Capital International Group | Investment Review

CapitalInternational Group

THIRD QUARTER 2015

INVESTMENT REVIEWINNOVATION | INTEGRITY | EXCELLENCE

CapitalInternational

Our VisionThe Capital International Group exists to improve lifestyles through increased prosperity

Our ValuesWe seek to achieve this through the enduring values of innovation, integrity and excellence

This quarter has been a particularly difficult one for investors, with a major global sell off in equities...

Volume: 13 | Issue: 3

Innovation Integrity Excellence

Global EquitiesDramatic Sell Off... Page 2

WEDNESDAY | 30 SEPTEMBER 2015The quarter under review has been a particularly difficult one for investors, with a major global sell off in equities. The majority of the declines occurred in Augus...

Global IndictorsThe Impact of El Niño Page 4

FRIDAY | 18 SEPTEMBER 2015This year’s El Niño looks set to be more powerful than usual with forecasters predicting the strongest since 1950. The latest cycle could push the average global temperature past 2014′s record high in 2016...

Sector in FocusGlobal Automotive Review Page 6

FRIDAY | 11 SEPTEMBER 2015Car sales in the UK are booming and they have just grown for the 42nd consecutive month. In August, traditionally a quiet month for the sector ahead of September’s change in the licence plate, registrations of new cars rose by 9.6%...

Country in FocusChina Page 9

WEDNESDAY | 09 SEPTEMBER 2015Until the second half of the year China’s equity markets had been amongst the best performing in the world with the benchmark Shanghai Index up over 150% over the previous two years...

Economy in FocusDebt Levels & Quantitative Easing Page 12

THURSDAY | 30 JULY 2015Of all the changes that have taken place since the credit crisis, one in particular stands out above all others, and that is the increasing role and dominance of the world’s central banks...

Fixed Income ReportThird Quarter Review Page 14

WEDNESDAY | 30 SEPTEMBER 2015Greece, famed for its drama, certainly brought plenty of volatility to fixed income markets once again in the second quarter but it was a very bad quarter for most bond investors...

Investment ReviewContents

Commodity in FocusDoes Coal Have a Future? Page 16

THURSDAY | 30 JULY 2015There is no denying that the strict regulatory measures to control emissions will have an adverse impact on the unrestricted use of thermal coal for power production...

Industry in FocusGlobal Infrastructure Page 18

THURSDAY | 23 JULY 2015Over the last 20 years, the global infrastructure sector has attracted massive inflows from investors seeking to capitalise on the security and relatively predictable cash flow...

Country in FocusRussia Page 20

TUESDAY | 29 SEPTEMBER 2015Russia is the largest and most powerful of the states to emerge from the former Soviet Union...

Economy in FocusMergers & Acquisitions Page 22

THURSDAY | 24 SEPTEMBER 2015

Enthusiasm for Mergers and Acquisitions has barely flinched despite the high volatility of the last two quarters as businesses seek increasingly innovative methods to maximise efficiency...

Regional UpdateSouth Africa Page 24

WEDNESDAY | 30 SEPTEMBER 2015The third quarter was one of high volatility in equity markets, currencies and commodities...

Jack Cookson | Success StorySailing to the Olympic Games Page 26

THURSDAY | 17 SEPTEMBER 2015We are extremely proud to sponsor Jack Cookson, who we reported back in the Spring was top in his class and attained bronze in August at the European Championships...

Group AnnouncementsIsland Participation Page 28

Read about how the Capital International Group and its staff have helped the island's charities and gotten involved in events across the Isle of Man...

Page 1

© Capital International Group 2015

2 Page


WEDNESDAY | 30 SEPTEMBER 2015

The quarter under review has been a particularly difficult one for investors, with a major global sell off in equities. The majority of the declines occurred in August, with the

blame placed largely on deteriorating growth prospects in Emerging Markets, most notably in China. The country remains in the transition phase from external growth to boosting domestic consumption but this creates strong negative influences in certain areas. This is exacerbated with the devaluation in the currency. For instance, industrial production growth is at its lowest level on record and fixed asset investment growth is at its slowest pace since 2001.

Economic growth in many developed economies remains at decent levels, boosted by domestic consumption but there are the first signs of contagion appearing in some export sectors. It is this negative impact on global GDP growth that led the Federal Reserve to leave interest rates unchanged in their recent meeting. This was a surprise given the positive employment data and has unnerved many observers.

The UK economy continues to demonstrate solid growth, with expansion running at 2.5%/2.75% per annum, with no real increase in inflationary pressures evident. The decline in the crude oil price and other commodities has helped on this aspect, however with the sharpest fall in unemployment levels in forty years there is certainly evidence that wages are picking up and consumer confidence is at record highs.

The Bank of England have let it be known that they are more worried about China than the consensus view, which will mean that interest rates now will be unchanged, possibly for yet another six months at least. There is also evidence that the two speed housing market has returned, with prices in the south and east growing at twice the level as the country as a whole.

The US economic outlook is precariously balanced at the moment, with the domestic focused sectors in good shape. For instance, in recent months there has been a re-acceleration in the housing market with prices trending firmly higher, nearly 6% on a year on year basis. This typically boosts credit demand from consumers and this has been shown recently with strong growth in auto loans. Offsetting these conditions are the more troublesome factors influencing the corporate sector, which is seeing operating margins rolling over and net cash flow deteriorating. Many of the large international players are facing a currency disadvantage and currencies on a global basis will be crucial in the coming months. Merger & Acquisition activity is also running at levels usually seen with equity market peaks.

Global EquitiesDramatic sell off...

World Price at % Chg % ChgIndices 30-Sep-15 30-Jun-15 30-Sep-14 Quarterly 1 Year

UK Markets 6,061.61 6,520.98 6,622.72 -7.04% -8.47%Dow Jones 16,284.70 17,619.51 17,042.90 -7.58% -4.45%NASDAQ 4,620.17 4,986.87 4,493.39 -7.35% 2.82%S&P 500 1,920.03 2,063.11 1,972.29 -6.94% -2.65%DAX 9,660.44 10,944.97 9,474.30 -11.74% 1.96%CAC 40 4,455.29 4,790.20 4,416.24 -6.99% 0.88%Nikkei 225 17,388.15 20,235.73 16,173.52 -14.07% 7.51%Hang Seng 20,846.30 26,250.03 22,932.98 -20.59% -9.10%FT All Gilts 173.79 170.33 165.89 2.03% 4.76%

Rates & Price at % Chg % ChgCommodities 30-Sep-15 30-Jun-15 30-Sep-14 Quarterly 1 Year

GBP/USD 1.5132 1.5725 1.6219 -3.77% -6.70%GBP/EUR 1.3533 1.4101 1.2843 -4.03% 5.37%GBP/JPY 181.073 192.023 177.852 -5.70% 1.81%SILVER 1813.750 2030.090 1942.670 -10.66% -6.64%GOLD 1122.50 1175.00 1210.00 -4.47% -7.23%EUR Crude Oil 47.13 61.36 93.17 -23.19% -49.42%US Fed Funds 0.25 0.25 0.25 0.00% 0.00%UK Base Rate 0.50 0.50 0.50 0.00% 0.00%ECB Base Rate 0.05 0.05 0.05 0.00% 0.00%

Continental Europe is now back on track following the problems with Greece in Q2 and there are a number of sources of stimulus on the region. The ECB continues the monthly bond buying programme and this looks likely to be extended beyond September 2016. The low energy prices are also ensuring that inflation across the region is only running at 0.2% per annum.

The weaker Euro had also been providing a competitive advantage for industry, although it has strengthened somewhat in recent weeks. There is a broad re-leveraging of the region with consumer finances being boosted by rising house prices, with Germany currently seeing 6% growth and Ireland at 9% growth. Emerging Markets remain a major challenge for investors and as a group there has certainly been major under-performance from the equities, although the local currencies are now looking cheap on a long term basis. Earnings revisions are weak, negatively impacted by the commodity exposure but valuations are approaching interesting levels for long term investors.

The S&P 500 Index has suffered one of its largest quarterly falls for several years, with a 6% decline in £ terms, the Dow Jones Industrial Index fared worse, losing over 7%. Continued out-performance from the technology sector ensured that the NASDAQ Index fell just shy of 5%. Indeed technology stocks figured highly in some of the biggest quarterly gainers, with Amazon up 24% on estimate beating results and Google rose 21% on impressive revenue traction.

Other gainers included Chubb up 27%, Under Armour climbed 22% and Molson Coors rose 19%. Commodity related stocks were once again harshly treated with Freeport-McMoRan down 42% and Newmont Mining down 33%. Other fallers included Viacom down 31%, BorgWarner also down 31% and Wynn Resorts fell 35% on Macau woes.


Page 3

In the UK, the FTSE 100 fell nearly 8% with the All Share down over 6%, reflecting some out-performance by mid and small caps. News of a merger between Betfair and Paddy Power saw the former’s shares gain 34%. In the insurance sector, Amlin also received a takeover offer, with the shares rising 38%. Other shares to rise included Inmarsat up nearly 10%, Imperial Tobacco rose nearly 11% and Easyjet was up 14%. As with US equities, the heavy falls came in the commodity sector with Glencore down 55% on falling price fears and debt concerns, with Tullow Oil down 46% and Petra Diamonds down 34%. Other decliners included Mitchells & Butler down 28%, Premier Farnell down 34% and Ocado fell by 26%.

