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Quarterly OutlookQ1 2012
MARKET COMMENTPERFECT STORM BREWING?page 4
MACRO OUTLOOKNAVIGATING THE ROUGH SEASpage 7
EQUITY OUTLOOKACCEPT THE UNCERTAIN FUTUREpage 10
FX OUTLOOKTHE SONG REMAINS (MOSTLY) THE SAME page 13
MONETARY POLICYMAJOR CENTRAL BANKSpage 19
ASIA OUTLOOKFASTEN YOUR SEATBELTSpage 22
COMMODITY OUTLOOKMARKETS BRACED FOR HEADWINDSpage 24
FX OPTIONSMORE UPSIDE POTENTIAL FOR VOLATILITIESpage 26
2 QUARTERLY OUTLOOK l Q1 – 2012
– Quarterly Outlook Q1-2012 –
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social tension. These factors will leave no nation untouched and could result in the most pivotal year by far since the global
ÖM@MBH@K�BQHRHR�NE�����
We feel that the onrushing Crisis 2.0 will however prove constructive in the sense that it forces the hands of policymakers and
politicians so that 2012 will be a year in which we fundamentally alter our assumptions not only about economics and monetary
ONKHBX��ATS�@KRN�@ANTS�NTQ�V@X�NE�KHED �!TS�ADENQD�VD�FDS�SGDQD��VDiKK�RDD�XDS�@MNSGDQ�PT@QSDQ�NE�DWSDMCHMF�@MC�OQDSDMCHMF�SG@S�
VHKK�LNRS�KHJDKX�OQNUD�BNTMSDQOQNCTBSHUD�@MC�KD@C�TR�PTHBJKX�SN�SGHR�MDV�BQHRHR
2012 will be a year of great change
QUARTERLY OUTLOOK l Q1 – 2012 3
– Quarterly Outlook Q1-2012 –
STEEN JAKOBSENCHIEF ECONOMIST RIM�R@WNA@MJ BNL
MADS KOEFOEDMACRO STRATEGISTLJNE�R@WNA@MJ BNL
JOHN J. HARDYHEAD OF FX STRATEGYIIG�R@WNA@MJ BNL
NICK BEECROFTSENIOR MARKETS CONSULTANTWMAD�R@WNA@MJ BNL
ANDREW ROBINSONFX STRATEGIST@VQ�R@WNA@MJ BNL
OLE SLOTH HANSENSENIOR COMMODITY STRATEGISTNKG�R@WNA@MJ BNL
GUSTAVE RIEUNIERGLOBAL HEAD OF FX OPTIONSFQ�R@WNA@MJ BNL
PETER GARNRYEQUITY STRATEGISTOF�R@WNA@MJ BNL
4 QUARTERLY OUTLOOK l Q1 – 2012
M A R K E T C O M M E N T: P E R F E C T S T O R M B R E W I N G ?
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sions are mounting unbearably. The key ingredients
are already clear: the combination of the ongoing
$4� BQHRHR�� RKNVHMF� @FFQDF@SD�FKNA@K� CDL@MC� @R� SGD�
OTAKHB�CDAS�ATAAKD�B@M�MN�KNMFDQ�AD�FQNVM��@MC�QHR�
ing social tensions. These factors will leave no na�
tion untouched and could result in the most pivotal
XD@Q�AX�E@Q�RHMBD�SGD�FKNA@K�ÖM@MBH@K�BQHRHR�NE����� �
That crisis unleashed the combined forces of govern�
LDMSR� @MC� BDMSQ@K� A@MJR�� VGN� QD@BGDC� CDDO� HMSN�
SGDHQ�ONKHBX� SNNKANWDR�m�@MC�DUDM� HMSN� SGDHQ�GHCCDM�
unconventional reaches – to intervene massively at
every turn to keep the economy and its zombie bal�
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NE� jBNKK@ORDk � 3GD� +DGL@M� A@MJQTOSBX� DWODQHDMBD��
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SDQUDMSHNM�� SGD�L@QHNMDSSDR� HM� SGD�DBNMNLX�@QD� SHQ�
ing and will soon no longer be able to respond to
government and central bank manipulations. The
EU is in the hottest water at the moment due to
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rest of the developed world and possibly also China
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which ever mounting intervention from the public
RDBSNQ� NMKX� ÖMCR� Q@OHCKX� CHLHMHRGHMF� QDSTQMR � 3GD�
other name for this point is Crisis 2.0 – the needed
destruction of the old order that allows the con�
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considered a bad thing and inevitably brings with it
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AD� SG@S� ����� TRGDQR� TR� PTHBJKX� SNV@QCR� SG@S� STQM�
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rather than pretending that we can pay for all of
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2012 will be a year for the optimists as we might
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tion again – towards the future and away from the
tired and misguided efforts of the interventionists.
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that will conspire to make a perfect storm in the New
Year:
EU CRISISThe EU crisis has not been solved after the endless
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proach a solution unless we see a combination of an
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bined with debt restructuring for the periphery and
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tioning smoothly as those debt restructurings take
place. The “peripheral” crisis has even spread to core
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HSRDKE �3GD�PTDRSHNM� HR�VGDSGDQ�SGD�DMCKDRR�RDQHDR�NE�
EU summits has merely shown us that the EU as it
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something more dramatic from EU leadership – but
more on that below.
PUBLIC SECTOR AUSTERITY(M�SGD�$4��SGD�BNLHMF�@TRSDQHSX�VHKK�AD�SGD�LNRS�UH�
cious and is thoroughly entwined with the sovereign
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over the printing press will ensure a particularly se�
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gether under the sway of the austerity impulse.
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by its reliance on over investment in infrastructure
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even if nominally not so.
QUARTERLY OUTLOOK l Q1 – 2012 5
SOCIAL TENSION3GD�FKNA@K�ÖM@MBH@K�BQHRHR�@MC�SGD�CQHES�HM�RNBHDSX�SN�
wards a larger gap between rich and poor and high�
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the potential for strife have popped up in the Occupy
movements starting in the US and spreading rapidly.
(M�$TQNOD�VD�G@UD�@�GHRSNQHB@KKX�RSQNMF�@MSH�$4�RDM�
timent that will represent a serial challenge as the
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ly in 2012 in France. The rise of True Finns of Finland
in 2011 might be a strong indication of what kinds
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got an election year in the US. Could this one be the
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begin running out?
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about the potential for geopolitical strife in the Mid�
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fate of Iran and its nuclear programme and how will
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and dramatic is actually far more likely than simply
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EU CRISISAs the EU leaders have failed to address the fact that
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that particularly well) a renewed crisis is inevitable.
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toward EUR 300 billion by the end of January and
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-DV�8D@Q �3GHR�SHLD�@QNTMC��VD�L@X�ÖM@KKX�RDD�@�SQTD�
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dropping 25 percent or more in short order. Basi�
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somewhat like how cardinals select a new pope at a
papal conclave. A new EU would likely mean massive
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sibly two or more nations dropping out of the 17 na�
tion EMU. It would also almost have to mean a new
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KHSSKD�QDRDLAK@MBD�SN�SGD�DWBDRRDR�NE�SGD�KHJDR�NE�SGD�
Federal Reserve and the Bank of England. Despite the
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the European Stability Mechanism rescue funds (or
plans to have funds…) never really take off and Euro
Bonds are never issued and it becomes clear that the
United States of Europe was always a mirage. The
good news? The new EU establishes a more worka�
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issue and offers a fresh start.
ECONOMIC GROWTHThe growth outlook for Europe is clearly very nega�
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may hammer together some kind of deal with the
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ity cat is out of the bag and all the talk will be of off�
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progress. US growth will likely be somewhat stronger
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VD@JDQ�SG@M�BNMRDMRTR��@R�"GHM@�E@BDR�RNLD�GD@UX�
lifting on rebalancing its economy. Uncertainty is
great there because the regime is capable of forc�
ing activity and behaviour to a degree not attainable
elsewhere.
EQUITY MARKETS5@KT@SHNMR� HM� L@MX� L@QJDSR� @OOD@Q� PTHSD� QD@RNM�
@AKD��ATS�ENQV@QC�DWODBS@SHNMR�@QD�E@Q�SNN�GHFG�FHUDM�
SG@S�OQNÖSR�@R�@�ODQBDMS@FD�NE�&#/�@QD�RSHKK�MD@Q�QD�
cord levels and given our outlook for weak demand
growth. The tensions around the world from the on�
going EU crisis and possibly from higher interest rates
could increase the risk premium for owning stocks.
2SHKK�� U@KTDR� VHKK� KHJDKX� AD� ENTMC�VGDM� SGD�L@QJDSR�
overreact.
6 QUARTERLY OUTLOOK l Q1 – 2012
INTEREST RATES(MSDQDRS�Q@SDR�VHKK�FN�TO�HM����� � ESDQ�@KK��SGD�BQDCHS�
cake is getting smaller as the ongoing balance sheet
recession around the world is already seeing the pri�
vate sector deleveraging in most areas. Banks must
move towards compliance with Basel 2.5 and Basel
3.0 to reduce the leverage on their balance sheets.
MC�L@QJDS�CHRBHOKHMD�@MC�ÖRB@K� QD@KHSX�VHKK� HMBQD@R�
ingly force the public sector to at least curtail its
growth if not begin to shrink outright. The most in�
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O@M��SGNTFG�SG@S�L@X�KHD�ADXNMC�SGD�GNQHYNM�NE�SGHR�
outlook.
CURRENCIES LNMF� SGD� L@INQ� BTQQDMBHDR�� SGD� 42#� HR� KHJDKX� SN�
ODQENQL�UDQX�VDKK��O@QSHBTK@QKX�CTQHMF�ODQHNCR�NE�QHRJ�
@UDQRHNM��@R�SGD�VNQKC�BNMSHMTDR�SN�CDKDUDQ@FD �3GD�
)/8� NTSKNNJ� HR� SQHBJX� CTD� SN� HMSDQDRS� Q@SDR�� ATS� SGD�
JPY could continue stronger for the initial part of the
year. Other strong currencies might include NOK and
2$*��VGHBG�BNTKC�ÖMC�@�AHC�NM�SGDHQ�RNUDQDHFM�A@K�
ance sheets and distance from EU strife. The curren�
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CDU@KT@SHNM�B@M�AD�CNMD�@MC�"-8�@MC�HSR�R@SDKKHSDR��
like AUD and NZD.
A COUPLE OF ALTERNATIVE SCENARIOSWith so much potential energy in the still overlever�
aged and limping economies of the world and with
RNBH@K�SDMRHNMR�ATHKCHMF��HSiR�BQHSHB@K�SN�TMCDQKHMD�SG@S�
there are an endless variety of paths the markets may
S@JD�HM�SGD�-DV�8D@Q��DUDM�HM�HSR�HMHSH@K�RDUDQ@K�VDDJR �
We have simply outlined here the scenario we judge
to have the higher odds. Outcomes could look far
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SN� JDDO� SGD� CDAS� AN@S� @×N@S� E@Q�LNQD� RTBBDRRETKKX�
than we anticipate (likely in the short term with fancy
ENNSVNQJ�NM� KHPTHCHSX�LD@RTQDR�� SGDM� SGD�"QHRHR�� ��
and perfect storm could see a surprising delay and
not materialise until beyond Q2.
CONCLUSIONThe perfect storm is coming but there is no need to
panic. We feel that the onrushing Crisis 2.0 will prove
constructive in the sense that it forces the hands of
the policymakers and politicians. Ultimately we need
SN� ÖMC� @� KNMF�SDQL� RNKTSHNM� @MBGNQDC� AX� ONOTK@Q�
RTOONQS � 3GD� jMNM�DKDBSDCk� FNUDQMLDMS� KD@CDQR� HM�
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rather as a warning sign of the alternative.
