the henley group_market_outlook_aug13

Hong Kong | Singapore | Shanghai | LondonTHE WEALTH MANAGEMENT PROFESSIONALS

Henley Market OutlookAugust 2013

On the cusp

The Henley Outlook August 2013Hong Kong, Singapore, Shanghai & London

EquiTiES

Global Overview ............................................................................................................................................. 3

Cash & Currencies ............................................................................................................................................. 5

Fixed Income .............................................................................................................................................. 6

Property ............................................................................................................................................. 7

Equities US ..................................................................................................................................... 8

Japan ................................................................................................................................ 8

UK ....................................................................................................................................... 9

Europe Ex UK ................................................................................................................. 9

Australia ....................................................................................................................... 10

ASEAN .......................................................................................................................... 10

Greater China ............................................................................................................... 11

India ............................................................................................................................. 11

Other Emerging Markets ........................................................................................ 12

Commodities Energy ..............................................................................................................................13

Precious Metals ............................................................................................................13

Industrial Metals ......................................................................................................... 13

Agriculture ............................................................................................................. 14

Alternative Investments ............................................................................................................................................15

2

CONtENt

tHE INvEStMENt COMMIttEE

Peter Wynn WilliamsInvestment Director

& Partner

Andrew KellyPartner

George RipponPartner

Simon LiuHead of Investment

Research

Paul BradyPartner

Chris SkinnerPartner

the Henley Investment Committee combines more than 110 years’ experience and is unique in being backed by a full-time team of five investment professionals to optimise asset allocation and manager selection.

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“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

Sir Winston Spencer Churchill, KG (1874 - 1965), wartime speech, November 1942

We are on the cusp of great financial change. Largely unnoticed, all sorts of ducks are moving quietly into a row. the few who do notice usually scratch their heads and wonder what might be going on, lacking the tools to join the dots. Let us have a look at a few of those dots.

the ever-present problems in Europe, while out of sight and out of mind in recent months, have continued to deteriorate, and have now burst back into the open. the inevitable has happened: as a result of both fiscal and monetary contraction, the PIIGS public debt levels have rocketed and there is now talk of more bailouts, bail-ins and debt restructurings. this time around, however, there will be no taxpayer-funded handouts. Losses will fall on deposit holders (YOU!), bondholders and other creditors – perhaps even including central banks and sovereigns, ie, tax payers.

First, however, there is the matter of getting Chancellor Merkel re-elected in the German federal elections on 22nd September. they need at all costs to hold Europe together until then. Will the PIIGS try to take advantage of the situation and try to wring concessions out of Germany ahead of the elections? they should, because after the elections, the gloves will come off and moves will finally be made to resolve the intertwined banking and sovereign debt crises, now nearly five years old.

Over in the US, Detroit’s bankruptcy (with debts and unfunded liabilities for retired employees’ pensions, health care, etc, totalling more than USD18bn) is not the first, but it is the biggest and will certainly not be the last. the American economy continues to bounce along the bottom despite trillions in life support over the last five years. Only 47﹪ of adults have a full-time job at this point, and 53﹪ of all American workers make less than USD30,000 a year. Real average earnings have fallen a further 5﹪ since 2010.

China and Japan each has its own set of challenges. China is trying to re-balance its economy away from export dependence to domestic consumption, while at the same time trying to tame the alarming explosion in its shadow-banking sector. Japan, on the other hand, amid much sound and fury, is trying hard to husband inflation and growth for itself through a vigorous burst of money printing. the more likely result will be bankruptcy.

Against this troubled background in all the major trading blocs, the Shanghai Cooperation Organization (SCO) countries, led by China and Russia, continue to work to undermine the dollar as the settlement currency for global trade, including oil. they also continue to accumulate the

gold, which, until very recently, the western central banks appeared happy to dishoard for them. China’s network of yuan swaps with trading partners all over the world is a precursor to yuan convertibility, which Chinese officials have committed publicly to achieving by 2015. Recently, speculation has resurfaced that China’s currency strategy might include partially backing the yuan with gold.