European equities were also heavy fallers on the quarter with the DAX Index faring the worst, down 12% because of the sharp fall in Volkswagen, which lost over 40% on the emission rigging scandal. Other indices included France down 7%, Spain fell 11%, Italy declined 6% and the Netherlands lost 11%. On the negative side, Greek banks were still suffering fallout with National Bank of Greece down 58% and Alpha Bank down 60%. Other fallers included ThyssenKrupp down 31%, Repsol lost 36% and Aegon fell 23%. Gainers included French defence company, Thales, which continues its impressive strategic turnaround and the shares gained 17%. Other stocks to rise were Marine Harvest up 14%, Deutsche Wohnen up 12% and Atlantia gained 11%.

Asia really suffered from the China slowdown fears and the impact of the weaker currency on the neighbouring countries. In Japan, the Nikkei declined 11% in £ terms, with Shanghai down 27%, Hong Kong declined 19%, Singapore fell 14% and Australia lost 9%. Heavy Japanese fallers included Toshiba down 25%, NSK lost 30% and OKI Electric declined 24%. Gainers included Tokyo Electric up 20%, Sharp Corporation rose 10% and NEC was up 4%. In Hong Kong, there were some awful falls in Chinese related stocks with Petro China down 36%, Bank of China down 33%, Galaxy Entertainment down 31% and China Merchants fell 29%. In Australia, Sydney Airport was a rare gainer up 21% and Qantas climbed 17% higher. The fallers included Santos down 38%, Western Areas lost 30% and Slater & Gordon lost 25% on concerns over the UK purchase of Quindell.

FRIDAY | 18 SEPTEMBER 2015

This year’s El Niño looks set to be more powerful than usual with forecasters predicting the strongest since 1950. The latest cycle could push the average global

temperature past 2014′s record high in 2016. Indeed, the rate at which global temperatures are increasing is also on track to pick up in the coming years.

The weather phenomenon happens when ocean temperatures in the eastern Pacific, near South America, rise due to a change in the normal wind direction, creating knock-on effects across the globe due to the amount of heat released into the atmosphere. The polar jet stream tends to move further south, and brings wetter weather across the Atlantic, which causes heavy rainfall in warmer months, but can bring snow in the winter.

The difficulty with the phenomenon, which occurs every two to seven years, is that the effects are impossible to predict. Europe is often colder; parts of Asia and Australia are often drier whilst parts of the US see heavy rainfall. Storm activity is also affected, with North Atlantic hurricanes less likely, whilst typhoon activity in the West Pacific is heightened. Recent UK newspaper headlines have been filled with predictions of the upcoming winter being one of the coldest on record.

Investors will certainly be looking at the El Niño pattern and how weather events play out in the coming months. The weather impacts virtually all sectors in some way, either positively or negatively. For instance, UK retailers have recently reported disappointing trading in the month of August, due to unseasonably wet weather.

The soggy bank holiday in many parts of the country ensured it was the wettest end to the summer in 50 years in Dorset, Hampshire and Guernsey, according to the Met Office. Cornwall and the south coast had to cope with up to three times the average rainfall for August. This can mean that whole clothing ranges go unsold or supermarkets stock the wrong food. One clear beneficiary was the airline sector, with Easyjet reporting record bookings as consumers looked to get away.

The global agriculture sector is obviously one of the main areas to be impacted, so far it has reduced this year’s cereal outputs in El Salvador, Guatemala, Honduras and Nicaragua, putting a large numbers of farmers in need of agricultural assistance as the sub-region tries to recover amidst ongoing drought conditions. Early estimates from Central America’s main de prima harvest suggest declines of as much as 60% of maize and 80% of beans.

Lower rainfall is also impacting India; parts of the southern, central and western regions are facing moisture stress and need widespread rains in the next two weeks to salvage crops. Domestic food inflation overall will rise as there will be upward pressure on food prices because of lower rainfall. This will hamper the Prime Minister’s efforts to reduce interest rates to further boost domestic demand.

Global IndicatorsThe Impact of El Niño

4 Page

Current reservoir levels are only at 58%, compared with a ten year average of 88%. This situation does not bode well for winter crops such as wheat, which require extensive irrigation.

In the US, California has been suffering from a record breaking, four year long drought. It’s been at least half a millennium since California has been this dry. The snow in the Sierra Nevada Mountains; which provides nearly a third of the state’s water supply; is the lowest it has been in 500 years. The State will be hoping that El Niño can bring about a much needed increase in precipitation levels. However it may not be that simple, one potential scenario is that flooding rains sweep across the southern part, causing mud-slides which damage infrastructure. Meanwhile, in the north where most of California’s reservoirs are located, almost no rain will fall at all.

There are also health related issues; it is associated with increased risks of some of the diseases transmitted by mosquitoes, such as malaria, dengue, and Rift Valley fever. Cycles of malaria in India, Venezuela, Brazil, and Colombia have now been linked to El Niño. In answer to some of the issues, the World Health Organisation has launched the Roll Back Malaria Partnership (RBM Partnership), as a global framework for coordinated action. During the 1997 El Niño, droughts hit Malaysia, Indonesia and Brazil, exacerbating the huge forest fires. Smoke inhalation from these fires was a major public health problem in these countries, with countless people visiting health facilities with respiratory problems.

Predictable - the weather?In December 2014, the Japan Meteorological Agency declared the onset of El Niño conditions, as warmer than normal sea surface temperatures were measured over the Pacific, albeit citing the lack of atmospheric conditions related to the event. In March and May 2015 both the National Oceanic and Atmospheric Administration's (NOAA) Climate Prediction Center (CPC) and the Australian Bureau of Meteorology respectively confirmed the arrival of weak El Niño conditions.

El Niño conditions were forecast in July to intensify into strong conditions by the autumn and winter of 2015. In July the NOAA CPC expected a greater than 90% chance that El Niño would continue through the 2015-2016 winter and more than 80% chance to last into the 2016 spring. In addition to the warmer than normal waters generated by the El Niño conditions, the Pacific Decadal Oscillation was also creating persistently higher than normal sea surface temperatures in the northeastern Pacific. In August, the NOAA CPC predicted that the 2015 El Niño "could be among the strongest in the historical record dating back to 1950.”

The CPC forecast now says there’s an approximately 95% chance that El Niño will continue through the northern hemisphere during the winter, months and gradually weaken through spring 2016.


Page 5

Innovation Integrity Excellence© Capital International Group 2015


FRIDAY | 11 SEPTEMBER 2015

Car sales in the UK are booming and they have just grown for the 42nd consecutive month. In August, traditionally a quiet month for the sector ahead of September’s change

in the licence plate, registrations of new cars rose by 9.6% on the same month last year to 79,060, according to data from industry trade body the Society of Motor Manufacturers and Traders (SMMT). Registrations in the year to date have now hit 1,634,369, up 6.7% on the same point last year. On a global basis, car sales were up 2% in the first half of this year and look set to rise to a record sixth consecutive annual level. There are three broad segments, with luxury accounting for 10% of volumes, the value segment accounts for 70% and the entry level for the 20% balance.

The car manufacturing sector overall, is a surprisingly large and important employer. In Europe alone, it is estimated that twelve million jobs, including related roles, are accounted for by the industry. In fact, Western Europe has become the auto industry’s growth leader in 2015, with volumes advancing in fifteen of the eighteen countries in the region. In the US, the employed figure is eight million and Japan employs more than five million people.

The Central Bank support of many economies through Quantitative Easing and the record levels of employment have led to strong industry conditions in recent years, most notably in the US. Sales for 2015 are forecast to be over twenty million units for the first time on record. The improvement reflects strengthening labour markets and household balance sheets.

Attention will now turn to the important Chinese market where volume sales growth has slowed markedly. The 30% plunge in the Shanghai Stock Exchange since mid-June reduced car sales below a year earlier for two consecutive months and slashed the increase in overall vehicle purchases (including heavy trucks) to only 0.4% so far this year. It is no longer running at double digit levels but more in line with GDP at 5-6% per annum. The pricing environment is also getting worse and manufacturers are having to adjust the product mix to protect margins. For instance, the VW Polo has seen price cuts of 8% this year. Many manufacturers will increasingly use platform sharing to reduce not only costs but also the build complexity.

Toyota remains the world’s largest producer, followed by Volkswagen, which has now surpassed General Motors back in third position. These manufacturers need to respond to changing regional demand, with India now surpassing China as the fastest growing major global economy. Huge investment is also needed to develop the connectivity of vehicles. Over the next four years, the global market volume for connectivity services and hardware will double from an estimated $20 billion to $40 billion, and more than half of it will be services and apps.

Sector in FocusGlobal Automotive Review

There will also be a need to allow for more autonomous/assisted driving. The self-driving car does not come in one big bang. It is a gradual development, and with self-parking assistants, adaptive cruise controls and lane keeping assistants the first steps have already been taken. As yet, there are only few key suppliers for complete autonomous technologies, even on a global basis. Relentless safety recalls is another major concern, as it not only adds to expenses but also leads to negative media coverage. This year, the defective Takata airbag inflators have been the main reasons for massive recalls.

Such trends could well see mergers and takeovers not only at the manufacturer level but also at the supplier level. Joint Ventures have been highly prevalent in recent years but overall some very complex holdings occur. For instance, Daimler AG holds a 20% stake in Eicher Motors, a 10.0% stake in KAMAZ, an 89.29% stake in Mitsubishi Fuso Truck and Bus Corporation, a 6.75% stake in Tata Motors and a 3.1% in the Renault-Nissan Alliance, a 12% stake in Beijing Automotive Group, and an 85% stake in Master Motors. Daimler and BYD Auto have a joint venture called Denza; both companies hold a 50-50% stake.