Only through accountability and owning up to reality
can economic renewal and growth return. We are
optimistic that 2012 will be a year of great change –
a year in which we fundamentally alter our assump�
SHNMR�MNS�NMKX�@ANTS�DBNMNLHBR�@MC�LNMDS@QX�ONKHBX��
but also about our way of life. But before we get
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@MC�OQDSDMCHMF�EQNL�SGD�ONKHBXL@JDQR�SG@S�VHKK�LNRS�
KHJDKX�OQNUD�BNTMSDQOQNCTBSHUD�@MC�KD@C�TR�PTHBJKX�SN�
SGHR�MDV�BQHRHR � MC�GDQD�VD�LD@M� BQHRHR� HM� HSR�ÖQRS�
CDÖMHSHNM� HM� SGD� ,DQQH@L�6DARSDQ� CHBSHNM@QX�� j@�
turning point” – not a state of cowering in fear or
RTEEDQHMF�O@HM � ESDQ�@KK��XNT�B@M�NMKX�ÖFGS�SGD�MDF@�
SHUD�DBNMNLHB�BNMRDPTDMBDR�NE�BNLONTMCHMF�ONKHBX�
mistakes for so long before being forced to make
better choices. Therein lies the hope for the balance
of 2012.
2HMBDQDKX�
Steen Jakobsen
QUARTERLY OUTLOOK l Q1 – 2012 7
M A C R O O U T L O O K : N A V I G A T I N G T H E R O U G H S E A S O F T H E P E R F E C T S T O R M
The world economy eased off the accelerator in 2011
as foreign trade growth and government stimuli fad�
ed and the prospects for 2012 are for more of the
same. The developed economies will struggle with
weak domestic demand as austerity programmes
and soft labour markets take their toll while emerg�
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KH@MBD�VHKK� G@UD� SN� AD�LNQD� NM� CNLDRSHB� CDL@MC��
which will see central banks swinging into action
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world growth to slow further in 2012 to 3 percent.
US – THE OUTPERFORMER AMONG DE�VELOPED ECONOMIESThe Great Recession was an entirely different animal
to previous recessions as the impact on the economy
EQNL�SGD�KHPTHC@SHNM�NE�L@KHMUDRSLDMSR�G@R�ADDM�DW�
asperated by a still ongoing private sector delever�
aging process. The US economy has struggled with
SGD�Q@LHÖB@SHNMR�NE�SGHR�OQHU@SD�RDBSNQ�HMCDASDCMDRR�
for the better part of a decade now and while the
deleveraging process is slowing down that it is still
@�E@Q�BQX�EQNL�SGD�G@OOX�FN�KTBJX�C@XR�NE�SGD�D@QKX�
noughties when debt and a growing economy went
hand in hand. The process continues to put a damper
NM�OQHU@SD�RDBSNQ�BNMSQHATSHNM�SN�SGD�BTQQDMS�DWO@M�
sion and with a mostly uncooperative Congress the
public sector will not receive much additional help
in 2012. With these two factors combined you have
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VHSG�RTARHCHMF�HM×@SHNM�@MC�@�RNESDMHMF�K@ANTQ�L@Q�
ket. Though the risks from the Eurozone sovereign
debt crisis and a weaker Asia (China) loom so large
that a recession cannot be ruled out it is not our pre�
ferred scenario; rather we look for the US to ‘muddle
SGQNTFGi
EUROPE – ON THE RECEIVING END OF THE PERFECT STORM6GHKD�VD�DWODBS�SGD�42�SN�LTCCKD�SGQNTFG�SGD�R@LD�
cannot be said about Europe where public sector
austerity prevails to a degree not seen across the
Atlantic. The US and Europe share many of the same
� QUARTERLY OUTLOOK l Q1 – 2012
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@MC� @M� HMCDASDC� OQHU@SD� RDBSNQ� �� ATS� SGD�L@M@FD�
LDMS�� NQ� Q@SGDQ� LHRL@M@FDLDMS�� NE� SGD� AKN@SDC�
OTAKHB�CDÖBHSR�HR�MNS�NMD�NE�SGDL
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@�OQNAKDL�ÖM@MBHMF�HSRDKE��@�ONRHSHNM�L@MX�$TQNYNMD�
countries would kill for presently as they see yields
shoot up to untenable levels; illustrated by Italy in
SGD�@ANUD�BG@QS��VGHBG�G@R�O@RRDC� SGD� HME@LNTR����������������������
percent level several times recently (though we note
that real rates are not too high on a historical basis).
With Germany adamant (for now) that the European
Central Bank should not engage in unsterilised sov�
ereign bond purchases this is not an option for the
ADKD@FTDQDC�$TQNYNMD��VGHBG�G@R� HMRSD@C�BGNRDM�@�
Q@SGDQ�O@HMETK�DWDQBHRD�NE�BTSSHMF�OTAKHB�RDBSNQ�BNRSR�
just enough for the economy to remain in a state of
OQNKNMFDC�QDBDRRHNM��ATS�MNS�DMNTFG�SN�CD@K�PTHBJKX�
@MC�DEÖBHDMSKX�VHSG�SGD�QD@K� HRRTDR �3GD�$TQNYNMD�HR�
DWODBSDC� SN� SHO� HMSN�MDF@SHUD�FQNVSG� HM� SGD� ENTQSG�
PT@QSDQ� NE� ����� @MC� RS@X� SGDQD� HM� SGD�ÖQRS� PT@QSDQ�
NE������ SGDQDAX�BNMÖQLHMF� SGD� QDBDRRHNM �3GD�4*��
VGHBG�HR�HM�@�RHLHK@Q�ONRHSHNM�SN�SGD�42��HR�DWODBSDC�SN�
QUARTERLY OUTLOOK l Q1 – 2012 9
NTSODQENQL�SGD�$TQN�@QD@�MDWS�XD@Q�SGNTFG�SGD�4*�
has plenty of rough seas to steer clear of itself.
ASIA – HURT BY THE SLOWDOWN IN THE DEVELOPED WORLDThe headwinds faced by Western economies are
ÖMCHMF�SGDHQ�V@X�SN� RH@ �$UDM�SGD�"GHMDRD�jFQNVSG�
LHQ@BKDk�� VGHBG� G@R� A@RDC� HSR� DBNMNLX� NM� HMUDRS�
LDMSR�@MC�DWONQSR��G@R� SN�BNOD�VHSG�VD@JDQ� SQ@CD�
growth as evidenced by its trade balance which is
down 19 percent in the twelve months through No�
vember compared to the year before. The decline
in global trade growth is bound to continue and
QDPTHQDR�"GHM@�SN�ÖMC�FQNVSG�DKRDVGDQD��@M�TMCDQ�
S@JHMF�VD�DWODBS�SGD�"GHMDRD�@QD�NMKX�O@QSKX�@AKD�SN�
achieve – hence our below consensus forecast for
"GHMDRD�&#/�NE���ODQBDMS
China however has a weapon that most developed
DBNMNLHDR� CN� MNS� ONRRDRR�� M@LDKX� Q@SD� BTSR � 3GD�
SHFGSDMHMF�OG@RD��VGHBG�ADF@M�HM������@R�SGD�DBNM�
NLX�QDF@HMDC�SQ@BSHNM�@MC�HM×@SHNM�OQDRRTQDR�RS@QSDC�
SN�ATHKC��G@R�ADDM�NM�GNKC�@S� SGD�/DNOKDiR�!@MJ�NE�
China lately. Indeed we have already witnessed the
ÖQRS� BTS� HM� QDRDQUD� Q@SHN� QDPTHQDLDMSR � 3GD� SHFGSDM�
HMF�OG@RD�SGTR�ONHMSR�SN�OKDMSX�NE�@U@HK@AKD�ÖQDONVDQ�
should the central bank deem it necessary to stimu�
late more to keep Chinese growth at a respectable
KDUDK�@MC�VHSG�HM×@SHNM�NM�QDSQD@S�SGD�ÖQRS�GTQCKD�HR�
out of the way. We look for a succession of cuts to
QDRDQUD�Q@SHN�QDPTHQDLDMSR�@MC�HMSDQDRS�Q@SDR�SGHR�XD@Q�
as China moves to strengthen the investment side
of its economy to compensate for the weakness in
foreign trade.
10 QUARTERLY OUTLOOK l Q1 – 2012
Life is like an ocean voyage. Some days the sun
RGHMDR�� NSGDQR� HS� Q@HMR� @MC� HM� Q@QD� B@RDR� /NRDHCNM�
demonstrates his wrath. In order to navigate in this
world we need a compass. As we head into the per�
EDBS�RSNQL��VD�HMSQNCTBD�@M�HMUDRSLDMS�BNLO@RR�SN�
better embrace the uncertainty and avoid the white
noise clouding our minds. Instead of trying to fore�
B@RS�SGD�MDWS�SGQDD�LNMSGR�VD�VHKK�HMRSD@C�OQNUHCD�@�
�������EDDS�ODQRODBSHUD�NM�DPTHSHDR
EQUITIES ARE HISTORICALLY CHEAP BUT ARE THEY WORTH BUYING?&KNA@K� DPTHSHDR� LD@RTQDC� AX� NTQ� U@KT@SHNM� LNCDK�
are relatively cheap in a historical perspective due
to record low debt leveraging in companies and be�
nign valuations. One factor that is dangerously high
HR� QDSTQM�NM�@RRDSR�CQHUDM�AX�GHRSNQHB@KKX�GHFG�OQNÖS�
margins as high returns on assets normally precede
@�OKTMFD�HM�@FFQDF@SD�OQNÖSR �&HUDM�SGD�L@RRHUD�DW�
cess capacity in the labour force and recent down�
V@QC�OQDRRTQD�NM�BNLLNCHSHDR��VD�ADKHDUD�BNLO@�
MHDR�B@M�L@HMS@HM�BTQQDMS�OQNÖS�L@QFHMR� HM�SGD�ÖQRS�
RHW�LNMSGR�NE�����
!@RDC� NM� BTQQDMS� U@KT@SHNMR�� @� RDSA@BJ� HM� SGD� ÖQRS�
G@KE�NE�������CTD�SN�ONKHSHB@K�@MC�DBNMNLHB�CDUDKNO�
LDMSR� HM� $TQNOD��VNTKC�MNS�AD�NTSQHFGS�AKNNCX� @R�
DPTHSX�L@QJDSR�G@UD�@KQD@CX�@CITRSDC�U@KT@SHNMR�ENQ�
E Q U I T Y O U T L O O K : A C C E P T T H E F U T U R E I S U N C E R T A I N A N D E M B R A C E I T
a low growth scenario and more turmoil in Europe.
.TQ� HMCDW� U@KT@SHNM�LNCDK� NM� SGD� 2�/� ���� ADKNV�
HMCHB@SDR� @������ XD@Q�DMC� KDUDK� NE� ������A@RDC�NM�
an Earnings Per Share (EPS) of 104.5 and Price Earn�
HMFR� �/�$�� NE� �� � � &HUDM� SGD� BTQQDMS� C@S@� DPTHSHDR�
@QD�HM�@FFQDF@SD�SDQLR�ONHRDC�ENQ�@�×@S�XD@Q� HM�NTQ�
A@RD�B@RD�RBDM@QHN�VHSG�LNRS�CNVMV@QC�OQDRRTQD�DW�
ODBSDC�HM�SGD�ÖQRS�RHW�LNMSGR�@R�SGD�D@QMHMFR�XHDKC�HR�
KHJDKX� SN� HMBQD@RD� QD×DBSHMF�@�BNMSQ@BSHNM� HM�FQNVSG�
DWODBS@SHNMR
However with historically decent earnings yields and
other asset classes providing no income stream to
ROD@J�NE��VD�ADKHDUD�@�MDS�MDTSQ@K�DPTHSX�ONRHSHNM1 is
attractive going into 2012.
ARE EQUITIES CLOSE TO A LOW POINT BEFORE A SECULAR BULL MARKET?Investors are in a thick fog with low visibility and
L@MX�@QD�RB@QDC�@ANTS�SGD�ETSTQD�NE�DPTHSHDR �6GHKD�
humans can certainly be too optimistic and they can
@KRN�BDQS@HMKX�AD�SNN�ODRRHLHRSHB��VD�CDÖMHSDKX�SHKS�SN�
wards the latter at this point in time.