Russia is president of the G20 this year. the G20 will hold a leaders’ summit in St Petersburg at the beginning of September. Spurred on by the SCO countries, the G20 has been working on “international financial architecture reforms.” Our current financial system is a house of cards built on a foundation of risk, leverage and debt. Reform is certainly a nettle which needs to be grasped. Plans are thought to include a gold-based trade settlement system and possibly a gold trade note (rather like a bank letter of credit), potentially greatly undermining the dollar’s importance in international trade.

GLOBAL OvERvIEW

Peter Wynn WilliamsInvestment [email protected]

G20 International Financial Architecture Reform Working Group, Moscow, February 2013

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GLOBAL OvERvIEW

Peter Wynn Williams Investment Director

Gold, silver and the associated mining funds have been making a tentative recovery in recent weeks after their double drubbing at the hands of the western central banks in April and June. the signs of shortage of metal (which probably sparked the April smash) have only strengthened since then, perhaps reflecting a reduced willingness on the part of the western central banks to supply as much as the market would like. the slow-motion run on the highly-leveraged paper gold market, which began early this year, may lead to the market’s collapse and a forced switch to cash-only settlement – in effect, the death of the paper gold market. What would be the point of a gold market with no gold? this would be a dramatic event, and the consequences for the dollar could be even more dramatic.

How timely of the G20 to be working on alternative arrangements!

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HENLEY ASSESSMENtNeutral

US Dollar Index Spot dropped to its lowest level in four months at 81.8 vs a basket of major currencies after US Federal Reserve pledged to continue buying USD85bn worth of bonds per month. We have seen considerable volatility in currencies in recent weeks, though not so much in the headlines.

Summary ■ Capital flows out of Asian and emerging markets have caused considerable stress, especially

in Brazil and China, and have affected the JPY carry trade. ■ SGD remains steadily strong. Expectations are that the current gradual appreciation policy

will continue as it is.

CASH & CURRENCIES


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Points of General Interest ■ Investors yanked USD43.8bn from taxable-bond funds and USD16.4bn from municipal-bond

funds in June, making the month the worst on record for bond fund outflows. ■ Detroit defaulted on its debt and highlighted fundamental issues within America at present

and the likely scenario should the Fed stop buying its own debt. ■ the fallout from Detroit has resulted in further scrutiny to municipal debt in the US; scrutiny

that is likely to highlight the significant issues facing a number of other cities in the US and highlights that municipal debt can no longer be viewed as a risk-free asset class.

Why Did Detroit Fail So Spectacularly?

Government Bonds ■ Italy defied its political landscape and held a smooth debt auction at the end of July. ■ Foreign investors account for 30﹪ of all Russian bond purchases. ■ Bond issues by Guangdong province are expected to set a record this year, even as the central

government launches a national audit of local government liabilities to address concerns about rising debt from overly-ambitious development projects.

Cash on Deposit ■ As is often the case, speculation within the financial markets has not been translated into

the retail sector. the concern that rates will rise has caused no such spike in the interest rates offered by the banks to retail savers.

FIxED INCOMEEqUItIES

HENLEY ASSESSMENt Neutral/Negative

After a terrible month in June for this asset class, we have seen a steadying of the ship in July as markets appeared to either come to terms with the idea that there could be tapering to the US bond buying programme or that with everybody away for the summer holidays, the concerns that a departure from qE for fixed interest has been put on hold until September.

We believe that it is a little bit of both; as June highlighted the 30-year bull run within fixed interest is at threat from the halting of qE. However, old habits die hard and with qE still being very much a part of current Federal Reserve policy, investors are returning, albeit fairly cautiously, to this asset class.

the lessons to take from the June crash is that not even fixed interest can be viewed as a safe haven asset given the global economies’ reliance on continued QE to inspire confidence; proceed but proceed with caution when investing within this asset class.

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Positives ■ the S&P/Case-Shiller

US Home Price Indices increased 11.6﹪ and 12.1﹪ for 10 and 20 cities respectively in the 12 months ending Apr13. MOM gains were 2.6﹪ and 2.5﹪ respectively. However, both indicies are still 26-27﹪ lower than the Jul06 housing peak, with current market values at their early 2004 levels.