6 Page

Toyota The company is trading well with recent analyst upgrades driven by increased product competitiveness and the weak Yen. Recently launched models also are equipped with the new Toyota New Global Architecture technologies, a new modular production technique. The Prius hybrid range will also see a re-launch in the autumn and there will be a revamp of two lucrative IMV platform models. Toyota has been trading well in the core North American market, although mini vehicle sales have been struggling in the domestic, Japanese market. The company have been reporting fierce price competition in certain markets combined with her quality related expenses.

VolkswagenThe current strategy for the company is to slim down, become quicker and more efficient. It is aiming to boost market share in the Americas and also India and Russia. No major plants will be closed as VW already has a higher capacity utilisation rate than the industry average. Although there is likely to be some geographical reorganisation, with Spain having more focus on Audi. The company can use its growing Skoda brand to compete with competitors such as Fiat and Renault. A new SUV will be launched in 2016 in the US and there are also some refreshed Porsche models. The company could also move the MAN and Scania truck operations into a separate, combined entity.

General MotorsGM currently has the most attractive leverage to the global recovery in the auto sector, with an improving product mix and further operational recovery. Indeed, management are looking for $2 billion in cost savings this year, notably from materials and logistics. For the current financial year, the company is looking to turn profitable in Europe and achieve a 10% EBIT margin in the US. The positioning in China is also helped by the JV with Baojun being exposed to lower tier cities where growth is still coming through. High demand has also been continuing for the truck division and in SUV sales, with refreshed Sierra and Silverado ranges.

BMWBMW has been hit by a slowing Chinese economy where cut-throat competition leaves its ageing product range increasingly exposed, indeed sales have begun to fall for the first time in a decade. For the next 4 years overall, group volume growth will struggle to reach 3% per annum, compared to 7.6% in the last 3 years. Later this year will see the launch of the new 7 Series, which should boost margins for 2016. The need for new models will also drive costs higher in the coming years, as capital expenditure programmes are boosted. Currency movements will impact not only on BMW but across the industry. The stronger US$ could see volumes diverted there, instead of China which is devaluing the Yuan.

FordFord’s recent second quarter earnings surprised the market on the upside, with an excellent performance in the core US market and Asia beating expectations. The company are reaping the benefits of the ‘One Ford’ strategy, where non-core businesses and brands have been sold. The North American market has been helped by the roll out of the lucrative F-150 pick-up truck. Management also highlighted very pleasing pre-registration numbers in Europe, although this will be offset by Chinese headwinds. There is also a drag in the truck division, which has yet to contribute positively.


Page 7


CapitalInternationalCapitalInternationalCapitalInternational

8 Page

Page 9



Until the second half of the year China’s equity markets had been amongst the best performing in the world with the benchmark Shanghai Index up over 150% over the

previous two years. This stellar performance started to unwind rapidly however when the Chinese central bank widened the trading range of the Yuan to the US Dollar by 2%, prompting a de facto devaluation of the Chinese currency.

This triggered waves of heavy selling by equity investors, fearful that the currency’s slide indicated a more significant weakening in the world’s second economy than anticipated. Growth in the Chinese economy has indeed turned out to be lower than expected and below the officially reported numbers, with a nominal growth rate of 6.3% versus the Government’s stated 7% target.

A devaluation of the Yuan would therefore stimulate the Chinese domestic economy by maintaining its competitive edge against other exporters and fend off any threat of deflation which has beset the US, Eurozone and Japan over the last decade. This surprise devaluation could result however in profound and unintended consequences to global capital markets, leading investors into uncharted territory and goes some way towards explaining the severity and pace of the recent decline in asset prices.

The Western world has been the beneficiary of twenty years of easy financing and low inflation despite the frequent, sharp, corrections seen in the wake of several financial crises. China’s leadership has progressed its long term economic plans to urbanise its workforce and adopt some elements of capitalism, drawing rural peasant workers out of the agrarian lifestyle into a new class of modern super-city with the infrastructure needed to support a fast-growing economy of over 1 billion people. Throughout these last two decades China has been the world’s top producer with an abundance of relatively low cost and skilled labour able to attract substantial business from overseas giants such as Apple and Microsoft.

Manufacturers or designers of goods produced or finished in China have effectively benefitted from a ‘carry trade’ whereby borrowing in one currency and investing in another results in a self-financing profitable trade. China receives US Dollars for its products which it then reinvests into ‘risk-free’ US Treasury securities or equivalents. This then drives down the cost of borrowing in US Dollars maintaining a positive yield difference between the two currencies in a virtuous circle of increasingly cheap funding and continuously strong returns. Provided the gain from investing or buying from China exceeds the cost of borrowing in the USA (plus a margin for risk) the cycle continues until such time as the equation changes.

American business has been prolific in its outsourcing of manufacturing with Apple being the standout example amongst many; its devices even carry labels which state ‘Designed by Apple in California. Assembled in China’. China’s enormous workforce has been engaged in this manufacturing activity at such competitive prices, it allowed the designers’ margins to remain high while the huge economies of scale have been instrumental in pushing down prices at the point of sale. One only needs to visit ordinary supermarkets to see a range of low cost electronic appliances like flat screen televisions, tablets and games consoles that would have only been available at specialist outlets a decade or two ago at significantly higher cost.

Many of the world’s largest manufacturers have established contract labour agreements with factories in China. Taiwanese contractor Hon Hai Precision (or ‘Foxconn’) is responsible for the assembly of up to 40% of all the world’s electronic appliances and employs more than a million workers in China alone. Its largest plant is the ‘Foxconn City’ in Shenzhen with 300,000 workers spread over a sprawling complex of over 3 square kilometres with its own dedicated infrastructure such as shops, TV station and fire service.

The Shenzhen facility is notable for being the location where Apple’s MacBook and iPod are assembled. As Apple has grown to become the world’s most valuable company with a market value almost equivalent to Spain’s entire market capitalization, contract manufacturers have become significant forces behind the world’s most ubiquitous devices.

With this in mind, the link between two vastly different economies is apparent. American investors have been comforted by the Yuan’s floating peg to the US Dollar as it provides a degree of certainty not present when trading in a free-floating currency. For the Chinese, their holdings of US Treasuries accumulated over the last 20 years make them the USA’s largest external creditor. The strong performance of the Dollar and US sovereign bonds during a period of low or declining real rates of interest has been highly profitable to the Chinese and the government has substantial FX reserves to draw upon to support its new devalued Yuan policy, estimated at $40 billion per month.

Investors are concerned though about China’s role as an economic powerhouse. Firstly, transparency of the People’s Bank of China, the reserve bank. The recent devaluation largely took by surprise a market which has grown accustomed to central banks co-ordinating significant policy measures as much as possible and telegraphing their intentions. Measures taken to stabilize markets by freezing sales of certain companies have also drawn criticism.

Country in FocusChina

10 Page

CapitalInternationalCapitalInternationalCapitalInternational

Another aspect is China’s ambition to see the Yuan as a genuine alternative reserve currency to the US Dollar and make it a component of the IMF’s Special Drawing Rights ‘currency’, a basket of USD, Euro, Sterling and Yen. For the Yuan to attain this status, it will need to start relinquishing control over the movement of capital, a potentially disruptive factor as long-term capital controls become gradually looser.

China’s role as the workshop of the world faces challenges in the next five years during the implementation of its next ‘Five Year Plan’. Having effectively exported disinflation worldwide by keeping prices competitive, there is a risk that this benign disinflation turns into the dreaded deflation during a critical phase while the US Federal reserve is looking to contract its balance sheet and unwind its Quantitative Easing programmes. If China were to commence selling its Treasury holdings in the face or an already-rising interest rate, problems could arise. Without a last-resort buyer such as the Fed, the possibility of rates rising too high, too quickly is a major concern. Modest inflation in the US helps reduce the real value of its debt while capping its servicing costs while the reverse happens in a deflationary scenario.

Central bankers will be therefore working behind the scenes to ensure that China’s reserve bankers are supported as much as possible and are co-ordinating their responses during a key shift in policy.

EconomyAs of 2014, China has the world's second-largest economy in terms of nominal GDP, totalling approximately US$10.380 trillion according to the International Monetary Fund. If purchasing power parity (PPP) is taken into account, China's economy is the largest in the world, with a 2014 PPP GDP of US$17.617 trillion. In 2013, its PPP GDP per capita was US$12,880, while its nominal GDP per capita was US$7,589. Both cases put China behind around eighty countries (out of 183 countries on the IMF list) in global GDP per capita rankings.

Economic history & growthFrom its founding in 1949 until late 1978, the People's Republic of China was a Soviet-style centrally planned economy. Following Mao's death in 1976 and the consequent end of the Cultural Revolution, Deng Xiaoping and the new Chinese leadership began to reform the economy and move towards a more market-oriented mixed economy under one-party rule. Agricultural collectivization was dismantled and farmlands privatized, while foreign trade became a major new focus, leading to the creation of Special Economic Zones (SEZs). Inefficient state-owned enterprises (SOEs) were restructured and unprofitable ones were closed outright, resulting in massive job losses. Modern-day China is mainly characterized as having a market economy based on private property ownership, and is one of the leading examples of state capitalism. The state still dominates in strategic 'pillar' sectors such as energy production and heavy industries, but private enterprise has expanded enormously, with around 30 million private businesses recorded in 2008.

Since economic liberalization began in 1978, China has been among the world's fastest-growing economies, relying largely on investment- and export-led growth. According to the IMF, China's annual average GDP growth between 2001 and 2010 was 10.5%. Between 2007 and 2011, China's economic growth rate was equivalent to all of the G7 countries' growth combined. According to the Global Growth Generators index announced by Citigroup in February 2011, China has a very high 3G growth rating. Its high productivity, low labour costs and relatively good infrastructure have made it a global leader in manufacturing. However, the Chinese economy is highly energy-intensive and inefficient; China became the world's largest energy consumer in 2010, relies on coal to supply over 70% of its energy needs, and surpassed the US to become the world's largest oil importer in September 2013. In the early 2010s, China's economic growth rate began to slow amid domestic credit troubles, weakening international demand for Chinese exports and fragility in the global economy.

