Henley February Outlook Hk

Monthly Market Outlook
February 2012
The financial world watches like a deer caught in the headlamps
as Greece plays another game of chicken, this time with some
of its hedge fund creditors in the negotiations on private-sector
involvement in re-structuring its sovereign debt. Time is now fast
running out. Will one side pull the pin, or will one side cave in?

The Henley Outlook
February 2012
THE WEALTH MANAGEMENT PROFESSIONAL

The Henley Outlook
February 2012

Overview

ASSET CLASS HOUSE VIEW REMARKS

Fixed Income Investment Grade

High Yield
Student accommodation only
Property

Equities US

Japan

UK

Europe Ex UK

Australia

ASEAN
Broad equity exposure
Greater China including the region preferred

Brazil

Other Emerging Markets

Commodities Energy

Precious Metals

Industrial Metals

Agriculture
Selective strategies only
Alternative Investments

Key: Positive Neutral Negative

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

The Henley Outlook
February 2012

Global Overview

“’HOW dId yOU GO bANKRUPT?’ bILL ASKEd.
‘TWO WAyS,’ MIKE SAId. ‘GRAdUALLy ANd THEN
SUddENLy.’”
“The Sun Also Rises” (1926), Ernest Hemingway (1899-
1961)

The financial world watches like a deer caught in the headlamps as Greece plays a game of chicken with some of its
hedge fund creditors in the negotiations on private-sector involvement in re-structuring its sovereign debt. Time is now
fast running out. Will one side pull the pin, or will one side cave in?

Greece is now thought to be demanding that its creditors swallow losses on par value of up to 90%, as we forecast here
last August (not the 50% “agreed” at the October summit). Some hedge funds are holding out because, rather than
swallow such losses in a so-called “voluntary” deal, they would prefer Greece to default and trigger payouts on the loss
insurance (credit default swaps) which the hedge funds have bought, turning their losses into profits (and bonuses).

So high are the stakes that I expect a way will be found to buy the hedge funds out (probably in secret) so preventing
a default that would trigger the credit default swaps, and without the associated and very real risk of many dominoes
around the world toppling – not least among those the European Central Bank itself.

It is a complex game with a large number of players with numerous different motives - and more than one hand grenade.

Meanwhile, in the interbank market, the year has started with a slight improvement in the stresses in the system. The
new President of the European Central Bank, Goldman Sachs alumnus, Mario Draghi, has wasted no time in both reducing
interest rates and injecting nearly half a trillion euros into the European banking system in its Long-Term Refinancing
Operations (three-year loans at 1.0%). This takes some of the pressure off sovereign and bank financing pressures at a
time when France, Italy and Spain alone need to refinance EUR 425bn of sovereign debt before the end of April. Yields
have fallen. Even so, nine European sovereigns and even more banks have had their credit ratings downgraded in recent
days. It’s not pretty.

“IT’S A bATTLE OF THE POLITICIANS AGAINST THE MARKETS. bUT I’M dETERMINEd TO WIN THE bATTLE.”
Angela Merkel, 06May10

Directly or indirectly then, the European Central Bank is giving euro zone governments and banks the money that the
rest of the world has been taking away. As a result, its balance sheet has expanded by the equivalent of more than USD1
trillion in six months, to USD 3.5tn. This compares with the US Federal Reserve’s balance sheet of “only” USD 2.9tn.


The Henley Outlook
February 2012

Over the past three years, the central banks have succeeded in engineering a decline in interest rates. The trouble is,
eventually, the cost of servicing your rising debt reaches the limit of your income, and you cannot borrow any more, even
at rates close to zero. When the borrowing stops, the printing begins.

We are now in that transition.

There will be another round of European Central Bank Long-Term Refinancing Operations this month. It is expected to
be just as huge as the first.

The inflationary/debasement dangers, which such balance sheet expansion represents, should not be underestimated.
The US, UK, European and Japanese central banks are all walking a tightrope between, on the one hand, injecting
enough liquidity into the system to restore integrity to the banking system, and, on the other, printing too much and
causing a hyperinflationary collapse. We must all hope their sense of balance is impeccable!

