Monthly Outlook - Jan 2014

Henley Market Outlook
January 2014

“But how unique are
they - really?”
Hong Kong | Singapore | Shanghai | London
THE WEALTH MANAGEMENT PROFESSIONALS

The Henley Outlook January 2014
Hong Kong, Singapore, Shanghai & London

Content
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

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

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

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

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

Agriculture...................................................................................................................... 14
Alternative Investments
.............................................................................................................................................15

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

Peter Wynn Williams
Investment Director
& Partner

George Rippon
Partner

Martin W. Hennecke
Group Chief Economist

2

Paul Brady
Partner

Andrew Kelly
Partner

Robert Chapman
Consultant

Simon Liu
Head of Investment
Research

Global Overview
Equities
Martin W. Hennecke
mwh@thehenleygroup.com.hk

“To understand the world fully and clearly, you should look at the whole picture before
drilling down into detail.”
I Ching (3rd to 2nd millennium BC), one of the oldest Chinese classical texts
One of the major pieces of news in December was the “budget deal” reached in the US by
Democrats and Republicans that was celebrated as a supposed breakthrough and major step
towards a solution, not only of political infighting but also the US debt problem. In reality, what
actually happened was that a previously agreed policy of budget cuts known as sequestration –
designed, it should be emphasised, to “reduce the speed of debt growth” of the US rather than
reduce the debt itself – was partially reversed, basically allowing for debt growth to continue on
roughly the same unsustainable trajectory it was on before the start of the fiscal cliff debate.
Clearly, the rise in US Treasury yields back to almost 3% does not help against this backdrop, as
the country already struggles to keep servicing interest payments at low rates – and therefore
in our view it is most likely that the Federal Reserve will have little choice but to largely maintain
inflationary easy-money policies, even if market chatter following the face-saving exercise of a
USD10bn taper to “only” USD75bn per month of quantitative easing may tempt some to think
otherwise.
Over in Europe meanwhile, with France’s sovereign rating cut by Standard & Poor’s in November
followed by very weak manufacturing and employment numbers last month, as well as Spanish
bad loans and national debt levels breaking new highs, the European Central Bank (ECB) likewise
seems forced to keep bailout funds flowing.
China though is holding up relatively well so far, having just posted the highest trade surplus
since 2009, which may further support the strength of the renminbi (CNY). Since holding a
large exposure to the currency itself (ie CNY deposits) would still be subject to globally rising
inflationary risks, inflation protected CNY income-producing assets such as property and stocks
come into the picture.
In this regard it is important to take note that, since late 2007, property prices have roughly
doubled both in Hong Kong and in the Chinese mainland (and in some cities like Beijing even
almost quadrupled), while mainland listed equity prices have lost about 2/3rd of their value.
In other words, property prices relative to equities are now six times more expensive (Beijing
property 12 times), or in turn we can say that equities have dropped well over 80% relative
to property prices. In fact, Hong Kong and Chinese property prices, as measured in relation to
average household income (and also as measured per square foot in the case of Hong Kong),
have become the most expensive in the world, while equities are now among the cheapest.

3


Global Overview
Equities

So, relative to property, it appears that the equity market has become relatively more attractive
again from a value perspective, and hence especially for investors currently focused only on
(Hong Kong or mainland) direct property exposure, it would seem wise to consider diversifying
some holdings (back) into the equity market at this point. Such equity exposure may well include
listed property equities and Real Estate Investment Trusts (REITs) as well, since many of these
are trading at attractive prices below book value, as they underperformed the physical properties
together with other listed equities, following the stock market.
And talking about potential buying opportunities, we have recently received a number of inquiries
about the outlook for Bitcoin. Our answer is that we are staying away from it because while
the supply of Bitcoins may be limited, the supply of virtual currencies as such is not. There are
already well over 50 similar currencies being traded
on the market such as Litecoin, Megacoin, BetaCoin
and Junkcoin to name but a few. Many have been
launched over the past several months, and they
may well dilute each other’s values going forwards.
Unlike gold, by the way, Bitcoins do not protect
against heat and radiation either (i.e., they do
not have intrinsic value derived from unique
physical properties rendering it useful in real world
applications), which is why we don’t see them on
lunar rovers.

Martin W. Hennecke

4

Equities
Cash & Currencies
HENLEY ASSESSMENT
Neutral
USD Index spot touched a near-term
high in two weeks after the US Fed
announced it would continue with its
bond purchase programme, but trim
its monthly purchases by USD10bn
(~12%) to USD75bn.

