it is clear that there have been some structural changes in the balance of domestic and foreign production. Increased petroleum and LPG demand due to the nuclear-plant shutdowns explains only a fraction of the deterioration in the trade balance. At a higher frequency, industrial production rose in January with significant increases across a range of industries.

 

 

Recent survey data are mixed. The Shoko-Chukin survey of small and medium enterprises moved up in February to its highest level since 1990. In contrast, the Composite PMI as well as consumer confidence declined. Views on employment have held up, but income and livelihood measures have weakened since spring 2013, perhaps reflecting angst over the balance between prospective wage increases and inflation, including the upcoming consumption tax hike. The Economy Watchers survey diverged with the current conditions index holding up but the future conditions index softening.

 

The latest consumer price data were disappointing. Western core prices declined -0.1% on a seasonally-adjusted basis in January across the country and were flat in February in Tokyo. Base effects may support gains in the year-on-year increase over the next couple months, but progress is expected to plateau without a further acceleration in the underlying trend. In that regard, the authorities are hopeful that, as the momentum from energy-cost increases and the sharp depreciation in the yen falls, an increase in inflation expectations as well as wage and margin increases from tightening labour markets and a

narrowing output gap are able to take up the baton. However timing is particularly tricky. Some important information on wages will be available in mid-March when large companies are expected to announce their reactions to union wage demands. The authorities are banking on some increase in base wages (as opposed to bonus payments). Such an increase would be the first in a long time and would go a long way to establishing a higher rate of inflation expectations and national confidence in Abenomics more generally. Increases among large corporations would also put pressure on small and medium-sized corporations. Not to be ignored is the 8% wage increases scheduled for Government workers, as the wage cut they took a few years ago to help pay for earthquake reconstruction is unwound.

 

 

China

 

In February, the key themes were the Renminbi (“RMB”) depreciation late in the month and the continuation of a cyclical slowdown. The market has now reached consensus that the currency depreciation was a deliberate policy move, with a twofold motivation: the

 

People’s Bank of China (“PBoC”) intention (i) to show that the RMB can move in both directions and thus reduce speculative positioning; and (ii) to close the gap between spot and fixing rates while preparing to widen the RMB fluctuation band. The latest currency movement followed a 3% appreciation in 2013, which attracted capital inflows betting on a RMB appreciation. As a consequence of the PBoC’s intervention, the one week

 

SHIBOR rate collapsed from mid-4% to 1.7% and was still low at 2.1% as at 3 March.

 

The policymakers’ focus is still most likely on the onshore CNY market, rather than on

 

CNH structured products. The impact of this depreciation on the behaviour of the onshore corporate sector is not known yet, while the media says that the SAFE has required banks to estimate this impact.

 

Recently published statistics in January and February on activity in China have been disappointing. Business surveys – namely the HSBC and the official PMI – indicated a further slowdown from the cyclical peak recorded in the third quarter of 2013. In particular, the HSBC Composite PMI, encompassing both manufacturing and services, fell back below the 50 threshold, from 50.8 to 49.8. Industrial production, fixed asset investments and retail sales have all showed a meaningful slowdown, largely undershooting market expectations. After a largely seasonal rebound in January, both money and credit aggregates showed a continuation of a moderate deceleration trend on a 3m/3m seasonally-adjusted metric in February.

FURTHER IMPORTANT INFORMATION

 

Past performance is no guarantee and is not indicative of future results.

 

The information herein reflects prevailing conditions and Brevan Howard’s judgments as of this date, all of which are subject to change. Any portfolio characteristics and risk controls set forth are not static and may change over time. Neither BHAM nor its affiliates represent that any statistics, investment guidelines, capital allocation and limits disclosed herein will remain constant over time.

 

Any projections or analyses contained or relating to the matters described herein may be based on subjective assessments and assumptions and may use one among alternative methodologies that produce different results. Accordingly, any such projections or analyses should not be viewed as factual and should not be relied upon as an accurate prediction of future results.

 

Any hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, hypothetical or simulated results do not represent actual trading and similar investment opportunities may not be available in practice. Also, since the investments represented thereby do not represent actual investments, hypothetical or simulated results may under- or over-compensate for the impact, if any, of certain market factors, such as lack of liquidity or market disruptions. Hypothetical or simulated investment performance data is also subject to the fact that it is designed and prepared with the benefit of hindsight.

 

Risk Factors

 

Acquiring an investment in a Fund or any of the other products or services described herein may expose an investor to a significant risk of losing all or a substantial amount of the amount invested. Any person who is in any doubt about investing in a Fund or any of the other products or services described herein should consult an authorised person specialising in advising on such investments, products or services. Any person making an investment in a Fund must be able to bear the risks involved, which include, besides such other risks as may be described in any prospectus or offering memorandum for the relevant Fund, the following:

 

The Funds are speculative and involve substantial risk and may have limited, or no, operating history.

 

The Funds will be leveraged and will engage in speculative investment practices that may increase the risk of investment loss. The Funds will invest in illiquid and volatile securities.

 

Investments in the Funds are subject to restrictions on transfer, withdrawal and redemption and should be considered illiquid.

 

As there is no recognised market for interests in the Funds (and no secondary markets are expected to develop), it may be difficult for an investor to realise its investment or to obtain reliable information about its value or the extent of the risks to which an investor is exposed through its investment.

 

Past results of the Funds’ investment managers are not necessarily indicative of future performance of the Funds, and the Funds’ performance may be volatile.

 

While the Funds are subject to market risks common to other types of investments, including market volatility, the Funds employ certain trading techniques, such as the use of leverage and other speculative investment practices that may increase the risk of investment loss.

 

The investment managers have total investment and trading authority over the Funds, and the Funds are dependent upon the services of the investment managers. The use of a single advisor could mean lack of diversification and, consequently, higher risk.

 

The Funds are not required to provide periodic pricing or valuation information to investors with respect to individual investments. The

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