Rather than just hope, however, like a broken record, we continue to urge our clients to accumulate gold and silver in their
portfolios. The monetary metals have proved themselves over millennia to be the ultimate hedges against inflation. Year
to date, the dollar has already fallen 9% versus gold, and 16% versus silver.

Chancellor Merkel may be determined to win the battle; but – not for the first time – the markets may force a different
outcome.

In this Year of the Dragon, please mind the flames!

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


The Henley Outlook
February 2012

Cash and Currencies

USd Index (Source: Bloomberg)

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

HENLEY ASSESSMENT:
Unchanged. Negative USD, GBP and EUR over medium-to-long term against a trade-weighted basket of
currencies. The euro is unlikely to continue in its current form.


The Henley Outlook
February 2012

Fixed Income
Positives
• ECB surprised the market by injecting the largest amount of credit into euro zone banking system. As a result, 523
banks borrowed a total of EUR 489bn (USD 639bn) at rate of around 1% for an exceptionally long period of three years.
• Euro zone banks parked a record of EUR 452bn at the ECB as they favoured the safety of central banks’ deposit facility
over lending to each other’s on the interbank market.
• Germany paid a negative return at its debt auction for first time as European debt crisis worsened. Apparently, some
institutional investors are willing to pay the German government to keep their money rather than earning a return on
their investment. Germany auctioned EUR 3.9bn (USD 5bn) of six-month bills at an average yield of minus 0.0122%.

Negatives
• Credit ratings agencies continued to undermine rescue efforts in euro zone. Though hardly any surprise, S&P’s
downgraded nine sovereign countries which include stripping France and Austria of their triple-A ratings. Investors will
further scrutinise credit worthiness of the EFSF bailout fund and commercial banks in the region.
• Negotiation on debt restructuring between Greek government and its private creditors broke off after failing to agree
how much money investors will lose by swapping their bonds. A disorderly default by Greece is still an imminent threat.

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

We believe political risk will remain high and credit will further tighten in Europe in H1 of 2012. Besides the
struggling sovereign nations, European financials are also required to settle/rollover USD 700bn of public
market debt over the next nine months (as shown in graph above) in rather challenging market conditions.
THG is concerned about the deleveraging process in the overall developed markets.


The Henley Outlook
February 2012

Property
Positives
• As property prices continue to rise in Singapore, the Government has just announced an Additional Buyers Stamp Duty
(ABSD) for private property of between 3% and 10% for Singaporeans, permanent residents, and foreigners, to slow
down the rise of the property market. The ABSD is in addition to the current Buyer’s Stamp Duty of 1% to 3%, and the
government have stated it is designed to moderate investment demand for private residential property, and to prevent
future volatility. Foreign purchasers, who accounted for 19% of all private residential property purchases in the second
half of 2011, will now pay an additional 10% ABSD for any residential property purchases.
• Knight Frank reported that Central London luxury home prices gained 0.8% in December, representing a 14th
consecutive month of rises. This demand for prime property is a reflection of ongoing global economic uncertainty,
and a smaller number of properties for sale. Prime Central London prices gained 12.1% in 2011, and are up 40% since
the market’s low in March 2009.
• With interest rates likely to remain low in many countries, properties commonly enjoy positive rental yields, compared
to the cost of finance.

Negatives
• In the US residential property market, the seasonably adjusted Case-Shiller Index fell by 7.42% from a year earlier, and
by 1.61% in the latest quarter. The index’s co-founder Robert Schiller recently commented to Reuters: “I do not know
what will happen, but I don’t see any reason to predict a recovery now.” Freddie Mac expects the US housing market to
decline over the following months, due to the large inventory of houses with delinquent mortgages.
• According to Lloyds Banking Group, UK property values dropped 0.9% to an average of GBP 160,063 in December, the
lowest since July 2009. Values fell 2.2% in 2011. The Bank of England has suggested the problem is rising unemployment
(at a 17 year high), and the Euro-area debt crisis, which is undermining confidence, and property demand. This is at a
time when banks are expected to toughen lending terms because of strains in funding markets.
• Chinese home prices fell for the fourth consecutive month in December (0.25% month on month) after the Government
reiterated plans to maintain property curbs. However the price falls are steep in some areas. Average prices in Shanghai
are down around 40% from their peak in mid-2009. In Beijing, nearly two years of inventory is clogging the market, and
more than a thousand real estate agencies have closed this year.
• The Hong Kong Government has suggested that the cooling measures enacted to slow the rise of residential property
prices may be eased in 2012. This follows the news that Hong Kong’s property prices dropped to a six-month low,
reflecting the success of the government’s policies. Samsung Securities Asia expects property prices in Hong Kong
to drop by 10% to 15% next year, but they are unlikely to see any sharp corrections as mortgage rates (although still
rising) are still below average rental yields, and the mortgage loan to value ratios are still low by historical standards.

