Henley Outlook September 2012

Monthly Market Outlook September 2012

The Henley OutlookSeptember 2012

THE WEALTH MANAGEMENT PROFESSIONALS

Trading over the summer months has continued with low volumes but with equities pushing higher, recouping losses incurred during May. On the surface, it is not easy to say what is driving equity prices. The health of the world economy is looking far from great. Europe is flirting with recession and is only keeping its nose just above water, thanks to Germany.

2The Henley Outlook: Hong Kong, Singapore & Shanghai


2The Henley Group LimitedAn SFC Licensed investment advisor in Hong KongSuite 2004-08, 20/F, St George’s Building, 2 Ice House Street, Central, Hong [email protected] www.thehenleygroup.com.hk

Fixed Income Investment Grade

High Yield

Property

Equities US

Japan

UK

Europe Ex UK

Australia

ASEAN

Greater China

India

Other Emerging Markets

Commodities Energy

Precious Metals

Industrial Metals

Agriculture

Alternative Investments

Key: Positive Neutral Negative

Overview

Student accommodation only.

High dividend stocks preferred.



Selective strategies only.

Agribusiness equities.

ASSET CLASS HOUSE VIEW REMARKS

Broad equity exposure including the region preferred.

The Henley Outlook




Global OverviewPeter is on holiday in Europe so I am picking up his pen for this edition.

Trading over the summer months has continued with low volumes but with equities pushing higher, recouping losses incurred during May. On the surface, it is not easy to say what is driving equity prices. The health of the world economy is looking far from great. Europe is flirting with recession and is only keeping its nose just above water, thanks to Germany. At the same time, the reading on German manufacturing activity is at a 38-month low. China, seen by many as the saviour of global growth, is also showing more signs of slowing down. With the August flash reading, China’s manufacturing purchasing managers’ index has now been in contraction territory for 10 consecutive months, the first time ever. Iron ore prices and prices of many other important raw materials for which China is the key consumer have come off significantly. So why then are equities performing reasonably well?

The prospects of more monetary easing certainly goes a long way in explaining why the Dow Jones Industrial Average has risen more than 7% per year to date despite the fact the US official unemployment remains stuck above 8% and there are few signs that the stick-your-head-into-the-sand approach towards the highly unsustainable fiscal position is about to change. In many ways, we are in a counterintuitive and highly ironic environment. Investors are almost hoping for more bad economic data to be released as it would give policymakers the excuses they badly need to embark on more money printing.

Prices of some assets have gained recently for other reasons besides the expectation of monetary easing. Corn and wheat futures have gained more than 50% and 20% respectively over the last three months, largely on the back of adverse weather conditions in the US, which is experiencing its worst drought in half a century. The Black Sea region, an important “breadbasket”, is also a victim of drought conditions. Given the huge run up in prices, and keeping the cyclical nature of agricultural commodities in mind, we now perceive better value in agribusiness equities. The world is going to face huge challenges to feed a growing population as arable land per capita is drifting lower. To meet this challenge, it will be key to increase the yield per acre. The right firms in the fertilizer and seed industry are well positioned to benefit from this effort and we see good value in these sectors.

The release of the latest minutes from the Federal Open Market Committee Meeting (FOMC) held 31st July–1st August showed that most participants had lowered their near-term growth forecasts on lacklustre employment indicators and soft consumer spending. The key take-away from this release was that consensus in the FOMC is building, and that substantial easing action is warranted should the “recovery” run out of steam. To us, this comes as no surprise as we have long argued that another round of easing in the US is only a question of ‘when’, not a matter of ‘if’. With a debt-to-GDP ratio of over 100%, there is very limited room for any fiscal gymnastics left. Furthermore, the lack of a recovery in the US economy, despite numerous fiscal and monetary efforts, suggests that whatever is coming next needs to ‘shock and awe’. While the effect on the real economy of another quantitative easing program can be debated – with interest rates already rock bottom and where QE1 and QE2 did nothing to turn the ship around – asset prices will be boosted. Equities will fare well in nominal terms but the key beneficiary will of course be the monetary metals. Both gold and silver prices jumped sharply as the minutes were released but we continue to believe that there is much more to come.




In the last edition Peter outlined some of the key reasons why investors should hold gold, and one of the reasons he mentioned was the re-monetisation of gold. Keeping that in mind, it is particularly interesting to see that the US Republican Party is considering proposing a gold committee as part of their party platform. The committee would study “the feasibility of a metallic basis for US currency.” Regardless of how this develops going forward, it sends a clear signal that gold is far from the “barbarous relic” that some would like us to believe.