3GD� BG@QS� NM� SGD� MDWS� O@FD� BNLO@QDR� SGD� BTQQDMS�
CAPE (cyclically adjusted price earnings – price over
SGD�K@RS�ÖUD�XD@QRi�NE�D@QMHMFR��NM�SGD�2�/�����VHSG�
QUARTERLY OUTLOOK l Q1 – 2012 11
SGD�ENKKNVHMF����XD@Q�@MMT@KHRDC�QDSTQM�RHMBD����� �
It shows that we have entered a valuation range that
is normally a very good starting point for a secular
bull market with good probability of delivering more
SG@M�@�ÖUD�ODQBDMS�@MMT@KHRDC�QDSTQM
The chart below shows the prediction interval of the
QDFQDRRHNM�� VGHBG� RGNVR� SG@S� RHMBD� ����� DPTHSHDR�
have never returned below zero percent (annualised
over 10 years) if investors bought at these current
U@KT@SHNMR � (M� NSGDQ�VNQCR�� HE�VD� DMSDQ� SGD� ODQEDBS�
storm and stock prices plunge even more we might
AD�HM�@�ODQEDBS�KNV�ONHMS�ADENQD�SGD�MDWS�RDBTK@Q�ATKK�
market.
6'(3$�-.(2$��(-5$23.12i�-4,!$1�.-$�ENEMY(MUDRSNQR� SDMC� SN� ENQFDS� SG@S� DPTHSHDR� QD×DBS� SGD�
underlying nominal growth of the economy.
Thus as the monetary base and productivity are
12 QUARTERLY OUTLOOK l Q1 – 2012
BNMSHMTNTRKX� FQNVHMF�VD�VNTKC� DWODBS� DPTHSHDR� SN�
SQDMC� TO�� @CITRSDC� ENQ� SGD� ATRHMDRR� BXBKD� NUDQ� SGD�
KNMF�SDQL �2SNBJR�B@M�SDLONQ@QHKX�DWODQHDMBD�MDF@�
tive real rate returns though.
The chart above shows the helicopter perspective
NM�SGD�SQDMC�HM�D@QMHMFR��OQHBD�SN�BXBKHB@KKX�@CITRSDC�
D@QMHMFR� @MC� ENQV@QC� ���XD@Q� @MMT@KHRDC� QDSTQMR �
#DROHSD� DMDQFX� BQHRDR��V@QR�� SDQQNQHRL�@MC�ÖM@MBH@K�
crises the human race and asset markets continue to
move forward. What we want to demonstrate with
the chart is that given the current earnings cycle in
QDK@SHNM�SN�OQHBD��SGDQD�HR�@�GHFG�OQNA@AHKHSX�NE�FNNC�
KNMF�SDQL�QDSTQMR ��(M�SGD�RGNQS�SDQL�SGNTFG�UNK@SHK�
ity can be high which is why we recommend a neu�
tral position at this point. Yes the Eurozone is seeing
BQ@BJR�@MC�"GHM@�LHFGS�AD�DWODQHDMBHMF�@�ATRS�HM�QD@K�
DRS@SD�ATS�SGDRD�VNTKC�MNS�AD�SGD�ÖQRS�@RRDS�L@QJDSR�
hiccups in history.
The biggest risk to our compass (built on data since
������HR�SG@S�SGD�BTQQDMS�CDKDUDQ@FHMF�HR�@�QDOK@X�NE�
the 1930s Great Depression where the economy and
RSNBJR�VHKK�RHFMHÖB@MSKX�CDUH@SD�EQNL�SGD�SQDMC�SN�SGD�
downside.
IF THE STORM HITS HOW DEEP CAN EQUITIES GO?According to our investment compass going back to
�����SGD�KNVDRS����ODQBDMS�NARDQU@SHNMR�NM�OQHBD�SN�
cyclically adjusted earnings have been between eight
and thirteen. If the markets enter the perfect storm
could stock valuations fall into that range? Yes it is
OK@TRHAKD�@MC� SGD�@FMNRSHB�ADS�VNTKC�AD�LHC�ONHMS�
in the range which is 11.5 times cyclically adjusted
D@QMHMFR �6HSG�SGD�BTQQDMS�ÖUD�XD@QRi�D@QMHMFR�BXBKD�
NE����ODQ�RG@QD�HM�SGD�2�/�����SG@S�VNTKC�HLOKX�@M�
HMCDW�OQHBD�NE�����NQ�@�CDBKHMD�NE�QNTFGKX����ODQBDMS
,NQD� QD@KHRSHB@KKX�VD� ADKHDUD� SGD� TKSHL@SD� ×NNQ� KHDR�
around the price point when the present value of
FQNVSG�NOONQSTMHSHDR�HR�YDQN�SGTR�SGD�2�/�����U@KT@�
tion is the present value of a perpetual stream of cur�
rent cyclically adjusted earnings discounted with an
DHFGS�ODQBDMS�QDPTHQDC�QDSTQM�NM�DPTHSX�� SGHR�VNTKC�
HLOKX�@�×NNQ�QNTMC�����HM�SGD�2�/�����NQ�@�CDBKHMD�
of 23 percent from current levels. Put very simply if
VD�FN�ADKNV�������HM�SGD�2�/�����HMUDRSNQR�RGNTKC�
OQNA@AKX� ADFHM� SN� @FFQDRRHUDKX� HMUDRS� HM� DPTHSHDR� @R�
the future will most likely deliver more than zero
economic growth.
1 A net neutral equity position means holding a quality portfolio of long positions expected to relatively outperform the market and hedge
the market risk (beta) equally, meaning hedging the long position value 1:1.
QUARTERLY OUTLOOK l Q1 – 2012 13
F X O U T L O O K : T H E S O N G R E M A I N S ( M O S T LY ) T H E S A M E
With a perfect storm in sight for the beginning of
������NMD�VNTKC�DWODBS�VD�G@C�RNLDSGHMF�CQ@L@SHB�
and new to say about the currency outlook relative
SN� NTQ� LNRS� QDBDMS� PT@QSDQKX� LTRHMFR � !TS� VHSG� @�
BNTOKD�NE�MNS@AKD�DWBDOSHNMR��NTQ�RNMF�ENQ�SGHR�NTS�
look remains mostly the same for the majority of the
&���BTQQDMBHDR �(M�AQN@C�RSQNJDR��VD�DWODBS�SGD�42#�
rally to pick up further steam in early 2012 on global
uncertainty and continued deleveraging and on the
×HORHCD�NE�SG@S�CDUDKNOLDMS��VD�DWODBS�SG@S�SGD�OQN�
cyclical currencies will generally face an uphill battle.
The Euro is likely to continue to weaken against the
42#��)/8�@MC�&!/�@R�SGD�$4�BQHRHR� KNNJR�SN�QD@BG�@�
crescendo some time in Q1.
EURO TO CONTINUE STRUGGLING3GD� #DBDLADQ� ���� RTLLHS� NTSBNLD� NMBD� @F@HM�
E@HKDC� SN� RGNQD� TO� BNMÖCDMBD� SG@S� SGD� $TQNYNMD� HR�
LNUHMF�SNV@QC�ÖRB@K�@MC�ONKHSHB@K�RTRS@HM@AHKHSX �3GD�
agreement on a new EU treaty by March will be a
BQHSHB@K� ENBTR� HM� 0��� SGNTFG� SGD� BQ@BJR� NM� ONKHSHB@K�
resolve were already beginning to show merely days
after the summit. And any refusal of various mem�
ADQR�NE�SGD�$4����SN�RHFM�NM�SN�SGD�OQNONRDC�SQD@SX�
could render their connection to the EU potentially
tenuous to say the least.
,D@MVGHKD��ENQ�SGD�$TQNOD@M�"DMSQ@K�!@MJ��VDiKK�
paraphrase Forrest Gump and say that “easy is as
D@RX�CNDRk��LD@MHMF�SG@S��VGHKD�SGD�$"!�RS@MBD�
is far different from that of the Federal Reserve or
!@MJ�NE�$MFK@MC��VGHBG�@QD�G@OOX�SN�LNQD�CHQDBSKX�
LNMDSHRD�CDAS��SGD�#DBDLADQ���$"!�@MMNTMBD�
ments did see further ECB easing moves of a kind.
The lowering of reserve ratios and the launch of
��XD@Q�+NMF�3DQL�1DÖM@MBHMF�.ODQ@SHNMR��+31.iR��
@QD�@�ONRRHAKD�A@BJ�CNNQ�ENQ�RTEÖBHDMS�KHPTHCHSX�SN�
ease some of the pressure on the banks and EU
ODQHOGDQ@K�RNUDQDHFM�CDAS�HM�SGD�RGNQS�SDQL��DUDM�HE�
this is yet another delaying tactic and does not ad�
dress the overall longer term problem of insolvency.
1DF@QCKDRR��@R�VD�G@UD�R@HC�HM�SGD�O@RS�QDF@QCHMF�SGD�
$TQN�m� SGD� RHST@SHNM� HR�jKNRD�KNRDk �2BDM@QHN�.MD� HR�
simply more of the same: as long as the EU dithers on
ÖRB@K�TMHNM�@MC�SGD�$"!�CHSGDQR�NM�SQTD�0T@MSHS@SHUD�
$@RHMF�� SGD� BQHRHR�VHKK� AD� QD�@FFQ@U@SDC� @MC� SGD� $4�
VHKK�SHKS�PTHBJKX�SN�SGD�AQHMJ�NE�@�G@QC�CDE@TKS�@MC�NQ�
$,4�DWHSR�NQ�VGNKDR@KD�O@QSH@K�CDU@KT@SHNMR�NE�CDAS�
back into local currencies and the prominent risk of
widespread bank nationalisations. Scenario Two is
one in which the ECB either overtly or covertly pro�
UHCDR�RTEÖBHDMSKX�L@RRHUD�KHPTHCHSX�SN�JDDO�SGD�RXRSDL�
out of a crisis for the near term while the solvency
PTDRSHNM� HR�NMBD�@F@HM�JHBJDC�CNVM� SGD� QN@C � 3GHR�
would be de facto QE and bearish for the Euro.