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


The Henley Outlook
February 2012

Equities
US
Positives
• US economy highly flexible, resilient and leads world in technology and innovation.
• Federal Reserve has forecast rates unchanged until at least late 2014.

Negatives
• Deterioration of US fiscal position continues (national debt: USD 15.3tn).
• Housing market in depression, foreclosures rising again (median home price in Detroit: USD 6000).
• Real incomes falling (down 7% in four years), total unemployment rising.
• Political system dysfunctional, no appetite for tax increases or spending cuts (election year).

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

JAPAN
Positives
• Japanese machinery orders in November rose 14.7% compared to previous month, beating expectations by nearly
10%. The significant increase is attributed to overseas orders from businesses, such as rebuilding Japanese factories
in Thailand after the flood.
• Japan’s economy rebounded from a recession in Q3 by expanding 1.5%. The world’s third largest economy grew by
an annualised 6% after three consecutive quarters of contraction. Net exports contributed 0.4% to GDP growth, first
positive contribution in five quarters due to rebuilding efforts after the earthquake and tsunami. Private consumption
grew a stronger-than-expected 1.0%.
• JPY 12.1tn (USD 157bn) additional budget is now in the government to be passed by end of November. Recovery in
Japan will largely depend on the effect of public spending in its largest rebuilding effort since WWII.

Negatives
• Corporate governance is on the spotlight with the accounting scandal of Olympus continuing to appear in the headlines.
• Japanese government sold an estimated record JPY 7.7tn (USD 100bn) in its currency intervention, but its effect turned
out to be short lived as JPY is now trading at below JPY77.
• Japan’s sovereign debt is set to surpass JPY 1,000tn (USD 12.81tn), or 200% of its GDP by the end of this fiscal year.

HENLEY ASSESSMENT:
Negative. Nikkei 225 dropped 15.6% in 2011 and underperformed most equities in the Asia Pacific region. We
expect the slower growth environment likely to persist and more mergers and acquisitions by Japanese companies
in 2012. The growth potential lies in the cash-rich conglomerates as they expand their foreign investments on the
backdrop of strong JPY and low interest rates.


The Henley Outlook
February 2012

UK
Positives
• UK services, manufacturing and construction gauges showed growth in Dec11, indicating that the economy has
improved slightly.
• BoE maintained its benchmark rate at 0.50% and held the asset purchase target at GBP 275bn following its policy
meeting.
• Although BoE is expected to ultimately increase its gilt purchases, it is predicted that it will delay announcing any plans
until February when it reviews economic prospects and issues its quarterly inflation report.

Negatives
• UK’s GDP contracted by -0.2% in 4Q11, mainly due to manufacturing and construction. Services flat.
• Industrial production dropped in Oct11 and Nov11 attributed to declines in the output for mining, quarrying and
utilities sectors.
• Imports from countries outside the EU hit another record high. UK has found it hard to wean itself off imports despite
a fall of about 25% in the value of the pound since the recession.

HENLEY ASSESSMENT:
Negative. With demand showing few signs of revival, economists and financial market participants expect the
asset-purchase programme to be extended to at least GBP 325bn. A core problem has been deficient growth,
which has persistently fallen short of expectations and kept unemployment at high levels. The BoE has revised
its expectations of the future level of UK GDP 16 times running in each of its quarterly forecasts over the past
four years. It is this assumption of persistently low growth from the government forecaster – not the weakness
in the recovery thus far – that has forced ministers to prolong the austerity drive.

