Henley January Outlook Hk

Monthly Market Outlook
January 2012
It is customary at this season to review the year which has just
drawn to a close, and to prognosticate about the new year dawning.
This year, in the interests of preserving whatever festive spirits
might have survived, that might be a custom better honoured in
the breach than the observance!

The Henley Outlook
January 2012
THE WEALTH MANAGEMENT PROFESSIONAL

The Henley Outlook
January 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

Brazil

Other Emerging Markets

Commodities Energy

Precious Metals

Industrial Metals

Agriculture
Selective strategies only
Alternative Investments

Key: Positive Neutral Negative

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

The Henley Outlook
January 2012

Global Overview

It is customary at this season to review the year which has just drawn to a close, and to prognosticate about the new year
dawning. This year, in the interests of preserving whatever festive spirits might have survived, that might be a custom
better honoured in the breach than the observance!

2011 was not a great year for mankind. The Japanese suffered their apocalyptic triple tragedy of earthquake, tsunami
and nuclear meltdown. The Europeans were overwhelmed by the scale of the structural problems facing their currency
union. There were also earthquakes in New Zealand and serious floods on several continents.

The Americans, meanwhile, demonstrated to the rest of us that their democracy has broken its back on voter self interest
and lobbyists’ whispers, leaving the nation paralysed and without much hope of improvement, even after the elections in
November this year. Now China—perhaps the last big shoe to drop in the slow-motion global financial train wreck, now
in its sixth year—is dicing with a hard landing. Inflation, the banking sector, non-performing loans and capital flows all
raise cause for concern as a dangerous combination.

Perhaps the good news this year was that the quadrillion-dollar derivatives’ death star did not implode and take the
rest of the financial system down with it. Quite an achievement in the circumstances, really. Perhaps, as the mystery
surrounding the USD 1.2bn of client assets which disappeared in the insolvency of New York futures brokerage, MF
Global, unfolds, and as the shadow banking system and its hyper-hypothecated collateral continue to collapse, that is
something to which we can look forward in 2012? For all our sakes, let us hope not.

It is important not to underestimate the loss of confidence in the system and its supposed safeguards which the MF
Global insolvency has caused. That loss of confidence has been matched by a corresponding increase in fear.

What else might 2012 bring? So far, political ideology has prevented the Europeans from addressing the real issues: the
euro itself, and European trade and capital flows. Will they finally acknowledge that the euro has to go? No sign of it at
the summit on 9th December, which signally (and somewhat bizarrely) failed to address the debt mountain. Nor did they
create a fiscal union. No joint debt issuance. No EU Treasury. No shared budgets and no fiscal transfers to countries in
need. No change in the European Central Bank’s mandate, no lender of last resort. What they proposed instead was an
austerity union, which may or may not be made to work.

The northern European countries are running huge trade surpluses with their southern neighbours and have relatively
low unemployment—a sort of regional equivalent of the US-Chinese imbalances. But it is only the south which is being
required to adjust. Until these issues are addressed, the European crisis will not recede. It is now clear to all that Europe
is too big to solve, and preparations for sovereign defaults and a return to national currencies are being accelerated in
financial centres all over the globe.

Central banks across five continents are undertaking the broadest reduction in borrowing costs since 2009 to avert a
global economic slump stemming from Europe’s sovereign insolvencies.

In some ways, the Americans must be happy to see the Europeans stewing in their own juice. They must realise that, when
the spotlight finally leaves Europe, it will fall on them (and/or Japan), its concentrated rays of scrutiny illuminating the


The Henley Outlook
January 2012

unsustainable American fiscal position and lighting the touch paper of their own sovereign debt crisis. Their debt-to-GDP
ratio has just sailed past the 100% mark.

The Japanese, in fiscal 2012, for the fourth consecutive year, will fund more government spending from bond sales than
from taxes – and Japanese tax rates are not low.

Those are just some of the numerous icebergs ahead in 2012. There are others. It gives me no pleasure to incant this litany
of woes (in no particular order); but we firmly believe that one of Henley’s competitive advantages is our independence,
which allows us to tell it as we see it, warts and all. For our clients, hopefully this means forewarned is forearmed:

1. Hard landing in China. A wave of bond interest defaults (CNY 30bn+) appears already to have begun.
2. Disintegration of the euro.
3. More money printing by central banks (leading to further debasement of paper currencies and possibly a currency
crisis and/or hyperinflation).
4. Sovereign risk (name a country – any country: Japan, US, UK, euro zone).
5. Competitive currency devaluations—“Confetti” wars/inflation.
6. Middle East oil supply shock.
7. US municipal defaults.