3GD�SVN�RBDM@QHNR�@ANUD�@QD�MNS�CHRBQDSD��ATS�LNQD�
a description of two dynamics that are working at all
SHLDR��@MC�SN�SGDL�VD�LTRS�@CC�SGD�ONKHSHB@K�CHLDM�
RHNM�� RTBG� SG@S� SGD�LNRS� KHJDKX� DUDMST@K� RBDM@QHN� HR�
@KNMF�SGD�KHMDR�NE��SGD�$"!�OQNUHCDR�BNUDQS� KHPTHCHSX�
SG@S�JDDOR�SGD�BQHRHR�@S�A@X�ENQ�@�SHLD��ATS�SGD�ONKHSHB@K�
EQ@FHKHSX�HR�VG@S�HM�SGD�DMC�TMCDQLHMDR�L@QJDS�BNMÖ�
dence and we end in a serious reorganisation of the
$4��@KNMF�VHSG�R@HC�A@MJ�M@SHNM@KHR@SHNMR��O@QSH@K�CD�
E@TKSR��DSB �m�SGD�SQTD�"QHRHR�� ��VD�G@UD�CHRBTRRDC�HM�
this publication and previously. However reality plays
NTS� HM� ������ SGD� $TQN� HR� KHJDKX� SN� E@CD� @F@HMRS� SGD�
42#��&!/��SGD�)/8��@MC�ONRRHAKX�SGD�2B@MCHDR�@R�VDKK
THE USD RALLY TO EXTEND FURTHER(M� NTQ� ENTQSG� PT@QSDQ� NTSKNNJ�� VD� RTFFDRSDC� SG@S�
SGD�42#�Q@KKX�VNTKC�DWSDMC�HM�0��@R�FKNA@K�L@QJDSR�
faced uncertainty and as we might see a new US
BNQONQ@SD�OQNÖS�QDO@SQH@SHNM�RBGDLD�HM������RHLHK@Q�
to the one that boosted the USD back in 2005. We
were both right and wrong in that outlook. While
L@QJDSR�G@UD�YHFFDC�@MC�Y@FFDC��SGD�FDMDQ@K�QHRD�HM�
global growth uncertainty has increasingly plagued
L@QJDSR�@MC�JDOS�SGD�42#�VDKK�AHC��RTBG�SG@S�HS�AQNJD�
SN�MDV����LNMSG�GHFGR�@GD@C�NE�XD@Q�DMC �.M�SGD�
NSGDQ�G@MC��VDiUD�RDDM�MN�RHFMR�SG@S�@�MDV�BNQON�
Q@SD�OQNÖSR�QDO@SQH@SHNM�AHKK�HR�HLLHMDMS �
3GD�42�DBNMNLX�G@C�@� QHO�QN@QHMF�0��DUDM�@R� SGD�
EU sank into a funk and Chinese growth worries
LNTMSDC � &NHMF� ENQV@QC�� SGNRD� QDK@SHUD� RSQDMFSGR�
@QD� KHJDKX� SN�ODQRHRS��VHSG� SGD�42�ODQG@OR�NMKX� QDK@�
SHUDKX�QDRHKHDMS��HE�MNS�O@QSHBTK@QKX�RSQNMF �,D@MVGHKD��
14 QUARTERLY OUTLOOK l Q1 – 2012
the compelling political rewards to be reaped from a
MDV�OQNÖS�QDO@SQH@SHNM�RBGDLD�@R�VD�FN�HMSN�DKDBSHNM�
year still offer compelling odds that new legislation
comes to pass early in 2012. That and the continued
deleveraging in the world economy and shrinking
carry as the other central banks have kicked off a
MDV�D@RHMF�BXBKD��@QD�E@BSNQR� KHJDKX�SN�ANNRS�SGD�42�
CNKK@Q��@M�@BBNLLNC@SHUD�%DC�MNSVHSGRS@MCHMF
THE POUND STERLING – STRONGER THAN IT OUGHT TO BE?There is nothing at all to like about the pound sterling
from an objective standpoint. The currency sports a
UHQST@KKX�MNM�DWHRSDMS�XHDKC��SGD�DBNMNLHB�NTSKNNJ�HR�
ONNQ��SGD�BNTMSQXiR�SVHM�CDÖBHSR�QDL@HM�L@RRHUD��@MC�
its central bank has an overtly bearish and dovish
president willing to offer endless helicopter drops of
cash. Even some of the more determined efforts at
@TRSDQHSX�@QD�E@HKHMF�SN�RGNQD�TO�ATCFDS�CDÖBHS�BQDC�
HAHKHSX� @R�LTBG� @R� GNODC � MC� XDS�� SGD� ONTMC� G@R�
been recovering slowly in recent months and that
CDL@MCR�@M�DWOK@M@SHNM �/@QS�NE�SGD�QD@RNM�B@M�AD�
found in shrinking carry disadvantage as other cen�
tral banks began easing in the second half of 2011.
MC�EQNL�@�B@OHS@K�×NV�RS@MCONHMS��@MC�DUDM�EQNL�@�
ONRHSHNMHMF�RDMSHLDMS�RS@MCONHMS��VD�G@UD�SN�VNM�
der whether the currency might actually do relatively
VDKK� HM�NTQ�E@UNTQDC�RBDM@QHN�NUDQ�SGD�MDWS�PT@QSDQ�
NQ�SVN � ESDQ�@KK��@R�KNMF�@R�SGD�RNUDQDHFM�CDAS�SHLD�
ANLA�HR�MNS�CDSNM@SDC�HM�SGD�BNLHMF�RDUDQ@K�LNMSGR��
the ongoing risks of balance sheet deleveraging and
safe haven seeking are possibly sterling positive. (Not
NMKX�BNTKC�RSDQKHMF�BNMSHMTD�SN�ÖMC�@�AHC�@R�SGD�$4�
seems to be doing everything in its power to drive
HMUDRSNQR�@V@X��SGD�FDNONKHSHB@K�@MFKD�HR�HMSDQDRSHMF�@R�
VDKK��VHSG�SGD�RSHKK�GTFD�4*�ÖM@MBH@K�RDBSNQiR�SHDR�SN�
VNQKC�ÖM@MBH@K�×NVR��MNS�SGD�KD@RS�EQNL�NHK�OQNCTB�
ing nations.) It is clear from the EU debate that the
UK has no interest in signing on to the new EU treaty
OQNONR@KR��ANSG�ADB@TRD�NE�HMSNKDQ@MBD�ENQ�SGD�KNRR�NE�
RNUDQDHFMSX��ATS�@KRN�ADB@TRD�SGD�4*�QDBNFMHRDR�SGD�
HLONQS@MBD�NE�HSR�ÖM@MBH@K�RDQUHBDR�RDBSNQ�@MC�V@MSR�
MN�O@QS� HM�ONRRHAKD�MDV� S@WDR�NM�ÖM@MBH@K�BTQQDMBX�
transactions.
SWISS FRANCThe Swiss National Bank and Swiss government must
AD�PTHSD�G@OOX�VHSG�SGDLRDKUDR�@ESDQ�SGDHQ�CQ@L@SHB�
efforts to halt an aggravated rise in the Swiss Franc
in 2011 took EURCHF from collapse to parity all the
way back to 1.20 and higher once the new EURCHF
×NNQ� V@R� HMSQNCTBDC� @MC� RN�B@KKDC� RHFGS� CDONRHSR�
VDQD� DLOKNXDC� SN� ENQBD� L@RRHUD� KHPTHCHSX� HMSN� SGD�
A@MJHMF�RXRSDL �(M�������VD�RGNTKC�DWODBS�LNQD�NE�
SGD�R@LD��SGD�PTDRSHNM�NMKX�ADHMF�NMD�NE�SHLHMF�@MC�
whether the SNB will act forcefully in the midst of EU
turmoil early on in the year and possibly bide its time
TMSHK�0��NQ�K@SDQ �1DF@QCKDRR��SGD�OQDRRTQD�NM�$41"'%�
is generally higher as the central bank and govern�
ment will simply not tolerate damage to the Swiss
economy from an overvalued currency. Additional
DWO@MRHNMR� HM� RHFGS� CDONRHSR� @QD� @� FHUDM� HM� ������
but other measures that are already having an ef�
fect are Swiss agreements with the UK and Germany
NM�BQ@BJHMF�CNVM�NM�S@W�CNCFDQR�@MC�ONRRHAKX�DUDM�
the application of negative interest rates on foreign
CDONRHSR �(M�������SGD�BNLAHMDC�ENQBDR�NE�SGD�2VHRR�
government and the SNB will show that intervention
B@M�VNQJ��HE�HS�HR�CNMD�jSGD�QHFGS�V@Xk
JAPANESE YEN – WILD CARD OF THE &���The Japanese Yen seems interminably associated with
the carry trade – always strengthening when risk is
off and weakening against higher yielding currencies
VGDM�SGD�L@QJDS� HR� QHRJ�RDDJHMF � (M�D@QKX�������SGD�
)/8�L@X�ITRS�L@M@FD�SN�BNMSHMTD�HSR�O@RS�ADG@UHNTQ��
VHSG�AQ@JDR�@OOKHDC�AX�SGD�,HMHRSQX�NE�%HM@MBD�!@MJ�
of Japan intervention on market attempts to push
42#)/8�ADKNV��� �3GD�PTDRSHNM�VD�G@UD�@RJDC�ENQ�
RN�KNMF��GNVDUDQ��HR�VG@S�G@OODMR�VGDM�VNQKC�FNU�
DQMLDMS� HMSDQDRS� Q@SDR� QHRD�� )@O@M� G@R� SGD� VNQKCiR�
GD@UHDRS� OTAKHB� CDAS� KN@C�� @� RGQHMJHMF� BTQQDMS� @B�
BNTMS� RTQOKTR�� @MC�@�CDLNFQ@OGHB� RSQTBSTQD� SG@S� HR�
tilting Japan towards a nation of net spenders rather
SG@M� MDS� R@UDQR�� RN� SGDQD� HR� @� ONSDMSH@KKX� DWOKNRHUD�
direction change in store for the JPY from strength
SN�VD@JMDRR�HE�VGDM�SGD�FNUDQMLDMS�B@M�MN�KNMFDQ�
roll its debt at virtually free rates and the population
loses faith in its paper. The Japanese Yen will not be a
QUARTERLY OUTLOOK l Q1 – 2012 15
currency for the faint hearted trader once it reaches
SGHR�HM×DBSHNM�ONHMS
3'$�".,,.#(38�#.++ 12�� 4#��" #��NZD)6DiQD�SGQNVHMF�SGD�jBNLLNCHSX�CNKK@QRk�NE�SGD�&���
SNFDSGDQ�GDQD� HM�NMD�O@Q@FQ@OG��ATS� SGDHQ� ENQSTMDR�
are likely to diverge considerably in the New Year. The
TRRHDiR�@AHKHSX�SN�M@UHF@SD�SGD�STQLNHK�NE� K@SD������
VHSG�QDK@SHUD�@OKNLA�E@RBHM@SDR �-NQL@KKX��NMD�VNTKC�
DWODBS�SG@S�SGD�ANTSR�NE�QHRJ�@RRDS�RDKKHMF��BNLLNCHSX�
OQHBDR�OKTMFHMF�@MC�1DRDQUD�!@MJ�NE� TRSQ@KH@�DWODB�
S@SHNMR�MNRD�CHUHMF�CTD�SN�SGD�VD@J�CNLDRSHB�DBNM�
omy would have resulted in a far weaker currency.
3GHR�CDL@MCR�@M�DWOK@M@SHNM�m�@MC�SG@S�DWOK@M@SHNM�
might just be that the Aussie has been a kind of safe
G@UDM�ENQ�B@OHS@K�×HFGS�×NVR�EQNL�"GHM@��VGDQD�VNQ�
QHDR�@QD� HMBQD@RHMF�SG@S�@�G@QC��ONRS�ATAAKD� K@MCHMF�
HR� HM� SGD�L@JHMF � 'NV� KNMF� RTBG� ×NVR�LHFGS� RTR�
S@HM�SGD� TRRHD�HR�TMBKD@Q��ATS�SGD�L@RRHUD�DQNRHNM�NE�
fundamental support for the currency could mean a
UDQX�RHFMHÖB@MS�QD@KHSX�BGDBJ�Q@SGDQ�D@QKX�NM�HM������HE�
@�ODQEDBS�RSNQL�HR�AQDVHMF �1DK@SHUDKX�ROD@JHMF��-9#�
@MC�" #�VHKK� KHJDKX�AD� RSQNMFDQ� SG@M� 4#��@R� SGDX�
CNMiS�G@UD� SGHR�OQDLHTL�ATHKS� HM �" #�L@X�AD� SGD�
ADRS�ODQENQLDQ�NE�SGD�SGQDD�ADB@TRD�NE�HSR�OQNWHLHSX�
to the relatively strong US dollar and more resilient
42�DBNMNLX��SGNTFG�"@M@C@�RSHKK�E@BDR�@M�DWSDMRHUD�
CDKDUDQ@FHMF� HM� HSR�OQHU@SD� RDBSNQ��DUDM�@R� HSR�OTAKHB�
RDBSNQ�G@R�QDL@HMDC�ÖRB@KKX�UDQX�OQTCDMS
THE SCANDIES (NOK AND SEK) – SAFE HAVENS BY DEFAULT?The European investor is desperate for a safe place
to park capital. The SNB after all is bent on devalu�
HMF�SGD�ENQLDQ�EQ@MB�R@ED�G@UDM��@MC�$4�A@MJR�@MC�
EU sovereign debt are in a parlous state and possible
A@MJ�M@SHNM@KHR@SHNMR��CDU@KT@SHNMR�@MC�CDAS�G@HQBTSR�
NM�SGD�@FDMC@ � R�HE�SG@S�V@RMiS�DMNTFG��$4�ONKHSH�
cians are also pounding the table on the need for
ÖM@MBH@K� @MC� BTQQDMBX� SQ@MR@BSHNM� S@WDR � $MSDQ� SGD�
2B@MCHDR� @MC� SGDHQ� QDK@SHUDKX� NODM�� B@OHS@K� EQHDMCKX�
The wild-card of the year is the Japanese Yen. The fate of the JPY is clearly bound up with the direction of inter-
est rates, as the above chart shows. The two lines are the average US and German government 10-year yield
vs. the spot (carry-free) level of the JPY vs. an evenly weighted basket of the remainder of the G-10 currencies.