EUROPE Ex UK
Positives
• ECB provided banks nearly half a trillion euros of three-year money in Dec11, called LTRO, and will make a similar offer
in Feb12.
• ECB President Mario Draghi stated that a massive liquidity injection is helping the euro zone’s banking system
substantially and supporting confidence in the bloc’s economy.
• Italy sold EUR 12bn of Treasury Bills, meeting its target, with the rate on the one-year bills plunging to 2.735% from
5.952% at the last auction of similar- maturity securities in Dec11.
• German exports gained in Nov11 and business sentiment in France climbed from a two-year low in Dec11.

Negatives
• S&P’s lowered the top ratings of France and Austria one level to AA+, with “negative” outlooks, downgraded Italy,
Portugal, Spain and Cyprus by two steps and cut Malta, Slovakia and Slovenia by one level.
• Hungary received its second sovereign-credit downgrade to junk when S&P followed Moody’s in taking the country out
of its investment grade category in Dec11. The yield on its 10-year notes rose 21 bp, the highest since Jun09.
• Private-sector bondholders in Greece have warned that time is running short to clinch a deal on a voluntary debt
exchange, which is necessary to secure international aid and avoid a messy bankruptcy when a major bond redemption
comes due on 20Mar12.

HENLEY ASSESSMENT:
Strongly negative. Mario Draghi has announced boldly that the euro zone is “showing some signs of stability” after
the injection of liquidity from LTRO. However, his victory lap over his efforts to improve liquidity and stabilise European
credit markets seemed premature as more than 90% of the cash was deposited back to the ECB instead of being used
for lending. S&P’s downgrades are less a negative verdict on the fiscal positions of the individual countries and more an
indication of the shortcomings of the euro zone’s collective leadership in dealing with the crisis.

The Henley Outlook
February 2012

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

Negatives
• Strong AUD making it very difficult for tourism, agriculture, wine and other exporters to compete. As a result, the
economy is now very reliant on one industry.
• Any slowdown in Chinese and Indian growth (and related commodity demand) will send base metal prices and the AUD
tumbling.
• As interest rates rise to address inflation may very well result in the highly-leveraged Australian property bubble
bursting, putting bank balance sheets under a lot of pressure.

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

ASEAN
Positives
• Indonesian domestic consumption contributes approximately 62% of the economic output. According to Bank Indonesia,
the country is expected to achieve 6.5% GDP growth in 2011 and 6.3% in 2012 on a YoY basis. Inflationary pressures have
eased to 3.8% in December, the lowest since April 2010 while the reference interest rate was kept at record low of 6%. Bank
Indonesia has sufficient room to accommodate economic growth given high rates of inflation no longer an imminent threat.
• Indonesia sovereign ratings up from BB+ (non-investment grade) to BBB- (investment grade) was attributed to the improved
economic performance, better fiscal position and strengthened economic fundamentals of the nation.
• Thailand’s cabinet on 27 December 2011 has approved the THB 350bn post-flood budget proposed by the government to
improve infrastructure and water management in the country. The purpose of this budget is to avoid any repetition of the
massive flooding that has happened in recent months, and to restore investors’ confidence.

Negatives
• Philippines’ November exports contracted 19.4% YoY, with electronics exports declined 34.5% YoY, following a 36.5%
YoY drop in October. Philippines consistently underperformed other NJA electronic exporters, particularly in 2011.
• Thailand’s cabinet has also agreed to the government’s proposal to transfer the THB 1.14tn debts incurred from the
1997 financial crisis banking sector bailout into the Bank of Thailand (BoT) balance sheet. This may help to reduce
Thailand’s debt-to-GDP ratio however, it may force BoT to print more money to repay the loan causing higher inflation.
• Singapore’s economy shrank for the second time in three quarters as manufacturing eased, increasing pressure on
policy makers to spur growth as they forecast slower expansion this year. Singapore’s manufacturing sector declined
for the sixth straight month in December.


The Henley Outlook
February 2012

HENLEY ASSESSMENT:
We remain neutral. Although they are exposed to a sharp slowdown in the developed world that can affect
exports, but we continue to think domestic demand within ASEAN will hold up better.