Can’t wait!

You will not be surprised to know that we continue to view this environment as bullish for the monetary metals, gold and
silver. Gold has risen an average of 17% per annum for the last eleven years. 2012 is likely to be even better. Although
the environment is deflationary, the policy response is likely to become increasingly inflationary, since the central banks
have no other option.

May your New Year be silver lined and iceberg free!

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


The Henley Outlook
January 2012

Cash and Currencies

USD Index (Source: Bloomberg)

Summary
• Risk off saw the USD stronger against all major pairs.
• The troubles in Europe are perceived to be a greater risk than troubles in USA at present and therefore the EUR is
suffering as a result.
• AUD fell below parity with the USD and is trending lower. Poor data from China has cooled the outlook for Australia’s
exports.
• The SGD weakened against the USD, underlying intervention is trying to keep the SGD from gaining against the USD.
• Illiquidity tends to occur around the festive season as few participants are in the market. This can lead to heightened
volatility and sharper moves. Equally, traders may be looking to enhance their profits for the year before their bonus
is calculated!

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.


The Henley Outlook
January 2012

Fixed Income
Positives
• US Fed coordinated with five other central banks to ease borrowing in an attempt to buy time as Europe wrestles with
debt. Premium banks paying to borrow USD overnight from central banks fell by 0.5% to 50bp. Cost of borrowing for
European banks also dropped from highest in three years.
• ECB reduced its benchmark rate by another 0.25% to 1% on 8 December. ECB also revealed unconventional measures
such as loosening collateral rules so that banks can borrow more.
• China’s inflation cooled to slowest pace in 14 months. CPI growth declined to 4.2%YoY from 5.5% in previous month.
Slower inflation will give policymakers more room to tackle China’s problems even though PBoC has already cut its
reserve requirement ratio by 50bp on 5 December. We believe any major policy shift in China must be preceded by
lower property prices.

Negatives
• Credit ratings agencies continue to put pressure on euro zone. Moody’s announced that despite the proposed new
fiscal compact agreed, it saw no reason why it would not be continuing with its previously announced review of all
euro zone countries in the first quarter of 2012. Eight Spanish banks were placed on review for a possible downgrade.
• Italy auctioned EUR 7bn worth of 12-month bills at 5.95%, slightly below the record high of 6.08%. Stresses in peripheral
bond markets show no sign of abating and the credit will grind on.

HENLEY ASSESSMENT:
Negative. Most bond investors were cautious on the outlook of sovereign bonds of Portugal, Ireland, Italy,
Greece and Spain (PIIGS), but one year ago not many would have expected the contagion fears spreading to
France. Yield spread between 10-yr France sovereign and its German counterpart rises to more than 200bp
for the first time since EUR was created. Germany failed to get sufficient bids at an auction of USD 8.06bn of
10-yr bonds, heighten borrowing costs in Europe and lower EUR on concerns of debt crisis in eurozone. In this
perspective, European debt crisis has worsened.

We believe political risk will remain
high and credit will further tighten in
Europe in 1H12. Besides the struggling
sovereign nations, European financials
are also required to settle/rollover
USD 700bn of public market debt
over the next nine months (as shown
in graph above) in rather challenging
market conditions. THG is concerned
about the deleveraging process in the
overall developed markets.


The Henley Outlook
January 2012

Property
Positives
• As property prices continue to rise in Singapore, the Government has just announced an Additional Buyers Stamp Duty
(ABSD) for private property of between 3% and 10% for Singaporeans, permanent residents, and foreigners, to slow
down the rise of the property market. The ABSD is in addition to the current Buyer’s Stamp Duty of 1% to 3%, and the
government have stated it is designed to moderate investment demand for private residential property, and to prevent
future volatility. Foreign purchasers, who accounted for 19% of all private residential property purchases in the second
half of 2011, will now pay an additional 10% ABSD for any residential property purchases.
• Although we are not predicting a recovery in the US housing market any time soon, there are some slightly positive
indicators. For example, homebuilder confidence was now at an 18-month high in November 2011, according to the
National Association of Home Builders. Also, the number of homeowners in negative equity decreased moderately in
Q3, though levels remained high.