If interest rates remain very low, the JPY may strengthen further, but the currency’s days of strength will be
numbered if the 30-year bull market in government bonds comes to an end in the New Year.
16 QUARTERLY OUTLOOK l Q1 – 2012
DBNMNLHDR��VHSG� KNV�RNUDQDHFM�CDAS� KN@CR�SN�ANNS �
%NQ� SGNRD�VHKKHMF� SN�AQ@UD� SGD� KNV� KHPTHCHSX�NE�-.*�
and SEK (one of the main reasons we rejected their
ONSDMSH@K�@R�R@ED�G@UDM�BTQQDMBHDR�HM�SGD�O@RS���SGDQD�
L@X� AD� ETQSGDQ� @OOQDBH@SHNM� @GD@C � 3GD� KHPTHCHSX�
ONHMS� HR� RSHKK� @� BG@KKDMFD� ENQ� RSQNMF�@OOQDBH@SHNM��@R�
HR�SGD�2VDCHRG�JQNM@iR�MNQL@KKX�LNQD�OQN�BXBKHB@K�AD�
G@UHNTQ�CTD�SN�HSR�CDODMCDMBD�NM�DWONQSR �!TS�FHUDM�
SGD�DWSDQM@K�DMUHQNMLDMS�� SGDRD� SVN�BTQQDMBHDR�@QD�
unlikely to replay the sharp weakening they saw in
��������@MC�HMRSD@C�L@X�CDE@TKS�SN�SGD�RSQNMF�RHCD�
in early 2012. Another potential source of trouble for
2VDCDM�HR�HSR�GNTRHMF�ATAAKD��VGHBG�ÖM@KKX�@OOD@QR�
to be unwinding and could drag on the health of the
BNTMSQXiR�A@MJHMF�RXRSDL
Who will be the relative winner in early 2012 - the generally pro-cyclical, but resource-backed commodity
dollars, or the possible European safe havens known as the Scandies? Odds lean to the latter given our overall
scenario for the coming quarter.
QUARTERLY OUTLOOK l Q1 – 2012 17
QUARTERLY OUTLOOK l Q1 – 2012 ��
2 7.�! -*�31 #(-&�%+..1���#$"$,!$1�����
QUARTERLY OUTLOOK l Q1 – 2012 19
US The statement released after the last meeting of the
Federal Open Market Committee on December 13
reveals a Federal Reserve which is somewhat sur�
prisingly concerned about the economic landscape
SG@M�LHFGS�ODQG@OR�G@UD�ADDM�DWODBSDC��FHUDM�SGD�
moderate upside surprises which can be said to have
BG@Q@BSDQHRDC�DBNMNLHB�QDKD@RDR�HM�SGD�ENTQSG�PT@QSDQ�
of 2011.
The statement made reference to only “some im�
OQNUDLDMSk� SN� SGD� K@ANTQ� L@QJDS�� ODQG@OR� VHRDKX�
spurning the euphoria which greeted the fall in the
GD@CKHMD�TMDLOKNXLDMS� Q@SD� SN�� ��ODQBDMS� HM�-N�
UDLADQ�� @R� SGD� %.,"� QD@KHRDC� SGD� GHRSNQHB@KKX� KNV�
participation rate of 64.0 percent means the report
×@SSDQR�SN�CDBDHUD�@MC�RSHKK�O@HMSR�@�OHBSTQD�NE�@�CHR�
BNTQ@FDC�VNQJENQBD��L@MX�NE�VGNL�G@UD�FHUDM�TO�
DUDM�RDDJHMF�DLOKNXLDMS���SGD�VHCDQ�j4��k�LD@R�
TQD��VGHBG�HMBKTCDR�SGD�CHRBNTQ@FDC�@MC�SGD�TMCDQ�
DLOKNXDC�� QDL@HMR� CDOQDRRHMFKX� GHFG�� @S� �� �� ODQ�
BDMS �3GD�RS@SDLDMS�V@R�@KRN�BNMÖCDMS�SG@S�HM×@SHNM�
“has moderated”.
%DCDQ@K�LD@RTQDR�VGHBG�@QD�@KQD@CX�A@JDC�HM��BNL�
AHMDC� VHSG� RS@SD�KDUDK� BTSA@BJR�� LD@M� ÖRB@K� ONKHBX�
VHKK�HLONRD�@�RL@KK�CQ@F��HE�@MXSGHMF��HM������@MC�HS�
VHKK�DRRDMSH@KKX�QDL@HM�O@Q@KXRDC�TMSHK�������@R�/QDRH�
dential and Congressional candidates struggle to
devise the stance they believe will please the voters
LNRS �6HSG� SGD� Q@SHMF�@FDMBHDR�ONHRDC�VHSG�ÖMFDQR�
NM�SQHFFDQR��SGD�MHFGSL@QD�NTSBNLD�VNTKC�OQNA@AKX�
AD�@M�.A@L@�QD�DKDBSHNM��VHSG�1DOTAKHB@M�BNMSQNK�NE�
the House and Senate. All of this will do nothing for
BNMRTLDQ�BNMÖCDMBD� ��DUDM� SGD�AHF�ANTMBD� HM� SGD�
Conference Board survey in November still left the
GD@CKHMD�ÖFTQD�ADKNV�SGD� KNVR�RDDM� HM� SGD�CDB@CD�
preceding the Financial Crisis.
%HM@KKX��SGD�$KDOG@MS�HM�SGD�1NNL��$TQNOD �2TEÖBD�HS�
SN�R@X�SGD�$4�HR�SGD�42i�MN ��SQ@CHMF�O@QSMDQ��VHSG����
percent of the revenue of the Top 500 US companies
coming from Europe. It is also highly likely that Euro�
OD@M�A@MJRi�CDRODQ@SD�@SSDLOSR�SN�LDDS�B@OHS@K�Q@SHN�
QDPTHQDLDMSR�VHKK�LD@M�SGDX�BTS�A@BJ�NM�KDMCHMF�SN�
42�ÖQLR���VGHBG�BTQQDMSKX�@LNTMSR�SN�@OOQNWHL@SDKX�
US$2 trn. We would estimate that US growth will be
at least 1 percentage point lower as a result of the
recession in Europe that we may well see in 2012.
(S�HR�UHS@K�SN�MNSD�SG@S��CTD�SN�SGD�@MMT@K�QNS@SHNM�NE�
UNSHMF� LDLADQR�� SGD� TADQ�CNUHRG� ODQL@MDMS� UNSDQ�
ruling class on the FOMC will be joined in January by
SGQDD�KHJD�LHMCDC�1DFHNM@K�%DC�/QDRHCDMSR���@MC�NMD�
BNLOKDSDKX� HRNK@SDC� G@VJ� �� +@BJDQ��� VGDQD@R� SGQDD�
hawks and only one dove will depart.
It therefore seems probable that the Fed will be
predisposed towards further easing; certainly in the
DUDMS�VD�RDD�NMD�NQ�LNQD�NE�SGD�ENKKNVHMF���@�VD@J�
RSNBJ�L@QJDS��CDBKHMHMF�HM×@SHNM��NQ�@�RSQNMF�CNKK@Q �
(M�E@BS��@KK�NE�SGD�@ANUD�RDDL�DLHMDMSKX�KHJDKX�@MC�RN�
VD�VNTKC�DWODBS�SN�RDD�ETQSGDQ�0T@MSHS@SHUD�$@RHMF��
�0$���� HM�������VHSG� SGD� OQHK����LDDSHMF�@�GHFGKX�
KHJDKX� @MMNTMBDLDMS� C@SD�� FHUDM� SG@S� SGHR�LDDSHMF�
VHKK�AD�ENKKNVDC�AX�@�"G@HQL@MiR�OQDRR�BNMEDQDMBD
EUROZONE 3GD���SG�$4�RTLLHS�SN�DMC�@KK�RTLLHSR��NM�#DBDL�
ADQ�����L@QJDC�SGD�RS@QS�NE�SGD�KNMF�L@QBG�SNV@QCR�
ÖRB@K�TMHNM���HS�C@QD�MNS�XDS�ROD@J�HSR�M@LD��VD�G@UD�
SN�B@KK�HS�@�hÖRB@K�BNLO@BSi����ATS�SGD�OQNAKDL�HR�SGD�
L@QBG� VHKK� HMCDDC� AD� KNMF� @MC� C@MFDQNTR�� S@JHMF�
SVN�XD@QR�SN�BNLOKDSD��@R�@�BNMRDQU@SHUD�DRSHL@SD
The trouble is that way before then the market will
CDL@MC�AKNNC��HE�ENQ�MN�NSGDQ�QD@RNM�SG@M�SGD�BNL�
pletely understandable fear that the march will never
QD@BG�HSR�CDRSHM@SHNM��ENQ�SGD�INTQMDX�SN�ÖRB@K�TMHNM�
will inevitably enjoy unpleasant travelling compan�
ions in the form of austerity and soaring unemploy�
LDMS�� KD@CHMF�SN�RNBH@K�TMQDRS�@MC�OQNA@AKD�QDFHLD�
changes.
3GD�L@QJDSiR�ED@QR�VHKK�BDMSQD�TONM�SGD�QD�ÖM@MBHMF�
MDDCR�NE�(S@KX�@MC�2O@HM���$TQN�����AM�ENQ�(S@KX�@KNMD��
�DWBKTCHMF� @MX� RS@SD� RTOONQS� ENQ� A@MJR�� �� VHSG� SGD�
combined needs of Italy and Spain amounting to
Euro 500bn a year between 2012 and 2015.
M O N E T A R Y P O L I C Y : M A J O R C E N T R A L B A N K S
20 QUARTERLY OUTLOOK l Q1 – 2012
The probability is we will see yet another crisis sum�
LHS�HM�0��@MC�&DQL@MX�VHKK�B@UD�HM���L@XAD�@FQDDHMF�
to the issuance of Eurobonds with joint and several
KH@AHKHSX���B@TRHMF�ATMC�XHDKCR�SN�RN@Q �.MD�V@X�NQ�@M�
NSGDQ�VD�VHKK�ÖM@KKX�RDD�SGD�$TQNOD@M�"DMSQ@K�!@MJ�
R@SHRÖDC� SG@S� HR� G@R� VQTMF� DMNTFG� ÖRB@K� PTHC� OQN�
PTN�NTS�NE�ONKHSHBH@MR�@MC��GHCHMF�ADGHMC�HSR�RS@STSNQX�
QDPTHQDLDMS� SN� hDMRTQD�LNMDS@QX� RS@AHKHSXi�� BNLHMF�
SN�SGD�QDRBTD�AX�DWOKHBHSKX�ATXHMF�CHRSQDRRDC�RNUDQDHFM�
bonds. In fact one can argue that they have already
implemented this policy via the back door; Decem�
ADQiR� @MMNTMBDLDMS� NE� TMKHLHSDC�� ��XD@Q� KHPTHCHSX�
DM@AKDR�A@MJR�SN�ANQQNV�EQNL�SGD�$"!�@S���ODQBDMS��
�NQ�KNVDQ�HM�SHLD�OQNA@AKX���@MC�HMUDRS�HM�SGD�ANMCR�
of their mother country at maybe 6 percent or more.
Thus we see the classic mechanism by which banks
B@M� QDATHKC� B@OHS@K�� �VHSGNTS� DPTHSX� HRRT@MBD��� @MC�
SGD� RS@SDR� B@M� @OO@QDMSKX� RS@X� KHPTHC �#HC� RNLDNMD�
say Ponzi?
