The Henley Group Outlook May 2012

Monthly Market Outlook
May 2012
Phew! What a relief. Back to normal again: crisis mode. Those six long
weeks of relative calm between the European Central Bank’s (ECB)
second injection of half a trillion euros into the euro-zone banking
system, and people noticing that Spain was still unraveling, were quite
unnerving. Just goes to show, I suppose, that a trillion confetti currency
units are not what they used to be! Even I, Mr Optimism, was shocked
by how quickly the oil poured on troubled waters had evaporated.

The Henley Outlook
May 2012
THE WEALTH MANAGEMENT PROFESSIONALS

The Henley Outlook
May 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 Pte Limited The Henley Outlook: 2
30 Cecil Street, #23-01 Prudential Tower, Singapore 049712 Hong Kong, Singapore & Shanghai
info@thehenleygroup.com.sg www.thehenleygroup.com.sg
A MAS licensed investment adviser in Singapore

The Henley Outlook
May 2012

Global Overview
Phew! What a relief. Back to normal again: crisis mode. Those six
long weeks of relative calm between the European Central Bank’s
(ECB) second injection of half a trillion euros into the euro-zone
banking system, and people noticing that Spain was still unraveling,
were quite unnerving. Just goes to show, I suppose, that a trillion
confetti currency units are not what they used to be! Even I, Mr
Optimism, was shocked by how quickly the oil poured on troubled
waters had evaporated.

All this goes to remind us, if reminder were needed, that the
problems facing the global economy are systemic, deep seated
and structural. Never mind how gorgeous the passmenterie of
the drawing-room curtains is, or how vigorous the flowers in the
window boxes are; the very foundations are turning to poo.

Investors need to keep an unwavering focus on the condition of
the monetary system within which the various markets and asset
classes operate and not be distracted by bullish day-to-day data
releases of dubious veracity.

The spotlight has, for the time being, switched from Greece (Debt to GDP now 165.3%, 14% higher than last year!)
to Spain – and with good reason. Its bond yields have risen to 6% again, the economy is collapsing, unemployment is
over 24% and capital is fleeing (as it fled Greece before it). The property market, and the banks which financed it, are
deeply under water. In the last three months, bad debts in the Spanish banks have risen to 8% (EUR143.8bn) of total
debt. That’s massive. Bank credit stands at about 170% of Spanish gross domestic product (GDP). Spain has borrowed
USD415bn from the ECB, about 63% of total ECB lending, while depositors withdrew a further EUR65bn from Spanish
banks in March alone.

This means we can probably expect bank defaults, for which the banks have not provided. When those dominoes start
to fall, the weakness of euro-zone bank balance sheets will tell. Will Spain try to stand behind its banks like Ireland did?

As an aside, let’s remember that a Spanish sovereign default would not be its first. Habsburg Spain defaulted on all or
part of its debt fourteen times between 1557 and 1696. It also succumbed to inflation due to a surfeit of New World silver.
Portugal has defaulted on its national debt five times since 1800, Greece five times, Spain no less than seven times. In
fact, there have been more than 250 sovereign-debt defaults since 1800.

Needless to say, excess leverage/debt remains at the heart of the problem globally. Banks are supposed to be reducing
leverage to twenty times their capital; but, so far, only one of the top twenty-five banks globally is at or below that level.
Twenty times leverage means that if the bank only loses 5% on its loan book, it has lost all its capital.

Deutsche Bank is leveraged sixty-two times. This means that if it has a bad debt position of 1.5%, the bank is insolvent.
Deutsche Bank is bigger than German GDP. Credit Agricole, the largest French bank, is leveraged sixty-three times. The
two big Swiss banks combined total seven times Swiss GDP.


The Henley Outlook
May 2012

This is not just a little frightening. Some banks will not survive a default. Of course, central banks and governments are
aware of this, and they will spew money to try to keep the banks alive. Will they print in time? Maybe for some banks,
but not for others.

