Henley Outlook July 2012 Hong Kong

Monthly Market Outlook
July 2012
At the time of writing, the umpteenth crisis meeting of the Council of
Europe has just finished and the markets are being ramped upwards
into the half-year close. The European Union smoke-and-mirrors
merchants want us to believe that a game-changing agreement to
solve the euro crisis has been reached; but there is no agreement, any
more than there is a plan to bail out the Spanish banks. They just say
they have a plan. There is no plan; no formalised, agreed plan.

The Henley Outlook
July 2012
THE WEALTH MANAGEMENT PROFESSIONALS

The Henley Outlook
July 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

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 advisor in Hong Kong Hong Kong, Singapore & Shanghai
Suite 2004-08, 20/F, St George’s Building, 2 Ice House Street, Central, Hong Kong
info@thehenleygroup.com.hk www.thehenleygroup.com.hk

The Henley Outlook
July 2012

Global Overview
At the time of writing, the umpteenth crisis meeting
of the Council of Europe has just finished and the
markets are being ramped upwards into the half-
year close. The European Union smoke-and-mirrors
merchants want us to believe that a game-changing
agreement to solve the euro crisis has been reached;
but there is no agreement, any more than there is
a plan to bail out the Spanish banks. They just say
they have a plan. There is no plan; no formalised,
agreed plan.

What we have is a Memorandum of Understanding,
the weakest form of non-binding document
possible. We have EUR120bn of (mostly) previously
announced spending being amalgamated and
trumpeted as a new growth package. We have no
new bailout money. We do have some technical
changes to the European Stability Mechanism,
which are to be applauded. We also have a central supervisory authority for banks to be run by the European Central
Bank. But we will really have all this only if that wish list can be converted into a legally-binding agreement. As usual, the
devil will be in the detail, in the camels which have to be squeezed through the eyes of needles and in the time and money
which it is all going to take. Déjà vu, anyone?

In conceding even to the Memorandum, Chancellor Merkel has opened the floodgates on a torrent of hostile legal
challenges within Germany. (Perhaps, now that the chips are down, Germany is reverting to her old ways, seeking a
German Europe, rather than the European Germany we have seen her pursue since the Second World War? Probably not,
but who could blame her)? The constitutional consequence of the litigation may have to be a German referendum on the
way forward; so Italy’s victory at the summit (as on the championship soccer field!) may prove short lived – but at least
a referendum would allow Merkel to wash her hands of Europe’s fate. Is that her game?

So far, Merkel has been saying that, if Germany is expected to take on liability for other countries’ debts, Germany must
be given control over other countries’ taxing and spending. However, if you believe that control over your taxing and
spending is the essence of your sovereignty, it is no wonder that other nations are unwilling to succumb; but, although
Germany may have blinked on a debt union, she won on banking supervision. In that sense, perhaps Italy’s success was
even less than it appeared at first?

In reality, however, conceding that already insolvent banks may borrow even more money from previously forbidden
sources will not help, except perhaps for a few days. The debt crisis continues to deteriorate, and the rate of deterioration
continues to accelerate.

After months of posturing and denial, Spain and Cyprus have become the fourth and fifth countries formally to request
aid from Europe’s bailout funds. In doing so, these governments have officially confessed to their own insolvency and to
the insolvency of their respective banking systems. In response, Spain’s ten-year bond yield jumped to over 7% again,
and Moody’s downgraded many Spanish banks to junk.

Meanwhile, Slovenia’s prime minister said that his country may soon ask for a bailout. Italy cannot be far behind. Where
is that money going to come from?

In the US, the Californian city of Stockton filed for bankruptcy – the largest US municipal bankruptcy so far. JP Morgan
Chase admitted that the USD2bn credit derivatives loss announced in May has already increased to USD9bn and rising.
Some analysts opine that a USD50bn loss would bring the bank down.


The Henley Outlook
July 2012

The confetti war is also intensifying.

Foreigners are reducing their holdings of US Treasuries, while countries from Ukraine to Kazakhstan to Turkey announced
that they have purchased gold in recent months to bolster their growing reserves. The Bank of International Settlements
and US regulators are both moving forward with proposals that allocated gold bullion be treated as a risk-free cash
equivalent on banks’ balance sheets, alongside US Treasury securities.