In Europe the saga continues with the usual political wrangling and charades. Greek Prime Minister Antonis Samaras travelled to Paris and Berlin, hat in hand, to ask for more time to get the Greek economy back on track and restore growth. Not surprisingly, the French and the German leaders have made it clear that they would like Greece to stand by its current austerity commitments. Next up to watch is the troika report on Greece’s progress towards meeting its bailout terms. Given the dismal shape of Greece’s economy, this will likely be dire reading. In an ironic twist, Prime Minister Samaras said he “guarantees personally” that the rescue funds for his country will be paid back. Given the Greek prime minister is at the helm of a rather shaky coalition government, creditors better put their hopes elsewhere.

Mattias HoijerAssociate Investment [email protected]




Cash & Currencies

Summary• The euro had a better month against both GBP and the USD, mainly due to poor data out of the UK and the US. The

longer trends of a weaker euro remain intact.• GBP gained further ground against the USD as signals from the US indicate further monetary easing. • AUD pulled back a little during the month, suffering from the data coming out of China and also the perceived easing

of European tensions. The AUD remains above parity to the USD for the time being and with moderating inflation, interest rates are expected to stay as they are. AUD/USD to remain rangebound.

• 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 for Japan and may cause further action by the BoJ.

• The SGD has seen little change on the month, but has bounced from the high against GBP.

HENLEY ASSESSMENT:Negative on USD, Strongly Negative on GBP and EUR over medium-to-long term against a trade-weighted basket of currencies. The euro is unlikely to continue in its current form as we are consistently seeing weakness in the euro zone economies due to the euro. The strength of JPY is likely to result in intervention from BoJ. SGD strength is expected to continue against the western currencies. AUD is expected to remain volatile as a result of the Chinese data.

USD Index (Source: Bloomberg)




Fixed IncomePositives• US consumer prices showed no sign of inflation. Consumer prices were unchanged in July, making the annual inflation

rate stand at 1.4%, compared to 3.6% a year ago. Inflation pressures are well contained in the US and the euro zone, allowing room for further easing measures.

• The market has a strong appetite for speculative-grade bonds as investors are concerned about volatility of stocks and are desperate for yields. With USD184bn in new public issues, junk bond funds are on track to raise a record amount of money in 2012. Average yields of Barclays high-yield index have dropped to 6.6%, near a record low. Historically, the market requires a higher risk premium (10% or higher) for the same investment.

Negatives• 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, and rates can possibly unwind quickly.

• US Treasury 10-year yields reached 1.85%, almost a 50bp increase from July. Investors sold off US Treasury bonds sharply as haven demand weakened.

HENLEY ASSESSMENT:Negative. Yields on emerging market bonds are priced on an average of 5.5%, near multi-year lows. Low yields in emerging market bonds are a function of the current low-interest environment that has persisted since the financial crisis. US Treasury bonds are a benchmark for pricing high-yield bonds. Investors receive a higher interest rate for emerging market bonds to compensate for their higher risks. Interest rates on developed government bonds are low, with 10-year US Treasury bonds paying only 1.85%. Emerging markets in good fiscal health are attractive by comparison and still they are required to pay as much on their debt. Prices of emerging market bonds are far from a bargain although in the near-term, rates will likely go even lower as monetary policy easing continues in response to slower growth.

Source: BCA Research




Property

Positives• Rightmove Plc advised that after several months of fairly heady price increases, London home sellers have cut asking

prices by 3.6% from June to an average of GBP460,304. Property demand weakened in July as bad weather affected viewings and the London Olympics added to the distractions. In London, part of the decline may have been as a result of a tax increase on properties purchased by corporate entities costing GBP2m or more, announced by the government in March. Values in Kensington and Chelsea, London’s most expensive district, fell by 5.1% in July to GBP2.03m. None of the above detracts from London still being viewed as a safe haven with all of the global uncertainty around.

Negatives• Nearly seven years after the housing bubble burst, most indices of US residential property prices are trending up,

including the first monthly increase in the slow-moving Standard & Poor’s/Case-Shiller home price data, after several months of decline. Nearly 10% more existing homes were sold in May than the same month a year earlier. Builders began work on 26% more single-family houses in May 2012 as opposed to the depressed levels of May 2011. However, housing is still far from healthy despite the Federal Reserve’s efforts to assist by pushing mortgage rates to very low levels (3.62% for a 30 year loan according to Freddie Mac’s latest survey). Single-family housing starts, though up, remain 60% below the 2002 pre-bubble levels. American home equity is estimated to be USD2tn or 25% less than it was in 2002, and half of what it was at the peak. More than one in every four mortgage borrowers still has a loan bigger than the value of their home, although rising values are reducing that percentage slowly.