Furthermore, 6th May approaches, possibly a watershed day for Europe and its seemingly incessant crisis. On that day,
goodness knows who is going to come to power in the Greek general election. My guess is they won’t be big on austerity.
On the same day, the socialist Francois Hollande appears likely to be elected President of the French Republic. The Dutch
government has already fallen. Chancellor Merkel’s austerity pact would appear to be crumbling. Even as I write, Mario
Draghi is probably ordering oodles more ink for his proposed “growth compact”.

This is why we recommend that clients hold on to their precious metals, and buy more on the dips. The miners’ shares are
also extremely cheap. But remember, patience is required. Some clients have been made uncomfortable by the short-term
volatility; but we have always seen this as a five-to-ten-year play, and dips should be relished as opportunities to tuck
cheap assets away for the future.

Talking of gold (you didn’t think I would let the opportunity pass, did you?!), having been kicked out of the SWIFT
international payment system (a private company now apparently a weapon of economic warfare), Iran announced in
February that it would accept gold in payment for oil. There have already been reports that India would pay in gold, and
now Forbes is reporting that China will also do so.

This feels like an historic decision for gold. By taking up Iran’s gauntlet, China may, at a stroke, have simultaneously
resurrected gold as an accepted medium of settlement for international trade and nailed a rather large nail in the dollar’s
reserve-status coffin.

Wow!

Ironic, really, when sanctions on Iran were supposed to achieve the exact opposite. Talk about shooting yourself in the
foot!

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


The Henley Outlook
May 2012

Cash & Currencies

USD Index (Source: Bloomberg)

Summary
• Not a lot of activity this month across the board.
• USD flat for the month, in line with S&P 500.
• JPY was flat but remained weaker YTD against USD for the first reversal in trend in a long time. It did however rebound
slightly from strong support at 84.
• GBP/EUR was also range bound but since 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 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
May 2012

Fixed Income
Positives
• Interest rates will remain low for the foreseeable future as economic recovery is anaemic in most developed economies.
We believe the central banks will come up with more easing measures and labour market (not inflation) holds the key
to future. We are closely monitoring employment situation in most economies.
• Overall credit quality of Asian and emerging markets remains intact with low levels of debt and record high reserve
cushions though risk premiums, or spreads have further narrowed 65bp YTD based on JPMorgan Emerging Markets
Bond Index Plus.

Negatives
• Debt concerns persist over Europe. Investors have shifted away from risky assets since the Spanish government
announced in early March that it will be unable to meet its deficit targets, and fears have grown that both Spain and
Italy may require bailouts.
• Politics undermine efforts in restoring confidence in Europe. Austerity brought down the Dutch government and left
French President Sarkozy trailing in his re-election bid. German bunds rallied, driving its 10-year benchmark yields to
record lows of 1.63%. US treasuries and UK gilts also benefited from demand for safety.

HENLEY ASSESSMENT:
Negative. Recovery rate is the average proportion of bad debt recovered. It is an important validation of
default probabilities and default
correlations which often neglected in
credit risk analysis. In the past decade,
recoveries normally rise in a low default
environment and vice-versa. The
relationship between higher recovery
rates and lower default has diverged
significantly over the past 24 months.
The graph (shown right) is a reflection
of the current challenging environment
for raising capital despite numerous
interventions by the central banks.
Given the weakening trend in recovery,
we should be more conservative in
analysing corporate credit and its
compensation to investors even at the
face of low default rates.


The Henley Outlook
May 2012

Property
Positives
• Investors continue to purchase central London property to preserve wealth amid political and economic tensions both
in their home markets, and globally. In the recent UK budget the government has raised stamp duty tax for all property
purchases in excess of GBP2m. In an attempt to curb stamp duty abuse, this is split into a rise from 5% to 7% for
purchases in the owners name, but rising to 15% for properties purchased by “non-natural persons” (most commonly
offshore companies). Additionally, there is likely to be a mansion tax, which will also be introduced within the next year,
on properties above GBP2M and owned by “non-natural persons”. Central London property prices are likely to continue
to rise for the reasons given above, but there may well be a growth disparity between properties under GBP2m (which
are now likely to grow faster), as opposed to properties valued above this level.