Summary
■■ We estimate that the positive domestic (combined fiscal and monetary stimuli) and external
factors driving JPY strength over the past few months will be reversed and that the Japanese
currency will revert to a weakening trajectory by the end of 2014 as growth dynamics lose
momentum and the Bank of Japan (BoJ) struggles to meet its 2% inflation target.
■■ The appreciatory fixing trend in the CNY remains in play while October saw new record highs
in the CNY against USD. External surpluses have been sustained while the record level in
FX reserves indicates appreciatory pressures remain on the CNY, helped by a resurgence in
growth momentum and positive credit dynamics.
■■ SGD remains steadily strong. Expectations are that the current gradual appreciation policy
will continue as it is.

5


Equities
Fixed Income
HENLEY ASSESSMENT
Neutral/Negative
The
fixed
income
sector
demonstrated comparative restraint
after the Federal Reserve finally
announced that they would be
tapering their quantitative easing
(QE) program; especially given the
volatile
reaction
demonstrated
within this asset class when the idea
was initially mooted in the summer.
That said, yields have risen
throughout the year and 2013
will doubtless be remembered as
significant for this asset class; maybe
not for what happened in the year
but for what the events within this
asset class will signify for the years
to come.

In the US, we are seeing US Treasury yields approaching the 3% figure and it appears
conventional wisdom is now suggesting that the 30-year bull market within this asset class that
was created by a decrease in rates from over 14% on a 10-year bond in 1981 to under 2% at the
start of 2013 is coming to an end. Rates seem set to rise and the mantra that has dictated fixed
income strategy for investors over this period must now also be challenged, with the long-term
and unchallenged investment wisdom within this asset class now needing to be reassessed and
the often-mentioned risks of increased rates needing to be managed.
Most strategies being offered currently within this sector for 2014 appear to recommend
increased diversification within the fixed interest asset class to reduce the risk and maximise the
reward.
What must also be remembered is that while a rate increase in the US will provide new questions
for investors to answer it may also have a far greater significance for the foreign exchange
markets as well as the emerging market sovereign bonds as well.
In recent times, the minimal rates being offered by US Treasuries has seen global investors
looking to allocate their fixed interest exposure to the more attractive rates being offered by
emerging markets such as Indonesia; a trade that has also been increased by a carry trade of
borrowed USD.
With rates looking more appealing in the US or concerns that the borrowed money that has been
used so rampantly via the afore mentioned carry trade may now cost more money, we could see
money flee away from these emerging markets and back into USD.
The potential for this reaction was demonstrated briefly in the summer after tapering was first
mooted; a potentially scary signal of the devastation that could be seen in the likes of Asia;
please refer to the graph below.

When considering all of these afore mentioned eventualities, it would seem that 2014 could in
fact see the most steady of investments have an uncharacteristically volatile year.

6

Property
Equities
HENLEY ASSESSMENT
Neutral
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 see signs of a recovery in the US
and UK housing markets.

Positives
■■ The UK government plans to impose a capital-gains tax on sales of investment properties by
non-residents from April 2015, as it seeks to raise revenue and control home price increases
in London. Knight Frank have commented that the tax would bring UK in line with other key
investor markets, such as New York and Paris, where an equivalent tax is charged. Savills has
forecast that prime residences in central London will appreciate by around 23% over the next
five years, assuming that there are no other significant tax changes.
■■ UK house prices rose by 1.1% MOM in November and 7.7% annually. The Bank of England
took action last week to cool down strengthening UK residential property prices by ending
incentives for mortgage lending under its “Funding for Lending Scheme”.
■■ In the US, the S&P/Case-Shiller 10- and 20-City Home Price Indices rose 0.73% and 0.7%
MOM in September, with annual gains being 12.27% and 12.29%. However, applications for
mortgages have dropped, suggesting that rising mortgage rates are affecting the US housing
market.
■■ Despite recent cooling measures, analysts are predicting further home price rises in the main
Chinese cities for the rest of this year, although volume is expected to fall. Annual increases
are in excess of 20%, exceeding local leaders’ targets of below 10% for the year.