(M� @CCHSHNM� SN� SGHR�NUDQS�NQ� BNUDQS�PT@MSHS@SHUD�D@R�
HMF��VDiC�DWODBS�SGD�L@HM�1DÖM@MBD�1@SD�SN�GHS�� ���
ODQBDMS�HM�0���VHSG�@�ETQSGDQ�BTS�SN�� ��ODQBDMS�K@SDQ�
in the year.
JAPANJapan continues to represent a casebook study in the
C@MFDQR� NE� SGD� KHPTHCHSX� SQ@O��VHSG�LNMDS@QX� ONKHBX�
apparently emasculated and unable to improve eco�
MNLHB� BNMCHSHNMR �3G@S�ADHMF� SGD�B@RD�� SGD�ATKJ�NE�
SGD�GD@UX�KHESHMF�E@KKR�NM�SGD�RGNTKCDQR�NE�ÖRB@K�ONKHBX�
and new Prime Minister Noda seems to be displaying
an encouraging level of activism in this regard.
(M� SGD�E@BD�NE�DWSQDLD�FKNA@K�TMBDQS@HMSX�� SGD�!@MJ�
of Japan will probably keep its powder dry during
0���V@HSHMF�SN�RDD�VGDSGDQ�DUDMSR�HM�$TQNOD�@MC�NQ�
a strengthening of the yen mean they feel the neces�
sity to either increase the amount or duration of JGB
OTQBG@RDR�NQ�QDLNUD�SGD�� ��ODQBDMS�O@HC�NM�DWBDRR�
bank reserves.
UK 4*� "G@MBDKKNQ� &DNQFD� .RANQMDiR� TSTLM� !TCFDS�
Statement could hardly have made for more depress�
HMF�QD@CHMF���SGD�4*�KNNJR�RDS�SN�DMCTQD�@S�KD@RS�@M�
NSGDQ�ÖUD�XD@QR�NE�KNV�FQNVSG��GHFG�TMDLOKNXLDMS�
@MC�ÖRB@K�@TRSDQHSX
Whereas the UK economy managed to grow by 1.9
ODQBDMS�HM�������NEÖBH@K�OQNIDBSHNMR�EQNL�SGD�.EÖBD�
NE�!TCFDS�1DRONMRHAHKHSX���.!1���MNV�ENQDB@RS�FQNVSG�
NE�� ��ODQBDMS��@MC�� ��ODQBDMS� HM������@MC������
QDRODBSHUDKX��ADENQD�@�hAKHRSDQHMFi�� ��ODQBDMS�QDBNUDQX�
in 2013.
(M�KHFGS�NE�SGD�@ANUD��SGD�!@MJ�NE�$MFK@MC�VHKK�BNM�
tinue to feel that the government is sticking to its
RHCD� NE� SGD� hA@QF@HMi� QD � ÖRB@K� ONKHBX� @MC� SGD� !@MJ�
will therefore respond with further QE in Q1. The
purchase of the additional £75bn of Gilts announced
NM�.BSNADQ���VHKK�AD�ÖMHRGDC�AX�%DAQT@QX�����@MC�HS�
is therefore possible that additional QE will be an�
MNTMBDC� @ESDQ� SGD� %DAQT@QX� ���� LDDSHMF�� ATS� VD�
VNTKC�OTS�NTQ�LNMDX�NM�,@QBG�� �1@SDR�VHKK�AD�GDKC�
at 0.5 percent throughout 2012.
SWITZERLAND#DROHSD� SGD� HMSQNCTBSHNM� NE� HSR� � �� h×NNQi� ENQ� $41�
"'%�� VHSG� HSR� @BBNLO@MXHMF� BNLLHSLDMS� SN� OQHMS�
@R�L@MX�%Q@MBR�@R�MDBDRR@QX��2VHSYDQK@MC�QDL@HMR�HM�
C@MFDQ� NE� RKHOOHMF� HMSN� @� CD×@SHNM@QX� PT@FLHQD� HM�
2012. A danger that will only be compounded by the
$4iR� SQHATK@SHNMR � 3GD� 2VHRR� -@SHNM@K� !@MJiR�� �2-!���
K@SDRS�HM×@SHNM�ENQDB@RSR��QDKD@RDC�@S�HSR�#DBDLADQ����
LDDSHMF��MTCFDC�HSR������DWODBS@SHNM�CNVM�SN�� ��
percent from 0.5 percent and even at the end of its
ENQDB@RS�GNQHYNM��HM�0��������HS�RDDR�NMKX�� ��ODQBDMS�
��RTQDKX�SNN�BKNRD�SN�CD×@SHNM�ENQ�BNLENQS
&HUDM�VG@S�VD�DWODBS� SN�G@OODM� HM� SGD�$4�m�@TR�
SDQHSX� BTADC�@MC� YDQN�FQNVSG� HM������@S�ADRS� �� AX�
DMC�0��VD�VNTKC�DWODBS� SGD�VQHSHMF� SN�AD�NM� SGD�
V@KK�@MC�DWODBS�SGD�2-!iR�$41�"'%�×NNQ�SN�AD�Q@HRDC�
to 1.3.
FIXED INCOME MARKETS�����L@X�TRGDQ�HM�@�MDV�O@Q@CHFL�ENQ�ÖWDC�HMBNLD�
L@QJDSR�VHSG�HMSDMRD�BNLODSHSHNM�ENQ�B@OHS@K��LD@M�
ing we have seen the bottom in yields in most mar�
QUARTERLY OUTLOOK l Q1 – 2012 21
JDSR �+DSiR�AD�BKD@Q��SGHR�HR�MNS�SGD�hNKC�MNQL@Ki�VNQKC�
VGDQD�QHRJ�EQDD�RNUDQDHFM�ANMC�XHDKCR�ENQLDC�@�A@RD�
ENQ�QDSTQMR���OQDCHB@SDC�OTQDKX�TONM�SGD�BK@RRHB�HMFQD�
CHDMSR��M@LDKX�DWODBS@SHNMR�ENQ�RGNQS�Q@SDR�@MC�HM×@�
SHNM�NUDQ�SGD�KHED�NE�SGD�ANMC��@MC�SGD�XHDKC�NM�KNVDQ�
FQ@CD�ANMCR�@KRN�QD×DBSDC�SGD�OQHBD�NE�BQDCHS�QHRJ
The new normal means that virtually no sovereign
ANMCR� B@M� SQTKX�AD� QDF@QCDC�@R� QHRJ�EQDD�@MC�L@MX�
factors point to higher yields:
l� !@MJ�CDKDUDQ@FHMF�SN�LDDS�MDV��OTMHSHUD�B@OHS@K�
Q@SHN�QDPTHQDLDMSR�VHKK�LD@M�KDRR�KDMCHMF�SN�BNQ�
porates and therefore more corporate issuance.
l� .MD�NE�SGD�VNQKCiR�OQHLD�ANQQNVDQR��&DQL@MX��
faces a potentially huge bill to ensure the sur�
UHU@K�NE�SGD�$TQN���@MC� HS� HR�@�R@ED�ADS�SG@S�SGD�
German people will eventually decide to pay this
AHKK��@R�SGDX�QD@KHRD�GNV�ADMDÖBH@K�SGD�$TQN�G@R�
been for Germany and what a cataclysm its de�
mise would bring.
l� The market can stay irrational longer than gov�
DQMLDMSR� B@M� RS@X� RNKUDMS�� HE� ED@Q� CNLHM@SDR�
greed.
R�DUDQ�� HM�@M� HMBQD@RHMFKX�BNQQDK@SDC�FKNA@K�DBNMN�
LX��SGD�JDX�SN�RTBBDRR�VHKK�AD�SGD�@M@KXRHR�NE�ROQD@CR�
ADSVDDM� HRRTDQR��@MC�OTQD�BNQONQ@SD�BQDCHS�@M@KXRHR�
will also have to be overlaid with country risk. For
HMRS@MBD��SGD�4*�G@R�BNLD�SN�AD�RDDM�@R�RNLDSGHMF�
NE�@� R@ED�G@UDM��CTD� SN� SGD�BN@KHSHNM�FNUDQMLDMSiR�
DWSQDLD�BNLLHSLDMS�SN�ÖRB@K�OQNAHSX��@MC�RN�BNQON�
Q@SD�HRRT@MBD�G@R�DWOKNCDC �� BBNQCHMF�SN�#D@KNFHB���
2SDQKHMF�CDMNLHM@SDC�MNM�ÖM@MBH@K� BNQONQ@SD� ANMC�
R@KDR��@BQNRR�@KK�FQ@CDR��@QD�TO����ODQBDMS�CTQHMF�SGD�
ÖQRS����LNMSGR�NE�������VGHKD�DTQN�@MC�CNKK@Q�L@Q�
JDSR�G@UD�BNKK@ORDC�@MC�RS@FM@SDC��QDRODBSHUDKX �6,�
,NQQHRNM�� SGD� 4*� RTODQL@QJDS� BG@HM�� BNTKC� G@UD�
RNKC�v� �AM�NE� HSR� QDBDMS����XD@Q� HRRTD�� Q@SGDQ� SG@M�
the £400m it looked to raise. QE has probably also
helped.
22 QUARTERLY OUTLOOK l Q1 – 2012
While our recent commentaries on the macro situ�
ation in the developed world have drawn the anal�
NFX�NE�@�OK@MD�×XHMF�NM�NMD�QDL@HMHMF�DMFHMD�� RH@iR�
DBNMNLHDR�G@UD�SGD�ADMDÖS�NE�RSHKK�×XHMF�NM�@KK�DM�
gines but with tremendous hope placed in the hands
NE�SGD�OHKNS�m�SGD�ONVDQR�SG@S�AD�HM�"GHM@�m�SN�CDSDQ�
LHMD�SGD�RLNNSGMDRR�NE�SGD�MDWS�K@MCHMF
There is no doubt that the Chinese economy is com�
HMF� HM� SN� K@MC� m� DWONQS� FQNVSG�G@R�ADDM� HM� RSD@CX�
CDBKHMD� RHMBD� LHC������ @ESDQ� SGD� GD@KSGX� QDANTMC�
@ESDQ� SGD� ����� BQHRHR� @R� FKNA@K� CDL@MC� E@KSDQR � (L�
port growth is dead in the water as manufacturing
slows and both industrial production and PMI data
DBGN�SGD�R@LD�SGDLD �3GD�LTBG�U@TMSDC�RVHSBG�SN�
CNLDRSHB� BNMRTLOSHNM� Q@SGDQ� SG@M� QDKH@MBD� NM� DW�
port markets has yet failed to materialise as efforts
SN� BG@MFD� @� LTBG�HMFQ@HMDC� LHMCRDS� L@JD� LHMHR�
cule steps forward. Yet we are still talking of above
��ODQBDMS�FQNVSG�ENQ�������SGNTFG�LNRS�NE�SGHR�V@R�
EQNMS�KN@CDC�HMSN�SGD�ÖQRS�G@KE�NE����� �%QNL�GDQD�NM�
HM��SGD�NTSKNNJ�@OOD@QR�AKD@J�@MC�NTQ�@M@KXRHR�RTF�
FDRSR�VD�BNTKC�E@BD�FQNVSG�NE�@�LDQD�����ODQBDMS�ENQ�
������VDKK�ADKNV�LDCH@M�L@QJDS�ENQDB@RSR�NE�@QNTMC�
� ��ODQBDMS
With no change in the current dismal global outlook
HM�RHFGS��VG@S�@QD�SGD�@TSGNQHSHDR�CNHMF�SN�LHSHF@SD�
SGD� LTBG�ED@QDC� G@QC� K@MCHMF�� 3GD� /DNOKDiR� !@MJ�
of China recently initiated a shift in monetary policy
VHSG�SGD�ÖQRS�D@RHMF�RSDO� HM�SGQDD�XD@QR�@MMNTMBDC�
DMC�-NUDLADQ�� @� ��� A@RHR� ONHMS� BTS� HM� SGD� QDRDQUD�
Q@SHN� QDPTHQDLDMS�� VHSG� LNQD� DWODBSDC� MD@Q�SDQL�
�-NSD�@����AO�BTS�HR�DWODBSDC�SN�ANNRS�SNS@K�KHPTHCHSX�
by about Yuan 400 bn (USD 63 bn)). With time run�
ning out for an additional cut this year (though in the
past the PBOC has announced moves during western
L@QJDS� GNKHC@XR�� HS� HR� NCCR�NM� ENQ� ETQSGDQ� BTSR� �� @S�
KD@RS�SVN�VD�OQDCHBS���CTQHMF�0�������VHSG�SGD�ÖQRS�
ADENQD�SGD�+TM@Q�-DV�XD@Q�GNKHC@XR�HM�K@SD�)@MT@QX
6G@S� @ANTS� SGD� ATAAKDR�� /QNODQSX�QDK@SDC� ATA�
bles were very much the talk of the markets in the
ÖQRS� G@KE� NE� ����� @MC� SGD� FNUDQMLDMS� G@R� ADDM��������������������
consistent in applying measures to cool this sector
�ENQ�DW@LOKD��GHFGDQ� KDMCHMF�Q@SDR��OTQBG@RHMF� KHL�
its and a ban on mortgages for third homes). While
SGDQD�G@UD�ADDM�AQN@C�RHFMR�NE�@�BNNKHMF�NEE��K@SDRS�
data for November shows that there are still hot�
spots recording 6 percent annualised price increases
so this issue is still not completely and uniformly re�
solved.