In the online realm, China's e-commerce industry has grown more slowly than the EU and US, with a significant period of development occurring from around 2009 onwards. According to analysts, the total value of online transactions in China grew from an insignificant size in 2008 to around RMB 4 trillion (US$660 billion) in 2012. The Chinese online payment market is dominated by major firms such as Alipay, Tenpay and China UnionPay.

Page 11


Facts & Figures

Capital ■ Largest city

BeijingShanghai

Official languagesRecognised regional languages

Standard ChineseMongolian, Tibetan, Uyghur, Zhuang and various others

Official written languageOfficial script

Vernacular ChineseSimplified Chinese

Ethnic groups 91.51% Han55 minorities

Demonym Chinese

Government Socialist single-party state ■ President Xi Jinping ■ Premier Li Keqiang ■ Congress Chairman Zhang Dejiang ■ Conference Chairman Yu Zhengsheng ■ President of the Supreme People's Court

Zhou Qiang

Legislature National People's Congress

AreaTotal 9,596,961 km2 (3rd/4th)

3,705,407 sq mi

Water (%) 0.28%

Population2015 estimate2010 census

1,376,049,000 (1st)1,339,724,852 (1st)

Density 2013: 145/km2 (83rd)373/sq mi

GDP (PPP)TotalPer capita

2015 estimate$18.976 trillion (1st)$13,801 (87th)

GDP (Nominal)TotalPer capita

2015 estimate$11.212 trillion (2nd)$8,154 (75th)

Currency Renminbi (Yuan)(¥)(CNY)

Time Zone China Standard Time(UTC+8)

Drives on the Right

Calling Code +86

Internet TLD .cn.中國.中国

China in the global economyChina is a member of the WTO and is the world's largest trading power, with a total international trade value of US$3.87 trillion in 2012. Its foreign exchange reserves reached US$2.85 trillion by the end of 2010, an increase of 18.7% over the previous year, making its reserves by far the world's largest. In 2012, China was the world's largest recipient of inward foreign direct investment (FDI), attracting $253 billion. China also invests abroad, with a total outward FDI of $62.4 billion in 2012, and a number of major takeovers of foreign firms by Chinese companies.

In 2009, China owned an estimated $1.6 trillion of US securities, and was also the largest foreign holder of US public debt, owning over $1.16 trillion in US Treasury bonds. China's undervalued exchange rate has caused friction with other major economies, and it has also been widely criticized for manufacturing large quantities of counterfeit goods. According to consulting firm McKinsey, total outstanding debt in China increased from $7.4 trillion in 2007 to $28.2 trillion in 2014, which reflects 228% of China's GDP, a percentage higher than that of some G20 nations.

China ranked 29th in the Global Competitiveness Index in 2009, although it is only ranked 136th among the 179 countries measured in the 2011 Index of Economic Freedom. In 2014, Fortune's Global 500 list of the world's largest corporations included 95 Chinese companies, with combined revenues of US$5.8 trillion. The same year, Forbes reported that five of the world's ten largest public companies were Chinese, including the world's largest bank by total assets, the Industrial and Commercial Bank of China.

12 Page

THURSDAY | 30 JULY 2015

Of all the changes that have taken place since the credit crisis, one in particular stands out above all others, and that is the increasing role and dominance of the world’s central

banks. Since the start of Quantitative Easing (QE), retail banks have been shrinking the monetary base at the same time. QE has increased the BoE balance sheet by about £150 billion. But bank balance sheets have contracted by some £600 billion. This is in part due to a reduction in lending and in part due to asset write downs, fines and other factors. The reduction in lending element is effectively just negative QE.

The net effect of this is that the monetary base has remained largely unchanged (so far). Since 2010 the total money supply has remained flat. This is a major reason why we have seem no inflationary effect from QE and indeed most western economies have remained close to or in deflation.

The question is what happens when bank balance sheets start to expand again?

If the central banks do not reverse QE (very unlikely) then we will see a rapid increase in money supply and the size of the monetary base. This is when the inflation dam will burst and we are likely to see interest rates rise rapidly at that point.

This is not necessarily bad news. If driven by an expanding monetary base then we can expect to see growth accelerate and more importantly earnings and wages. This will likely translate into bad news for cash, bonds and gold, but good news for equities, properties and commodities.

However, if the monetary base rises too rapidly it could be trouble. Interest rates might have to rise much higher than desirable to stave off inflation leading to a whole host on consequences. However, this does not currently seem likely. Bank lending remains fairly subdued and is likely to rise only steadily giving time for interest rates to rise steadily and remain ahead of inflation.

The second big issue is the debt pile. As we know UK public debt has ballooned and will keep increasing for the next few years. It has almost tripled since 2008 to £1.5 trillion in 2016 (see below). This is in part due to the nationalisation of the banks, which increased it by about £500 billion and will be reversed over time. However nearly £500 billion has been added from the deficit. These are clearly eye watering figures.

However, the story is again not complete. Private sector borrowing has done the reverse falling from £2.6 trillion in 2010 to about £2.1 trillion today, a fall of £400 billion (see below). In effect we have seen a socialisation of private debt to public debt. The total UK debt figure has actually not increased that much.

The question then is about affordability. Clearly the level of government debt is a concern and although it is now beginning to fall as a percentage of GDP it is still going to mean that government fiscal policy will continue to tighten for the next few years, which will be a drag on growth. Total public and private debt in the UK is currently about £3.5 trillion.

Again this is a massive number, but how affordable is it?

We need to consider serviceability and Loan to Value (LTV).

GDP is currently £1.8 trillion, so total debt is nearly 2x the national income. If we think of this in a similar way to a private mortgage, then 2x earnings would not typically be a problem. The rule of thumb used to be up to 3x earnings, although these days it has increased to more like 4x. Of course as interest rates rise then this will again be a drag on growth, but interest rates will only rise as growth increases so this is not unduly concerning. The total debt should be serviceable.

Looking at LTV, the latest figures for the total net wealth of the UK were for 2012 with a figure of £9.5 trillion, having risen from £8.4 trillion in 2008. This is net wealth so net of the debt. Total assets will be somewhere in the region of £13 trillion. The LTV is less than 30% of total wealth. Perhaps this is being slightly misleading because most debt is secured against property, so let’s look just at property wealth. The net figure was £3.5 trillion in 2012. The gross figure is likely to be in the region of £5.6 trillion (I have excluding public debt as this is not property backed). So the LTV to property values is about 62%. This is on the high side but not a particular concern.

Overall the public debt is undoubtedly too high, but more generally debt levels are not unduly high. The picture is similar in other western economies, with the US being probably the most extended and Europe actually being less extended than the UK on average.


Economy in FocusDebt Levels & Quantitative Easing

The ProcessQuantitative easing is distinguished from standard central banking monetary policies, which are usually enacted by buying or selling government bonds on the open market to reach a desired target for the interbank interest rate. However, if a recession or depression continues even when a central bank has lowered interest rates to nearly zero, the central bank can no longer lower interest rates. The central bank may then implement a set of tactics known as quantitative easing. This policy is often considered a last resort to stimulate the economy.

A central bank enacts quantitative easing by purchasing; without reference to the interest rate; a set quantity of bonds or other financial assets on financial markets from private financial institutions. The goal of this policy is to facilitate an expansion of private bank lending; if private banks increase lending, it would increase the money supply, though QE does directly increase the broad money supply even without further bank lending. Additionally, if the central bank also purchases financial instruments that are riskier than government bonds, it can also lower the interest yield of those assets.

Quantitative easing, and monetary policy in general, can only be carried out if the central bank controls the currency used in the country. The central banks of countries in the Eurozone, for example, cannot unilaterally expand their money supply and thus cannot employ quantitative easing. They must instead rely on the European Central Bank (ECB) to enact monetary policy.

What is Quantitative Easing?Quantitative easing (QE) is a type of monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other financial institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the money supply. This differs from the more usual policy of buying or selling short-term government bonds to keep interbank interest rates at a specified target value.

Expansionary monetary policy to stimulate the economy typically involves the central bank buying short-term government bonds to lower short-term market interest rates. However, when short-term interest rates reach or approach zero, this method can no longer work. In such circumstances monetary authorities may then use quantitative easing to further stimulate the economy by buying assets of longer maturity than short-term government bonds, thereby lowering longer-term interest rates further out on the yield curve.

Quantitative easing can help ensure that inflation does not fall below a target. Risks include the policy being more effective than intended in acting against deflation (leading to higher inflation in the longer term, due to increased money supply), or not being effective enough if banks do not lend out the additional reserves. According to the International Monetary Fund, the US Federal Reserve, and various other economists, quantitative easing undertaken since the global financial crisis of 2007-08 has mitigated some of the economic problems since the crisis.


Page 13

EffectivenessAccording to the International Monetary Fund (IMF), the quantitative easing policies undertaken by the central banks of the major developed countries since the beginning of the late-2000s financial crisis have contributed to the reduction in systemic risks following the bankruptcy of Lehman Brothers. The IMF states that the policies also contributed to the improvements in market confidence and the bottoming-out of the recession in the G7 economies in the second half of 2009.