Negatives
■■ An influx of wealthy mainland buyers and record-low mortgage rates resulted in a 250%
increase in Hong Kong luxury home prices from 2003 to the beginning of last year, outpacing
the 150% gain in mass market homes, according to Savills. However, cooling measures
introduced by the Hong Kong Government over the last three years have taken the heat from
the property market, with luxury property (normally defined as in excess of HKD15m) demand
most affected. It is reported that mainland buyers only represent 8% of current private home
sales, down from a record 25% in 4Q11. Savills predicts a fall of 5% in 2H13 luxury home prices
after a drop of 3.2% in the first three months of the year.
■■ Singapore government reported that the property price index dropped by 1.2% but remained
at an elevated level. Measures by the Singapore government to curb property prices rises may
be working.

7


Equities
EQUITIES
UNITED STATES
HENLEY ASSESSMENT
Negative
Some headline economic data
appears positive – for example,
the 3Q13 GDP revision (+3.6%).
These are enough for the trading
robots, which scan the headlines
and account for the majority of
what passes for trading these days,
to power the markets to new alltime highs almost on a daily basis.
Digging a little below the headlines
however usually tells a different story.
In the case of the GDP revision, for
example, growth was largely due to
a build-up of unsold inventories and
falling consumer spending - hardly
bullish signs. The disconnect between
rising asset prices and deteriorating
fundamentals grows ever more stark.
Meanwhile, the Federal Reserve now
owns one-third of the entire US bond
market, and its balance sheet has
broken through USD4tn.

Even if the Federal Reserve does attempt a QE taper of some sort, by the end of this year it will
be printing more money than it is this month. You cannot taper a Ponzi scheme. Such is the US’s
economic weakness that the Federal Reserve cannot increase interest rates and the politicians
can neither increase taxes nor cut spending. So, as has been obvious for years, the USD is being
left to take the strain. It is likely that there will be a dollar crisis of some sort this year, perhaps
sparked by the growing shortage of bullion to back the paper gold market. The catalyst could be
one of many, but the risks remain more important than the returns.
Positives
■■ Not tapering would allow asset prices to continue to rise, subject to rising bond yields.
■■ The 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: USD17.2tn; debt-to-GDP: 107%. Absurdly unsustainable.
■■ A significant attempt to taper QE could cause asset prices to correct sharply.
■■ The possible collapse of paper gold market would collapse the USD.
■ ■ QE to infinity promises currency debasement, rising consumer prices and lower
discretionary spending.

JAPAN
HENLEY ASSESSMENT
Neutral
Abenomics has improved the outlook
of exporters yet there exists a gap
between improving sentiment and
the state of the real economy. While
it all seems to be one-way traffic for
now, the litmus test will be the sales
tax hike in spring. By then, the BoJ
and Prime Minister Shinzo Abe will
also know the outcome of annual
pay negotiations between companies
and workers. Boosting basic salaries,
which have been falling for years
(see graph), is a key measure for the
success of reviving consumption.

Positives
■■ BoJ is open to more
government bond purchases
to achieve its inflation target.
Apparently, fiscal deficits
are of secondary concern.
We believe JPY will weaken
further in 2014.
■■ BoJ managed to suppress
real rates to the lowest levels
in history while concerns
about tapering pushed real
yields significantly higher
in the US and in other G4
economies. Negative real
interest rates are a key
feature of Mr Abe’s war
on deflation. The aim is to encourage bond-heavy investors to seek higher returns through
domestic stocks, loans or property, or even buying assets abroad.
Negatives
■■ Mr Abe struggled with a rapid decline in his approval ratings. Several opinion polls showed
Mr Abe’s popularity plunged below 50% for first time after his ruling coalition passed a
controversial bill for tougher penalties in breaches of national security intelligence.
■■ Japan reported a larger-than-expected trade deficit of JPY1.35tn for November. Imports
climbed 21.1% from a year earlier while exports rose 18.4%.

8

EQUITIES
Equities
UNITED KINGDOM
HENLEY ASSESSMENT
Neutral
As alluded to in December 2013, and
is now official, Britain will impose a
capital gains tax on foreign property
investors from 2015 in a bid to allay
fears that wealthy foreign buyers
are inflating a London-led property
bubble which is pricing locals out
of the market. The acquisition
of housing ranging from opulent
mansions to modest apartments
mainly by overseas purchasers has
helped fuel a London-led rise in prices.
That has stoked concerns ahead of
the 2015 election that many Britons
may never be able to afford their own
homes. To roars of approval in the
British parliament, finance minister
George Osborne said that from April
2015 he would introduce a capital
gains tax on future gains made by
non-residents who sell a residential
property in the United Kingdom.

