4newsletter Q1 2016

www.1cornhill.com
Q1 / 2016
VIEW FROM THE DOME
EMERGING MARKETS:
RIDING THE POST
SELL-OFF RECOVERY
MARKET UPDATE:
APRIL 2016
CHINA:
NO NEED TO BE SO GLUM

Contents
2 Quarterly Review
QUARTERLY REVIEW
3 Word from The Director
4 Emerging Markets:
Riding The Post Sell-Off Recovery
8 China: No Need To Be So Glum
10 Market Update: April 2016
15 Sales Contacts
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Cornhill Management’s partners.
The volatility that marked 2015 plagued markets again in
the first quarter of the year. But although the first half
of the quarter was a chastening one for equity markets
with many indices seeing some dramatic falls, sentiment
improved markedly from mid-February onwards and global
stocks clawed back most of their previous losses to finish
the quarter roughly where they had started.
Fears over global growth and tumbling oil and commodity
prices were at the heart of major sell-offs in January and
February. There were worries that the US might be heading
into recession and that the Chinese economy was heading
for a very hard landing, while there seemed no end in sight
for oil price falls.
But better US data and a broadening consensus that the
Chinese economy is slowing as it transitions rather than
heading for a hard landing, plus a recovery in oil prices
helped calm markets. More dovish sounds from the Federal
Reserve, which has scaled back its projected rate hikes
to just two more this year from a previous four, as well
as further stimulus from the European Central Bank also
helped improve sentiment. The Bank of Japan also made a
move into negative rate territory and, taken together, the
banks’ actions seem to have been seen to take some of the
pressure off the global economy.
Emerging market stocks were among the major
beneficiaries of the better climate towards the end of the
quarter, helped up by some USD weakening and investors
looking to developing markets for bargains. Emerging
market stocks were among the best performers in March.
The quarter also saw good returns for most fixed income
sectors, including emerging market debt which had some
notably positive returns in local currency.
But while the quarter finished encouragingly amid seemingly
improving sentiment, some nagging concerns remain. The
global growth outlook is still muted and data out of Europe
remains very mixed. Worries over China are also unlikely to
disappear overnight and emerging market stocks look as if
they will need improving growth prospects to sustain longerterm
advances.
Overall, more volatility is likely in markets in the coming
quarter, but the overall trend appears to be an upward one.

3
AN EXCITING YEAR AHEAD
With markets starting the year the way they have, it would be
no surprise if some investors are rethinking their portfolios,
especially if they have exposure to emerging markets. Yes, it’s
not been a great few months for emerging markets - in fact
it’s not been a great last year for them - and reading the latest
market headlines, an investor might begin to wonder if it’s
time to pull out of emerging market equities completely. But
that could prove to be a big mistake.
Emerging markets are the focus investment markets for many
of our products and the portfolios of most of our financial
products have some exposure to emerging markets. This
is because we have always seen the potential of emerging
markets and although emerging market equities have had a
hard time recently, our longer-term view on their potential
has not changed and for investors, things are actually much
brighter than many headlines would suggest.
As you can read in this latest edition of our Newsletter, the
reality is that in many of the emerging markets our products
invest in, fundamentals remain good, valuations are currently
attractive and history suggests a period of heavy falls is often
followed by extremely outsized returns.
While no one is denying that the last year has been a difficult
one for emerging markets – or claiming that there is going to
be a massive improvement overnight – many of our partners
say that there are excellent opportunities in emerging
markets at the moment and as has been proved in just the
last ten years, what goes down must come up, and sometimes
dramatically so.
Emerging market equities were among those hardest hit when
the financial crisis struck. But in the next year, stocks in some
of the developing regions and countries we invest in, such as
India and Latin America, were up 100% with massive gains
in South-East Asia, China and Africa as well. Those who kept
hold of their stocks through the difficult times were rewarded
handsomely, as were investors who saw the opportunities and
potential on offer and moved into those markets when others
had fled.
History may not be about to repeat itself and it would be a very
brave person who said that those same markets are going
to rack up similar-sized gains once the dust of the recent
emerging market sell off settles. But it takes nothing but
common sense to see that opportunities are there and the
potential gains, as the past has shown, can be huge.
Now would be a good time to remind investors of this.
Derek Chambers,
Chairman, Cornhill Management

4
EMERGING MARKETS:
RIDING THE POST SELL-OFF RECOVERY
History Suggests Outsized Emerging Market
Rewards After Heavy Falls
Investors tracking recent market headlines and poring over
data releases from around the globe are more than likely to be
considering their portfolio’s exposure to emerging markets (EM)
at the moment.
EM equities and currencies took a battering last year amid a
commodities rout, oil price falls, a strengthening USD and the
increasing inevitability of a US rate rise.