Negatives
• Singapore home prices fell in 1Q2012 for the first time in almost three years after the government imposed new taxes,
according to estimates by the Urban Redevelopment Authority this week. Foreigners and corporate entities now have
to pay an additional 10% stamp duty from December 2011.
• According to Nationwide, their UK Residential Home Prices Index in March recorded its largest drop in two years (-1%)
whilst February’s rise was revised down to just 0.4% (reducing the YOY rate down from 0.9% last month to -0.9% this
month). One concern for the housing market is that because economic policy seems targeted at protecting fragile
banks (through QE etc), home prices are taking longer to correct, as interest rates have been maintained at artificially
low levels. However, interest rates will go up over time and bank floating interest rates have been increasing in recent
months.
• Recent US residential housing data suggests a very mild recovery from the recent market lows. For example, homebuilding
permits approached a 3.5 year high in February, and new building permits increased 5.1% to a seasonally adjusted rate
of 717,000 units (vs expectations of 690,000 units) last month, the highest rate since October 2008 according to the US
Commerce Department. However, many analysts have suggested that this recent data may have been improved by the
warmest winter on record in five years. Additionally,
it should be remembered that the property market
has received a large amount of artificial support,
eg tax payer funded bailouts, tax credits, a zero
interest rate policy by the Federal Reserve and
“Operation Twist”, which has suppressed interest
rates on mortgages to historic lows. Problems that
slow any property market recovery include the
inventory that needs to be cleared (see diagram to
right), the potential for rising interest rates, a weak
employment market, declining real incomes and
rising inflationary procedures.

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
May 2012

Equities
US
Positives
• US economy highly flexible and resilient, and leads world in technology and innovation.
• Federal Reserve has forecast rates unchanged until at least late 2014.
• QE3 in 3Q12 will boost asset prices in nominal terms.

Negatives
• National debt: USD15.7tn 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; no appetite for tax increases or spending cuts (election year).

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
• Bank of Japan signaled commitment to easing by maintaining its interest rate at virtually zero and purchasing financial
assets until its new goal of YOY inflation at 1% is achieved.
• Despite its recent rebound to JPY81.5, JPY will likely continue to weaken on prospects of more easing. Japanese
exporters will become more competitive in the face of a weaker JPY.
• Fastest export growth in a year and smaller-than-expected trade deficit suggesting that recovery in Japan may well
be on sustainable path. Outbound shipments rose 5.9% in March from a year ago and deficit was only JPY82.6bn
(USD1bn).

Negatives
• Nikkei 225 has fallen 5.7% from its peak level of 2012 but remains in positive territory along with most major equity
markets.

HENLEY ASSESSMENT:
Neutral. One year after the natural disasters, Japan may well be on a slow but steady recovery path if JPY
stays relatively weak and BoJ remains aggressive in stimulating public investment. Japan recently reported
an unexpected trade surplus (JPY32.9bn or USD395mn) for February and higher-than-forecast exports. THG
remains cautious over the outlook of Japan given its dependency on imported energy and its lack of leadership
in tackling structural issues, such as raising consumption tax. We expect more easing efforts by BoJ in H2.


The Henley Outlook
May 2012

UK
Positives
• The Total Commercial Development Activity Index, a measure of UK’s commercial-property industry, rose to 13.1%
from a negative 3.6% in Feb12. The gain was the first in nine months and lifted the index to its highest since Feb10.
• UK consumer confidence rose to a nine-month high in Mar12, according to Nationwide Building Society’s index of
consumer sentiment climbed to 53, the highest since Jun11, from 44 in Feb12.

Negatives
• GDP fell 0.2% from the Q411, when it declined 0.3%, the Office for National Statistics (ONS) announced. This was UK’s
first double-dip recession since the 1970s.
• The quarterly drop in GDP was due to a 3% slump in construction, the most since the 1Q09, and a 0.4% decline in
industrial production.
• The overall trade deficit widened from a revised GBP2.5bn in Jan12 to GBP3.4bn in Feb12.
• Feb12’s data showed goods export volumes to the EU fell 2.4% but this was outstripped by a 8.2% decline in exports
to countries outside the EU. ONS said this was driven by lower car exports to Russia, the US and China along with lower
exports of capital and intermediate goods.