Positives
■■ Inflation has fallen back to its slowest pace in four years thanks to steadying food prices and
the fact that energy price hikes have yet to come in. The consumer prices measure of inflation
slowed to 2.1% in November from 2.2% in October and was the lowest since November 2009,
according to the Office for National Statistics. The move closer to the Bank of England’s
government-set target of 2% will give policymakers more headroom to leave interest rates
at their record low. It will also ease the pressure on households that have been grappling with
living costs rising at a faster pace than average wages for several years.
■■ Official figures out in December 2013(?) showed the jobless rate fell 0.3% points to 7.4%
in the three months to October, meaning there were 2.39m out of work over the period.
Unemployment in Britain is now at a four-and-a-half-year low, with 2.39m people out of
work, down 99,000 on the previous three-month period – the biggest cut in over a decade.
Compared with the same period a year ago 121,000 fewer people were seeking jobs in 3Q13.
Negatives
■■ The political row over falling living standards was stoked this month as it emerged that
earnings-squeezed and pension-poor Britons born in the 1960s and 70s need inherited wealth
to be better off in retirement than people born in earlier decades. After an autumn in which
the cost of living has dominated Westminster debate, the Institute for Fiscal Studies (IFS) said
its research showed the days when each generation could expect to be better off than their
predecessors might be ending. The IFS said living standards for those currently considered
to be in the prime of their working lives were now dependent on wealth passed down the
generations, and that this was heavily skewed towards the already better off.

EUROPE EX UNITED KINGDOM
HENLEY ASSESSMENT
Neutral
The eurozone may no longer be
suffering an acute crisis since ECB
President Mario Draghi made his
“whatever-it-takes” pledge to save
the euro in the summer of 2012.
It is not all doom and gloom at
the moment. However, the feeble
recovery will do little to alleviate the
economic hardship being experienced
especially in southern Europe, which
could prompt a political backlash
against ruling parties that have
pushed through harsh austerity
programmes. This could trigger fresh
investor doubts about the willingness
of hard-hit countries to stay the
course and cause the region to suffer
a relapse.

Positives
■■ Europe has been trading at large discounts to historical valuation levels because risk-averse
investors have shunned the region. The price of European equities as a whole was recently at
a 40-year low relative to US equities.
Negatives
■■ The EUR’s strength, recently at a five-year high against the JPY, complicates the task for
policymakers trying to support a fragile eurozone recovery while the bloc’s biggest economies
diverge – with the latest data suggesting that German growth is accelerating but French
business activity is at a seven-month low. Upward pressure on the EUR is exacerbated by a
surge in early repayments to the ECB of the cheap long-term loans banks took out to weather
the eurozone crisis.
■■ A German-backed deal on Europe’s banking union suffered a blow after the ECB warned
it would fail the test of market credibility without streamlined decision-making and better
funding. The intervention from Vitor Constâncio, the ECB vice-president, came hours after
eurozone ministers emerged with a compromise that they thought would clear the path for a
deal on a single system for winding up banks in trouble.

9
9


Equities
EQUITIES
AUSTRALIA

HENLEY ASSESSMENT
Neutral
The decision by the Federal Reserve to
reduce bond purchases by USD10bn
in Jan14 to USD75bn should help
the Australian economy. One of the
reasons the AUD was above parity
with the USD for most of the past
three years was the Federal Reserve’s
economic stimulus program. The
AUD has dropped to below 89 US
cents and the fall would please Royal
Bank of Australia governor Glenn
Stevens, who has stated that the
currency should not be over 90 US
cents and should be close to 85 US
cents. This would be a boost to the
non-mining sectors of the economy
at a time when a major driver, mining
investment, is expected to tail off.

Positives
■■ Consumption, which comprises about two-thirds of GDP, is poised to drive the economy in
coming years for the fact that Australia’s population growth is among the fastest in the world.
It is expected to outpace the Organisation for Economic Co-operation and Development
(OECD) average growth rate by four to five times over the next decade. This will be the most
important consumption driver for Australia.
■■ Australia’s gross government debt, at 27%, is also much lower than many other developed
economies, including the US, Japan, and Germany. Allowing for cash held, net debt is only
12%.
Negatives
■■ Australian treasurer Joe Hockey said that the budget deficit will balloon to AUD47bn in the
fiscal year through June 30, 2014, up from an August estimate of AUD30.1bn, as the mining
boom wanes and the nation’s currency remains “uncomfortably high”.
■■ The OECD has stated that among its 34 members, Australia, along with Chile, are the most
exposed to a downturn in emerging economies, which it sees as the biggest threat to the
world economy in 2014. It notes that Australia’s terms of trade have risen by almost 70% over
the past decade with the potential for many of these gains to be reversed. It also sees other
sources of risk to Australia, including elevated housing prices and labour costs.

