which
accounts for 76% of industrial production, shrank 4.4%. Owing to
deteriorating economic indicators and a slow-paced fiscal
situation, Standard & Poors downgraded Indias outlook to
negative from stable. INR slumped to an all-time low of 56.50
against the USD on May 31 over growing concerns about the economic
challenges facing the country, as well as challenges from the
on-going euro zone crisis. HENLEY ASSESSMENT: Neutral. The
persistent trade deficit, the huge fiscal deficit, the
implementation of General Anti-Avoidance Rules (GAAR), tax
concerns, the weak INR, the governments inaction toward reforms and
the uncertainty in global markets pose a threat for investors in
India.The Henley Group Limited The Henley Outlook: 11An SFC
Licensed investment adviser in Hong Kong Hong Kong, Singapore &
ShanghaiSuite 2004-08, 20/F, St Georges Building, 2 Ice House
Street, Central, Hong [email protected]
www.thehenleygroup.com.hk
12. The Henley OutlookJune 2012 Other Emerging Markets (South
Korea, Russia, Brazil) Positives Brazils central bank lowered its
inflation forecast boosting hopes for another interest rate cut
which would also help to dampen the strength of the currency.
Mexicos bolsa gained 3.1%to end the first quarter at a record high
over growing optimism over the outlook for the local economy. As
the chart right illustrates, many Asian emerging market (EM)
economies, in particular via China, Singapore and Korea, are
running very large current account surpluses which will in turn
increase their standing in global financing in the coming years.
Negatives Russia, the worlds second largest exporter of oil, is
currently being hurt by signs of an increasing oil supply in the
US. Henley Assessment: Neutral. Whilst there have been developments
in emerging markets to create their own internal markets, at
present they do still remain sensitive to a slowdown in western
economies through exports. In addition, whilst the sector as a
whole has much higher forecasted growth rates and a younger, more
dynamic population, any fall out in the current sovereign debt
crisis will undoubtedly affect these markets also.The Henley Group
Limited The Henley Outlook: 12An SFC Licensed investment adviser in
Hong Kong Hong Kong, Singapore & ShanghaiSuite 2004-08, 20/F,
St Georges Building, 2 Ice House Street, Central, Hong
[email protected] www.thehenleygroup.com.hk
13. The Henley OutlookJune 2012 Commodities Energy Positives
Irans nuclear ambitions remain uncertain. Difficult conditions on
capital markets will make financing for new projects more
difficult. Negatives Ongoing debt concerns in Europe and signs of a
slowdown in China are adding to negative sentiment. Chinas net
crude imports continues to fall. The Saudis are advocating a lower
oil price. HENLEY ASSESSMENT: We downgrade to neutral. The
situation in the Middle East remains uncertain and difficult to
analyse but it now appears that the tension between Iran and the
West is easing for the timebeing. New talks are scheduled for June
in Moscow. On the macro side, the picture is not pretty with
sluggish growth in the US and near contraction in Europe. Concerns
about China is also weighting on the sector. In the longer run we
believe the oil price will go up as demand grows in line with
global population growth. Higher costs of production will also
provide support for a higher price. Precious Metals Positives Gold
and silver are a good hedge against financial instability. The
future of EUR is still uncertain. Public debt buildup on both sides
of the Atlantic shows no sign of slowing. Negatives Temporary USD
strength puts pressure on the gold price. Current sentiment for
precious metals is depressed. HENLEY ASSESSMENT: We remain strongly
positive on precious metals. The market conditions for precious
metals have been very challenging over the last months and we have
seen strong pullbacks in both gold and silver during May, despite a
clear deterioration of the situation in Europe following the
inability of the Greek politicians to form a government. Investors
have been flocking to their traditional safe haven, the USD, which
has put pressure on gold. In our view the recent pullback in gold
is normal and we fully expect gold to continue its decade long bull
run as the economic outlook for Europe in the medium term looks
bleak. Gold mining shares have suffered disproportionally and
continue to represent excellent value for investors with patience
and holding power. The spread between the gold price and average
cash costs is near record high, which is very encouraging for this
sector.The Henley Group Limited The Henley Outlook: 13An SFC
Licensed investment adviser in Hong Kong Hong Kong, Singapore &
ShanghaiSuite 2004-08, 20/F, St Georges Building, 2 Ice House
Street, Central, Hong [email protected]
www.thehenleygroup.com.hk
14. The Henley OutlookJune 2012 Industrial Metals Positives
Currency debasement will support real asset prices. Negatives The
health of the global economy remains uncertain. Demand from China
to soften as its economy slows down. HENLEY ASSESSMENT: We maintain
our neutral view on base metals. Market participants remain worried
about the seriousness of the challenges facing the global economy.
In the commodity sector we continue to favour other areas.
Agriculture Positives UNs Food and Agriculture Organisation
estimates there will be over 9bn 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 Prices are subject to
many uncontrollable risks, eg, weather and natural disasters,
politics and other pests. Source: The Fertilizer Institute HENLEY
ASSESSMENT: Positive: A rapidly-growing global population and the
rapidly-developing emerging world underpin the long- term prospects
of the agricultural sector globally, at the same time the supply of
arable land is limited. It is estimated by the World Bank that
worldwide 445m hectares of land are currently uncultivated and
available for farming, compared with about 1.5bn hectares already
under cultivation. On the other hand, soft commodity prices are
subject to many factors that are difficult to forecast such as
drought or flooding. We suggest investors take a diversified
approach when investing into this sector.The Henley Group Limited
The Henley Outlook: 14An SFC Licensed investment adviser in Hong
Kong Hong Kong, Singapore & ShanghaiSuite 2004-08, 20/F, St
Georges Building, 2 Ice House Street, Central, Hong
[email protected] www.thehenleygroup.com.hk
15. The Henley OutlookJune 2012 Alternative Investment Source:
FRM HF report Positives Specialist credit managers produced some of
the best returns as managers benefitted from increased dispersion
among credits. Relative value managers also fared well as stock
correlations remained at low levels. There is a growing expectation
among market participants that the three prominent central banks
(the Fed, ECB, and BOJ) will or need to act quickly to dampen
market volatility to mitigate systemic risk. Therefore, continuous
liquidity provision from central banks will definitely be a strong
source of return for hedge funds. There have been tentative signs
of a recovery in corporate activity. Given the deal flows are
expected to pick up again in the 2nd half of this year, M&A
arbitrage hedge fund managers should have plenty of things to do
despite the macro headwinds. Negatives April was a mixed month for
performance across hedge fund strategies. Managers with long-term
directional views tended to suffer as a series of market trends
reversed. On the whole, the choppy market conditions are
unfavourable for medium- to long-term trend following strategies.
Multiple sources of potential political risk indicate that the
rebalancing in Europe is far from over. Political factors dominate
the market sentiment and would be deter risk-taking manager from
deploying further risks on their trading book. HENLEY ASSESSMENT:
Positive outlook: Following January and Februarys head start, the
euro zone bogeyman has reared his ugly head since May, sending
global markets back into a sustained decline. However, we believe
market conditions will reward those hedge fund managers well for
their cautious positioning and keen focus on capital preservation
in such a volatile market environment. 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
distri- bution 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. Neither this document nor any information contained
herein shall be construed as an offer, invitation, advertise- ment,
inducement, representation of any kind or form or any advice or
recommendation to buy or sell any financial products.The Henley
Group Limited The Henley Outlook: 15An SFC Licensed investment
adviser in Hong Kong Hong Kong, Singapore & ShanghaiSuite
2004-08, 20/F, St Georges Building, 2 Ice House Street, Central,
Hong [email protected] www.thehenleygroup.com.hk