On top of this, very grave fears over the state of the Chinese
economy and what a slowing growth outlook might mean for
other developing economies added to increasingly gloomy
sentiment on the prospects for EMs. The MSCI EM Index (USD)*
was just under 15% down for 2015.
And the start of this year has done little to improve this
sentiment. Chinese stocks plunged in January as the extent
of the Chinese economic slowdown became clearer and signs
the global economy is continuing to struggle have led to lower
growth predictions for emerging economies and warnings from
global financial institutions such as the
IMF that 2016 will be a “challenging”
year for EMs.
comes in Latin America. Local stocks have plunged over the last
17 months, dropping 51%. But the economies in the region have
continued to grow, posting an annualized growth rate of 2.4%
over the last three years. They also have low levels of public debt
and rising real wages have seen consumer purchasing power and
consumption go up in recent years.
The picture for many of the industries across the region is a
bright one - Mexico has one of the world’s most competitive
manufacturing sectors and has become a key global autoproducer.
The team at INCA Investments LLC, Latin American investment
specialists and portfolio managers for the WIOF Latin American
Performance Fund, believe now is an excellent time to invest in
the region’s equities.
Fernando X Donayre, CEO of INCA Investments, said: “We believe
the current market conditions offer an attractive opportunity
to invest in Latin American stocks. Our view is supported by an
outlook for solid economic growth for the region and attractive
valuation levels for best in class franchise companies.”
MSCI EM Latin America NR USD
But despite this apparent slew of bad
news, analysts and fund managers
working in emerging market regions say
that investors should look beyond the
current short-term headlines.
They say that while economic conditions
may not be at their best and that
many markets have seen heavy falls
of late, EM fundamentals remain solid
and the current climate offers good
opportunities for investors considering
EM stocks.
One of the best illustrations of this
120%
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5
He also points to the parallels with
recent history and highlights the
enormous recovery made by Latin
American stocks – the MSCI Latin
America index gained 104% in 2009 -
after markets tumbled in 2008 following
the financial crash.
120%
100%
Performance in USD
DJ Titans Africa 50 TR USD
“To put Latin American markets’ recent
decline into perspective it is important to
note that during the recession of 2008,
a period of global economic concern
generally considered almost unrivalled in
living memory, Latin American markets
were the worst performing markets in
the world and they fell 61% from peak to
trough.
80%
60%
40%
20%
2007 - 12
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“It is noteworthy that once the market
eliminated the probability of a global
depression, Latin American markets increased by 104% in 2009.
As such, we believe we are currently experiencing a very similar
opportunity.
“The significant drop in stock prices offers us the opportunity
to invest in franchise companies at
attractive valuation levels. Our positive
long-term view for the stocks in our
portfolio is centred on our belief
that these franchise companies can
significantly increase their earnings and
valuations from current low levels.”
Another emerging region offering similar
opportunities is Africa. Among emerging
markets, the continent has always been
an enticing prospect for investors. As
Peter Townshend, portfolio manager
for the WIOF African Performance Fund,
says: “Africa is the last great frontier
for investing. The continent has over 1
Fernando X Donayre,
CEO of INCA Investments:
“….during the recession of 2008, a
period of global economic concern
generally considered almost
unrivalled in living memory, Latin
American markets were the worst
performing markets in the world
and they fell 61% from peak to
trough. It is noteworthy that
once the market eliminated the
probability of a global depression,
Latin American markets increased
by 104% in 2009.”
billion inhabitants, is growing faster than anywhere except Asia
and has a young, rapidly urbanising population and emerging
consumer class.”
But just like other EMs, African markets have struggled over
the past year. The MSCI Emerging Frontier Markets Africa Index
(USD) closed 2015 down 25%. However,
the falls mean that in some markets,
especially those in which the WIOF
African Performance Fund invests, there
are some excellent opportunities.
Addington Jerahuni, part of the
WIOF African Performance Fund’s
portfolio management team at Sanlam
Investments, explains: “While the
immediate short-term could be a
challenge, with the emerging markets
sell-off, we believe that once the dust
settles, African markets should start to
see an uptick.
“Corporate earnings remain intact in

6
Egypt and Kenya…some banks in Nigeria
are now trading at 50% discount to
tangible book value, while offering
attractive ROEs in the mid-20s which we
feel is good value. The Egyptian market
is now trading on 6.5x price to forward
earnings, which is below the fair market
long-term P/E of 11x. We believe there
is significant value in this market for our
investors.”
Addington Jerahuni, portfolio
manager at Sanlam Investments:
“While the immediate short-term
could be a challenge, with the
emerging markets sell-off, we
believe that once the dust settles,
African markets should start to
see an uptick.”