Economists argue that QE2 led to a rise in the stock market in the second half of 2010, which in turn contributed to increasing consumption and the strong performance of the US economy in late 2010. Former Federal Reserve Chairman Alan Greenspan calculated that as of July 2012, there was "very little impact on the economy." Federal Reserve Governor Jeremy Stein has said that measures of quantitative easing such as large-scale asset purchases "have played a significant role in supporting economic activity".


Bond investors were largely spared the pain subjected to equity investors during a relatively volatile quarter which was dominated by the September meeting of

the US Federal Reserve, one of the most closely scrutinised in years.

From the middle of the year, markets had largely been expecting a rise in the Fed’s policy rate, most likely a rise of 0.25% a key component of ‘normalization’ of the monetary system after the financial crisis and the end of the Quantitative Easing era in the USA.

The plunge in Chinese stock markets however sparked fears of systemic failure, reminding many of the panic resulting from an overload of debt during the great financial crisis of 2008 and 2009. At the heart of the China crisis was August’s unexpected devaluation of the Yuan by the People’s Bank of China by 2%.

Unlike 2008, a simple flight to quality reaction was not possible due to the expected rise in interest rates, which would offset the reaction somewhat. As well as the world’s second largest economy, China is the also the world’s largest non-US holder of US Treasury debt, and reactions amongst investors were more measured.

As data continued to emerge that pointed towards a softening in economic activity, with crude oil resuming its fall and commodity prices cratering worldwide, more traders started expressing dovish views towards rates and how the Federal Reserve would react.

On 17 September, Federal Reserve Chair Janet Yellen confirmed that there would be no rise in rates despite a tightening in domestic employment and economic activity expanding at a moderate pace. Inflation was not a concern due to the magnitude and duration of the fall in oil and expected it to remain below the target of 2%.

The concern therefore was that developments overseas would hamper the economic recovery and that the Committee would act once further clarity was seen in wage inflation, labour utilization and the broader level of inflation could regain the 2% target and sustain it.

The FOMC vote was 9:1 in favour of maintaining the current level of accommodative support to the markets, leaving their options open for the first rise of the cycle to be at the next meeting on 28 October or the final meeting of the year on 16th December. Futures trades are still implying doubt about this move up with just a 36% probability that a 0.25% will occur at this last meeting.

The conundrum is that bond markets are enacting the reverse of what central bank policy makers are intending, adding to the confusion. While consensus opinion was indicative of a rate rise in the USA, bond yields actually declined over the quarter, effectively negating any putative action by the central banks.

Fixed Income ReportThird Quarter Review


14 Page


Yield Movement on Quarter

UK 10 Year Bond -0.25%

German 10 Year Bond -0.17%

US 10 Year Bond -0.26%

South Africa 10 Year Bond 0.36%

Japan 10 Year Bond -0.13%

Moreover, 2016 is likely to see the end of the relatively low rate of corporate defaults as markets have been supported by benign central bank policies and investor concern will have much to contend with during the final quarter of the year. Central banks already have a tough role in co-ordinating global growth with clear weakness showing in China with a steadily improving USA.

In the middle the ECB is managing a difficult scenario with substantial immigration into Europe whilst continuing to manage its own growth issues while the impact on Japan’s QE programme is less clear in the face of China’s devaluation and any further escalation.

Yield Movement on Quarter

US 2-10 Year Spread -0.29%

UK 2-10 Year Spread -0.27%

German 2-10 Year Spread -0.14%

UST-BBB Spread 0.26%

Japan 10 Year Bond -0.13%

Indeed, markets have this quarter begun to exhibit clear signs of yield curve flattening, whereby the spread between shorter-dated and longer-dated securities narrows, a general marker of economic weakness, while the yield gap between US Treasuries and BBB-rated corporates has widened, suggesting that the remainder of the year and 2016 may well be a year of significant volatility in the corporate bond markets.

Q1 2015

Q2 2015

Q3 2015 YTD

World Bonds Aggregate 4.77% -4.23% 1.17% 0.00%

AAA Rated 2.57% -3.46% 1.32% 0.53%

AA Rated 2.79% -4.54% 1.54% 0.27%

A Rated 1.09% -2.82% 0.77% -0.57%

BBB Rated 3.35% -5.26% 2.45% 1.16%

1 to 3 Year Maturity Bonds 0.41% -0.17% 0.12% 0.33%





UK Treasuries 8.61% -3.43% 3.19% 1.88%

UK Index-Linked 10.38% -2.74% 1.80% 1.85%

Page 15


16 Page


There is no denying that the strict regulatory measures to control emissions will have an adverse impact on the unrestricted use of thermal coal for power production. Having

said that, coal still holds an advantageous position due to its wide availability and lower cost compared to other fossil fuels and renewable sources of energy.

From a report by the World Coal Association, there are currently 861 billion tons of proven coal reserves worldwide. This means that there is enough coal to last nearly 112 years at current rates of production. In comparison to this, proven oil and gas reserves are equivalent to around 46 and 54 years, respectively, at current production levels. Proven reserves are considered economically recoverable at any given time, taking into account available mining technology and costs.

Per a US Energy Information Administration (EIA) report, 2014 coal consumption in the US for power generation remained unchanged from year-ago levels. The US Environmental Protection Agency (EPA) announced in January 2015 that it is presently taking a commonsense approach to cut carbon pollution from power plants. The EPA decided to delay the implementation of the final rule to control pollution from new coal-fired power plants till midsummer 2015.

The crucial question is what’s keeping the coal industry afloat amid rising competition from other fuel sources and a stringent regulatory climate. Coal as a major source of generating fuel dominates the utility industry. Coal is used to generate near about 40% of the electricity consumed in the US Electricity generation absorbs about 93% of the total US coal consumption. The reason is simple; coal is by far the least expensive and most abundant fossil fuel in the country.

Electricity generation is just one use of coal in the US Manufacturing plants and industries use coal to make chemicals, cement, paper, ceramics and metal products, to name a few. Methanol and ethylene, which can be made from coal gas, are used to make products such as plastics, medicines, fertilizers and tar.

Certain industries consume large amounts of coal. For example, concrete and paper companies burn coal, and the steel industry uses coke and coal by-products to make steel for bridges, buildings and automobiles.

In Nov 2014, Westmoreland Coal Company signed a long-term coal supply agreement with a diversified chemical company FMC Corporation. The new deal terminates two old contracts and extends the fresh one through 2026. Cement, a major ingredient for the construction industry, also requires energy for its production. Coal here plays an important role in cement production.

Commodity in FocusDoes Coal Have a Future?


Due to its heat-producing feature, hard coal (metallurgical or coking coal) forms a key ingredient in the production of steel. Nearly 70% of global steel production depends on coal.

Per a release from the World Steel Association, the world crude steel production touched 1,662 million tons (Mt) in 2014, up 1.2% over the prior year. An earlier report from World Coal Association had estimated a 2% improvement in steel usage in 2015 from 2014 levels.


Page 17


Since metallurgical coal is an essential ingredient for the production of steel, US metallurgical coal producers like Walter Energy and Alpha Natural Resources Inc could benefit from this revival. The increase in coal demand in Asian economies like China and India has been a key price driver since the end of the recession in 2009. This trend is expected to continue in the future mainly due to rising energy needs in India, China and South Korea.

Of the Asian countries, economic growth in China and India will be the fastest. These two countries do produce coal, but their domestic coal production is yet to match the growing demand, resulting in a continuous need to import. These two countries rely heavily on coal for electricity generation.

Japan is also importing large volumes of coal following the deactivation of its nuclear power plants. Given the rising demand from the fast-growing Asian economies, companies will find it attractive to export coal to these regions.

Peabody Energy in a bid to access the Asian coal markets had acquired Macarthur Coal of Australia in 2011. To further strengthen its Australian footprint, the company has entered into a joint venture with the largest coal producer of Australia, Glencore Coal Pty Ltd to develop mines in Hunter Valley. The objective is to further reduce the cost of production and increase the mining life of assets.

Peabody has also extended its operations to Thailand, which is marked by a two-fold benefit. Firstly, Thailand is the world’s largest supplier of sea-borne thermal coal. This Southeast Asian nation is also strategically located nearer the Asian demand centres.

The black diamond hasn’t seen its last days yet. For the aggressively growing and energy hungry Asian economies, coal seems to be the most popular source of power generation in spite of the inroads being made by renewables.

Peabody Energy expects annual global coal demand to rise by 500 million tons by 2017. The company further adds that over this period, nearly 225 gigawatts of new coal-fired generation plants are expected to be built, supporting an estimated 8% to 10% increase in seaborne thermal coal demand.

A large section of the population in the developing nations of Asia and Africa are yet to have access to electricity. For most of these developing nations, thermal coal is the preferred choice of electricity generation. A disparity between demand and supply in these growing economies will compel them to import coal from abroad. US coal shipments are thus expected to rise going forward.

As per a report from the International Energy Agency, total global coal demand for coal is estimated to touch 9 billion tons by 2019. Coal demand is also expected to grow at an average rate of 2.1% per year through 2019. China will be responsible for nearly 60% of the global increase in coal demand, despite its efforts to moderate consumption over the long run.

18 Page



Over the last twenty years, the global infrastructure sector has attracted massive inflows from investors seeking to capitalise on the security and relatively predictable

cash flow of major projects. The rapid economic growth of China and India has played a key role within infrastructure. Prior to the 1990s China lacked an integrated motorway system like those in the USA and Europe with most freight being moved by rail.

In recognition of this need to catch up China embarked on an ambitious programme to support its growing economic power. At the beginning of the millennium, China had around 9,000km of Expressways under the new national system. Currently it has 112,000km, more than even the United States.