GREATER CHINA
Positives
• China’s CPI inflation eased to a
fifteen-month low of 4.1% YoY
in Dec from 4.2% last month,
broadly in line with market’s
expectations. It was due to
deceleration of non food prices
growth. Food prices picked up
from 8.8% YoY in Nov to 9.1%
YoY in Dec. CPI for the fiscal
year averaged 5.4%which was
above Beijing’s official annual
target of 4%.
• Pilot program for RQFII and mini-QFII scheme was launched which allows qualified investors to raise RMB funds in
Hong Kong and invest in China’s security market. This provides an opportunity for offshore RMB flowing back to China’s
capital market.
• Loan growth gained 15.8% YoY in Dec, after a straight decline for eight months, compared with 15.6% gain in Nov.
The growth was due to stronger lending in Dec and the lower base from last year. More liquidity freed to the banks
encourage lending due to the RRR cut. M2 gained 13.6% YoY in Dec compared with 12.7% gain in Nov. Both loan and
M2 growth beat market consensuses.
Negatives
• Exports in China grew 13.4% YoY (in line with market consensus) while imports grew 11.8% YoY in Dec (worse than
market expectations). The deceleration growth in imports reflects the slowdown in domestic investment demand and
weaker commodity prices. For the fiscal year, exports gained 20.3% and imports gained 24.9%.
• China’s monthly trade surplus was at USD 16.5bn up from USD 14.5bn in Nov. For the fiscal year, trade surplus was at
USD 154.9bn (2.1% of GDP), the third consecutive year of a declining trade surplus, down from the high of USD 298bn
(6.6% of GDP) in 2008.
• Taiwan’s export growth slowed in Dec to 0.6% YoY from 1.3% in Nov, worse than market expectation, due to deceleration
in mineral and transportation equipment exports. Exports to China fell 4.0% in Dec compared with 3.3% in Nov. Trade
surplus narrowed from USD 3.2bn in Nov to USD 2.3bn in Dec.
• Hong Kong’s export growth in Nov slowed to 2.0% YoY, lower than market consensus, compared with a decline of 11.5%
YoY in Oct. Retail sector has been resilient and the real payroll per person in retail trade sector rose 8.2% YoY in 3Q11
compared with an overall 1.6% increase for all industries.

HENLEY ASSESSMENT:
Neutral. Inflation in China continues to show signs of easing but it is still early to make a conclusion. Nevertheless,
a deflationary environment allows more room for policy easing. Trade growth in China is expected to slow
further in 2012 and combined with falling commodity prices, imports may see more deceleration. Election in
Taiwan and Hong Kong pose political change for 2012.


The Henley Outlook
February 2012

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

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

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

OTHER EMERGING MARKETS (SOUTH KOREA, INdIA, RUSSIA)
Positives
• Russia’s key refinancing rate was lowered by 25
bps to 8% in Dec given downside risks to growth
and easing inflation concerns. CPI inflation in Nov
decelerated below market consensus to 6.8% YoY
compared to 7.2% in Oct.
• Korea’s CPI remained at 4.2% YoY in Dec
unchanged from Nov’s reading. For the fiscal year,
CPI was 4.0% up from 3.0% in 2010.
• India’s industrial production rebounded from the
worst month since Mar09, better than market
expectations, increasing 5.9% in Nov YoY compared with 4.7% decline in the previous month. Food-price index fell for
a second straight week at 7.40%, declining 2.9% in the period ended 31Dec YoY.

Negatives
• According to Russia’s Ministry of Finance, its federal spending in Dec amounted to nearly 20% of the annual federal
budget spending compared with 18% in Dec10 and 15% in Dec09. This led its budget surplus to an equivalent of 0.8%
of GDP. The rise in fiscal spending was due to capital outflows and conversion of savings into foreign currency.

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


The Henley Outlook
February 2012

Commodities
ENERGy
Positives
• Long-term supply sources uncertain as several exporters are turning into importers.
• Tension is increasing between Iran and the West.
• Debasement of currencies will support real assets.

Negatives
• The macro outlook remains fraught with risk.

HENLEY ASSESSMENT:
We upgrade to positive. Friction between Iran
and the West is increasing. The Iranian threat to
close the Strait of Hormuz, through which around
17 million barrels of oil is shipped per day, could
seriously compromise global oil supply in the short-
to-medium term. Reports that Iran is enriching
uranium in an underground facility near the city of
Qom means that armed intervention by Israel and
the US is a distinct possibility in 2012. Open armed
conflict would easily push the oil price though USD
150/bbl.