Chile has joined a growing list of countries that has agreed to bypass the US dollar and settle all of its trade with China in
yuan. China itself has just announced plans to create an experimental zone (in Qianhai, just on the other side of Shenzhen
Bay from Hong Kong) where full exchange and convertibility of the yuan will be allowed.

So, there appear to be a number of (not necessarily new) takeaways from recent developments:

• European governments are insolvent.
• European banks are insolvent.
• US governments (federal and local) are not far behind.
• Even the best US banks are not as strong as believed.
• Foreigners are abandoning the US dollar and seeking alternatives.
• Gold remains at the heart of the monetary system.

Ho hum. Better a list of five ghastly certainties (plus one golden ray of light) than a Memorandum of Understanding, I
suppose!

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


The Henley Outlook
July 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 the 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 December 2008 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 was due to an 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 positions.


The Henley Outlook
July 2012

Fixed Income
Positives
• China reduced borrowing costs (25bps) for the first time in four years. UK also announced a plan to provide the banking
system with more than GBP100bn (USD155.43bn) to help its struggling economy. At THG, we are expecting more
central banks to flood the market with liquidity in order to cushion coming shocks from Europe.
• Inflation pressures are well contained. US cost of living fell in May by the most in more than three years. CPI declined
by 0.3% to 1.7% YOY. Similarly, inflation in the euro zone hit a 15-month low at 2.4% (May) from 2.6% (April), allowing
room for further easing measures.
Negatives

Sources: Bloomberg, Standard Chartered Research

• US Federal Reserve expanded the maturity of its Operation Twist program for an estimated USD267bn. To keep long-
term borrowing costs down, US Federal Reserve will continue to sell short-term securities and buy longer-term ones till
the end of 2012.
• ECB continues to increase its exposure to the peripheral countries and their banks. As shown in graphs above, Spain
and Italy have borrowed heavily from ECB in recent months. Under the provision of Emergency Liquidity Assistance
(ELA) program, ECB also lent directly to peripheral banks as their deposit base eroded. Spanish 10-year bonds hit euro
record of 7% despite the pledge of EUR100bn (USD125bn) funding by IMF. Moody’s also downgraded Spain’s credit
rating to Baa3, one step above junk, citing the bailout contributing to the Spanish government’s debt load.
• Lack of AAA sovereigns drove investors to Australian government bonds. Yields on all Australian notes maturing in two
years or longer fell to record lows in June. Even with its 10-year bond dipping below 3% for the first time, Australia still
offers higher yields than comparables of Germany and Canada.

HENLEY ASSESSMENT:
Negative. We saw a large selloff in emerging market bonds last month: JPMorgan GBI-EM Global Diversified
Index (Local Currency Denominated): -7.5% and JPMorgan EMBI Global Diversified Index (Hard Currency):
-2.5%. Risk premium widened 75bps, ending the month at 414bps vs US Treasuries. We believe valuation of
the emerging market debt is not cheap, but strong fundamentals and stable commodity prices will remain
favourable to the asset.