He adds that as part of preparations
for the formalization of the Asia
Pacific Economic Co-operation (APEC)
trade forum promoting free trade,
“governments in Indonesia, Malaysia
and Thailand are embarking on an
increase in fiscal spending to improve
infrastructure networks and connectivity
as they prepare themselves for the
opening of more trade routes”.
Again, recent market history shows that sustained heavy falls in
African markets have been followed by a strong recovery. African
stocks, as proxied by the DJ Titans Africa 50 Index, fell 49% in
2008. But they posted gains of 34% the following year and 25%
in 2010. Meanwhile, heavy falls in 2011 of 22% were followed by
gains of 23% in 2012.
The situation is little different in the emerging markets of South-
East Asia. Local stock indices finished 2015 lower overall with the
MSCI South-East Asia Index losing 18% for the year as local stocks
were not spared in the general EM sell off. With China a dominant
trade partner and seen by many investors almost as a proxy for
the region’s growth, the problems of the Chinese economy also
continue to weigh on sentiment towards local markets.
But, as Ken Goh, portfolio manager for the WIOF South-East
Asia Performance Fund explains, the long-term picture is
encouraging. He said: “In the near term, ASEAN markets are
likely to face challenges in the form of volatile commodity prices,
slower growth prospects in China and continuing soft export
markets. Earnings growth still remains weak across the ASEAN
region so expectations that an earnings-led recovery will take
place still remains a remote possibility for now.
“In the longer term, we are positive on ASEAN in general as we
believe the region still offers some of the better growth rates
in Asia.”
Once again, market records show that equities in the region
manage to make up lost ground soon after extended losses.
After the FTSE Asean 40 Index dropped 49% in 2008, it rallied a
whopping 65% in 2009 and a further 25% in 2010. Another poor
year in 2011 when stocks lost more than 6% was followed by a
16% gain in 2012.
But it is not just South-East Asia where opportunities for
investment lie. Despite local equity indices delivering negative
returns last year, investor sentiment on India was more positive
than towards other emerging markets.
As Ashutosh Garud, part of the portfolio management team at
Reliance Wealth which is the portfolio manager for the WIOF
India Investment Fund, said: “Amid the global chaos… India
seems to be an oasis of growth in the world.”
While many emerging market economies have struggled as
oil and commodity prices have tumbled, India has actually
benefitted.
Garud points out: “Externally, commodities, especially crude prices,
have favourably supported India’s fiscal position, thereby providing
an arsenal to the government to kick-start the capex cycle and
attract massive foreign capital to partially fund this cycle.”
At the same time, investors have welcomed important domestic
economic reforms.
120%
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80%
60%
40%
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Performance in USD
MSCI India PR USD
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“Government measures and reforms
in the last year, such as direct benefit
transfer of subsidies (DBT), energy
reforms, bank recapitalization,
allowing FDI in several sectors,
and increased expenditure on
infrastructure coupled with a declining
interest rate scenario are expected
to provide an environment in which
India will be able to outperform major
developing economies in the future,”
says Garud.
Indian stocks have not been immune
to some of the global market dips over
the last year or so and the most recent
domestic corporate results season was
devoid of any major positive surprises.

7
But, says Garud, now is a good time to
pick up Indian equities.
MSCI China PR USD
“The markets have already corrected
to price in the result season and global
volatility. We feel near term volatility
could provide an excellent opportunity
to build a portfolio for the longer term,”
he says. “We remain bullish on India in
the longer term, as it remains one of the
fastest growing economies in the world
and in the coming years, India will be in
a good position to reap the benefits of
recent government initiatives.”
120%
100%
80%
60%
40%
Performance in USD
And like equities in many other emerging
markets, Indian stocks have historically
recovered strongly after a period of heavy
falls, often posting outsized returns. In
2008, the MSCI India index closed the
year 65% down. But in 2009 it had a return of 101% and in 2010 it
gained a further 19%. 2011 was a poor year and local stocks lost
39%. But they finished 2012 up 24% and after losing 5% again in
2013 the index gained 22% in 2014.
20%
2007 - 12
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setting a minimum economic growth benchmark of 6.5%, plans
to reform the running of China’s state-owned assets, while
throughout last year authorities cut rates, reduced the cash
reserve requirement for banks and upped state spending on
infrastructure projects, among others.
One of the most important factors in the outlook for emerging
markets in both the near and longer terms, though, is the
Chinese economy. As the engine of global growth in recent years,
its slowdown has already had an effect on economies and stock
markets around the world.
Disappointing macro data was behind a dramatic plunge in local
stocks in January which also dragged other markets around the
world down. Beyond those individual falls, negative perceptions
of China’s growth path are pulling down expectations for
economic and share performance in other emerging markets,
including its Asian trading partners and commodity suppliers in
Latin America and Africa.