ASEAN
HENLEY ASSESSMENT
Neutral
As a review of year 2013, the general
ASEAN markets have produced
satisfactory YTD performance amid
volatility. Malaysia, by the time this
section is written, is one of the best
performers. Moving forward, for
emerging markets including ASEAN,
the risk is further capital outflow
to North America and developed
markets that in turn can generate
even higher volatility.

10

Positives:
■■ The governments are in better fiscal positions as compared to that of western countries.
■■ Myanmar, a place with massive resources and potential, is facilitating its progress in opening
up its economy.
Negatives:
■■ Emerging-market currencies fell after the Federal Reserve reduced stimulus while pledging to
hold interest rates near zero.
■■ Indonesia’s IDR fell to a five-year low and government bonds dropped after the Federal
Reserve said it is reducing stimulus that has spurred fund flows into emerging markets.

EQUITIES
Equities
GREATER CHINA
HENLEY ASSESSMENT
Neutral
The Chinese Government released
the details of the post-Plenum reform
plan. The details present a picture
that is even more aggressive than
the already bullish expectations,
with reforms occurring in all sectors.
The decisions on state-owned
enterprise (SoE) reforms, including
promoting mixed membership, and
the introduction of a two-child policy
for couples where one member is
an only child, are particular positive
surprises compared to the market
expectations. We believe the
stimulus measures that have been
announced will increase excitement
regarding the market for the next
12 months. These plans will guide
China’s second-half journey towards
a market-based economy, lift
China’s growth potential, and reduce
macroeconomic risk.

Positives:
■■ China’s central bank will “basically” end normal intervention in the currency market and
broaden the CNY’s daily trading limit, governor Zhou Xiaochuan said, without giving a specific
timeframe.
■■ Foreign direct investment (FDI) into the Chinese mainland rose 2.4% YOY in November to
USD8.48bn, up from a 1.2% YOY increase in October. Capital inflows are expected to increase
in 2014 as government reforms and policies on opening up of key sectors are implemented.
Negatives:
■■ The liquidity crunch, even despite cash injections by the People’s Bank of China of CNY200bn
(USD32.9bn) at the time of writing. The seven-day bond repurchase rate, a gauge of funding
availability in banking system, increased 100bps to a six-month high of 7.60%. Borrowing
costs climbed in recent weeks as the government shifted toward allowing market-determined
interest rates.
■■ China’s inflation rose 3% YOY in November. Price increases in food remained the main driver
of overall inflation.
■■ Housing prices continue to climb which will probably trigger another round of tightening
measures. Low interest rates and cheap credit has fuelled a surge in property prices in China
since 2000. Real estate accounts for about 1/5 of Chinese investment. A combination of high
prices and overbuilding in China has raised concerns that the nation has a real estate “bubble”
that is about to burst.

11
11


Equities
EQUITIES
Other Emerging Markets (South Korea, Russia, Brazil)
HENLEY ASSESSMENT
Negative, except for
Russian equities
Differences among the countries are
pronounced in terms of resilience
towards an external capital freeze
as well as in terms of equity market
valuations. Both factors should have
great importance for the near-term
outlook. On the resilience score, China
has a current account surplus with
reasonably limited financing needs
(maturing debt and budget deficit)
and good forex reserve coverage.
India, on the other hand, has current
account deficits, sizeable financing
needs and relatively bad reserve
coverage of their short-term external
debt. Brazil has the highest financing
needs of the group in 2014 but also
has the best reserve coverage.