• China’s new home prices in June rose in the most number of the cities tracked by the government in 11 months, as buyer sentiment improved after the central bank cut interest rates twice in one month. Residential property prices climbed in 25 cities out of the 70 tracked by the government, the most since July 2011. Prices fell in 21 cities from a month earlier, while home prices were unchanged from May in 24 cities. These results present a very mixed picture for property prices and a dilemma for the government, which wants to spur economic growth with interest rate cuts, but does not wish property prices to rebound too much.

• House prices in Spain plunged 12.6% in 1Q12 from the same period last year. This is on top of the 20-30% falls seen since the start of 2008. The ratings agency Standard & Poor’s suggests that economic fundamentals point to a further decline of 25% in property prices before the market levels out.

• PricewaterhouseCoopers (PwC) has suggested that Britain’s 18 million homeowners are only five years into a punishing 17-year slump. Average property values will not return to their 2007 peak until 2024, once inflation has been taken into account, according to their report. In real terms the price of an average home has fallen 24% from a peak of GBP189,000 in 2007 to GBP143,000 today. PwC says prices will bottom out at GBP138,000 in 2014, a total fall of 27%, before starting to rise slowly.

HENLEY ASSESSMENT: Neutral. After significant falls in 2009, property prices generally 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 suggest that clients do not invest further at this time.

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




Equities

USPositives• The US economy is highly flexible, resilient and leads the world in technology and innovation.• The Federal Reserve has forecast rates will remain unchanged until at least late 2014.• Further monetary easing in 2H12 will boost asset prices in nominal terms.

Negatives• National debt: USD16tn and rising; debt to GDP: 104%and rising. This is absurdly unsustainable.• The housing market is in depression and prices are at 10-year lows.• Retail sales and consumer confidence are both falling.• The political system is dysfunctional and there is a possibility of a fiscal cliff and debt ceiling to negotiate at the end

of 2012.

HENLEY ASSESSMENT:Negative. Renewed economic contraction is being reported, including the first quarterly downturn in nominal retail sales since 2009. Is the fiscal cliff already here? Moreover, the official recovery since 2009 is simply a statistical illusion created by the government’s use of understated inflation, which results in overstated economic growth. There is a growing risk that the next easing by the Federal Reserve will trigger a massive dollar-selling crisis and begin the process of a rapid upturn in domestic consumer price inflation. Any boost to asset prices could be short lived. Broad economic activity remains likely to bottom-bounce for the foreseeable future.

JAPANPositives• Government subsidies and reconstruction are supporting housing demand after the earthquake and tsunami disasters.

Japan projected its nominal economic growth to exceed real growth for first time in 16 years in 2013. The government is expecting a moderate recovery, which may ease pressure on BoJ for further stimulus in the near term.

• The Japanese government pushed through a controversial plan proposed by Prime Minister Noda to double its sales tax to 10% by 2015. This is Japan’s first major initiative in years to tackle its budget deficit.

Negatives• With slower exports compounded by rising energy bills, Japan posted another big trade deficit of JPY517bn (USD6.5bn)

in July. Exports to Europe, especially of cars and machinery, are slowing because of the euro zone crisis.• Economic reforms and balanced budget are becoming a top priority as domestic support for Japanese Government

Bonds (JGBs) showed signs of fatigue. Japan’s household savings rate has dropped to near zero, partly due to rapid aging. Banks and non-financials are more reluctant to buy more JGBs and are instead increasing their purchase in US treasuries.

HENLEY ASSESSMENT:Neutral. Nikkei 225 has gained over 8% YTD. Japanese stocks collectively have long been trading below their book value. Buying Japanese companies for less than their net assets has attracted many foreign investors over the years, but takeovers are difficult in practice and the balance sheet value is often very hard to realise.




UKPositives• Unemployment in Britain fell to its lowest level in nearly a year in the second quarter. • The number of unemployed people fell by 46,000 in the three months to the end of June, bringing the unemployment

rate down to 8% from 8.2% in the first quarter.• The number of people in employment rose by 201,000, the biggest quarterly increase for almost two years, helping

the employment rate rise to its highest level in more than three years.• Retail sales volumes rose 0.3% between June and July, confounding expectations of a 0.1% fall.