■ One area of concern in the continued recovery of US home prices is further mortgage rate rises. After the US Federal Reserve suggested in June that it is considering scaling back its bond buying programme, bond prices fell sharply pushing the cost of a 30-year fixed mortgage up from 3.5﹪ to 4.5﹪, roughly a two-year high.

■ The Chestertons Humbert Prime London Capital Value Index recorded a 2.3﹪ increase in 1Q13. Given a more favourable mortgage market and an economy forecast to return to growth this year, the prime London property market is likely to continue rising, with Chestertons Humbert predicting a total gain of 8.2﹪ for 2013. Further momentum will be provided by overseas purchasers, who in some cases are enjoying a 30﹪ currency discount due to GBP weakness relative to their home currencies.

Negatives ■ UK home prices in England and Wales increased 0.4﹪ MOM and 0.8﹪ YOY, according to

property researcher Hometrack Ltd. Property prices have been supported by BoE’s Funding for Lending Scheme (which has helped ease credit strains and loosened the supply of mortgages) and by Mark Carney’s statement that interest rates are likely to remain low for a few more years. Whilst the recent property price rises appear to be due to improved confidence in both the housing market and the economy, a subdued economic background and weak income growth are expected to weigh on the market.

■ In Hong Kong, the US Federal Reserve’s plan to consider cutting stimulus is affecting sentiment in residential property prices, as investors fear rising interest rates. Property consultants believe prices could fall another 5 to 10﹪ over the next six months and transaction volumes could fall sharply as buyers withdraw from the market. this uncertainty comes on top of many property market cooling measures brought in by the Hong Kong government over the last few years.

■ Dubai residential property prices have slumped 64﹪ since the 2008 global financial crisis. However, Knight Frank reported prices were up by 19﹪ last year with the recovery mainly limited to better locations. However, there is also a fear of over supply again, as 40,000 new residential units are expected to be completed in the next few years.

PROPERtY


Property prices generally, after significant falls in 2009, stabilised in 2010 and 2011. Property prices in many areas have weakened in 2012 and 2013 YtD, as economic conditions remain difficult. Property values have, however, recovered in selected areas such as Singapore, Hong Kong and London. Additionally we are seeing signs of a recovery in the US housing market. We still consider some specialised property assets, such as student accommodation, to merit inclusion in our portfolios. Other than these investments, we would suggest that clients remain cautious.


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Positives ■ Prime Minister Abe cemented control of government with his party taking the majority in

the upper house of Japan’s National Diet. It will provide much needed support for Abe to overcome resistance in deregulation and reestablish order in government finances.

■ Japan business sentiment turned positive given a weaker JPY and stronger domestic demand. Business confidence among large manufacturers rose to +4, from -8 in March, the first positive figure since Sep11.

■ Outstanding loans held by Japanese banks rose 1.9﹪ in June from a year earlier. It is the 20th straight month of increase and posting the biggest gain since Jul09. BoJ’s aggressive monetary stimulus is perhaps creating demand for fresh investment.

Negatives ■ Abe has yet to deliver structural reforms promised as part of his three-pronged growth

strategy. Implementation of economic restructuring has so far been disappointing.

EqUItIES

UNITED STATES

JAPAN

HENLEY ASSESSMENtNegative

Financial markets are dangerous, unstable, short of collateral and drowning in debt. Growth is largely a mirage and top-line sales continue to disappoint. For as long as this continues, the risks remain more important than the returns. In a stark reminder of how “Alice-in-Wonderland” the markets have become, the S&P500 and the DJIA hit new all-time highs on the same day last month that Detroit became the largest US city ever to declare bankruptcy, with debt and unfunded liabilities of more than USD18bn. With the Federal Reserve seemingly losing control of both the bond and the gold markets, the risks of a collapse of the dollar grow closer by the day. Who can blame Bernanke for wanting to retire?! Better to be out of this market a long time early than one minute late.

Positives ■ Any experiment with tapering qE will be short-lived and likely lead to resumption at even

higher levels. ■ Federal Reserve has forecast rates will remain unchanged until at least 2015. ■ In the long term, demographics and returned energy self-sufficiency bode well.