Aviation has also been targeted for massive growth with 101 airports scheduled for expansion and a further 82 slated for construction under the 2011-2015 Economic Plan. Terminal 3 of Beijing’s Capital International Airport, designed by renowned British architects Foster + Partners opened in time for the Olympics in 2008 and has become the world’s second busiest airport, serving nearly 90 million passengers in the last year, second only to Atlanta.

Capacity is still an issue however and work started at the end of 2014 on a second airport for Beijing, 50km away in the Daxing region. Grand projects to facilitate transport and communications are truly a global phenomenon from the tunnelling of the UK’s own Crossrail and HS2 projects or the ambitious design of Istanbul’s new airport which with six runways and capacity for up to 200 million passengers a year will make it the world’s largest.

Industry in FocusGlobal Infrastructure

Page 19

The scale of these projects is part of the attraction for infrastructure investors. Due to the strategic nature, projects are often supported by governments or have multinational development banks as co-investors or guarantors mitigating some of the risk to the investor. Furthermore, the returns are relatively predictable with long-term contracts for the operators of the assets and with charges or tolls linked to inflation.

Those attributes are particularly important to pension funds, which can often have long-dated liabilities but require a relatively high level of security in order to meet their solvency requirements. State pension funds in California, Canada and Australia were notable early entrants, setting the scene for infrastructure to effectively become a totally new asset class.

Investment by these large funds has drawn in huge flows of capital from investors seeking income in a world of low or even negative interest rates where traditional bond instruments have been delivering lower returns with greater risk than ever. As the global debt mountain has risen to over $71 trillion, exceeding the capitalisation of world equity markets by $2 trillion, a long term diversification into infrastructure has taken place.

In the USA for example, university endowment funds such as those of Harvard and Yale invest over 55% of their assets in alternative asset classes, of which infrastructure is gaining share at the expense of hedge funds which have proven largely disappointing in their ability to generate absolute returns.

Recent events have started to question the asset class’s ability to continue its trajectory. As noted earlier, investors are drawn to the asset class due to its bond-like returns and volatility. It should therefore follow that as interest rates start to rise as a result of the improving economy, bonds and their proxies should under-perform.

There are also concerns that the volume of incoming funds is so great that it will lead to a glut of over-investment, some of which will end up in lower-quality projects which would not otherwise have been funded. This concern is well-founded; historically, high volumes of liquidity have often created bubble-like conditions. The US Federal reserve’s actions ahead of the millennium are often cited as a partial culprit for start-up technology companies. Likewise, surplus liquidity led to investment banks shifting low-quality mortgages off their balances sheets to yield-hungry investors which contributed to the financial crisis.

Supporters of infrastructure argue however that the asset class is differentiated by the business model which often sees government participation in many cases whereas there was no legal obligation at the time of the ‘dot com’ crash or even the great financial crisis for government intervention. Co-investment by quasi-sovereigns therefore provides considerable comfort to investors directing the inflows.

One of the outcomes of the great financial crisis was that investors turned increasingly to ‘hard assets’ or opportunities that have a physical, tangible presence. Projects such as rail networks, bridges and motorways have an obvious durability but their size means they cannot generally be bought or sold. This poses challenges to private investors who wish to access the asset class. Investments can be made in three types of vehicle depending on the requirements. Investment Trusts usually make investments either directly into the physical project or indirectly through illiquid private equity-style partnerships.

In the UK, some notable funds are HICL Infrastructure Ltd (HICL) which has a market capitalisation of £2 billion and a dividend yield of 4.7% while 3i Infrastructure is valued at £1.32 billion and trades with a yield of 4.2% but trades a high premium of 30% to its net asset value.

There are also a number of open-ended investment companies or unit trusts which typically invest in the more liquid shares of the respective operating companies. These will likely be more volatile with a lower income yield but will mitigate the effect of trading at a discount or premium to net asset values. Lazard’s Global Listed Infrastructure equity fund has over £650 million of assets and is one of the leaders in its field.

Private investors wishing to have a less diversified play on infrastructure can also buy Eurobonds issued by operators and receive a fixed income often with a legal charge on the assets.

In Sterling terms, Heathrow Airport (A+ rated) has secured bonds maturing in 25 years currently yielding 4.2% while Atlantia, the operator of Italy’s toll road system has bonds maturing in 2022 yielding 2.9% on a rating of BBB+ having performed well during the Eurozone crisis due to its high level of security. The French and UK State Rail companies also issues large quantities of senior and secured bonds at a range of maturities and are rated at the higher end, close to the sovereign parent.

While the initial rush of investment from the 1990s has slowed, driven initially by China but augmented by the reunification of Germany and expansion of the Eurozone, there remains a lot of demand for financing projects from rapidly developing economies in Asia, Latin America and Africa.

Furthermore there is also a fairly solid pipeline of developed market projects involving upgrading existing facilities as seen with the London Airport Study. The sector has not yet been fully tested during a rising rate cycle from such a low base but the sector should continue to achieve reasonable returns if selective over the quality and price of the invested projects.

© Capital International Group 2015 Innovation Integrity Excellence

20 Page


TUESDAY | 29 SEPTEMBER 2015

Russia is the largest and most powerful of the states to emerge from the former Soviet Union. As the seat of the Soviet empire that existed for over 70 years, the Russians

wielded tremendous power both within the USSR. and in the international sphere. Almost from their emergence as a separate people, the Russians have extended the boundaries of their country to include a wide variety of non-Russian people. Both the Russian Czars and the Bolsheviks who came to power in 1917 have a long history of expansionist policies, which explains why, even today, an important part of the Russian national identity is that of leader of a large empire. The nation’s politics have been dominated for more than a decade by the regime of President Vladimir Putin, who has re-nationalised private assets, cracked down on freedom of expression and pursued an expansion of regional influence. This expansion has included a military intervention in Ukraine and an internationally condemned annexation of the Crimean peninsula.

Since the collapse of the Soviet Union, Russia has experienced significant changes, moving away from a globally isolated, centrally planned economy towards a more globally integrated and market based economy, but stalling as a partially reformed, statist economy with a high concentration of wealth in official’s hands. Economic reforms in the 1990’s privatised most industry, with notable exceptions in the energy and defence sectors. The protection of property rights is still weak and the private sector remains subject to heavy state interference. Russia is one of the world’s leading producers of oil and natural gas, and is also a top exporter of metals such as steel and primary aluminium. Russia’s manufacturing sector is generally uncompetitive on world markets and is geared toward domestic consumption. Russia’s reliance on commodity exports makes it vulnerable to boom and bust cycles that follow the volatile swings in global prices.

The economy, which had averaged 7% growth during 1998-2008 as oil prices rose rapidly, was one of the hardest hit by the 2008-09 global economic crisis as oil prices plummeted and the foreign credits that Russian banks and firms relied on dried up. In 2014 economic growth declined further when Russia forcibly violated Ukraine’s sovereignty and territorial integrity, and interfered in Ukraine’s internal affairs. The tensions not only heightened perceptions that Russian investments had become riskier; they also dramatically increased the costs of external borrowing for Russian banks and firms. Spreads on Russian credit default swaps peaked in December at 578 basis points, compared to 159 a year ago. Together with the financial sanctions imposed on Russia in late July, which have restricted the access of Russia’s largest state connected banks and firms to Western international finance markets, this all but extinguished investment.

The economic impact of sanctions is likely to linger for a long time. As lessons from international experience demonstrate, economic sanctions could well alter the structure of the Russian economy and the ways in which Russia integrates with the rest of the world. And going forward, risks arising from a lower oil price and continued economic sanctions environment will need to be managed. The main medium-term risk for Russia’s growth lies in the continued dearth of investment and lack of affordable credit. In particular, less foreign direct investment could limit the transfer of innovation and technology that is critical to increasing Russia’s growth potential.

The World Bank notices that systematically lower investment rates will ultimately lessen Russia’s prospects for growth in the coming years and limit already modest growth potential. Also, the Bank emphasises that as long as access to external finance continues to be a constraint, a policy of careful management of financial sector risks and buffers will be important.

Country in FocusRussia

Page 21


Despite the economic turmoil, Russia has so far avoided recession. In 2014, growth was moderate at 0.6 percent, due to the carryover effect from 2013 growth of 1.3 percent. Two reasons contributed to this result. The government and the Central Bank moved swiftly, policy responses to both shocks were adequate. The economy was stabilised successfully. The planned switch to a free float of the rouble was advanced to November and other measures to support financial stability were introduced promptly, including the recapitalisation of banks in December. The oil price slump and stricter sanctions came late in 2014, so that their impact began to affect the economy only in the final quarter of 2014, the effects are likely to be more profound this year and in 2016. Other supportive circumstances relate to the balancing effect that imports, lowered by the geopolitical tensions and sanctions, had in softening the impact of the oil terms of trade shock.

In April, the Russian Ministry of Economic Development predicted that the Russian economy to fall by around 3% in 2015, and to grow less than 1% in 2016 and average only 2.5% growth through 2030. This weak turnaround is supported by the recovery of oil prices, better international relations achieved in the first half of 2015 and on the success of import substitution programmes. A spike in consumer price inflation, which has peaked at around 17%, resulted in a sharp fall in real wages, weighing on private consumption. The current account remains in surplus because lower revenues from oil and gas exports are more than offset by falling imports, which reflect weak domestic demand and sanctions.