But while China’s growth is slowing, the country’s 6.9% GDP
expansion last year was still way above that of most countries
and far outstrips the world’s largest developed economies.
And experts point out that while there may be no more doubledigit
growth rates in China, this is not a sign of economic
weakness. They argue that lower growth rates in China are likely
to become the new norm, but that this is nothing bad and is to
be expected as the Chinese economy transitions to a new, more
sustainable domestic consumption-led model.
At the same time, measures have been taken to help local stock
markets. These include direct intervention by regulators with
relation to trading accounts, IPO investor application processes
and circuit breakers. At the same time, Beijing has made it
clear it wants to tackle problems with corruption and corporate
governance – seen as a major issue for many investors. A
clampdown and investigation across the finance industry that
began last year has been seen by many as a positive move which
will help local markets.
And like those in many other emerging markets, Chinese stocks
have historically managed to make up lost ground when downturns
have been followed by gains soon after. Chinese markets were not
immune to the global crash in 2008 and the MSCI China Index closed
the year down 52%. But it gained 61% over the next two years.
There was a 22% drop in 2011, but once again stocks recovered,
posting gains of 24% over the next three years.
While our portfolio managers are keen to outline the
opportunities on offer in the current climate, they point out
that in the near term, markets will continue to face challenges.
Commodity prices are expected to remain volatile in the
immediate future and Chinese growth concerns will still weigh
on some markets going forward.
Ian Lancaster, founder of Cogent Asset Management and
portfolio manager for the WIOF China
Performance Fund, says a growth rate of
around 7% is “sustainable”.
Indeed, Beijing has already implemented
a number of measures to ensure the
economy stays strong, including recently
Ashutosh Garud, Investment
Analyst at Reliance Wealth:
“Amid the global chaos… India
seems to be an oasis of growth in
the world.”
But history has shown that large falls are
often followed by sharp rises - offering
the potential for handsome returns
for investors buying at the right time
and taking a longer-term view of their
investments.
*All equity index returns cited are in USD.

8
CHINA:
NO NEED TO BE SO GLUM
In this latest interview with selected fund managers, Ian Lancaster, CEO of Cogent
Asset Management Ltd and portfolio manager for the WIOF China Performance
Fund, tells us why investors are being overly pessimistic about China’s growth
prospects and how Beijing’s massive stimulus measures are already having a
positive effect on the economy.
A lot of the economic news coming out of China these
days appears to be very negative. Are people being
unnecessarily pessimistic about the economy, especially
as its growth rate is still much, much higher than that of
other countries?
The economic news from China has undoubtedly been
negative. Monetary tightening and a reduction of fiscal
stimulus in 2015 operated in the expected way with lower
consumer expenditure and lower industrial production.
We must remember that the previous monetary and fiscal
stimulus was somewhat connected to the 2008-9 financial
crisis, whereby China was “lifting its weight” to stimulate
the word economy. As this stimulus was a crisis response,
of course the authorities needed to rein in the super
normal economic growth. Debt was getting high and we
read many anecdotal stories such as those of the “ghost
cities”. There are risks of course in slowing the economy
down gradually, but I believe that investors are being
unnecessarily pessimistic. A sustainable growth rate of
6-7% would be the envy of developed nations!
Even though the economic indicators for any given
country may not look great, that does not always
necessarily mean that its stock markets are going
to deliver poor performance. Do you think that is the
case with China and do you think investors often
confuse economic performance with potential equity
performance?
There is low correlation between GDP growth and stock
market performance. The main rationale for this is that
reported GDP is backwards looking and stock markets are
forward looking. However, when the environment moves
from growth to slow down, it is likely that stock markets
will correct abruptly. This is because investors tend to
wait until there is evidence of an economic slowdown
before taking bets off the table, even more so in markets
dominated by private investors. So as the economic
news becomes negative the gloomy mood escalates as
the market falls. A self-perpetuating stock fall ensues
until valuations reflect the risk of a recession which is
the worst possible outcome. This is usually the buying
opportunity, as no central bank targets a recession. If
the worst possible outcome is not experienced then
valuations will be too cheap.
For an investor thinking about investing in the Chinese
market but who has seen data pointing to an economic
slowdown and the recent very heavy falls on local stock
exchanges, what reassuring advice would you have for
them?
During a slide such as this, it is hard to know the real
valuation of the market. Earnings forecasts are constantly
revised downwards so the actual valuation of the market is
hard to pin down. First, experience would suggest that when
the sliding market is headline news, and the conversation
at dinner tables, then this is the point of maximum negative
sentiment and a buying opportunity. Second, it is far wiser
to make regular investments during the down period rather
than invest a lump sum and try to time the bottom. Third,
China is not a normal economy. It is managed by the state

9
which could quite frankly put the stock market at whatever
level it wishes. With the one hundredth anniversary of the
communist revolution looming, I doubt that economic and
stock market collapse is what Party officials want as a back
drop to their celebrations.
argued this is good for the economy and markets but
others have said it has actually hurt economic growth.