Negatives• The Bank of England’s Monetary Policy Committee forecast for the first time that the economy would not spring back

to normal growth rates within two years.• Exports to countries outside Europe fell 8.6% between May and June, exacerbated by lower car exports to China,

which outstripped the 6% fall in exports to Europe.• UK posted an unexpected budget deficit in July as corporation tax receipts dropped sharply.• The budget deficit, which excludes government support for banks, was GBP557m compared with a surplus of

GBP2.84bn a year earlier, the Office for National Statistics announced.

HENLEY ASSESSMENT:Negative. Even after more than three years of near-zero interest rates, a QE programme worth more than 20% of GDP and the Chancellor’s various credit easing schemes, UK output remains more than 4% below its pre-crisis peak. At the heart of the problem lies an incorrect diagnosis, which invariably leads to the wrong prescription. In the UK, the underlying problem is excessive household sector debt. In the 10 years leading up to the crisis, the stock of UK household sector debt rose from around 90% of disposable income to over 160%, and banks fell over themselves to lend that money. In addition, rising employment is inconsistent with data, showing the UK has contracted for three consecutive quarters and is growing at the same rates as Spain and Italy, where unemployment is moving sharply higher. This has been described as a “genuine economic puzzle” by the BoE.

EUROPE EX UKPositives• The German government may be willing to make small concessions on the Greek bailout plan such as a reduction in

interest rates and an extension of the maturity on bailout loans, according to Norbert Barthle, the budget spokesman for Chancellor Merkel’s CDU party.

• The German parliament’s budget committee, and not the entire parliament, would have to approve any adjustments in Greece’s bailout program, which should make adjustments to the Greek bailout program a little easier to get approved.

Negatives• Eurostat said the euro zone economy had shrunk by 0.2% in the April-to-June period from flat growth in the previous

first quarter.• The euro zone’s trade surplus hit EUR14.9bn in Jun12 up from EUR200m a year ago. Germany, the Netherlands and

the Republic of Ireland recorded the biggest surplus amongst the 17-member euro zone and the wider 27-member European Union. The data underlined the region’s dependence on external sources of growth as austerity measures in core euro zone countries have damaged household spending and business confidence.

HENLEY ASSESSMENT:Strongly negative. According to data published by the Bundesbank, net lending by German banks to Spain, Italy, Portugal, Greece and Ireland reached a peak of EUR510bn in Nov08. Since then, total net credit provided to these economies by German banks has more than halved to EUR241bn in May12,and there has been a net contraction of credit of more than EUR60bn in just the last six months. Hence, the unbreakable link between credit provision and economic activity means that recessionary conditions in Spain, Italy and the weaker euro zone economies will intensify, as French and German banks take their money back.




AUSTRALIA Positives:• Unemployment is at 5.1%.• Interest rates are falling and the RBA cash rate is now at a lowly 3.5%,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 gives the Chinese government more room to stimulate its 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 household debt level is high.• Exposure to base metals sector, and reliance on trade with China where consumer spending is falling.• Share market is more than 40% below highs of 2007, although this can be seen as a positive!

HENLEY ASSESSMENT: Positive for clients with a long-term view and 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’ve 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.

ASEANPositives:• Indonesia plans to increase government capital spending by 15% next year to ensure sustainable growth. Capital

spending will rise to IDR193.8tn (USD20bn) in 2013 to boost infrastructure in order to support domestic connectivity, energy and food, and to support the economy. The budget deficit may narrow to 1.6% of gross domestic product from 2.23%, as economic growth is forecast to accelerate to 6.8% from an estimated 6.3% to 6.5% this year to maintain the fiscal deficit at a “safe level”.

• 1Malaysia Development Bhd (1MDB) plans to raise as much as USD2bn in an initial public offering of its power assets. The IPO may take place in the first quarter of next year.

Negatives:• Manila experienced the worst flood in three years, and this affected food production which may cause food prices to

spike. Damage caused by typhoons and other calamities reached PHP59.2bn (USD1.4bn) in 2011.• The Thai government’s warning of weaker growth in the second half of this year underscores the need for Asian

economies to rely on domestic demand for expansion as Europe’s crisis and elevated US unemployment erode export gains. GDP is forecast to expand 5.5% to 6%, compared with a previous growth range of 5.5% to 6.5%. This is due to a reduction in the forecast for export growth to 7.3% from 15.1% on the concern that Europe’s crisis will dampen demand.