Negatives ■ National debt: USD16.8tn and rising; debt-to-GDP: 107﹪ and rising. This is absurdly

unsustainable. ■ QE to infinity promises currency debasement, rising prices and lower discretionary spending. ■ Possible imminent collapse of paper gold market would collapse dollar.


Been here, done that! We have seen upsurges (as well pullbacks) in stock prices – refer to the graphs right. We note recent volatility in Japanese equity which is uncharacteristic of developed markets.

Abenomics involves not just monetary and fiscal policies, but also structural economic reform. Any disappointment will likely trigger further reversal in weakening JPY and in rising stocks. the stakes for restructuring are high as Japan seeks to sustain confidence. Equity valuations, however, remain attractive and below trend at 1.2x Price-Book. If Abenomics proves effective, Japanese stocks may have more upside over the medium to long term.

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UNITED KINGDOM

EUROPE EX UNITED KINGDOM

EqUItIES


the UK’s economic recovery has grown stronger and a little broader, according to official output data for the second quarter of the year. But no one wants to celebrate too soon. The economy is still more than 3﹪ smaller than before the financial crisis, living standards are the lowest in a decade and public sector debt is still rising. the recovery has also done little yet to boost the public finances. In the first three months of the fiscal year, the government borrowed about the same amount of money as it did a year ago, on an underlying basis. Mark Carney is expected to offer “forward guidance” to markets and the public that interest rates will stay low until the recovery can sustain itself.

Positives ■ The UK economy grew by 0.6﹪ in the three months to June, in line with market expectations,

and was up from 0.3﹪ growth in the previous quarter. Output grew in the construction, manufacturing, services and agriculture sectors.

Negatives ■ Real incomes have continued to decline in recent months. As of May, the average weekly

wage was GBP476 – only 1.7﹪ (or GBP7) higher than a year ago. Prices rose by 2.7﹪ over the same period. Some economists and policy makers think the squeeze on household incomes will continue for at least a couple of years.

■ the number of mortgages approved fell unexpectedly in June, according to BoE data. the data showed mortgage approvals for house purchases fell from 58,071 in May to 57,667 against expectations of a rise.

HENLEY ASSESSMENtStrongly negative

Recent euro zone PMI figures are encouraging, but we doubt the region is about to embark on a sustainable recovery. Draghi has stated that interest rates may be cut if the economy relapses but we think that would not make a difference as long as banks are failing to transmit the ECB’s cheap money to households and firms. Reflecting the clogged-up credit channels, euro zone lending to the private sector is forecast to have shrunk again in June.

Positives ■ The ECB said it expects to keep interest rates low for an “extended period”. The main refinancing

rate stayed at 0.5﹪. Draghi’s aim is to use so-called “forward guidance” to persuade investors that ECB has no plans to end its easy policy stance, keeping longer-term rates low, paving the way for consumers and businesses to borrow cheaply and mitigating already huge losses on bond portfolios of ECB and commercial banks.

■ Euro-area manufacturing unexpectedly expanded in July for the first time in two years, led by Germany. A manufacturing index based on a survey of purchasing managers rose to 50.1 from 48.8 in June.

Negatives ■ Portugal’s 10-year bond yield jumped to 7-month high (8﹪+) and the stockmarket fell

5.3﹪ after two ministers resigned. Prime Minister Coelho is battling rising joblessness and deepening recession as he cuts spending and raises taxes to meet bailout terms. Greece is also having problems pushing through reforms in return for its bailout money. Both countries need bigger bailouts or (more likely) more debt restructuring.

■ S&P lowered Italy’s long-term sovereign credit ratings to ‘BBB’ from ‘BBB+’ due to worsening economic prospects. Fitch downgraded France from AAA to AA+.


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ASEAN

AUSTRALIA

EqUItIES


the Australian trade weighted index is at 1.5x standard deviations above its 10-year average. However, the AUD is inescapably a cyclical currency and with the wheel being turned by continuing problems in Europe and slower than expected growth in China, and with fears of a reduction in Australian exports of industrial metals to China, the current phase of the AUD’s cycle is down. A lower AUD may stimulate the non-commodity oriented sectors of the economy such as manufacturing and tourism.