What is your view on this and how have markets reacted
in general to high-profile cases of investigations into
corporate executives and even local regulators?
With the Chinese economy transitioning and local
markets seemingly still volatile, what benefits does the
WIOF China fund have for investors that other China
equity funds do not?
The WIOF China Performance Fund is not mainland Chinacentric.
Around 50% of the investments are domiciled in
mainland China, whilst around 25% each are domiciled
in Taiwan and Hong Kong. As such there is some
diversification away from the problems in the mainland.
In addition the fund is managed in a quantitative manner.
There is a constant rebalancing of the portfolio towards
those companies with the best combination of price
and earnings momentum and low valuation. As the
environment is changing so rapidly, it is harder than ever
to pick companies based on “fundamentals” so we prefer
to invest based upon the numbers rather than guesswork.
Over the last nine months authorities have introduced
some massive stimulus measures for the economy. What
kind of effect are they going to have on markets as their
full economic impact starts to be felt?
The stimulus is already having an effect. For example, car
sales are already recovering. Since hitting a bottom of 1.3
million units sold in July, sales have increased each month
since then, surging to 2.4 million units sold in December.
The impact will be positive and as the data turns positive
the risk of recession will be discounted as discussed
earlier with a likely rise in the markets.
Over the last 18 months market authorities in China
have made a number of moves to improve regulation of
local markets. How do you think these have, or will, help
investors?
Mistakes were made and maybe we should have expected
this as capital markets are not exactly pillars of a
communist economy. Certainly the market suspension
triggers were ill thought out. In addition the market
was driven to very high levels by margin lending. The
authorities were slow to realize the amplification impact
of margin buying. Lessons were learnt and the regulatory
control will improve.
The government’s anti-corruption drive has spread well
into the corporate and financial sectors now. Some have
An anti-corruption culture can only be a good thing.
Corruption leads to misallocation of resources, and is
damaging to the economy. When corporate corruption is
discovered there will be a negative effect on the company
involved, but this is for the greater good.
Cogent also manages the portfolios for Cornhill’s WSF
range of funds, including the award-winning WSF
Global Equity Fund. Apart from the obviously different
investment universes, do you use the same stock
selection process for both the WSF funds and the WIOF
China fund?
The commonality between the investment processes
of all the funds that Cogent advises is that they employ
quantitative investment strategies. We firmly believe that
this leads to the best returns over the medium term. For
the WIOF China Performance Fund we systematically sift
through thousands of data items in the fund’s investment
universe to identify companies with characteristics that
give them the potential to outperform its benchmark. A
systematic process like this derives its strength via its
rigor. The same criteria are searched each month and
the optimal portfolio is constructed. We do not interview
Chief Executives, who are always bullish when talking
about their company’s prospects, and we do not listen
to analyses from brokers who are often working for
corporate clients rather than investors. We look at the
numbers and act accordingly.
You were in charge of the WSF funds before you took on
the portfolio management role for the WIOF China fund.
Was there anything from your experience with the WSF
funds which helped you with managing the WIOF China
fund’s portfolio?
The success of the WSF funds demonstrates the power
of quantitative investing. In essence the statistical
techniques used in determining investments in the WIOF
China Performance Fund are similar, but tailored. As one
would expect the criteria that developed market investors
use to evaluate investments and the criteria that
emerging market investors use to evaluate investments
differ. So we took the criteria used in managing the WSF
funds and determined which worked best for the Chinese
markets.

10
MARKET UPDATE: APRIL 2016
This regular quarterly overview of the world’s financial markets is kindly provided by the Cornhill
Management Advisory Service (CMAS) team. To find out more about the CMAS team and the service
they offer please read the article in this edition of View from the Dome or go to www.1cornhil.com
The start of 2016 saw market expansion
enter its seventh year; U.S. GDP grew for
the 20th straight quarter and continues to
expand despite increasing volatility. Equity
markets in the US and UK are now back to
levels seen at the beginning of the year,
Europe remains slightly down and Asian
markets appear to be stabilising.
In March we saw the majority of major markets range trading,
as uncertainties started to recede as a result of further stimulus
from the ECB and Janet Yellen’s dovish tone. The Fed’s further
embracement of a more holist view of international factors
surprised and mollified the markets, as did the firming of oil
prices and reports of lower capital outflows from China.