Another issue for China is the Yuan. Despite con�
tinued pressure from the US (and more lately from
SGD�$TQNOD@M�"DMSQ@K�!@MJ���@�QDRTQFDMS�42�#NKK@Q�
@MC�@�RGHES�HM�HMUDRSLDMS�×NVR�G@UD�RDDM�SGD�8T@M�
weaken some 0.6 percent versus the US dollar from
HSR�OD@J�LHC�-NUDLADQ �3G@S�LNMSG�R@V�@M�@KLNRS�
���ODQBDMS�CQNO�HM�%NQDHFM�#HQDBS�(MUDRSLDMS��%#(���
SGD�ÖQRS�CQNO�HM����LNMSGR��@MC�LNRS�KHJDKX�B@TRDC�
by the grim and complicated global outlook. At the
R@LD�SHLD��.UDQRD@R�#HQDBS�(MUDRSLDMS�HM�MNM�ÖM@M�
cial sectors originating from China rose to over $50
AM� HM� SGD�ÖQRS����LNMSGR�NE� SGHR� XD@Q��@M� HMBQD@RD�
NE�� ��ODQBDMS�X�X��@FFQ@U@SHMF�SGD�MDF@SHUD�HLO@BS�
NM�SGD�BTQQDMBX�NE�RTBG�ONQSENKHN�×NVR �&HUDM�RTBG�
×NVR�HS�VNTKC�S@JD�FQD@S�DEENQS�SN�BNMSHMTD�SGD�RN�
B@KKDC� O@SG� NE� jRKNV�� FQ@CT@K� @OOQDBH@SHNM� NE� SGD�
8T@Mk� SG@S�G@R�ADDM�@CUNB@SDC�CDL@MCDC�AX� SGD�
Western world (which leads to our Outrageous Pre�
CHBSHNM�MTLADQ���SG@S�42#"-8�QHRDR����ODQBDMS�SN�
7.00).
SO WHAT ARE THE IMPLICATIONS FOR THE REST OF ASIA?We all know how much the Australian resource sec�
SNQ�CDODMCR�NM�DWONQSR� SN�"GHM@ � (MCDDC� SGD�"GH�
nese thirst for natural resources has produced one
of the biggest mining booms in decades for the
BNTMSQX �4MENQSTM@SDKX��HE�VD�S@JD�@V@X�SGD�LHMHMF�
RDBSNQiR�BNMSQHATSHNM�SN�SGD�DBNMNLX�SGDQD�CNDR�MNS�
appear to be much left. The manufacturing sec�
tor has been struggling during the second half of
2011 (manufacturing PMI languishing below the 50
mark since July) and the service sector is depend�
ent on the recycled dollars from the mining sector. A
marked slowdown for China will undoubtedly cause
HRRTDR�ENQ�SGHR�NMD�SQHBJ�ONMX �
2 ( � . 4 3 + . . * � � % 2 3 $ - � 8 . 4 1 � 2 $ 3 ! $ +3 2 � � 6 $ � 1 $�A B O U T T O L A N D
QUARTERLY OUTLOOK l Q1 – 2012 23
Singapore has had a great emphasis on electronics
DWONQSR� HM� HSR� RSQNMF�FQNVSG�GHRSNQX��ATS� SGD� QNKKDQ�
BN@RSDQ�M@STQD�NE�SGHR�RDBSNQ�RHMBD�DMC������HR�BTQ�
QDMSKX� RSQTFFKHMF� ENQ� SQ@BSHNM�� DRODBH@KKX� FHUDM� SGD�
backdrop of weak global growth. There has been
RNLD�CHUDQRHÖB@SHNM�HMSN�SGD�OG@QL@BDTSHB@K�RDBSNQ�
ATS� SGD� NUDQ@KK� SQDMC� ENQ� MNM�NHK� CNLDRSHB� DWONQSR�
remains weak. With the global economy in dramatic
RKNVCNVM��MN�BG@MFD�HM�SGHR�SQDMC�HR�DWODBSDC�HM�SGD�
MD@Q�SDQL �(MCDDC��2HMF@ONQDiR�/,�+DD�G@R��PTHSD�QD�
@KHRSHB@KKX��V@QMDC�SG@S�FQNVSG�NE�ADSVDDM�����ODQ�
cent (compared with 5 percent on average over the
K@RS�ENTQ�XD@QR��L@X�ADBNLD�SGD�MNQL�NUDQ�SGD�MDWS�
few years.
R� ENQ�'NMF�*NMF�� SGD� PTDRSHNM� QDL@HMR�VGDSGDQ�
"GHM@�KD@CR�'NMF�*NMF�NQ�UHBD�UDQR@ �(M�-NUDLADQ��
,@CR�*NDENDCiR�QDRD@QBG�ONHMSDC�NTS�SG@S�SGD�SVN�
DBNMNLHDR� @QD� BNHMBHCDMS� @MC�@R� RTBG� BN�CDODMC�
DMS � .TQ� DWODBS@SHNMR� NE� RKNVDQ� "GHMDRD� FQNVSG��
LHWDC�VHSG� HMCDODMCDMS� DWSDQM@K� BG@SSDQ� NE� 'NMF�
*NMF� GD@CHMF� SNV@QCR� YDQN� FQNVSG�� RTFFDRSR� SGD�
prospects for Hong Kong are not healthy.
(M� SGD� DUDMS� NE� @� G@QC� NQ� DUDM� BQ@RG� K@MCHMF��VD�
VHKK�ÖMC�NTS�NUDQ�SGD�MDWS�EDV�PT@QSDQR�HE�HS�L@SSDQR�
VGDSGDQ�XNT�@QD�RHSSHMF�HM�ÖQRS��ATRHMDRR��NQ�DBNMN�
my class with the risk increasing that we are all at
the back of the plane.
24 QUARTERLY OUTLOOK l Q1 – 2012
C O M M O D I T Y O U T L O O K : M A R K E T S B R A C E D F O R H E A D W I N D S
Against the backdrop of an uncertain global eco�
MNLHB�NTSKNNJ��VHSG�$TQNOD� KNNJHMF�UDQX�A@C�� RH@�
probably worse than consensus and the US improv�
HMF� RNLDVG@S�� BNLLNCHSX� SQ@CDQR� VHKK� AD� KNNJHMF�
SNV@QCR������VHSG�RNLD�BNMETRHNM �3GD�ÖQRS�PT@QSDQ�
will most likely produce a great amount of uncertain�
ty as the market will be looking for clarity on many of
SGD�TM@MRVDQDC�PTDRSHNMR�KDES�EQNL�������DRODBH@KKX�
SGD�@KK�HLONQS@MS�TMJMNVM�NE�VGDSGDQ�VD�VHKK�E@BD�
another global recession in 2012.
6HSG�NTQ�DWODBS@SHNMR�ENQ�ETQSGDQ�CNKK@Q�@OOQDBH@SHNM�
CTQHMF�SGD�D@QKX�RS@FDR�NE�������SGD�TORHCD�ENQ�SGD�
major commodity indices seems to be limited dur�
HMF� SGD�ÖQRS�PT@QSDQ�VHSG� HMUDRSNQR� KHJDKX� SN�AD�UDQX�
RDKDBSHUD � 'NVDUDQ� VD� ADKHDUD� SG@S� SGD� LTKSH�XD@Q�
TOSQDMC��@KRN�B@KKDC�SGD�BNLLNCHSX�RTODQ�BXBKD��G@R�
MNS�XDS�QTM�HSR�BNTQRD�@MC�KNMF�SDQL�HMUDRSNQR�RGNTKC�
UHDV�SGD�MDWS�EDV�LNMSGR�@R�@M�NOONQSTMHSX�SN�@BBT�
LTK@SD��@�UHDV�SG@S�VHKK�AD�ETQSGDQ�RTOONQSDC�RGNTKC�
the central banks of emerging markets (EM) and de�
veloped markets (DM) engage in simultaneous ag�
gressive monetary easing.
/QDBHNTR�LDS@KR�KHJD�FNKC�@MC�SN�@�BDQS@HM�DWSDMS�RHKUDQ�
VHKK�BNMSHMTD�SN�ADMDÖS�EQNL�BNMSHMTDC�QHRJ�@UDQRHNM ��
Supporting factors also include the negative yield
DMUHQNMLDMS��BTQQDMSKX�RDDM�@LNMF�LNQD�SG@M�G@KE�
NE� SGD�&���M@SHNMR��BNLAHMDC�VHSG�RSQNMF�OGXRHB@K�
demand from central banks and emerging market
investors. We see prices stabilising after a late 2011
BNQQDBSHNM� VHSG� EQDRG� HMUDRSLDMS� ×NVR� CQHUHMF� SGD�
OQHBD�SNV@QCR�������CTQHMF�0��@MC�DUDM�GHFGDQ�K@SDQ�
in the year.
!@RD�LDS@KR�VHKK��CDROHSD�@�CDSDQHNQ@SHMF�NTSKNNJ�ENQ�
MDV�RTOOKX��BNMSHMTD� SN�RSQTFFKD� SGQNTFG� SGD�D@QKX�
parts of 2012 on growing concern of a recession in
CDUDKNODC�L@QJDSR�� BNLAHMDC�VHSG� DLDQFHMF�L@Q�
JDSR�RKNVHMF�CNVM �3GD�KNMF�SDQL�OQNRODBS�GNVDUDQ�
remains positive as lower prices should meet restock�
HMF� CDL@MC�� DRODBH@KKX� EQNL� BNTMSQHDR� KHJD� "GHM@ �
However with industrial metals being viewed as an
economic indicator for growth any traction during
the early parts of 2012 remains limited as focus will
AD�ÖQLKX�NM�SGD�CDL@MC�RHCD
The agricultural sector suffered a major setback dur�
ing 2011 on a combination of normalised weather
and farmers across the globe reacting to the high
OQHBDR�CTQHMF���������AX�OK@MSHMF�QDBNQC�@LNTMSR�NE�
MDV�BQNOR �3GD�RSQNMFDQ�CNKK@Q�GTQS�OQHBDR�@MC�42�DW�
ONQSR�@R�ATXDQR�STQMDC�SN�NSGDQ�RTOOKHDQR��DRODBH@KKX�
in the Former Soviet Union and South America. The
accumulative speculative long position held by hedge
funds across the sector has fallen to the lowest level
in two and half years and on that basis (combined
with the potential challenges of weather related sup�
OKX� HRRTDR��VD�RDD�FNNC�ONSDMSH@K� ENQ�GHFGDQ�OQHBDR��
QUARTERLY OUTLOOK l Q1 – 2012 25
especially among commodities with constrained sup�
OKX��RTBG�@R�BNQM�@MC�RNXAD@MR �+HUDRSNBJ�RGNTKC�@KRN�
hold up well due to strong fundamentals combined
with its defensive character.