Positives ■ Australian inflation came in short of expectations for a third consecutive quarter. The

Australian Bureau of Statistics (ABS) said consumer prices rose 0.4﹪ in April-June compared with the previous quarter, while they were up 2.4﹪ YOY. This boosts the case for an August interest rate cut.

Negatives ■ AUD / USD depreciated 1.7﹪, the most in a month, to 91.39. The fall in the AUD over the last

two months has been around speculation of the US Fed ‘tapering’ its bond purchase program and uncertainty around developments in China.

■ The economy grow at a slower-than-expected rate in the first three months of the year, expanding 0.6﹪ on quarter and 2.5﹪ YOY. Australia’s jobless rate jumped to 5.7﹪ in June, its highest level in almost four years.

HENLEY ASSESSMENtPositive

In the short term, export growth in several countries including Indonesia, thailand and Philippines is starting to weaken on the back of deteriorating external demand. However, the fundamental growth prospects remain intact.

Positives ■ vietnam’s central bank cut the

rate to 5.5﹪ from 6﹪. ■ qE is likely to continue for the

time being. ■ thailand plans to increase

production of electricity from renewable sources to 25﹪of total output over the next 10 years to reduce imports and boost energy security.

Negatives ■ thailand’s central bank said

rising household debt limits its scope to reduce interest rates, even as the monetary authority cut its economic growth forecast for this year on slowing exports.

■ It is adversely influenced by the concern of China’s economic slowdown.

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Positives ■ Growth in retail sales of China rose to 13.3﹪ YOY from 12.9﹪ in May. ■ China’s foreign direct investment (FDI) jumped surprisingly in June, soaring 20.1﹪ from a

year earlier to USD14.39bn. In the first half of 2013, China’s FDI totalled USD61.98bn, up 4.9﹪ YOY.

Negatives ■ China GDP grew 1.7﹪ QOQ in Q2 vs 1.6﹪ in Q1. Annual growth stood at 7.5﹪ YOY, in line with

expectations. ■ China June industrial growth slowed to 8.9﹪ YOY from 9.2﹪ YOY in May and fixed asset

investment for the year to June slowed to 20.1﹪YOY from 20.4﹪ YOY in May. ■ In China the June credit aggregates suggested a slower pace of growth. Total financing rose

RMB1.040tn – the slowest pace since April last year and RMB740bn less than in June 2012. According to PBoC, the slower M2 growth in June was in line with the expected outcome of macro-economic adjustments and prudent monetary policy and was closer to the full-year target of 13﹪.

GREATER CHINA

EqUItIES


In July, Chinese vice Premier Zhang Gaoli was quoted in the official press as saying: “We must adopt resolute measures, including fiscal, monetary and pricing measures, to expand domestic demand.” In addition to Zhang’s remark, the office Xinhua News Agency stated that GDP growth below 7﹪ is not allowed and reiterated that 7.5﹪ is the target for this year. In another milestone event, China’s PBoC announced measures to further liberalise China’s lending interest rates in an attempt to reduce lending rates and stabilise growth. the most important measure is the removal of the lending rate floors, which were previously 30﹪ below the benchmark rates. In our opinion, these new developments should be viewed as part of the new government effort to stabilise growth as well as to accelerate the pace of financial reforms. Although a large swing in macro policy is not likely, the new generation of government will probably take many low-profile measures to keep the wheels rolling. We expect the chance of a Q4 GDP recovery will increase further.


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HENLEY ASSESSMENtNegative

the unprecedented chain of events in Brazil that started with complaints about inflation (bus and subway tariffs) has led to mass protests over corruption, lack of public services, and taxes. As a result of the tension and uncertainty in the past few weeks, some investors have lost confidence in Brazil’s market. If the unrest continues, the short-term impact from the protests is likely to be negative for Brazil’s economy. Brazil’s central bank cut its growth forecast for 2013 to 2.7﹪, down from prior expectations of 3.1﹪, and cited volatility as a risk factor.

OTHER EMERGING MARKETS (SOUTH KOREA, RUSSIA, BRAzIL)

EqUItIES

Positives ■ Fitch maintained Brazil’s credit rating outlook at stable, citing signs of policy corrections

that, if sustained, could help to restore confidence and improve the consistency of economic policies. Moreover, the deterioration observed in Brazil’s fiscal and external credit metrics is within the tolerance level of its current rating.