The Henley Outlook
July 2012

Property
Positives
• Prime central London property prices rose 0.7% in May 2012, contributing to
an annual growth of 10.7%. Prices are up 47.3% since the post credit crisis
low in March 2009, and are now 12.1% higher than the price peak in March
2008. Prices in the sub-GBP2m and the GBP2m+ bracket rose 2.7% and 1.6%
respectively in the two months to the end of May following the imposition of
the new 7% GBP2m+ Stamp Duty Land Tax. Prime central London property
prices continue to be supported by growing tensions within the euro zone,
leading to the flight of capital to safer locations.
• Home prices in major Indian and Brazilian cities continue to surge following
strong economic growth over the last decade. Data reflects that Delhi home
prices surged 24.4% in 1Q12 but have been flat since. In Sao Paulo, prices
climbed by 18.7% in 1Q12, followed by 2.6% in the latest quarter. There are
concerns that both markets are overvalued. For example, in Sao Paulo and Rio
de Janeiro, prices may be 50% overvalued after rising 140% since 2008.
• In Singapore, sales of new private homes rose in April to a near a three-year
high, and transactions exceeded 2,300 units for a third consecutive month amid
resilient demand. If prices continue to rise, further government intervention to
curb price rises is expected.
Negatives
• Recent data on global home prices from a Global Property Guide survey,
reflects that home prices fell in 24 countries and have risen in only 12 during
the 1Q12. The rate of decline has since accelerated with 26 countries now in
decline and only 10 countries showing price gains.
Source: Knight Frank Residential Research
• Home prices fell in a record 46 of 70 Chinese cities in April and the People’s
Bank of China cut it’s benchmark interest rate in June for the first time since 2008. China’s property curbs continue to
work. Jones Lang LaSalle recently reported that many speculators have left the market, and of all residential property
purchases, 93% of them are for owner occupation, and only 7% are speculative.
• UK property company Rightmove reports that asking prices for British homes were unchanged in May as the European
crisis and the end of a tax break for first time buyers dampened demand. This is the first time since the survey began
in 2002 that home prices have failed to rise in May. The Council of Mortgage lenders reported that in April, UK gross
mortgage lending dropped 19% to GBP10.2bn. The UK government has just announced plans to lend GBP140bn to UK
banks to stimulate lending, part of which it is required to be used for residential property purchase.
• After rising 7.7% for the first four months of the year, sales of secondary Hong Kong homes have experienced a sharp
drop due mainly to falling share prices, and the euro zone debt crisis. There are warnings of price falls of between 5 and
10% in the mass residential market over the next year, based upon the government’s plans to improve affordability
by increasing supply.

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 and London but fundamentals remain weak elsewhere. However,
we still consider some specialised property assets, such as student accommodation/ground rent income, to
merit inclusion in our portfolios. Other than these investments, we would suggest that clients do not invest
further at this time.


The Henley Outlook
July 2012

Equities
US
Positives
• US economy highly flexible, resilient and leads world in technology and innovation.
• ederal Reserve has forecast rates unchanged until at least late 2014.
F
• urther monetary easing in 2H12 will boost asset prices in nominal terms.
F
Negatives
• National debt: USD15.8tn and rising; debt to GDP: 104%and rising. Absurdly unsustainable.
• Housing market in depression. Prices at 10-year lows.
• Real incomes falling, only 41.6% of working-age Americans have 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
• JPY was little changed at JPY79.5 from four weeks ago. We are still expecting Japan’s currency to further weaken on
the medium term over prospects of more interventions. The expectation of easing has heightened after IMF said JPY
was overvalued and Bank of Japan should consider further stimulus.
Negatives
• Japan reported a trade deficit of JPY907.3bn (USD11.5bn) for May. Japan has its first shortfall in trade with EUR
(JPY11.1bn) since its Finance Ministry keeping track of record in 1979. Shipments to Europe fell 0.9% while those to
the US surged 38%, highlighting the European crisis as an eminent threat to Japan’s recovery.
• Fitch cut Japan’s sovereign rating to A-plus citing Japan’s spiralling debt problem.

HENLEY ASSESSMENT:
Neutral. Japan made its first step toward reducing its record high debt burden. Prime Minister Noda overcame
significant resistance as he pushed the bill through the lower house to double Japan’s consumption tax to
10% by 2015. The Organisation for Economic Cooperation and Development (OECD) has recently predicted
that Japan’s debt will reach 223% of GDP next year and urged the country to be more aggressive in tackling
its debt.

UK
Positives
• The BoE is offering money to high-street banks to kick start mortgage and small business lending to prevent loans
being rationed for many families and entrepreneurs.
• The ‘funding for lending’ scheme would provide funding to banks for an extended period of several years, at rates
below current market rates and linked to the performance of banks in sustaining or expanding their lending.
• BoE will also activate an emergency scheme that offers six-month liquidity to banks in tranches of no less than
GBP5bn a month.


The Henley Outlook
July 2012

Negatives
• he Office for National Statistics (ONS) said the UK’s trade-in-goods deficit widened from GBP8.7bn in March to GBP
T
10.1bn in Apr12, with car exports down markedly because of weaker demand from buyers outside the euro zone.
• The services index, published by Markit Economics, fell to a six-month low of 52.4 in May12 from 53.3 in Apr12.
• he study by the Institute For Fiscal Studies (IFS), an independent think-tank, showed that median income fell 3.1% in
T
2010-11, from GBP432 / wk to GBP419 / wk. Mean household income fell 5.7% from GBP542 to GBP511, said the IFS.
Using either measure, this meant that average living standards were now below the level in 2004-5.