3GD�DMDQFX�RDBSNQ��DWBKTCHMF�42�M@STQ@K�F@R�VGHBG�HR�
stuck in a bear market amid ample US supply from
RG@KD�F@R�� KNNJR� RDS� SN� QDL@HM� Q@MFD�ANTMC�CTQHMF�
the early parts of 2012. Such is the uncertainty about
the direction that fat tails on the options curve have
emerged with investors buying out of money pro�
tection in both directions. The renewed slowdown
in 2011 largely occurred due to the spike in energy
OQHBDR��VGHBG�R@V�SGD�@UDQ@FD�OQHBD�NE�!QDMS�BQTCD�
rising by more than one third from 2010.
Increased energy demand from EM looks set to con�
tinue to outweigh the slowdown in DM and this com�
AHMDC�VHSG�L@MX�NHK�OQNCTBHMF�M@SHNMR�MNV�QDPTHQHMF�
GHFGDQ� OQHBDR� SN� O@X� ENQ� HMBQD@RDC� RNBH@K� RODMCHMF��
DRODBH@KKX�@ESDQ�SGD� Q@A�2OQHMF��RGNTKC�JDDO�OQHBDR�
supported despite slowing economies. Brent crude
has the potential of making a low around 95 dollars
and should average 100 dollars during Q1 before ris�
ing later in the year.
26 QUARTERLY OUTLOOK l Q1 – 2012
Options´ implied volatilities give an insight into both
SGD�BTQQDMS�ADG@UHNTQ�NE�ÖM@MBH@K�L@QJDSR�@MC�SGDHQ�
DWODBSDC�UNK@SHKHSX�@MC�SGD�%7�NOSHNMR�L@QJDS�HR�MNV�
at a crucial juncture.
.M� SGD�NMD�G@MC�� RNLD� BTQQDMBX�O@HQR� @QD�LNUHMF�
@�FQD@S�CD@K��VHSG� ENQ� HMRS@MBD�$4142#�BKNRHMF� SGD�
XD@Q�NM�SGD�KNVR �.M�SGD�NSGDQ�G@MC�SGNTFG��RNLD�
pairs such as USDJPY or GBPUSD remain lacklustre.
As for CHF a long period of low volatility could be
ENKKNVDC� AX� @� RGNQS� ODQHNC� NE� DWSQDLD�LNUDLDMSR�
(from intervention or other). It is therefore important
SN�KNNJ�@S�UNK@SHKHSHDR�HM�SGD�BNMSDWS�NE�VG@S�G@R�ADDM�
happening and what could happen over a short to
LDCHTL�SDQL�GNQHYNM
3GD�ADKNV�BG@QS�CHROK@XR�SGQDD�LNMSG� S�SGD�,NMDX�
HLOKHDC�UNK@SHKHSHDR�ENQ�ÖUD�L@INQ�BTQQDMBX�O@HQR�RHMBD�
LHC����� �"KD@QKX��HLOKHDC�UNK@SHKHSHDR�G@UD�HMBQD@RDC�
NUDQ�SGHR�ÖUD�XD@Q�ODQHNC��ROHJHMF�SN�QDBNQC�GHFGR�HM�
SGD�E@KK�NE�������ATS�HS�HR�HLONQS@MS�SN�MNSD�SG@S�UNK@�
tilities themselves have become a lot more volatile!
3GHR� HR�NE�BNTQRD�MNS�RTQOQHRHMF�� SGD�FKNA@K�ÖM@MBH@K�
crisis has made markets a lot more uncertain and li�
PTHCHSX�G@R�CQHDC�TO�@�FQD@S�CD@K
3G@S�R@HC��@�EDV�SGHMFR�CN�RS@MC�NTS��CDROHSD�SGD�QD�
BDMS�CDUDKNOLDMSR�HM�SGD�$TQNOD@M�RHST@SHNM��HLOKHDC�
UNK@SHKHSHDR� HM� $41�BDMSQHB� O@HQR� �$4142#�� $41"'%��
EURGBP for instance) still seem to provide decent
F X O P T I O N S : M O R E U P S I D E P O T E N T I A L F O R V O L A T I L I T I E S
TORHCD�ONSDMSH@K � �OQDLHRD�SN�SGD������STQLNHK�V@R�
@�GTFD�VHCDMHMF�HM�BQDCHS�CDE@TKS�RV@OR�ENQ�ÖM@MBH@K�
institutions and the failing of many of those institu�
SHNMR �1DOK@BD�jÖM@MBH@K�HMRSHSTSHNMRk�VHSG�j$TQNOD�
an countries” or “sovereign entities” and you have
a somewhat valid statement describing the situation
today. It is therefore easy to imagine that a worsening
NE�SGD�ÖM@MBH@K�BQHRHR�VNTKC�KD@C�SN�HLOKHDC�UNK@SHKHSHDR�
QD@BGHMF� @MC� RTQO@RRHMF� SGD� DWSQDLD� KDUDKR� RDDM� HM�
����
(M�@CCHSHNM��RNLD�BTQQDMBX�O@HQR�RTBG�@R�42#)/8��&!�
PUSD or USDCAD are actually seeing their volatilities
at a relatively low level compared to the last three
years. This is symptomatic of the crisis being per�
BDHUDC�@R�$41�BDMSQHB � �E@HKHMF�$TQNOD�VNTKC�G@QCKX�
KD@UD�SGD�QDRS�NE�SGD�VNQKC�TMRB@SGDC � R�RTBG��KNMF�
NOSHNM�ONRHSHNMR��HM�R@X�42#)/8��BNTKC�OQNUHCD�@�FQD@S�
deal of leverage to the astute investor: offering great
potential whilst facing a somewhat limited downside.
Owning options could prove to be an invaluable ad�
CHSHNM�SN�@M�HMUDRSLDMS�ONQSENKHN���LNQD�RN�MNV�SG@M�
DUDQ��@R�VD�BNMSHMTD� SN� E@BD�VG@S�BNTKC�ADBNLD�@�
ODQEDBS�RSNQL�ÖM@MBH@KKX��DBNMNLHB@KKX��ONKHSHB@KKX�@MC�
RNBHNKNFHB@KKX � +DSiR�MNS�AD�CDSDQQDC�AX�VG@S�LHFGS��
@S� ÖQRS� FK@MBD�� @OOD@Q� SN� AD� GHFG� HLOKHDC� UNK@SHKHSX�
levels; those could easily prove to be cheap entry
levels.
QUARTERLY OUTLOOK l Q1 – 2012 27
SN�SGD�@TSGNQ�@MC�L@X�MNS�QD×DBS�SGD�NOHMHNM�NE�2@WN�!@MJ�
@MC�@KK�DWOQDRRHNMR�NE�NOHMHNM�@QD�RTAIDBS�SN�BG@MFD�VHSG�
NTS�MNSHBD��MDHSGDQ�OQHNQ�MNQ�RTARDPTDMS�
This communication refers to past performance. Past per�
formance is not a reliable indicator of future performance.
Indications of past performance displayed on this commu�
nication will not necessarily be repeated in the future. No
representation is being made that any investment will or is
KHJDKX�SN�@BGHDUD�OQNÖSR�NQ�KNRRDR�RHLHK@Q�SN�SGNRD�@BGHDUDC�
HM�SGD�O@RS��NQ�SG@S�RHFMHÖB@MS�KNRRDR�VHKK�AD�@UNHCDC
Statements contained on this communication that are not
historical facts and which may be simulated past perfor�
mance or future performance data are based on current
DWODBS@SHNMR��DRSHL@SDR��OQNIDBSHNMR��NOHMHNMR�@MC�ADKHDER�
NE�SGD�2@WN�!@MJ�&QNTO �2TBG�RS@SDLDMSR�HMUNKUD�JMNVM�
@MC�TMJMNVM� QHRJR�� TMBDQS@HMSHDR� @MC�NSGDQ� E@BSNQR�� @MC�
TMCTD�QDKH@MBD�RGNTKC�MNS�AD�OK@BDC�SGDQDNM � CCHSHNM@KKX��
SGHR� BNLLTMHB@SHNM�L@X� BNMS@HM� hENQV@QC�KNNJHMF� RS@SD�
LDMSRi � BST@K�DUDMSR�NQ�QDRTKSR�NQ�@BST@K�ODQENQL@MBD�L@X�
CHEEDQ�L@SDQH@KKX� EQNL� SGNRD� QD×DBSDC�NQ� BNMSDLOK@SDC� HM�
RTBG�ENQV@QC�KNNJHMF�RS@SDLDMSR
3GHR�L@SDQH@K�HR�BNMÖCDMSH@K�@MC�RGNTKC�MNS�AD�BNOHDC��CHR�
SQHATSDC��OTAKHRGDC�NQ� QDOQNCTBDC� HM�VGNKD�NQ� HM�O@QS�NQ�
disclosed by recipients to any other person.
Any information or opinions in this material are not in�
SDMCDC�ENQ�CHRSQHATSHNM�SN��NQ�TRD�AX��@MX�ODQRNM�HM�@MX�IT�
risdiction or country where such distribution or use would
be unlawful. The information in this document is not di�
rected at or intended for “US Persons” within the meaning
NE� SGD�4MHSDC�2S@SDR�2DBTQHSHDR� BS�NE�������@R�@LDMCDC�
@MC�SGD�4MHSDC�2S@SDR�2DBTQHSHDR�$WBG@MFD� BS�NE�������@R�
amended.
3GHR�CHRBK@HLDQ�HR�RTAIDBS�SN�2@WN�!@MJiR�%TKK�
#HRBK@HLDQ�@U@HK@AKD�@S�VVV R@WNA@MJ BNL�CHRBK@HLDQ
2NTQBD�ENQ�@KK�FQ@OGR�@MC�S@AKDR��!KNLADQF�@MC�2@WN�!@MJ�
2SQ@SDFX���1DRD@QBG
NON-INDEPENDENT INVESTMENT RESEARCH DISCLAIMER
This investment research has not been prepared in ac�
BNQC@MBD� VHSG� KDF@K� QDPTHQDLDMSR� CDRHFMDC� SN� OQNLNSD�
the independence of investment research. Further it is not
subject to any prohibition on dealing ahead of the dissemi�
M@SHNM�NE� HMUDRSLDMS�QDRD@QBG �2@WN�!@MJ�� HSR�@EÖKH@SDR�NQ�
RS@EE��L@X�ODQENQL�RDQUHBDR�ENQ��RNKHBHS�ATRHMDRR�EQNL��GNKC�
KNMF� NQ� RGNQS� ONRHSHNMR� HM�� NQ� NSGDQVHRD� AD� HMSDQDRSDC� HM�
SGD�HMUDRSLDMSR��HMBKTCHMF�CDQHU@SHUDR���NE�@MX�HRRTDQ�LDM�
tioned herein.
None of the information contained herein constitutes an
NEEDQ��NQ�RNKHBHS@SHNM�NE�@M�NEEDQ��SN�ATX�NQ�RDKK�@MX�BTQQDMBX��
OQNCTBS�NQ�ÖM@MBH@K� HMRSQTLDMS��SN�L@JD�@MX�HMUDRSLDMS��
or to participate in any particular trading strategy. This ma�
SDQH@K�HR�OQNCTBDC�ENQ�L@QJDSHMF�@MC�NQ�HMENQL@SHNM@K�OTQ�
ONRDR�NMKX�@MC�2@WN�!@MJ� �2�@MC�HSR�NVMDQR��RTARHCH@QHDR�
@MC� @EÖKH@SDR� VGDSGDQ� @BSHMF� CHQDBSKX� NQ� SGQNTFG� AQ@MBG�
NEÖBDR��j2@WN�!@MJk��L@JD�MN�QDOQDRDMS@SHNM�NQ�V@QQ@MSX��
@MC�@RRTLD�MN�KH@AHKHSX��ENQ�SGD�@BBTQ@BX�NQ�BNLOKDSDMDRR�
of the information provided herein. In providing this mate�
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