Negatives
• In the US residential property market, the seasonably adjusted Case-Shiller Index fell by 7.42% from a year earlier, and
by 1.61% in the latest quarter. The index’s co-founder, Robert Schiller, recently commented to Reuters: “I do not know
what will happen, but I don’t see any reason to predict a recovery now.” Freddie Mac expects the US housing market to
decline over the following months due to the large inventory of houses with delinquent mortgages.
• National home prices in China suffered their third consecutive monthly decline in November, a fall of 0.3%. Further
falls in prices are expected as the government cooling measures, first introduced in April 2010, continue to affect the
market.
• The Hong Kong Government has suggested that the cooling measures enacted to slow the rise of residential property
prices may be eased in 2012. This follows the news that Hong Kong’s property prices dropped to a 6-month low,
reflecting the success of the government’s policies. Samsung Securities Asia expects property prices in Hong Kong
to drop by 10% to 15% next year, but they are unlikely to see any sharp corrections as mortgage rates (although still
rising) are still below average rental yields, and the mortgage loan to value ratios are still low by historical standards.

HENLEY ASSESSMENT:
Neutral. Property prices generally,
after significant falls in 2009,
stabilised in 2010 and 2011.
Property values have recovered
in selected areas such as Asia,
but fundamentals remain weak
elsewhere. However, we still consider
some specialised property assets
(such as student accommodation/
ground rent income) to merit
inclusion in our portfolios. Other
than these investments, we would
suggest that clients do not invest
further at this time.


The Henley Outlook
January 2012

Equities
US
Positives
• US economy highly flexible, resilient and leads world in technology and innovation.
• Federal Reserve has publicly committed to keeping rates unchanged until 2013.

Negatives
• Deterioration of US fiscal position accelerates (national debt: USD 15.2tn).
• Housing market is in a depression, foreclosures rising again (average house price Detroit: USD 6000).
• Real incomes falling (down 7% in four years); total unemployment rising.
• Political system dysfunctional, no appetite for tax increases or spending cuts (election year).

HENLEY ASSESSMENT:
Negative. Going into 2012, challenges facing US economy are growing, but Congress appears unable or unwilling
(or both) to do anything. There is a growing popular perception that the system is broken and that the markets are
both rigged and blatantly corrupt. The global environment is deflationary, and the only available response is money
printing/currency debasement/inflation – classic, textbook recipe for hyperinflation sooner or later (cp. Weimar
Germany 1923, Zimbabwe 2009). Increasingly, the only rational option may be to opt out.

JAPAN
Positives
• Japan’s economy rebounded from a recession in Q3 by expanding 1.5%. The world’s third largest economy grew by an
annualised 6% after three consecutive quarters of contraction. Net exports contributed 0.4% to GDP growth, the first
positive contribution in five quarters due to rebuilding efforts after the earthquake and tsunami. Private consumption
grew a stronger-than-expected 1.0%.
• Y12.1tn (USD157bn) additional budget is now in the government to be passed by end of November. Recovery in Japan
will largely depend on the effect of public spending in its largest rebuilding effort since WWII.

Negatives
• Japan’s consumer confidence dropped to 37.5 (November) from 38.6 (October). Consumers remain pessimistic amid a
deteriorating labour market in the 4Q11.
• Japan sold an estimated record JPY 7.7tn (USD 100bn) in intervention; its effect turned out to be short-lived as JPY is
now trading at below JPY 78.
• BoJ’s Tankan report still showed weak sentiment in November. Companies were pessimistic about economic outlook
for next three months citing concerns on strong JPY.
• Japan’s sovereign debt is set to surpass JPY 1,000tn (USD 12.81tn), or 200% of its GDP by the end of this fiscal year.

HENLEY ASSESSMENT:
Negative. In the final quarter, Nikkei 225 has been range-bounded below the level when the earthquake struck
in March. We believe production lift following the March earthquake and tsunami has largely played out. Export
manufacturing will struggle in the face of weak global demand. Slower growth environment is likely to persist through
2012. We also expect more mergers and acquisitions by Japanese companies next year. Cash-rich conglomerates
will be driven to expand their investments abroad given strong JPY and low interest rates. It is a worrying trend that
will reinforce downbeat prospects in the domestic economy, but shifting operations out of the country may well be
the way for Japanese exporters to stay competitive!