HENLEY ASSESSMENT:
Negative. Official data and private surveys fluctuated widely recently. However, any claims of positive
momentum have evaporated with the announcement of a double-dip recession. The preliminary figures are
consistent with the message coming from official and private data - that the UK was once again relying
heavily on services and consumption by households. That suggests the recovery will continue to be weak.

EUROPE ex UK
Positives
• The ECB held its main interest rate at 1.0% as persistently high inflation offset pressure to respond to the euro zone’s
shaky economic recovery.
• German inflation, calculated using a harmonised European Union method, eased to 2.3% in March from 2.5% a month
earlier, matching a preliminary estimate.

Negatives
• Spanish 10-year bond yields jumped above 6% for the first time since the ECB began flooding the region’s banks with
EUR1tn in cheap loans in Dec11.
• The Spanish economy also contracted 0.4% in the first quarter of 2012 from the previous quarter, when it shrank 0.3%,
indicating a slip back into recession.
• In the Netherlands, Prime Minister Mark Rutte and his cabinet resigned after failing to reach agreement on reducing
the country’s budget to meet European guidelines, paving the way for fresh elections and casting doubt on its support
for euro zone rescue measures.
• Greece’s jobless rate rose to a record of 21.8% in Jan12, twice as high as the euro zone average.


The Henley Outlook
May 2012

HENLEY ASSESSMENT:
Strongly negative. The spikes up in Spanish and Italian yields belied the strong claims from European leaders
that the worst of the euro zone fallout is behind them. The spotlight now falls firmly on Spain where the surge
in borrowing costs have prompted the Spanish deputy economy minister to call on ECB to resume its direct
intervention in the markets. The mechanisms for financing sovereign debt in the periphery are still open to
question, and the profound economic adjustments that are required in the peripheral Europe remain an issue.

AUSTRALIA
Positives
• The Australian economy is pretty good shape (apart from, perhaps, the wave of sackings announced recently).
Unemployment has fallen, according to the latest national statistics; the currency is strong; GDP is on trend and
holding up; there is a once-in-a-generation investment boom going on, and the government is heading back into
surplus.

Negatives
• The Reserve Bank of Australia left interest rates unchanged. While it appears to retain a bias to ease, its hurdle to do
so looks higher than earlier thought, requiring a “material” weakening in the domestic economy.
• Household debt is 150% of disposable income, up from 50% 25 years ago, and has been stuck at that level for five
years. The key cause is the price of land in Australia; it is one of the least populated countries on earth yet land is about
the most expensive.
• The combination of rising population, a lack of arable land and artificial restrictions on residential development in
cities has led to a six-fold rise in the median house price since 1986, from $93,000 to $550,000 now. Over the same
period, average household incomes have risen 3.5 times.
• Other countries in 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 commodity sector which we like). The Australian economy is a double-edged sword; it is
expected to grow a little below trend, although the make up of the growth will be heavily tilted towards
mining investment. Key headwinds for the non-mining sectors will be: 1)ongoing deleveraging by the
household sector; 2) caution by the corporate; 3) maintenance of a relatively high Australian dollar, and 4)
fiscal tightening by the authorities.

ASEAN
Positives:
• Bangko Sentral ng Pilipinas will keep its overnight borrowing rate at 4% after policy makers had cut the rate by 25bps
at each of the past two meetings. Inflation slowed to a 30-month low of 2.6% in March, while exports increased in
February by the most in 10 months.
• Asian central banks from Thailand to Malaysia have refrained from interest-rate cuts, and policy makers in Indonesia
and South Korea are expected to keep borrowing costs unchanged at meetings this week.


The Henley Outlook
May 2012

Negatives:
• Thai stocks slumped after north-western Indonesia was hit by a magnitude 8.7 earthquake that prompted tsunami
warnings across parts of Asia. The earthquake struck off Indonesia’s Sumatra island, prompting residents to flee to
higher ground as Indonesia, India and Thailand issued tsunami warnings. The tsunami report has further weakened
investors’ sentiment in the Thai market, which has already been under selling pressure from profit taking.

Henley Assessment:
Neutral. Given that inflation is manageable within ASEAN, policy makers can refrain from further monetary
and fiscal stimulus because growth will remain robust, while oil-price spikes can revive the threat of inflation.
Crude oil has risen 20% in the past six months, forcing governments to raise fuel prices and limiting policy
options for central banks in the world’s fastest growing region.