HENLEY ASSESSMENT: Neutral. Indonesia’s spending plan may stoke ASEAN growth. Southeast Asia is facing problems because of Europe’s debt crisis and China’s slowdown, yet Philippine and Malaysian expansion surpassed estimates due to strengthening domestic demand.




GREATER CHINAPositives• Economic data for June showed signs of stabilising in demanding conditions. Industrial production gained 9.5% YOY

in June versus 9.6% in May, a marginal decrease. • The underlying trend in exports also appears to have been steady in the past two months with exports up 11.3% YOY

compared to 13.8%in May.• Meanwhile, Consumer Price Index inflation continued to cool to a low 2.2%YOY in June which allows flexibility for

further easing of monetary policy. Softening food price inflation was the main contributor to the favorable results.• China infrastructure investment growth accelerated to 18.5% YOY, up sharply from May’s 7.9% YOY.

Negatives• The downturn in China A shares continued into July, with the MSCI China A index falling 1.18% YTD in local currency,

as a weakening economy and global factors continued to preoccupy investors.• The official purchasing managers’ index (PMI) for July fell to an eight-month low of 50.1 from 50.2 in June. The figures

showed that factory output expanded but new orders, including exports, contracted more in July than in June.• Taiwan’s economic growth rate in the second quarter of 2012 has been adjusted downward from the negative 0.16%

estimated in late July 2012 to negative 0.18%, according to advance estimates released by the Taiwan officials. Taiwan’s exports, the driver of the economy, fell a surprise 12% YOY in July, indicating the huge impact of the global economic downturn.

HENLEY ASSESSMENT: Neutral. While recent economic data confirms that economic momentum in China is slowing, we believe that the situation is stabilising. On the political front, we anticipate that the preparations for the leadership change later this year are going smoothly. Once this issue has been resolved, there will be clearer direction for economic policy and reform. In addition, the Chinese government continues to demonstrate a growth-bias attitude. There is strong evidence suggesting that monetary policy is turning to a looser mode in the form of more-than-expected interest-rate cuts and reductions in required reserve ratio (RRR). We also expect cumulative investment in the fixed asset and infrastructure sector may continue to improve and offset the real estate investment slowdown.

INDIAPositives• The Wholesale Price Index (WPI) eased to 6.87% in July from 7.25% in June thanks to the drop in vegetable and

domestic petrol prices.• The Government of India’s nod to Walt Disney’s USD180mn investment has sent positive signals to the international

investor community.• Till early August, the Foreign Institutional Investors (FIIs) bought assets worth USD10.7bn, much higher than 2007

and 2010.

Negatives• Owing to the slowdown in the US and Europe, India’s exports shrunk by 14.8% year on year to USD22.4bn, in figures

released this July. June’s Index of Industrial Production (IIP) sharply contracted by 1.8% compared to the 2.4% growth in May 2012, explained by a drop in the manufacturing and capital goods sectors.

• GDP growth forecast for 2012-13 is revised downwards by RBI to 6.5% from the earlier released figure of 7.2%.

HENLEY ASSESSMENT: Neutral. The country has witnessed 19% less rainfall than usual since the start of this year’s monsoon season till 31st July. This will have a significant impact on the economy since 60% of the agricultural land in India is still non-irrigated. The first drought in three years is expected to add fresh inflationary pressures. Indeed, the impact on the agricultural economy will have a domino effect on other industries too.




OTHER EMERGING MARKETS (SOUTH KOREA, RUSSIA, BRAZIL)Positives• Despite the US historically producing almost six times more corn than Brazil, the US is turning to Brazil for help with

corn supplies as low stocks and the worst drought in half a century haunt the world’s leading grain exporter. US meat producers have arranged to ship Brazilian corn to the US east coast as it has become cheaper than supplies from the US Corn Belt. This situation is unparalleled and in many ways is analogous to Saudi Arabia importing oil, and illustrates how desperate the current US drought is.

• Emerging market equity returns are set to outpace developed market returns over a five-year horizon. However, discrimination will be key for investing in the emerging market space. Ranking countries using valuation indicators and growth data shows that many markets are cheap for a reason. For example, Argentina may appear cheap but growth is expected to weaken sharply. Meanwhile, Thailand is expected to have the biggest improvement in growth, but it has relatively poor valuation. Importantly, a broad range of expected returns among emerging market bourses highlights the challenge of investing in these countries: it is important to understand the dynamics of each country because emerging markets is not a homogenous asset class.