As U.S. inflation and employment trend higher the Fed appears
to be taking on a third data dependent view as it focuses its
attention on international factors such as global growth, the
strengthening US dollar and Chinese growth. On this basis we
believe that the Fed will take a cautious stance with further
increases in interest rates in 2016.
The more holistic view may though come at a cost, as the factors
that affect global growth are difficult to manage and uncertainty
and unpredictability on the global stage will mean investors must
also be cognitive of non U.S. domestic factors that may affect
U.S. interest rate movements in future.
It is apparent that the global economy is still in recovery mode
and central bank policy around the globe is critical for financial
conditions and risk appetite in general. With central bank
support recession risk remains low for now, as the severity of the
last recession was so severe that it is taking longer for economic
excesses to build up. This situation is likely to continue as we see
a period of low inflation and subdue growth though 2016 /2017.
For global growth to get back to trend supply side structural
reform needs to be undertaken e.g. deregulating product
and service, reforming labour markets, supportive fiscal and
monetary policies to offset any dampening effect in the short
term. Growth friendly fiscal policy should also be adopted,
which shifts the composition of revenue and expenditure by
increasing the efficiency of public expenditure, Infrastructure
and innovation investment. Lastly, continuing monetary policy,
which has been supportive of the global recovery, however it
is clear that monetary policy can no longer be the alpha and
omega to recovery. Indeed, it will be much more effective
with support from structural and fiscal elements along the
aforementioned lines.
Whilst we remain optimistic that valuation will be supported by
the central banks we are wary that current nominal growth is
too low and valuations are too high to ignore worsening financial
conditions and increasing tail risks. The U.S. and Europe look
set to grow slightly above trend, but persistent weakness in
emerging markets (EM) will weigh on global growth. The good
news is that the worst of the EM contraction is likely behind us;
but equally, excess global capacity and debt continue to subdue
markets. It is likely that we will see broad valuations in developed
markets capped near to current levels and therefore sector and
geographical allocation will be more important in 2016 / 2017
than in previous years. Asian and EM will need further signs that
the Chinese economy is stabilising and both manufacturing and
service growth targets are been met, before we will see a major
change in market sentiment in these markets
US MARKETS
US manufacturing has been fairly weak overall with the
manufacturing survey signalling contraction since the latter part
of 2015 and industrial production actually contracting. However,
if you exclude the parts most exposed to the oil price collapse the
manufacturing numbers are relatively strong. We have recently
seen new orders component of the ISM manufacturing survey
bounce back into positive territory and regional manufacturing
surveys have also shown some signs of improvement. It should
be noted manufacturing only accounts for 14% of U.S. GDP and,
importantly, the non-manufacturing new orders component
of the ISM survey continues to indicate expansion in the much
larger services sector.
The low U.S. unemployment rate does, however, suggest we
are getting closer to the end of this economic cycle, even if it
looks unlikely to end this year. Investors should be mindful of a
deterioration in the labour market numbers and housing market
as they are fairly good indicator that the cycle may be ending.

11
Currently though there still appears to be plenty of room for
recovery in the housing market which leads us to believe that we
still have some time to go before we see the cycle end.
Are view on U.S. market is overweight with a bias towards
large cap stocks as SME’s are likely to underperform in a rate
tightening scenario. Sector allocation is important and we
therefore favour technology, consumer consumption and
healthcare with a view of quality vs cheapness and relative value.
US - We are overweight US Large Cap
EUROPEAN MARKETS
The worst of the eurozone crisis is probably behind us. Greece
has made it clear it doesn’t want to leave the euro, allowing
investors to focus on the improving European economy and
company earnings. The European Central Bank (ECB) has
committed to printing EUR 80 billion a month, has cut the
deposit rate further and is now buying corporate bonds.
After a long period of stagnation, company earnings now have
plenty of room to rise as the economic recovery gets under
way, aided by low borrowing costs, the weak euro and the
lower oil price.
European equities have sold off sharply since their 2015 peak,
however, if you exclude the impact of the fall in the oil price on
energy company earnings, European earnings have continued to
rise strongly and there is still room for further earnings growth.
Company margins are well below historic levels and those seen
in the U.S. Any European revenue growth should be amplified
into robust earnings growth as margins expand. With lower
borrowing costs European equities should benefit from the
continued economic recovery.
Unemployment is falling in Europe but given it is still high; it
has plenty of room to fall further. The market already knows
unemployment is high so continued falling unemployment
should support both the economy and markets.
Retail sales and industrial production data is also recovering,
showing that the recovery is broad based. Currently there is no
sign of a tightening in European lending standards which tend
to tighten prior to recessions. Recent surveys have identified an
increase in demand for loans as the economy grows and the cost
of borrowing falls. Loan demand tends to leads the economic
cycle and any improvement in lending normally indicates that
stronger economic growth in the future is likely.