12

Positives
■■ Russia currently is an overlooked/shunned yet very attractively valued market, to a large
extent as a result of the prevailing negative image and consensus. The likely generally positive
developments ahead for the country such as the external Asian export potential and the likely
internal pension reform, coupled with good macro-economic and equity valuation numbers,
plus the embedded inflation and geo-political crisis hedge, would suggest the market be
considered as a potential investment opportunity in diversified portfolios.
■■ Brazilian President Dilma Rousseff’s popularity continued to recover in November thanks to her
government’s social programmes and a slowdown in inflation, making her the clear favourite
in next year’s presidential vote. An initiative implemented this year brought thousands of
Cuban doctors to the most desolate areas of Brazil as part of a programme to improve the
country’s public health system.
Negatives
■■ India’s central bank kept the “repo” lending rate steady at 7.75% and the cash reserve
ratio at 4%, which went against the expectations of analysts and economists who thought
Raghuram Rajan, the governor of the RBI, would raise interest rates once to fight inflation. In
its monetary policy review the central bank notes that industrial activity remains weak and as
the government tightens government spending in the rest of the fiscal year to meet its fiscal
deficit targets, economic growth will be hit further.
■■ President Vladimir Putin’s gamble to bail out Ukraine with USD15bn in credits is seen to many
that Russia is putting geopolitical interests ahead of financial concerns. Not everyone at the
finance ministry, which manages the National Welfare Fund from which money will be taken
to buy Ukrainian eurobonds, is happy that cash supposed to be kept for helping Russia’s
growing population of pensioners will be used to aid an impoverished neighbour.

COMMODITIES
Equities
Energy
HENLEY ASSESSMENT
Neutral
The key word this month was tapering
but oil prices reacted relatively
benignly to the Federal Reserve’s
announcement it was to cut its assetbuying programme by USD10bn per
month. Initially, oil prices experienced
some pressure in the face of a rally in
the value of the USD but this was short
lived and markets remained relatively
unaffected by the full extent of the
impact and more attention was
focused on US inventories.

Key points
■■ During December US oil stocks fell by 18 million barrels.
■■ Libya’s exports have fallen as protesters occupied several fields demanding a greater share of
the nation’s oil wealth.

Precious Metals
HENLEY ASSESSMENT
Positive

Key points
■■ Indian and Chinese gold demand is strong and hitting record levels.
■■ Gold remains susceptible as investors continue to favour risk assets.

In December everything hung on the
anticipation of an actualisation of
the Federal Reserve’s announcement
it was to taper QE. Immediately
after announcing a reduction of
USD10bn in its monthly asset-buying
programme, the USD gained at the
expense of gold, which retreated to
a six month low. Given that there
was a re-emphasis that interest rates
will remain low for the foreseeable
future, this seems somewhat counterintuitive and once the impact of the
tapering announcement settles,
it is likely that gold will re-trace its
footsteps. Silver, which tends to
follow gold in its movements also
retreated. On a positive note, central
Banks in China and India continue to
hoard gold, bulking up their reserves
at these depressed prices. As supply
is taken out of western markets, this
is likely to have a positive effect on
prices going forward.

13
13


Equities
Commodities
Industrial Metals
HENLEY ASSESSMENT
Neutral

Key points
■■ Iron ore imports to China have reached record highs as domestic supplies have struggled to
meet demand.

China continues to drive sentiment on
base metals and renewed optimism
in Chinese growth helped boost base
and bulk metals. The broad metals and
mining index rose over 5%, with zinc,
nickel and copper all up in the month.
Rio Tinto suggested that iron ore would
soften in 2014 but that it remains a
good market to be in, while Goldman
Sachs re-iterated its bearish stance.

Agriculture
HENLEY ASSESSMENT
Neutral
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. 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 that is more tolerant to
changing global weather patterns.

14

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 cyclical
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.

Alternative Investment
Equities
HENLEY ASSESSMENT
Neutral

Positives
■■ The Hedge Fund Research Index gained 1.0% in November while S&P 500 increased by 3.1%.
■■ With equity markets across major regions recording strong gains (particularly post the
temporary resolution of the US debt ceiling), together with earnings season, it was hardly
surprising to see equity-based managers having a joyful year. In support of the fact that
central banks are still in stimulus mode, we believe that the current market condition will
persist into 2014. This could easily lead to the conclusion that the only way is up for most
risky assets.
Negatives
■■ In the US, managers had slightly more trouble extracting alpha, even with the rally in the
market. Several equity managers reported a lack of dispersion through earning season,
getting particularly hurt on short stock selections despite the weak earnings season and
disappointing data releases. A number of managers have moved away from single stock
shorts, taking index level shorts against their long stocks.
■■ Managers focusing on the emerging market space still performed badly this year. Emerging
market economies have become very dependent on capital inflows to maintain the levels of
consumption and investment. The main risk is that the shifts in US monetary policies will lead
to a large reversal of the flows into developed markets.

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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

15
15


Henley Market Outlook

Equities

January 2014

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16

Monthly Outlook - Jan 2014

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