The Henley Outlook
January 2012

UK
Positives
• Nov11 inflation is expected to ease to 4.8%, down from 5% in Oct11. Retail price inflation is also forecast to ease to
5.1% from 5.4% last month
• The Royal Institution of Chartered Surveyors (RICS) claimed that the index of UK house prices climbed in Nov11 from
a four-month low due to an increase in demand.

Negatives
• The Bank for International Settlements (BIS) claims that BoE’s first round of asset purchases in 2009 and 2010 may
have had less impact on gilt yields than the central bank estimated.
• The National Institute for Economic and Social Research (NIESR) stated that economic growth in the UK remains
subdued and output will not reach 2008 levels until 2013.

HENLEY ASSESSMENT:
Negative. Perhaps the biggest news to come out from UK this month was the refusal of David Cameron to back
a 27-nation fiscal pact without ironclad guarantees of a British veto right over future financial regulations. He
stated that they posed a threat to London’s standing as Europe’s leading financial centre. However, his move
is not likely to make the UK more independent of the bloc. This is because Britain is tightly locked into a system
of European regulation in which decisions taken in Brussels in setting common standards are also applied by
countries outside the bloc. Also, EU is UK’s largest market, accounting for 54% of all exports.

EUROPE Ex UK
Positives
• EU leaders agreed to lend up to EUR 200bn to the IMF to help it aid euro zone strugglers and to bring forward the
permanent rescue fund European Stability Mechanism (ESM) by a year to mid-2012.
• ECB cut its benchmark rate by 25bps to 1%, matching a record low. It also introduced new three-year loans for banks
and loosened the collateral criteria for lending by making credit claims.
• The euro rallied as the 10-year Italian bond yield slid to a 1-month low of 6.16% after Italy’s Cabinet proposed a EUR
30bn package of emergency economic measures in which Prime Minister Monti proposed a debt-reduction plan that
includes more than EUR 12bn in spending cuts.

Negatives
• S&P warned that France and Germany may be stripped of their AAA credit ratings as it put 15 euro nations on review
for possible downgrade. It also warned that it may also cut the credit rating for the European bailout fund if any of its
guarantors have their own debt grade lowered.
• Dollar funding costs increased after the summit amid concerns the measures are inadequate to stem the crisis. The
three-month cross-currency basis swap ended last week at 122bps below the euro interbank offered rate, from 117bps
the day before.
• The Nov Euro-Zone PMI composite index was unexpectedly revised downwards to 47.0 from the originally reported
47.2, while the Dec Euro-Zone Sentix investor confidence unexpectedly fell -2.8 to a 29-month low of -24.0, weaker than
expectations for a +0.2 point increase to -21.0.

HENLEY ASSESSMENT:
Strongly negative. Tellingly, the European summit deal to strengthen budget discipline in the euro zone failed to restore
financial market confidence. The initial market rally in reaction to the summit lasted less than 24 trading hours due to
legal uncertainty surrounding the new pact and the absence of an unlimited financial backstop for the euro. Also, if
some of the euro zone’s AAA-rated members are downgraded, it would call into question the solidity of the euro zone’s


The Henley Outlook
January 2012

rescue fund. The plan to pursue stricter budget rules for the euro zone and to have euro zone states and others provide
up to EUR 200bn in bilateral loans to the IMF, offer few new measures and does not lessen the risks to the cohesion of
the euro area. Investors looking for a magic bullet from this summit will be sorely disappointed.

AUSTRALIA
Positives
• US commitment to keep interest rates at virtually zero for some time are creating a clear drag on USD. With risk
appetite buoyant, commodity prices remain strong and equities climb, encouraging traders to invest in high-risk, high-
yield assets such as AUD.
• Interest rates likely to start rising again to curb increasing inflation due to demand pressures and skilled labour scarcity
driving up the pace of price rises.
• Mining boom remains alive and well and, if anything, is strengthening with the terms of trade continuing to rise and
set to further boost mining sector profits. Impact feeding through economy via higher wealth levels and dividend
payments, higher employment, higher tax receipts and higher business investment.