Greater China
Positives
• According to China’s customs bureau, inbound shipments rose 5.3% in Mar YOY below economists’ estimates of 9%.
However, exports rose 8.9% in Mar YOY, leaving a trade surplus of USD5.35bn. Economists expected a trade deficit.
• New lending in China unexpectedly surged to USD160bn in Mar YOY, the biggest monthly extension of credit since
Jan11, along with a stronger-than-expected growth in money supply (M2), which rose 13.4% in Mar YOY.
• China decided to widen its currency trading band against the dollar to 1% from 0.5% for the first time since 2007.
Regulators also doubled quotas for foreigners buying onshore stocks and bonds to USD80bn from USD30bn.
• According to China’s statistics bureau, the economy grew 8.1% in first three months this year, less than 8.4% growth
predicted by economists. China will aim for a 7.5% GDP growth this year according to Premier Wen.
• According to the SCMP, Hong Kong Exchanges & Clearing Ltd is seeking an acquisition loan for a possible bid for
the London Metal Exchange (LME). LME confirmed that they received preliminary bids from CME Group Inc., NYSE
Euronext and IntercontinentalExchange Inc. LME handles more than 80% of global trade in metals futures which
amounts to USD15.4tn in volume last year.
• Taiwan’s finance ministry proposed a capital gains tax on stock transactions. Individual investors who earn more than
USD102,000 per annum from trading stocks, futures and options will incur a 20% tax from next year.

Negatives
• China’s inflation accelerated more than forecast to 3.6% in Mar YOY in which food-related costs rose 7.5%. The real
savings rate, which excludes inflation, turned positive in Feb for the first time in two years. The one-year deposit rate
has been 3.5% since July.
• China increased its US treasury holdings for a second straight month in Feb by 1.1% to USD1.18tn. As for Japan, the
second largest foreign US creditor, its holdings climbed 1.3% to USD1.096tn. China’s currency reserves rose 3.9% in
1Q12 to USD3.305tn, reversing the first quarterly decline since 1998.

Henley Assessment:
Neutral. Economic data indicated a weakening domestic demand and investment growth which may signal
that the Chinese government may have to work harder in order to balance between sustaining growth and
containing inflation. Otherwise, we will not be surprised to see further slowdown in GDP growth in the coming
quarters. However, to clarify, we do not see this slowdown as negative but hope for a soft landing. To end this
note, the Chinese government has been taking measures to stimulate imports such as cuts in import duties on
some commodities and daily necessities. Perhaps, the bigger news is the widening of the yuan’s trading band.
It is a step forward to RMB internationalisation and increased exchange rate flexibility.


The Henley Outlook
May 2012

India
Positives
• With USD1.68bn inflow in the month of March, the Foreign Institutional Investors (FII) 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 the Indian real estate market that is growing annually at 30%

Negatives
• India’s index of industrial production (IIP) grew at 4.1% in Feb, significantly lower than 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 as a result of the Vodafone tax issue in the recent budget.

HENLEY ASSESSMENT:
Neutral. Although high prices of oil and food pose challenge 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.

Other Emerging Markets (South Korea, Russia, Brazil)
Positives
• Brazil’s central bank lowered its inflations forecast boosting hopes for another interest rate cut which would also help
to dampen the strength of the currency.
• Mexico’s bolsa gained 3.1%, to end the
first quarter at a record high, through
growing optimism over the outlook for the
local economy.
• As the chart to the 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, the world’s second largest exporter
of oil, is currently being hurt by signs of an
increasing oil supply in the US.

Henley Assessment:
Neutral. Whilst there have been developments in emerging markets to create their own internal markets, at
present they do still remain sensitive to a slowdown in western economies through exports. In addition whilst
the sector as a whole has much higher forecasted growth rates and a younger more dynamic population, any
fall out in the current sovereign debt crisis will undoubtedly affect these markets also.


The Henley Outlook
May 2012

Commodities
Energy
Positives
• Iran remains at loggerheads with the west.
• Long term weakness in USD will provide support for commodity prices.