■ The Bank of Korea decided to leave interest rates unchanged at 2.5﹪ for a second month. It also raised its growth forecast for this year to 2.8﹪ from its previous 2.6﹪ and for next year to 4 ﹪ from its earlier 3.8﹪.

Negatives ■ Brazil’s swap rates declined to a six-week low as reports showed consumer prices dropped

and consumer confidence waned, spurring speculation that the central bank’s increases in borrowing costs will be limited. Swap rates on the contract due in Jan15 fell seven bps to 9.28﹪, the lowest closing level since June 7.

■ Russia is preparing to introduce its own brand of qE in an attempt to keep growth going - the central bank plans to auction loans collateralised by non-marketable assets in a bid to inject liquidity into the economy and cut the cost of funding for banks and borrowers.

■ In the second quarter, Russia’s economy grew by 1.9﹪, an improvement from the 1.6﹪ growth it posted in the first quarter, but still well below the best case scenario of 3﹪ growth. Russian academics say the country has entered a technical recession, as its basic industries contracted for 6 months in a row.

INDIA


Foreigners sold a net USD2bn of domestic debt this month through July 30, extending the record USD5.4bn withdrawal in June. The two-month outflow from stocks reached USD2.8bn, the most since the global financial crisis in Nov08. RBI increased two of its policy rates on July 15 to stem the decline, prompting a record surge in three-month interbank borrowing costs. Higher interest rates may hurt the economy and cause more currency weakness, triggering a “vicious circle”. On a more positive note, India’s cabinet is considering easing some requirements for foreign retailers investing in local supermarkets, which will help to attract FDI from global chains such as tesco and Wal-Mart.

Positives ■ The RBI held its benchmark rate at 7.25﹪ on July 30 and said the past month’s measures,

which sought to shore up the INR by creating a cash squeeze, will be reversed once the exchange rate stabilise.

Negatives ■ India’s benchmark stock index fell 0.3﹪ in July, its second month of losses, as the INR’s fall

spurred concern that capital outflows will accelerate. ■ Government bonds dropped in July, pushing the yield on the 7.16﹪ bonds maturing May 2023

up by 75bps, the biggest monthly gain for benchmark 10-year rates since Mar09. ■ The RBI pared its economic-growth forecast for the year to Mar14 to 5.5﹪ from 5.7﹪ on July

30.

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Palladium, in line with gold and other precious metals, suffered a sharp fall during the month although it has outperformed gold and platinum YtD. the decrease in silver has outdone all the other precious metals and is down about 30﹪ YTD. However, it still maintains its role as a safe haven. the thing to remember about investing in precious metals is that while prices can go down quite dramatically, they can recover spectacularly. In 2008, the price of silver tanked from a peak of almost USD21 to USD8.40, a drop of 60﹪. However, by mid 2011, it had climbed back by over 400﹪. We continue to believe that investments in precious metals are an important insurance against some of the potential shocks that could befall the global economy and whilst painful in the short term, the longer term outlook remains very positive.

Positives ■ A poor run of economic data out of the US may see an increase in demand for gold. ■ The palladium market is in deficit and as this new demand materialises, higher prices should

follow. ■ Expect strong demand in palladium for industrial uses from emerging economies.

Negatives ■ Investment sellers outweigh physical buyers and this is likely to continue until a large central

bank steps in and makes a meaningful purchase. ■ Gold will continue to react to any new comments from the Fed.

ENERGy

PRECIOUS METALS

COMMODItIES


Oil prices moved marginally higher in June despite weak macroeconomic data and the fall in other commodity prices. US natural gas prices fell by over 11﹪, a consequence of lower than expected early summer demand for electricity.

Positives ■ Evidence of a slowdown in the growth rate of US domestic oil production. ■ The average city gas price in China is to increase by over 15﹪, which could support natural

gas producers.

Negatives ■ Consensus view remains that we are moving into a period of supply surplus. ■ Oil price forecasts are moving down.