Negatives
• Strong AUD making it very difficult for tourism, agriculture, wine and other exporters to compete. As a result, the
economy is now very reliant on one industry.
• Any slowdown in Chinese and Indian growth (and related commodity demand) will send base metal prices and the AUD
tumbling
• As interest rates rise to address inflation it may very well result in the highly-leveraged Australian property bubble
bursting, putting bank balance sheets under a lot of pressure.
• Australian immigration policy hasn’t allowed the economy to keep up with rising demand for its commodities and has
caused wage inflation.

HENLEY ASSESSMENT:
Negative. The global economy is now cooling down which will hurt Australia’s economy which is highly linked
with the rest of the world. Falling commodity prices are not making matters any better and in particular
Chinese demand for raw materials looks set to moderate near term.

ASEAN
Positives
• Malaysia’s exports advanced by a robust 15.8% YoY (or +8.3% MoM) totalling RM 63.57bn in October, which grew faster
than economists estimated in October as sales of commodities and energy products surged. With an imports growth of 4.6%
YoY (or +2.7% MoM) amounting to RM 50.35bn, trade balance registered a healthy RM 13.15bn in surplus during the month.
Collectively, the exports of manufactured goods rose by 2.2% YoY in October (or accounting for 64.8% of total exports),
mainly driven by the chemicals and chemical products, manufactured of metal and rubber products.
• Bank of Thailand cut interest rates for the first time in more than two years by 25bps, bringing the benchmark rate down to
3.2%, seeing looser policy as one way to boost growth after the country was hit by devastating floods in almost 70 years.
• Bank Indonesia left rates unchanged at record-low 6% after cutting 75bps over the previous two months, joining neighbours
in changing policy direction from combating inflation to shielding economic growth amid Europe’s debt crisis and a US
slowdown.


The Henley Outlook
January 2012

Negatives
• Singapore imposed new taxes on home purchases to curb excessive investment. Foreigners and corporate entities will
have to pay an additional 10% stamp duty. The extra levy will be 3% for permanent residents purchasing a second
home, and for citizens buying their third residential property.
• Thailand experienced the worst slump in industrial output in October since at least 2000, and the lowest consumer
confidence in a decade after the floods killed more than 600 people and shut thousands of factories. Food shortages caused
by crop damage threaten price gains. Consumer inflation accelerated to 4.4% this month, the fastest pace since 2008.
• Philippine peso weakened 0.8% to 43.63 per dollar, dropping the most since November 2010. In October shipments
abroad declined 14.6% from a year earlier to USD 4.09bn after falling a revised 27% in September. The Philippine
economy unexpectedly slowed in the third quarter due to a drop in public and private construction and sluggish exports,
casting doubts that this year’s downwardly revised growth forecast of 4.5 to 5.5%will be met.

HENLEY ASSESSMENT:
We remain neutral. Philippines and Malaysia held interest rates at their last meetings, while Thailand and
Indonesia lowered borrowing costs, showing that they switch policy direction from combating inflation to
shielding economic growth amid Europe’s debt crisis and a US slowdown. The EU is one of the largest FDI sources
into ASEAN and therefore the threat from the debt crisis in Europe adds pressure on Asia to shield growth.

GREATER CHINA
Positives
• China and Hong Kong signed an eighth supplement to CEPA, an important trade agreement, to give the city’s firms
preferential measures in trade in goods, trade in services as well as trade and investment facilitation.
• China’s CPI inflation moderated to 4.2% YoY in November, weaker than consensus estimates. This was mainly due to
a fall of 0.8% MoM in food prices. Food inflation was at 8.8% YoY where pork prices moderated by 5.3% MoM. More
room for monetary policy easing if possible for 2012.
• Hong Kong topped the World Economic Forum’s 2011 index of financial market development, supplanting the US and
UK from the highest rankings for the first time. Singapore is ranked fourth. Hong Kong was ranked fourth previously.
• According to Hong Kong Monetary Authority, the net interest margins for banks grew 8bps QoQ in 3Q11 at 1.27%. It
may indicate the peaking of loan growth in 2Q11. Loan growth peaked at 32.4% in May11 and since slowed down to
20.4% in Oct11.
Negatives
• Fixed asset investments in China grew at 24.5% YoY in Nov while falling 0.4% MoM. Industrial production increased by
12.6% YoY in November, slowing from 13.2% YoY in October. Nominal retail sales growth was at 17.3% YoY in November
where growth continued 1.27% MoM.
• Exports in China grew 13.8% YoY in November, the weakest export growth since December 2009, excluding the Chinese
new year period. Monthly trade surplus was at USD 14.5bn and on a 12-month rolling basis, trade surplus has moderated
further to USD 155.4bn, accounting for 2.1% GDP.
• Exports in Taiwan rose only by 1.3% YoY, falling 8.5% MoM in November where shipments plunged in November, rising
at a pace 1.3% YoY compared to 11.7% YoY in October, below market consensuses.