Negatives
• Ongoing debt concerns in Europe and early signs of a slowdown in China are adding to negative sentiment.
• China’s net crude imports fell 6% in Mar to 5.52m barrels a day from Feb’s record 5.87m.

HENLEY ASSESSMENT:
We remain positive. The situation in the Middle East remains fluid. There are no signs Iran will close its underground
enrichment facilities and this is a major headache for western powers. The Israelis are naturally uneasy about
Iran’s alleged nuclear capabilities. In Syria, President Bashar al Assad clings on to power while his country is torn
apart by civil war. Although there are clear risks to the demand side, at the moment we see many geopolitical
triggers that could push prices higher.

Precious Metals
Positives:
• Gold and silver are a good hedge against financial
instability and currency debasement.
• European public finances are still a mess.

Negatives
• Temporary USD strength puts pressure on the gold
price.

HENLEY ASSESSMENT:
We remain strongly positive on precious metals.
Pressure is building again in Europe. Spanish
bonds have come under pressure and the 10yr
bond yield is climbing back up towards 6%. Spanish Prime Minister Mariano Rajoy publicly recognised that Spain’s
very future is at stake. We believe that the ECB will continue with its efforts to add liquidity to the system. ECB
hinted that more bond buying is on the cards as Europe’s financial system still hangs on a thin thread. It is
essential for investors to maintain a core holding in precious metals. At these levels we also think that gold mining
shares represent excellent value. Gold miners have struggled recently but we believe that the patient investor will
benefit as the discrepancy between the bullion itself and the miners cannot go on forever.


The Henley Outlook
May 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.
• Demand from China to soften as its economy slows down.

HENLEY ASSESSMENT:
We maintain our neutral view on base metals. Slowing growth in China together with a rather bleak outlook
for European economies in the coming years make us favour other commodity sectors at the moment.

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%.
• 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.

HENLEY ASSESSMENT:
Positive: A rapidly-growing global population
and the rapidly-developing emerging world
underpin the long-term prospects of the
agricultural sector globally. Rising incomes
will lead to higher protein diets which will
require more grains as feedstock. 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
May 2012

Alternative Investment
Positives
• Hedge fund performance was mixed by
different strategies in March, therefore the
aggregate return for the industry was flat.
Overall, managers who had been cautious
in deploying directional risk were rewarded.
Also, March appeared to be a great month
for Specialist Credit managers as their strong
credit-picking skills performed particularly well.
• April’s forward redemptions dropped to 2%,
the second lowest month on record and the
lowest April in the history of the indicator,
which shows investors regain their interests
in the hedge fund industry since redemption,
reaching a historical high of 19.27% in Nov
2008.

Negatives
• Although risk assets have had a strong start
during the first quarter of 2012, the risks to
global growth remain unchanged. Recent correction in global equity markets indicates the predominant risk factor of
political navigation of the impending fiscal reforms and deleveraging process in Europe and US exists over the period.
Again, “risk on” and “risk off” environment creates dispersion which can be seen in managers’ trading books, which
might be another “alert” to most of hedge fund investors.

HENLEY ASSESSMENT:
Positive outlook: Looking ahead, we cautiously expect that hedge fund managers will benefit from gentle
rebuilding in risk exposures, which is the lesson they could learn from past two years. This tentative trend has
been evidenced by the increases in the margin to equity ratio of systematic trading managers and also in the
small additions to gross exposures by equity L/S managers. We like the cautious tone that managers have
adopted so far this year, which might be a good signal that hedge funds will achieve a better year.

GENERAL DISCLAIMER AND WARNING
The Henley Group Private Limited (“THGPL”) has produced this document for your private use only and you must not distribute it to any other person.
Redistribution or reproduction in whole or in part of this document by any means is strictly prohibited and The Henley Group Private Limited accepts
no liability for the actions of third parties in this respect. Notwithstanding that the information contained herein has been obtained from sources
which The Henley Group Private Limited believes to be reliable, The Henley Group Private Limited 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.or form or any advice or recommendation to buy or sell any financial products.


The Henley Group Outlook May 2012

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The Henley Group Outlook May 2012