With increased demand for loans and the ECB ensuring a very
cheap and plentiful supply of money for banks to lend, lending to
firms and households should continue to improve, which should
further stimulate the eurozone economy.
We are overweight European Equities
with a bias towards SME’s

12
UK MARKET
The UK economy continues to recover, with recession risk
low. Employment levels are at a record number and consumer
confidence is high which has resulted in retail sales figures
growing strongly. However industrial production has been
weak recently and business investment intentions are falling
in the manufacturing sector. Whilst this is of some concern, it
is not uncommon to see falls in industrial production and the
risk of an outright recession is unlikely as contractions in the
manufacturing sector (only 10% of GDP) tend not to cause
recessions. So long as the larger service sector remain healthy
the UK economy should continue to expand.
UK equities have sold off sharply since their 2015 highs mainly
driven by commodity price falls. The fall in commodity prices has
been caused by oversupply—not weak economic demand and it
is important to understand that such falls benefit consumers and
companies who use rather than produce them. If you exclude
the impact of the fall in commodity prices on mining and energy
companies, UK earnings are in better health.
UK equities are not expensive relative to their historic average
price-to-earnings (P/E) ratio and offer a very attractive dividend
yield relative to other developed equity markets. Should we see a
commodity price rebound, UK equities would benefit more than
most other markets
Brexit –
It is estimated that if the UK did vote to leave the European
union, UK growth could be reduced by as much as half over the
coming few years. Rather than growing at about 2% a year the UK
would probably only manage about 1% growth for a few years, as
uncertainty around the eventual outcome of negotiations about
the UK’s future relationship with the EU discouraged or delayed
investment and trade. Other things being equal, interest rates
would go up less quickly than otherwise as the economy would
be weaker, Sterling would likely fall, perhaps quite significantly.
Markets do not like uncertainty, so it is likely that once the result
is know the UK currency and bond / equity markets will begin
return normality.
Continued economic recovery combined with undemanding
valuations and a high dividend yield could provide support for
UK equities. Short-term volatility arising from concerns over the
European Union referendum could provide long-term investors
with attractive entry points into UK equities. However valuations
are not likely to increase greatly until the outcome of the
referendum is known. If the UK did vote to leave, in the short term
the UK and European markets are likely to respond negatively
with Sterling and the Euro coming under further pressure.
We are neutral on UK equities
JAPANESE MARKET
The ongoing appreciation of the yen is likely to add downward
pressure on the external sector and threaten corporate profits.
Despite rising wages, households’ appetites remain sluggish,
which is hindering any economic recovery. On the upside, the
possibility of further monetary and fiscal stimulus has the
potential to boost growth. Analysts see GDP expanding 0.7% in
2016, which is down 0.2 percentage points from last month’s
estimate. For 2017, we see growth at 0.6%.
According to the Bank of Japan’s quarterly TANKAN business
survey, sentiment among large manufacturers deteriorated
sharply in Q1 and hit a nearly-three-year low. The index fell from
Q4’s 12 to 6 and came in below the reading of 8 that markets had
expected. That said manufacturers’ sentiment remains above the
0-threshold, which means that optimists outnumber pessimists.
Business conditions were hit by a strong yen and tepid global
demand and cast doubts about the ability of Abenomics to
rekindle economic growth.
Confidence in non-manufacturing industries declined in Q1,
falling from 18 in Q4 to 13 and marking a six-month low.
Rising global uncertainty and faltering demand are prompting
large enterprises in the manufacturing sector to become more
pessimistic about the country’s economic outlook in the next
three months. The forward-looking forecast index fell from Q1’s
7 to 3 in Q2, which represented the lowest level since Q1 2013.
Meanwhile, large manufacturers forecast that the Japanese yen
will average 117.5 JPY per USD in the second half of the fiscal
year 2016 (ending March 2017).
We remain underweight Large Cap and neutral SME’s
CHINESE MARKET
In China, the latest data continues to show the economy
transitioning away from manufacturing and towards services and
consumption. The rate of economic growth is slowing gradually,
but the economy is not collapsing. Industrial production growth
has slowed to 5.4% y/y and retail sales continue to grow rapidly
at over 10% y/y. The economy has rebalanced away from
manufacturing and towards services since the financial crisis.
The slowdown in the manufacturing part of the Chinese economy
is therefore less of a drag given the rapid growth in the nonmanufacturing
part of the economy.
The Purchasing Managers’ Index (PMI) in March rebounded from
February’s multi-year low of 49.0% to 50.2%, according to the
National Bureau of Statistics (NBS) and the China Federation of
Logistics and Purchasing (CFLP), which publish the index. This
overshot the 49.3% that market analysts had expected and
represented the highest reading in nine months. As a result,
the PMI is now sitting above the 50% threshold that separates
contraction from expansion in the manufacturing sector. We
see GDP expanding 6.5% in 2016, which is unchanged from last
month’s projection and 6.25% in 2017.