HENLEY ASSESSMENT:
Neutral. With the weakening of real estate investments in China, fixed asset investment growth indicated a
decline which we believe may continue in 2012. As infrastructure projects from the stimulus package ran out
end of 2010, industrial investments from both private sector and state-owned enterprises have slowed. These
factors may indicate that China’s growth engine may slow down. With over one tenth of Taiwan’s shipments
heading for the US and Europe, a continued weakening in demand from these countries may prove a challenge.

The Henley Outlook
January 2012

BRAzIL
Positives
• Over the last two decades the poverty rate in Brazil has halved. With this, income inequality (measured by the Gini
coefficient) has also fallen sharply, declining on average by 1.2% a year. This is in contrast to most western developed
economies where the disparity between the poor and the wealthy has been increasing in recent years. Ultimately
pulling more people out of poverty and creating a larger middle class will be very beneficial for Brazil as it continues to
develop its own internal markets.
• According to the Economist Intelligence Unit, Brazil’s economy is forecast to grow by 3.6% this year, a number most
indebted countries can only dream about.

Negatives
• BRL remains very volatile against USD.
• Brazil’s stock exchange has suffered from capital outflows this year amounting to USD 6bn – the second-worst
performance among emerging markets after China.
• The Brazilian Bovespa Index has fallen 22% this year, compared with a 0.3% decline in the S&P 500 and a 3.4% decline
in the FTSE 100.

HENLEY ASSESSMENT:
We remain neutral on Brazil. The country is in the enviable position of being self sufficient in many commodities
and has a large and growing middle class. However, Brazil is reliant on commodity prices and evidence suggests
emerging markets are far from immune when the going gets tough in the developed world, this is evidenced
by the equity returns YTD in the Bovespa.

OTHER EMERGING MARKETS (SOUTH KOREA, INDIA, RUSSIA)
Positives
• Mikhail Prokhorov, one of Russia’s key oligarchs, declared his intention to participate in the presidential race. Prokhorov
needs to collect up to 2m signatures in support of his candidacy. This step to presidency may lower tension between
the authorities and the liberal opposition.
• Korea’s unemployment rate remains at a low level of below 3.5% due to employment growth in private sectors.
Construction and public sector may increase hiring in the coming months.
• Bank of Korea kept its benchmark base rate unchanged at 3.25% after the December meeting. According to the
central bank, they may expect a faster decline in inflation and a sharper deterioration in growth as domestic demand
weakened.

Negatives
• According to the Ministry of Finance in Russia, it is completing its preparations for an issue of sovereign eurobonds in
foreign currency in the beginning of 2012 with a maturity of more than 10 years. The government is projecting foreign
borrowing of USD 7bn for 2012. The domestic borrowing has touched nearly RUR 1.4tn which is equivalent to 2.8%of
GDP this year.
• India’s industrial production growth decelerated to 1.9% YoY in September compared to 3.6% YoY in August. Meanwhile,
inflation rate remained at 9.73% YoY in October compared to 9.72% YoY in September.

HENLEY ASSESSMENT:
Neutral. According to Financial Supervisory Service, the average capital adequacy ratio of 18 Korean banks
dropped 0.23% to 14.17% while the Tier 1 capital ratio declined to 11.45% as at end of Sep11. This deterioration
may attribute to increase in loans but it is indicating an early sign of weakening in banks’ capital and ahead of
Basel III adoption in 2013. Inflation in India remains a concern and the interest rate may be kept unchanged
unless there are signs of inflation easing in 2012.


The Henley Outlook
January 2012

Commodities
ENERGy
Positives
• Long-term supply sources uncertain as several exporters are turning into importers.
• Emerging markets will continue to grow, and will need more oil to do so.
• Debasement of currencies will support real assets.

Negatives
• The macro outlook remains fraught with risk.