Finally, in the second half of 2014, the Russian rouble lost about half of its value, contributing to increased capital outflows that reached $151.5 billion for the year. It is projected that investment demand will continue to be deeply depressed throughout 2015, with an estimated decline in gross capital formation of 15.3%. In 2016, with external and credit conditions somewhat improved, investment should see a marginal recovery. The weaker rouble and trade restrictions gave a slight positive boost to the manufacturing sector. The depreciated ruble could create incentives for expansion in some tradable industries. However, structural rigidities and the surging cost of imported investment goods and credit may dampen these benefits. Thus its potential effect is likely to be limited. The rouble still remains volatile. Declining oil prices, lack of economic reforms, and the imposition of foreign sanctions have contributed to the downturn and created wide expectations the economy will continue to slump.

Facts & Figures

Capitaland largest city

Moscow

Official languagesRecognised languages

Russian35 other languages co-official in various regions

Ethnic groups 81.0% Russian3.7% Tatar1.4% Ukrainian1.1% Bashkir1.0% Chuvash0.8% Chechen11.0% others / unspecified

Demonym Russian

Government Federal semi-presidential constitutional republic

■ President Vladimir Putin ■ Prime Minister Dmitry Medvedev ■ Chairman of the Federation Council

Valentina Matviyenko

■ Chairman of the State Duma

Sergey Naryshkin

Legislature ■ Upper house ■ Lower house

Federal AssemblyFederation CouncilState Duma

AreaTotal 17,098,242 (Crimea not

included) km2 (1st)6,592,800 (Crimea not included) sq mi

Water (%) 13.0% (including swamps)

Population2015 estimate 143,975,923 (Crimea not

included) (9th)

Density 8.4/km2 (217th)21.5/sq mi

GDP (PPP)TotalPer capita

2015 estimate$3.458 trillion (6th)$24,067 (53rd)

GDP (Nominal)TotalPer capita

2015 estimate$1.176 trillion (15th)$8,184 (74th)

Currency Russian Ruble (₽)(RUB)

Time Zone (UTC+2 to +12)

Drives on the Right

Calling Code +7

Internet TLD .ru.su.рф


Enthusiasm for Mergers and Acquisitions has barely flinched despite the high volatility of the last two quarters as businesses seek increasingly innovative methods to

maximise efficiency and profits.

Globally, there are deals to the value of $3.7 trillion either in progress or completed during this calendar year, a 22% increase from the same time last year. There is in fact still time for a further flurry of deal-making to reach 2007’s all-time record volumes of $4.8 trillion.

For that reason alone some investors are wary as the 2007 record was hardly a good omen. Sceptics point to the poor track record of giant mergers, often failing to deliver the projected growth in earnings and the product more often than not of the hubris of an empire-building Chief Executive. In the 1980s industrial giant GE made an ill-fated foray into investment banking by acquiring Kidder Peabody only to sell it three years later to Merrill Lynch after an accounting scandal. The ‘dot com’ period also created a frenzy of deals such as Vodafone’s takeover of Mannesman, the merger of AOL and Time Warner, and MCI/Worldcom whose CEO Bernie Ebbers was gaoled for fraud.

On the flipside, M&A activity makes financial sense for many companies. As interest rates in the USA have not changed for almost a decade and financing costs have remained at all-time lows, corporate treasurers have found numerous opportunities to create synergies through acquiring or merging with competitors. In an increasingly volatile, price sensitive and more globalised economy, businesses see a lot of merit in increasing their influence through volumes of scale, increasing their operating margins and eliminating duplication of business lines. There is also an element of consolidation driven by balance sheet concerns and a desire to create greater financial shock absorbers following the experiences of the great financial crisis.

The recent turbulence in China, the potential rise in interest rates and the precipitous decline in the price of oil have prompted a rethink by merger-happy CEOs however. Two major deals have already been withdrawn. Agriculture giant Monsanto’s acquisition of Syngenta while Teva’s takeover of Mylan failed due to the presence of an obscure but effective ‘poison pill’ defence, utilising an old Dutch foundation or ‘Stichting’ with powers to veto takeovers.

Whilst the USA still accounts for over half this year’s M&A activity the Asia Pacific region had been witness to the strongest growth, up 60% on the prior year with a raft of consolidations in conglomerates driving volumes of over $850 billion.

Economy in FocusMergers & Acquisitions

22 Page


The biggest deal of the year however has seen oil major Royal Dutch Shell acquire British Energy producer BG Group for around $80 billion with AOL Time Warner seeking to acquire rival Charter Communications for a similar amount. In addition to rising volumes, the average premium paid has been trending upward. Deal flow was near its bottom during the Eurozone sovereign debt crisis in 2011/2012 and premia paid on takeovers was just under 14%. In the following four years the average premium doubled while it currently stands around 25%.

Corporate activity has also been distorted to an extent by the proliferation of share buybacks, especially in the US for a variety of reasons. One of those has been the rise of the activist shareholder. Veteran investor Carl Icahn was one of the first high profile activists over 30 years ago, referred to at the time as ‘corporate raiders’ engaged in the act of ‘asset stripping’ as he took control of airline TWA and attempted to gain control of US Steel.

More recently, he took a stake in Mylan with the aim of preventing the company what he considered was too much for an acquisition target. He also attempted to force changes in AOL Time Warner, another regular company in the M&A news. Apple has become his latest target, taking a 5% stake.

This is partly why cash-rich Apple with over $80 billion in current assets and total assets of over $230 billion has issued debt of $55 billion. The sole purpose has been to fund the buyback of its own shares, thus returning cash to its shareholders by way of a return of capital rather than a dividend.

That a company with such a huge amount of liquidity would willingly take on debt seems illogical however the complexity of taxation in a multi-jurisdictional world has given rise to such anomalies. In simplistic terms the repatriation of funds to the US would see a bigger tax liability arise than the servicing of the debt. Daniel Loeb of Third Point and Bill Ackman of Pershing Square have been equally vocal in driving changes at companies deemed to be complacent in the use of shareholders’ funds. The message has been clearly issued to CEOs to not sit on huge cushions of cash unless they have plans to use it efficiently.

Some investors are sceptical regarding the motives of some merger activity. The reduction in the number of shares in issue inevitably affects the Earnings Per Share measure and therefore make CEO performance look artificially strong as the growth in EPS has been accompanied by large volumes of share buybacks rather than through organic growth.

Indeed, in the US, buybacks have served an increasingly important role in the direction of the S&P 500. Equity investors generally expect their return to be a combination of capital growth caused by the quality of management and the business environment and income from dividends as their stake allows management to share out some of the profits.

Throughout the 2000s, share buybacks have totalled over $1.5 trillion dollars, actually exceeding the sum paid out to investors through regular cash dividends. As markets attempt to understand the impact of interest rates, energy and commodity prices and economic growth, M&A activity could well exhibit a high level of volatility in the remainder of the year.

Date Buyback (BLN)

Buyback Yield

Dividend (BLN)

Dividend Yield

Dec 2000 $34.9 1.4% $33.5 1.2%

Dec 2001 $42.1 1.5% $35.0 1.4%

Dec 2002 $42.2 2.0% $48.1 1.9%

Dec 2003 $46.8 1.5% $39.8 1.5%

Dec 2004 $70.1 2.1% $79.9 1.9%

Dec 2005 $112.5 3.2% $54.4 1.7%

Dec 2006 $110.5 3.7% $61.9 1.8%

Dec 2007 $152.1 4.7% $78.2 2.0%

Dec 2008 $50.6 4.4% $65.2 3.2%

Dec 2009 $96.4 2.4% $54.7 2.3%

Dec 2010 $87.0 2.6% $61.7 1.9%

Dec 2011 $94.2 3.7% $70.7 2.1%

Dec 2012 $102.2 3.0% $92.4 2.3%

Dec 2013 $135.8 2.9% $88.1 1.9%

Dec 2014 $133.9 2.9% $100.6 2.0%

Mar 2015 $131.3 2.8% $96.5 2.0%

Page 23


24 Page



The third quarter was one of high volatility in equity markets, currencies and commodities.

Equity Markets & CurrenciesThe JSE All Share Index declined by 12.6% from a peak on 21st July to a low on 24th August. It has since recovered a large portion of the fall. This decline is slightly less than the fall of 15.3% recorded by the FT100 over the same period. The fall in the JSE would have been more severe if it had not been protected by a sharp decline in the rand. During the quarter the rand fell to an all-time low against the dollar of 14.15 and also against the pound to 21.50. The weakening trend in the rand was accentuated by the devaluation of the Chinese yuan against the dollar. This move put world currency markets in disarray for a few weeks.

Interest RatesDespite assurances from the governor of the Reserve Bank in May that interest rates would not be increased unless CPI stayed above the target of 6%, the members of the Monetary Policy Committee saw fit to raise rates by 0.25% in July. Although there are inflationary pressures due to hikes in electricity tariffs, rising food prices and a weak rand, inflation has not yet exceeded the target. In September the MPC kept interest rates unchanged.

Medupi Unit 6 Comes On StreamFinally we have seen positive developments on the electricity front. The long awaited Medupi Power station is now contributing to the national grid. The 794MW Unit 6 was commissioned in March, but was only synchronised to the grid in late August. The effect of this and better management of maintenance work has resulted in there being no load-shedding for over 7 weeks. As we are over the high usage winter months it is likely that load-shedding is a thing of the past for the rest of 2015 and hopefully well into 2016. We look forward to the addition of the other 5 Medupi units over the next few years. The next Medupi unit, number 5, is due to come online in the first half of 2017.