Negatives• In China, private sector credit has risen from 107% of GDP in 2007 to 127% last year, according to Capital Economics,

a consultancy. In Brazil, Turkey and Poland, private sector credit has meanwhile risen by as much as 20% of GDP. Countries with slower credit growth are the exceptions. South Korea, for example, has held back because of an earlier painful credit boom, and India because of high interest rates induced by persistently high inflation.

• Elsewhere, though, the credit surge is in full flow. The latest data shows private credit grew in April at annualised rates of 20% or more in Colombia, Indonesia, Turkey and Russia. Although these countries are relative latecomers to the credit binge, Brazil has been partying from the start. Private credit is still growing 23% a year, even though borrowers are now struggling, as seen in rising numbers of delinquent car loans.

HENLEY ASSESSMENT:Neutral. Whilst there have been developments in emerging markets to create their own internal markets, at present they 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 fallout in the current sovereign debt crisis will undoubtedly affect these markets also. The current rise in debt levels in certain emerging market countries is also a worrying trend.




Commodities

ENERGYPositives• Tension between Iran and the West has heightened once again.• OPEC spare capacity is low.

Negatives• Ongoing debt concerns in Europe and signs of a slowdown in China are adding to negative sentiment and make future

demand for oil and energy look uncertain.

HENLEY ASSESSMENT:We remain neutral. Talks between Iran and western powers have yet to provide a conclusive solution. The Israelis are getting restless and there are once again rumours and speculation whether Israel will strike alone. Israel obviously hopes for direct US support but the Americans are wary of getting dragged into another conflict. Oil prices continue to be guided by geopolitical tension and a weakening outlook for the global economy.

PRECIOUS METALSPositives:• Gold and silver are a good hedge against financial

instability.• Unrest in the mining community in South Africa is

providing support for platinum.

Negatives• Temporary USD strength puts pressure on the gold

price.• According to the World Gold Council, the demand

for gold in Q1 fell to 707 tonnes, down 7% YOY.

HENLEY ASSESSMENT: We remain strongly positive on precious metals. Investors are still waiting for Europe’s leaders to come up with a credible plan to deal with excessive debt levels. So far, there has been much talk, but very little action. In the US unemployment remains stubbornly high and this hampers any meaningful recovery in the housing market. Overall, we feel that we continue to move closer to the point at which policymakers need to add to their stimuli efforts, although the exact timing of this is not easy to pinpoint. Monetary metals should do well in these circumstances. Gold demand in India and China slowed in Q2 but we believe this is temporary. Central bank demand remains robust.




INDUSTRIAL METALSPositives• Currency debasement will support real asset prices.

Negatives• The health of the global economy remains uncertain.• Europe is edging closer to a recession.

HENLEY ASSESSMENT:We maintain our neutral view on base metals. Economic output in the euro zone contracted 0.2% in Q2, measured from one year earlier, and China continues to slow down. In the commodity sector we still favour other areas.

AGRICULTUREPositives• The Food and Agriculture Organization of the

UN 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• 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 over the past few months due to changing global weather patterns. 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 fertiliser 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.

Source: The Fertilizer Institute




Alternative Investment

Positives• Hedge fund managers were positive on average in July, reflecting the good returns of most global equity indices.• The best-performing strategy in July was directional trading. In particular, systematic trading managers produced

some strong returns on the back of some established trends in fixed income and FX markets.

Negatives• In the short term, policy makers

have succeeded in delaying tough decisions on the euro crisis until after the summer holidays. Nonetheless, these decisions will have to be addressed from September onwards. Further disagreements are highly likely, leading to another round “selling-off” on risky assets. Therefore, the climate for most hedge fund strategies in the coming few months remains challenging.

• Hedge fund attrition rate spiked in 2Q12, with the number of closures exceeding the number of new launches.

HENLEY ASSESSMENT:

Positive on Commodity Trading Advisors (CTA) and Global Macro strategies: As expected, managers who focused on trading technical factors tended to do far better than managers who focused on fundamentally-driven sources of return. In an environment with low volumes/liquidities, lost money can be exceptionally difficult to recover. Therefore, we stick closely to those managers with a trader’s mind, and who position their assets in a particularly cautious way.

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.

Source: FRM Viewpoint




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Henley Outlook September 2012