HENLEY ASSESSMENT:
We remain neutral. Tension in the Middle East and worsening relations between the West and Iran is providing
support to energy prices. Libyan output is now at more than half its pre-war level of 1.6m barrels a day. In the
near term any blow up in the European situation would be negative news for energy markets. Fundamentally,
we remain constructive on the oil price but we expect high volatility as prices are being torn between tight
fundamentals and poor macro.

PRECIOUS METALS
Positives
• Stress in the banking system is high with funding
costs on the increase.
• Korean Central Bank bought 15 tons of gold in
November, boosting its holding to 54.4 tons, or
0.7% of its total reserves.
• Gold and silver are a good hedge against
financial instability and possible monetisation
of sovereign debt.

Negatives
• Given the run up in prices, precious metals
remain sensitive to short-term profit taking to
cover losses and margin calls elsewhere.
• Short-run USD strength will put pressure on the
gold price.

HENLEY ASSESSMENT:
Despite the recent volatility, we remain strongly positive on precious metals. The crisis in the European
continent shows few signs of abating and the latest summit leaves many questions unanswered. Central
banks are clearly concerned about the health of the financial system, pouring liquidity into the market to ease
constraints. With economies around the globe slowing down, and with treasuries broke, we see more money
printing as a real possibility in 2012. Hold tight to your bullion!


The Henley Outlook
January 2012

INDUSTRIAL METALS
Positives
• Ample liquidity will support base metal prices.

Negatives
• Macro uncertainty and risk aversion will continue to keep base metals under pressure for some time to come.
• China, which is the most important powerhouse for commodity demand, is showing early signs of slowing down.
• A recession in Europe in 2012 is likely.

HENLEY ASSESSMENT:
We maintain our neutral view on base metals. BHP Billiton, the world’s biggest miner, has turned more wary
on the outlook for commodity markets. 2012 is likely to be difficult for economies around the world with a
recession in Europe likely and possibly also in the US. While we favour real assets over financial assets, we
prefer monetary metals over industrial commodities.

AGRICULTURE
Positives
• By 2030, the UN estimates that demand for
agricultural products will be about 60% higher than
today.
• Developing markets are seeing an increase in annual
protein intake of 11% - 15%.
• In 2030, China’s meat consumption will be more
than double the 1997 levels of 41kg/person.
• We now have about half the arable land per person
that we had 40 years ago.

Negatives
• Prices are subject to many uncontrollable risks, eg,
weather and natural disasters, politics and other
pests.

HENLEY ASSESSMENT:
Positive: A rapidly-growing global population and the rapidly-developing emerging world underpin the long-
term prospects of the agricultural sector globally. However, due to the vagaries of weather, politics and acts
of God, this will always be a high-risk sector in which diversification is essential.


The Henley Outlook
January 2012

Alternative Investments
Positives
• Although the increased correlations between asset classes points towards markets responding broadly to “risk on” vs.
“risk off” as opposed to any fundamental factors, the opportunity set is focused on shorter duration trades and those
that have hard catalyst.
• Systematic traders ended another month in positive territory despite the sharp reversal in risk assets at the end of
month. Commodities and bond exposure generated the gains while losses came from short equity exposure.

Negatives
• After a rocky 2011, hedge fund managers are bracing themselves for the possibility of more turbulence in the year
ahead, according to a global survey carried out by Aksia, which asked 125 hedge fund managers, with USD 800bn
in assets between them, what 2012 holds for the industry. A sizeable 42% of respondents saw the potential for
defaults or restructures by Italy and Spain, with
60% anticipating a similar outcome for Greece;
predictions which have no doubt added to an
already bearish outlook on next year’s economic
growth.
• The average hedge fund manager has lost 4.37%
in the year to the end of November, according
to data just released by Hedge Fund Research
– losing money in six of the past seven month.
Only in 2008, following the collapse of Lehman
Brothers, did the industry fare worse.

HENLEY ASSESSMENT:
Positive: Looking ahead into 2012, market
conditions remain poor. For some time now,
we have held the view that liquidity provision
is an attractive source of return for hedge
fund managers, therefore technical strategies
or managers with trading approaches are the
right space to be; our view remain unchanged
in this respect.

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. Neither this document nor any information contained herein shall be construed as an offer,
invitation, advertisement, inducement, representation of any kind or form or any advice or recommendation to buy or sell any financial products.


The Henley Outlook
January 2012

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