HENLEY ASSESSMENtPositive

the pressure on gold’s price continued in June, falling by more than 10﹪ to USD1235 / oz by the end of the month. Gold continues to be affected by any comments coming out of the US Federal Open Market Committee (FOMC) with anything hawkish being seen as a call to sell. Physical gold demand remains strong in the face of weaker prices. Gold does not appear to be trading as a currency at present but rather as a regular commodity driven by supply and demand and the current oversupply from investors selling cannot be absorbed by physical buying from consumers or central banks.


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Positives ■ UN’s Food and Agriculture

Organization estimates there will be over nine billion mouths to feed on the planet by 2050.

■ Middle class consumers in BRICS economies are increasingly demanding more varied and protein-rich foods. As affluence increases, protein from sheep, poultry, pigs, cows and fish may in turn displace grains in diets.

■ On the supply side, agricultural land in production has barely increased since the mid-1960s. Climate change and depletion of natural resources are powerful secular trends that will restrict future food production.

■ We remain positive on the agricultural equities asset class for 2013 as farmers are incentivised to maximise production by optimising the usage of fertiliser and crop protection and using the best seeds.

Negatives ■ Prices are subject to many uncontrollable risks, eg, weather and natural disasters, politics and

other pests. ■ Due to recent drought conditions in the American Mid-West and Russian Black Sea regions

we have seen corn, wheat and soy prices increase on average over 50﹪ within a few months.

COMMODItIES

AGRICULTURE

INDUSTRIAL METALS


Aluminium prices fell to their lowest price since Aug09 on excess production. Chinese production continues to grow with new lower-cost smelters being built on captive coal fields in north-west China and while demand continues to grow at 6-7﹪ per annum, the industry is only just taking on board the need to cut capacity. traders attributed the fall in base metals to weak global trend after data showed that the pace of economic growth in China, the biggest user, slowed in the second quarter.

Positives ■ Aluminium prices look unlikely to move lower in the short term.

Negatives ■ the outlook remains grim for aluminium while current overcapacity persists. ■ China remains the major influencer and if economic growth slows further, this could put

pressure on metal prices overall.

HENLEY ASSESSMENtPositive and Negative

there are two very different markets playing out in the agriculture sector – physical and equity. Many physical soft commodity prices have exploded due to changing global weather patterns over the past few months, however these sharp price increases tend to be followed with just as sharp falls; there is a very seasonal and cyclical pattern with these movements. Currently with many soft commodity prices at or near record highs we have a negative view on investing at these levels and encourage profit taking. On the equity side, the largest weighting funds have to this sector is via fertiliser and seed companies. these industries are having a significantly more important role to play to help increase yield and in the case of seed companies, invent seed which is more tolerant to changing global weather patterns. We remain positive on agriculture equity funds.

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Positives ■ Volatility Arbitrage managers benefitted over the month from increased levels of realised and

implied volatility in stock markets. ■ Despite the pressure on equity indices over last two months, it was notable that inflows into

hedge funds remained constructive.

Negatives ■ Following the move in rates in June the hedge fund industry’s positive run of performance

came to an end – the HFRX Global Hedge Fund Index returned -1.3﹪. ■ Global macro managers were once again amongst the worst performing strategies in June. ■ Managed future managers lost money in trend reversals in short-term rates, equities and Fx.

If markets continue to exhibit range bound price action, and the recent inflection in bonds persists, summer may be a difficult period for this strategy.

■ Returns for Equity Long-Short managers were disappointing in June - the HFRx Equity Hedge index ending the month with -1.89﹪.

■ Correlation between stocks and between assets increased back close to the level seen in 2012. Market has been proved that most of stock movement was driven by recent macro events.

ALtERNAtIvE INvEStMENt


Across the hedge fund universe, risk levels have reduced slightly during June, both on a net and gross exposure basis. We expect to see managers remain well hedged through the coming quarter in light of potential market risk. these risks, together with the lower exposure levels, are suggesting that the second half will present conditions far less conducive to return generation for the hedge fund industry as a whole. therefore, our short-term outlook for hedge fund is less positive than for much of this year. the effect of tapering by the Fed, or more accurately the effect of market reaction, remains unclear for several strategies.

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. 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. 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


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Henley Market OutlookAugust 2013

the henley group_market_outlook_aug13

Economy & Finance