Jyske Invest Far Eastern Equities

Market Comments, Q4 2011

The sentiment improved in Q4

Review

The debt crisis in Europe, the Arab Spring and the nuclear disaster in Japan all contributed to setting the stage for the equity market in 2011. In the Far East, the countries struggled with high inflation from the beginning of the year and Thailand was later hit by devastating floods. Furthermore, in August, Jyske Invest’s risk model indicated increased risk that our investment process might come under fire and we therefore opted for a risk reduction in the fund. The last part of 2011 was characterised by uniform fluctuations of Far Eastern equities within the sectors, making it even more difficult to generate returns by company selection. In general, 2011 was a difficult year for active investors. The fund’s return came to -17.67% in 2011, which is 0.37 percentage point lower than that of the region.

Despite fair returns in the region in Q4 (+3.29%), the return could not match that of the global equity market (+7.18%). The developments in the Far East cover major differences between the returns of the countries, with India standing out negatively recording a fall of 14.31%. 2011 was a poor year for India which was dominated by a number of scandals, political inactivity, continued high inflation and decelerating growth.

For Q4 the fund generated a return of 1.74%, underperforming the benchmark by 1.55 percentage points. Our Indian equities were strongly represented in the list of loss-making equities in the quarter, including Sintex, Axis Bank, Bank of Baroda and Mahindra & Mahindra.

In Q4 several countries opted for a relaxation of their monetary policies to support growth and particularly Indonesia’s latest interest-rate cut of 0.5 percentage point was surprisingly aggressive. China succeeded in fighting inflation and the country is slowly stimulating the economy, by lowering the reserve requirements for the banks. In Thailand the situation is under control following the devastating floods, among others.

Outlook

While fighting inflation was a political top priority in the Far East in 2011, we expect the region to give top priority to economic stimuli in 2012. The transition from tightening to relaxation may prompt a more positive investment environment.

We expect growth in the Far East to slow down slightly but given a real growth of around 7% in 2012, the region remains the growth engine of the global economy. Growth in the Far East will to a greater extent be propelled by the region itself via the countries' intraregional trade and increased private consumption. In other words, the Far East will be more resistant to fluctuations in exports to the Western countries.

The companies in the Far East are in a good position. The companies generally have less debt and they deliver a fair level of return on equity just as they are expected to realise growth rates exceeding the global average. Nevertheless, the equities in the Far East are not overvalued. Following a poor 2011, we therefore have a more positive view of the region which should be able to deliver returns above the level of the global equity market.

In early 2012, the global economy is still facing a number of large challenges which may have a considerable impact on the market returns in the coming year. Much depends on political measures, which means that 2012 may be unpredictable for investors. When expectations are low, there may be room for positive surprises – but it takes a shift in the global economy and the market psychology.

One of the major question marks for 2012 will be the development in the Chinese housing market which is allowed to be cooled – but housing prices must not decline to such a great extent that the Chinese economy is jeopardised. With respect to risk investors should also note that the Far Eastern markets tend to fluctuate more than the developed equity markets and that political measures are more unpredictable.

Please note

Past performance is not a reliable indicator of future results. The value of and return on your investment may fall, and you may not get back the full amount invested. Investment in small and emerging markets may prove more volatile than investment in other markets. An initial charge is usually made when you purchase and sell units. The fund may invest in instruments denominated in various currencies. You should be aware that changes in exchange rates may have an adverse effect on your investment. This may also be the case if USD is not your base currency.

Information in this text should not be regarded as investment advice, and investors should consult their own investment and tax advisers before buying or selling.