PRECIOUS METALS
Positives
• Still no sign that a credible solution to the European debt crisis is within reach.
• Coin sales from the US mint is very robust.
• Gold and Silver are a good hedge against financial instability and possible monetization of sovereign debt.

Negatives
• Temporary USD strength will put pressure on the gold price.

HENLEY ASSESSMENT:
Positive. Despite the recent volatility, we remain strongly positive on precious metals. Banking stress in Europe
remains high. The difficulties experienced by Italian Bank Unicredit in terms of raising equity paints a bleak
picture for other European banks that will have to improve their capital positions during the year. We expect
central banks and retail investors to add to their bullion positions throughout the year which will support
prices. More monetary easing on both sides of the Atlantic remain the most likely policy response to the crisis,
leading to further currency debasement and, of course, higher bullion prices.


The Henley Outlook
February 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.
• A recession in Europe in 2012 is likely which will affect exports in Asia.

HENLEY ASSESSMENT:
We maintain our neutral view on base metals. While copper imports by China surged to a record in December
on stockpiling, we remain mindful that China will face a difficult year trying to maintain a healthy growth rate
amid signs of a weaker housing market. We continue to favour real assets over financial assets and prefer
monetary metals over industrial commodities.

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

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

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


The Henley Outlook
February 2012

Alternative Investments
Positives
• With 2012 gearing up to be one of the most
unpredictable years in recent times, it could be
easy for hedge fund managers to be distracted
from the ongoing rumble of the regulatory
express. In fact, in the shadow of lurching global
markets, hedge funds are poised for particular
full legislative programme, with key dates for
Dodd-Frank and Fatca in the US; short-selling,
derivatives and the AIFMD in Europe; and
master fund registration in Cayman. Throw
in a handful of significant national elections,
and the 2012 calendar is one most industry
professionals will want to keep an eye on.
• We do not expect 2012 to be less emotional
than 2011. As a result, systematic and model-
based kind of managers could continue to
outperform. Strategy-wise these managers are
to be found in the quant, CTA and global macro
buckets.

Negatives
• Unsurprisingly, tempered performance expectations are echoed widely. It is suggested by a global survey from
HFMWeek that a “Focused” or “Cautious” optimism for 2012 hedge fund returns. With interest rates at very low levels
and prices being driven by macro and especially, political factors – rather than fundamentals – it could be difficult for
some strategies of hedge funds to produce alpha that we have seen in the previous decade. Meanwhile, the extreme
volatility we have seen in 2011 has caused some managers to rethink their hedging strategies and reduce basis risk.
• Returns in 2011 ended negative overall, memories of 2008 are not-so-distant and there have been only two reasonable
years in between. Fees are still relatively high and most of investors feel dissatisfied given the low level of performance.

HENLEY ASSESSMENT:
Positive. It is still incumbent on hedge funds to prove that they can, in fact, generate returns that are
‘independent’ of whether broader markets are going up or not. So, we can put forward global macro, distressed
credit and event driven as widely tipped successes for 2012, while systematic funds are also expected to
continue to magnetise investment.

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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 in Hong Kong. Re-distribution or reproduction in whole or in part of this document by any means is strictly prohibited and The Henley Group
accepts no liability for the actions of third parties in this respect. Funds not authorized by the Securities and Futures Commission may involve more risk
and distribution or re-distribution of information relating to such funds to the public of Hong Kong may constitute an offence under the Securities and
Futures Ordinance. Notwithstanding that the information contained herein has been obtained from sources which The Henley Group believes to be
reliable, The Henley Group makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy, completeness or
correctness. The information in this document, including any expressions of opinions or estimates, should neither be relied upon nor used in any way
as indication of the future performance of any financial products, as prices of assets and currencies may go down as well as up and past performance
should not be taken as indication of future performance. Neither this document nor any information contained herein shall be construed as an offer,
invitation, advertisement, inducement, representation of any kind or form or any advice or recommendation to buy or sell any financial products.


The Henley Outlook
February 2012

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