HENLEY ASSESSMENT:
Negative. The main problem for UK is that Europe’s banking crisis does not appear to be abating as shown by
the miserable results of most EU banks. On the fiscal side, the deficit to GDP has declined over the past three
years from 11.5% to 8.3%, but the bulk of the reduction was the result of increased taxes since GDP growth
was weak. The overriding concern is whether the country will be able to continue to cut its deficit in the face
of weaker economic conditions and a possible deterioration in the country’s financial sector. We expect that
the UK’s debt/GDP will continue to rise and the country will remain pressed.

EUROPE EX UK
Positives
• Greece’s largest pro-bailout parties, New Democracy and Pasok, won enough seats to forge a parliamentary majority,
official projections showed, easing concern the country was headed toward an imminent exit from the euro. The
election would give New Democracy and Pasok 163 seats if they agree to govern together in the 300-member
parliament.
• Spain asked euro region governments for a bailout worth as much as EUR100bn to rescue its banking system as the
country became the biggest euro economy so far to seek international aid.
• The French election results were positive for French President Hollande since his Socialist Party took an outright
majority in the National Assembly. This gives the socialists control of the presidency and both houses of parliament.
Negatives
• A composite index based on a survey of purchasing managers in euro-area services and manufacturing industries
dropped to 46 from 46.7 in April. While above an initial estimate of 45.9, the May reading is the lowest since June09.
The indicator has remained below 50, indicating contraction, for four months.
• European companies are cutting back on hiring and spending as the intensifying fiscal crisis makes the economic
outlook more uncertain. While the euro area narrowly avoided falling into a recession in the first quarter, unemployment
has reached the highest on record and economic confidence is at the lowest since 2009.
• The 10-year Spanish bond yield rose sharply by 25bp to 7.13%, vaulting the 7.00% level for the first time and increasing
the risk that the Spanish government will need a full bailout of EUR 350-450bn euros rather than just up to EUR 100bn
for its banks.

HENLEY ASSESSMENT:
Strongly negative. The Greek election results mean that Greece will stay in the euro zone (for now) and will
continue to pursue severe austerity measures. Although this outcome puts an end to the near-term uncertainty
surrounding Greece’s participation in the euro, it does nothing to resolve the ongoing crisis. Spanish bond
yields are once again above 7%, implying that markets continue to require a larger European solution. One
positive development in France is that, after the Socialist Party gained a strong majority in the legislative
elections, President Francois Hollande will now have room to manoeuvre if a market riot occurs and structural
reform is demanded by the markets,. The crisis in Europe will not end until policymakers take steps that
convince markets of the viability of the euro.


The Henley Outlook
July 2012

AUSTRALIA
Positives
• The Australian economy is in pretty good shape (apart from, perhaps, the wave of sackings announced recently):
unemployment has fallen, 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 Australia’s 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 makeup 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:
• Indonesia will implement stimulus measures to boost consumption and infrastructure spending as a global slowdown
limits exports. The government will tap last year’s IDR24tn (USD2.5bn) budget surplus to fund building projects, and
lift the tax-free annual income level to IDR24mn from IDR15mn.
• Optimism about the region’s economic outlook draws investors to offerings in Malaysia, Thailand and the Philippines.
• Thailand’s central bank kept its key interest rate unchanged for a third straight meeting amid rising risks from the
European debt crisis and slowing growth in China.
• Bangko Sentral ng Pilipinas kept its benchmark interest rate at a record-low 4% yesterday after the economy expanded
6.4% in the first quarter from a year earlier, the most in Southeast Asia.
Negatives:
• Singapore’s May private home sales fell 32% from a month ago, posting the lowest sales this year as the European
crisis damped demand. Sales fell below 2,000 units for the first time in four months.
• Indonesia has underperformed Asia ex-Japan & Emerging Markets up to 01June.

HENLEY ASSESSMENT:
Neutral. A cut is an option for ASEAN in the future if the situation deteriorates, and as inflation is not a major
issue now. They have the bullets to use when it is necessary. Domestic demand, consumption and investment
remain strong while exports may slow because of weakening global demand and commodity prices. Imports
will remain high because of growing domestic consumption.