The economic reality is probably that China is growing at a
slightly less spectacular pace than previously and is unlikely to

13
have a hard landing. The recent rapid growth in Chinese money
supply suggests that Chinese growth is unlikely to collapse in the
near future and could even surprise to the upside in the short
term. That said, support from authorities via cheap credit, strong
investment and a loose monetary policy has the potential to
exacerbate economic imbalances in the medium and long term.
We are neutral on Chinese equities
EMERGING ASIAN MARKETS (ASEAN)
In August of 2015 we saw Asian equity markets fall despite
many countries having strong economic fundamentals. A
number of Association of Southeast Asian Nations (ASEAN)
have built up large foreign exchange reserves and have adopted
flexible exchange rates to protect themselves from a repeat
of the balance of payments crisis that they experienced in the
late 1990s. We therefore believe that the long-term potential
for ASEAN equities remains high, especially now that equity
valuations are low.
Growth in the ASEAN inched up in the final quarter of 2015. The
associations economies accelerated from a 4.5% expansion in
Q3 to a 4.6% increase in Q4. The pick-up partly reflected strong
momentum in Indonesia fueled by government stimulus, as well
as solid expansions in the Philippines and Vietnam.
Despite the slight acceleration in Q4, growth in the ASEAN region
stalled in 2015 at the lowest level since 2009. The economic story
was dominated by external headwinds, especially weak demand
from China and the low-commodity-price environment. At the
outset of 2016, these factors look likely to linger and weigh on
growth prospects again this year.
To boost growth, some governments in the region have turned
to stimulus, such as Indonesia and Thailand. However, in
Thailand, although the government’s measures seem promising,
implementation has been slow. In Indonesia, the low-oil-price
environments, along with a delay in an important tax bill, are
squeezing the government’s revenues, which could affect
stimulus measures going forward. The government is set to
review the budget in May and these realities will likely be taken
into account.
We are overweight ASEAN
EMERGING MARKETS EX – ASIA (EM)
EM’s markets have performed badly in the past two quarters
as many macro and micro issues have led to unfavourable
conditions in many EM countries. The start of US Federal Reserve
interest rate hikes, the changing growth picture in China, falling
commodity prices, and political instability in some of the major
economies, including Brazil, Turkey and Russia have affected the
markets. It’s should come of no surprise that the MSCI Emerging
Markets Index has lost 12.5% since the start of 2015, compared
with a 3.6% fall for the MSCI World (DM) index. Many of these
problems are not actually dissipating but current EM equity
prices meanings that they should not be ignored.
EM equity outperformance has historically moved in tandem
with EM GDP growth expectations and the EM equity index has
underperformed over the last two years. The fall in EM earnings
expectation began in 2011, when the commodity cycle peaked.
Companies in Latin America have seen falling earnings estimates
since then, while emerging Europe (mostly comprised of Russia,
on a market-cap basis) held on to earnings expectations until
the oil price drop in mid-2014. The key catalyst for EM equities
to pick up again is when we see earnings estimates increase. It
is worth noting that the MSCI EM price-to-book ratio (P/B) is at
1.25x, the lowest level since November 2001. Within the index,
P/B valuations vary widely, with India and Indonesia at 2.6x,
Brazil at 1.0x and Russia the cheapest at 0.5x.
Valuations vary dramatically across countries, with India and
Mexico trading at much higher valuations than Russia and
Brazil. Furthermore, current valuations in some countries are
high relative to their own history, while others can be bought at
cheaper valuations than in the past. While valuation alone should
never be the only investment consideration, present valuations
and the underweight position of many investors suggest a
rethink on an emerging market position is warranted. However,
the diversity of the asset class means active management is
crucial.
Weak commodity prices have led to very poor company earnings,
particularly in Latin America and Russia. If EM growth can
stabilise and commodity prices stabilise, investors could turn
again to EM equities, where there are more companies offering
attractive income yields than in any other region. Whilst we
have seen large falls in a number of markets we still may have
further downside movement, so timing is important. There are
however opportunities available with valuations at historically
low levels from an equity and currency perspective, as at these
levels positive returns have historically been seen over the next
12 months.
There are selective opportunities in EM equities
US - We are overweight U.S. large cap equity and
underweight small cap
Europe ex-UK equities - We are overweight - SME’s
being more favoured
UK - We are neutral
Japan - Underweight with a bias for SME’s
China - We are Neutral
ASEAN - We are overweight
Emerging Market ex-Asia - Underweight with selective
opportunities

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15
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