The Henley Outlook
July 2012

GREATER CHINA
Positives
• We witnessed the PBoC’s first rate cut of 25bps since 2008 following
last month’s decline of the banks’ reserve requirement ratio, which
suggests that the Chinese authorities are becoming more proactive
in stimulating the economy.
• It is almost a sure bet that inflationary pressure will continue to
abate – China’s CPI increased 3% YOY or decreased 0.3% MOM in
May, which the YOY figure hit 23 months’ lowest level.
• Hong Kong Exchange & Clearing (HKEx) reached an agreement to
buy all of London Metal Exchange’s (LME) shares for GBP1.39bn.
Although the deal seems “extremely expensive”, this bid for LME will
give China more power in global commodity trading.
Negatives
• China’s growth slid to 8.1% in the first three months of the year
from a year earlier, the fifth quarterly deceleration. HSBC Flash PMI
weakened to 48.1 in June, compared to 48.4 in the previous month.
• The major wildcard in China’s cyclical growth outlook is the
escalating crisis in Europe and recovery progress in the US economy.
Risk factor remains external, and China export sector is suffering in
the near term.
Source: BCA Proprietary Indicator
• Recent comments from Joseph Yam, the former chief of the HKMA,
raised the issue that the city’s decades-old currency board system, peg-to-USD, is no longer serving the best interests
of the Hong Kong economy.

HENLEY ASSESSMENT:
Neutral. Economic expansion/industrialisation of China is a long-term story driving growth all the way. We
have witnessed some slowdown and concerns on recent Chinese economic activities, however it will not derail
the overall story. External risks from peripheral euro zone and uncertainty of US economy are still making
huge impact on China’s export sectors. But apparently, more stimulation is on the way from the Chinese
central government once they make sure inflation is under control.

INDIA
Positives
• With USD1.68bn inflow in the month of March, the FIIs pumped in a total of USD8.89bn in Q1 which is the highest
for any quarter in the last 10 years.
• Country’s central bank – the Reserve Bank of India (RBI) purchased dollars (USD1.1bn) after more than a year to arrest
volatility and prevent further appreciation of the Indian Rupee (INR).
• Donald Trump has announced his foray into USD12bn Indian real estate market that is growing annually at 30%.
Negatives
• India’s index of industrial production (IIP) grew at 4.1% in February, significantly lower than the expected 6.6%.
• Bond yields fell sharply from 8.54% to 8.46% following the release of the IIP data.
• Grant Thornton has reported a decline in corporate deals in the first quarter (USD20.4bn) owing to the amendments
proposed at the backdrop of Vodafone tax issue in the recent budget.

HENLEY ASSESSMENT:
Neutral. Although high prices of oil and food pose challenges to managing inflation, it is widely expected
that RBI would cut down the repo rate for the first time in three years. Whether this reduction will boost the
economy remains to be seen.


The Henley Outlook
July 2012

OTHER EMERGING MARKETS (SOUTH KOREA, RUSSIA, BRAZIL)
Positives
• Brazil’s major mobile phone carriers have paid
a total of R$2.6bn (USD1.3bn) for spectrum for
high-speed fourth-generation networks as Latin
America’s biggest economy prepares for major
sporting events in the next four years. Brazil’s
telecommunications market is one of the world’s
fastest growing as its growing middle class takes
to the mobile internet. The country is already one
of the biggest markets for social media thanks
to the high proportion of young people in its
population.
• As the chart right illustrates, many Asian 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’s economy, highly reliant on oil, is under severe pressure. Falling oil prices have sent Russian shares and the
rouble tumbling. The uncertainty is beginning to take its toll even in the rural regions where criticism of the president is
mounting. There is currently a creeping crackdown designed to stifle protests sparked by deeply flawed parliamentary
elections last year, and Mr. Putin’s stage-managed return to power in May.
• Brazil’s economy barely grew for the first quarter of this year, despite interest rate cuts and government stimulus
measures, reinforcing concerns over a broader slowdown in emerging markets. This was primarily driven by the
agricultural sector whose crops fell prey to erratic weather in several parts of the country.

HENLEY ASSESSMENT:
Neutral. Whilst there have been developments in EM 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 Outlook
July 2012

Commodities
ENERGY
Positives
• Iran’s nuclear ambitions remain uncertain
• OPEC left its output steady at 30 million barrels per day
Negatives
• Ongoing debt concerns in Europe and signs of a slowdown in China are adding to negative sentiment

HENLEY ASSESSMENT:
We remain neutral. In the absence of any adverse developments between Iran and the West, the oil price will
continue to be driven by macro data. Given signs of a slowdown in China and the overall rather bleak picture
for sustained world growth as a result of the debt issues on both sides of the Atlantic, we believe that the oil
price will struggle to sustain a rally. Further monetary easing will, however, provide some support for prices.

PRECIOUS METALS
Positives:
• Gold and silver are a good hedge against financial
instability.
• Chinese gold imports from Hong Kong in April rose to
101.8 tonnes, +62% MOM, +1300% YOY, just shy of a
record
• set in Nov11, when 102.8 tonnes were imported.
Negatives
• Temporary USD strength put pressure on the gold price.
• Gold is a liquid asset that can easily be sold by investors
to cover losses elsewhere

HENLEY ASSESSMENT:
We remain strongly positive on precious metals. Another one bites the dust. Spain finally succumbed and
has been offered a EUR100bn bailout; it is unclear if this will be enough. Most probably not, and the number
needed is closer to EUR400bn. Despite the bailout, yields on Spanish debt have edged higher. Italian bonds
yields are also rising, and of course, everyone knows that the money to eventually bail out Italy does not exist.
For gold and silver, the continued stress in Europe is widely bullish and these assets remain at the very core
of our asset allocation.


The Henley Outlook
July 2012

INDUSTRIAL METALS
Positives
• Currency debasement will support real asset prices.
Negatives
• The health of the global economy remains uncertain.
• Net speculative length in COMEX Copper High Grade is at a 12 month low.

HENLEY ASSESSMENT:
We maintain our neutral view on base metals. Market participants remain worried about just how serious the
global economy challenges really are. In the commodity sector we continue to favour other areas.

AGRICULTURE
Positives
• UN’s 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

Source: The Fertilizer Institute

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, at the same time the supply of arable land is limited.
It is estimated by the World Bank that worldwide 445mn 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 Outlook
July 2012

Alternative Investment
Positives
• Hedge funds were down
1.55% in May, although
they beat most market
indices by a large margin
amid heightened risk
aversion and falling global
markets.
• CTA/Managed futures
funds gained 2.55%
on average in a largely
negative month according
to a Eurekahedge report.
Strong returns are
provided by their material
exposures to the extended
moves in fixed income
and FX markets. Overall,
managers with long-term
bearish positioning did
well and made up for some
of the losses incurred
earlier in the year.
Negatives Source: HFMWeek
• Recent data is showing
investors lost their patient and interest in hedge fund space. According to both BarclayHedge and TrimTabs reports,
there was a USD5.1bn outflow in April 2012 and over USD12bn for the 12 months from May 2011. However, some
healthy strategies for the likes of macro and fixed income are still attracting the capital inflows.

HENLEY ASSESSMENT:
Positive: Our bet in commodity trading advisors (CTAs) and Global Macro has payoff in May. This is exactly
what we called “hedges” to our model portfolios during those “down markets”. We continue to think that
the outlook for global growth is still in trouble therefore we believe hedge fund managers, especially those
managing CTA and Macro funds, are better equipped to deal with tough market conditions this time around.
Also, we are cautiously selecting managers those who could quickly exercise capital protection measures and
have tight control of their risks.

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
distrib ution or re-distrib ution of information relating to such funds to the pub lic 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.


The Henley Outlook
July 2012

Our commitment:
to give you control

The Henley Investment Advisory Service is all about providing you with a committed, professional
partner for your personal finances. Similar to the service level a private bank would offer, it brings
proactive investment advice to our clients in a cost-effective manner. Henley Investment Advisory will
help ensure your savings are invested in the right asset class at the right time, making your hard-earned
cash work harder still and propelling you faster towards financial freedom.

For more information about the service, talk to your Henley advisor or send an email to
hias@thehenleygroup.com.hk


Henley Outlook July 2012 Hong Kong

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