Oil, Precious Metals & CommoditiesThe impact of the lower oil price, precious metals and specifically commodities on shares prices on the JSE over the past year or so has been dramatic. Sasol is significantly affected by the oil price and its share price has fallen by 45% from its all-time high of R650 in June 2014. The weaker rand has protected Sasol to a large degree. The impact of lower prices in gold and platinum, combined with higher wages, lower grades and increasing costs of energy and other costs, has resulted in dramatic falls in share prices. Anglo Gold share price has fallen to its lowest level in 12 years and is down by 79% from its peak in June 2008. Anglo American Platinum is at a 10 year low and down by 84% from its 2008 peak, while Impala platinum is down by 90% from its 2008 peak. Other resource shares have also fallen sharply in line with declining metal and mineral prices. Kumba Iron Ore is down by 88% from its peak in February 2013.

The sheer magnitude of these falls raises some very serious questions regarding the commodity “super cycle” and the health of the Chinese economy. Although Chinese growth has slowed in recent years from over 10% to close to 7%, there should still be sufficient demand to keep commodity prices at reasonable levels, or is the Chinese economy in worse shape than official statistics reveal? Has China over-spent on infra-structure development? Is the super cycle history? What about demand from other BRIC countries and developing economies? Are resource shares offering the best buying opportunity in a decade? At this time will fortune favour the brave?

Regional UpdateNews from South Africa

Jan 2010 Feb 2011 Apr 2012 Jun 2014 Sep 20140

20406080

100120140160180200220240260

Iron Ore Pellets Price(61.26 USD/t - 31 August 2015)

Iron

Ore

Pel

lets

Pric

e (U

SD/t)

Page 25


Climbing Back Into Key ListingsSouth Africa is now in the top 50 once more of the Global Competitiveness Report of the World Economic Forum (WEF), reversing a four-year downward trend with an impressive seven-place jump. In the report released today, South Africa leapt to 49 among 140 countries assessed.

However, Mauritius remained the sub-Saharan region’s most competitive economy at 46 with Switzerland retaining its first place in the global competitiveness index for the seventh consecutive year.

Defining competitiveness as the set of institutions, policies and factors that determine the level of productivity in a country, the global scores are calculated by drawing together country-level data covering 12 categories – the pillars of competitiveness – that collectively give a comprehensive picture of a country’s competitiveness.

Twelve PillarsThe 12 pillars are: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labour market efficiency, financial market development, technological readiness, market size, business sophistication and innovation.

South Africa’s climb was largely due to the increased uptake of information communication technology, especially higher internet bandwidth, and improvements in innovation, which establish the economy as the region’s most innovative.

The country is also home to the continent’s most efficient financial market, driven by strong domestic competition and an efficient transport infrastructure. It further benefited from strong institutions, particularly property rights and a robust and independent legal framework.

The WEF said reducing corruption and the burden of government regulation and improving the security situation would further improve institutions.

Weak PointsThe report also said that South Africa had to address its inefficient electricity supply and inflexible labour market. But more worrisome was health and the quality of education, where higher secondary enrolment rates would not be enough to create skills needed for a competitive economy.

WEF economists have said that the relative rankings are not a race as to who is more competitive. What South Africa needs to do is move towards a knowledge-driven economy. The report said seven years after the global financial crisis, the world economy was evolving against the background of the 'new norma' of lower economic growth, lower productivity growth, and high unemployment. Although overall prospects remained positive, growth was expected to remain below the levels recorded in previous decades in most developed economies and in many emerging markets.

The report stated that growth prospects could still be derailed by the uncertainty fuelled by a slowdown in emerging markets, geopolitical tensions and conflicts around the world, as well as by the unfolding humanitarian crisis. There are some positive developments though, such as the rapid diffusion of information communication technologies, which have given rise to new business models and bores great promise for a future wave of innovations that could drive growth.

The WEF said geographical patterns of growth continued to shift, with advanced economies gaining ground on emerging markets. In 2013, emerging markets grew almost four times as quickly as advanced economies; this year they are projected to be growing less than twice as quickly.

Datsun Drives Back Into Our HeartsDatsun has performed strongly in South Africa since the reintroduction of the marque to the market in August last year. The vehicle brand was re-launched by the Nissan Motor Company of Japan in four emerging markets – India, Indonesia, Russia and South Africa – last year.

The Datsun Go has, in the 11 months since it was launched, achieved total sales of 5 561 units in South Africa to become the market leader in the A-segment, the crowded and highly competitive entry-level segment of the car market.

Datsun South Africa has attributed the success of the relaunch of the brand in the country to its links with the past and its competitive pricing. Despite the challenging economic environment, which has put pressure on household disposable income, the company is optimistic about future sales of Datsun.

26 Page



The Capital International Group is extremely proud to sponsor Jack Cookson, who we reported back in the Spring was top in his class and attained bronze in August at the

European Championships. We have now caught up with him, and in his own words here is how he has fared so far this year.

This summer has been so hectic, but I am glad to say that I have achieved every goal I set myself at the start of the year. I knew I had set myself up well after winning the RYA Youth Nationals, but I had no idea how competitive I would be on the European and World stages.

I went into the Europeans feeling positive and that I was capable of achieving my goal of a top five finish. I started off with a very consistent qualifying series; this set me up well when the fleets were split into gold, silver and bronze, (gold being the top group where the European title was up for grabs). I easily qualified for gold being around 7th overall.

Over the last three days of racing I put together a string of top five results in strong winds. I was really happy with this, as strong winds had always been my weakness and went into the last day lying 3rd overall. It was really difficult for me to move forward as second was around 15 points ahead of me, but 4th was only two points behind. I knew that I would have to defend hard to keep my place in the top-three.

We had two races on the last day where I finished 2nd and 4th which was brilliant, it meant I held on to 3rd and ended up only a few points behind 2nd. I could believe it, 3rd at the Europeans, but I knew if it would have been slightly lighter winds I would have been in with a really good chance of the title. I left the Europeans feeling motivated for the next event which was the EUROSAFS in France.

After two long days in the van travelling from Portugal to France, I still felt ready to fight for the EUROSAF title. After finishing 6th at this event last year I knew that I could do better and was hoping for my second podium of the year. The racing that week started with really tough conditions, the wind was really shifty and unpredictable; meaning whoever could string together consistent results would come out on top.

As the EUROSAFS is where the top-two from each European country are selected to compete and so the competition was fierce. It was really difficult to maintain a place at the front of the fleet, but I managed to string together some consistent results – although I found myself being less consistent than in previous events.

I went into the last day of racing lying 3rd overall only two points off the lead, meaning whoever out of the top-three won the medal race (which in the final race scores double points over a short course) would win overall. The medal race was really windy, blowing around 25-30mph. The first upwind was really tight; all my main competitors were within a few meters of me. I rounded the top mark in 4th, but I knew this wasn’t good enough.

I sailed a brilliant downwind, rounding for the next upwind in 3rd. I then sailed a great second upwind meaning I was 2nd to the finish. The French sailor who beat me in the medal race went into the day 5th overall so could not challenge for the win. This meant I had won!! I won the EUROSAFS, I was so proud. I stood on the podium with the National Anthem playing and the Union Flag behind. I felt great, I knew all of my hard work had paid off and I had done what I set out to do.

Jack Cookson | Success StorySailing to the Olympic Games

Page 27


Next stop Canada - we landed only five days after leaving the EUROSAFS. I was starting to feel a little more tired out. By the second day of training I had caught a cold and developed a really bad cough. Even though the weather was beautiful in Canada, with most days being around 25-30 degrees, it only made my cold worse. I went into the first day of racing not at my best.

The first few days were tough, I was seriously under-performing, and in fact all the Brits were, with me being the worst.

After two days I was lying around 40th overall which was depressing. Moving into gold fleet racing I knew I really needed to start performing again. I went onto the water on the last few days with a real fire to perform. I got some great results from then on, showing that I was back and was ready to put up a fight. By the second to last day I was 20th, which was already a good recovery. But I knew I could still perform better. On the last day of racing I put together the best day of the entire field. I moved up to 7th, tying 6th overall. I was so happy with my result. I managed to claw back a good result after such a bad start. I also managed to beat all my British competitors, which was great. I was happy, but in the back of my mind I knew that if I would have had a good start to the week I very possibly could have won the World Championships.

It has been a brilliant summer – 3rd, 1st and 7th – not bad at all, being top Brit in all of the events apart from one (the Europeans) where one of my team mates, Jamie Calder managed to beat me, wasn’t bad either.

I have now moved into the Laser Standard. This is the Olympic boat, the men’s boat where I will now need to progress through the fleet and become the best to represent Great Britain at the Olympics. I have done 6 days training now with the Olympic guys and managed to beat them in some practice races in light winds. I have got a meeting with the Olympic pathway manager next week to discuss my next step and how they can help me towards my Olympic goal.

I feel like the transition into the Laser Standard is going well. I have also stuck the Capital International Group logo on all of my Laser Standard sails and have had quite a few people ask me about the business and what you guys do.

Without your support none of this would have been possible this year. I am so grateful for all of the support I have been given, none more so than from you. It has been a privilege to be supported and I hope that our relationship continues long into the future, and I hope that Capital International Group stays with me until I eventually reach my goal of competing at the Olympic Games.

Jack Cookson is clearly on his way to sailing to the Olympic Games…

SUNDAY | 13 SEPTEMBER 2015

On a dull, overcast Sunday Neil Cullington, John Venables and Cole Hayes competed in, and finished, the End 2 End Challenge Mountain Bike Event on the Isle of Man.

The 75km route across the Isle of Man incorporates 1,500 metres of climbs with a thrilling mixture of fast fire roads, sweeping moorland paths, country lanes and forest single track. Out of the 1,700 people who took part, only 777 finished the gruelling course. A huge congratulations to John Venables who finished the course in 37th place with an amazing time of 3hr 42:16. He’s a lean, mean cycling machine!

Well done on tackling this huge challenge and to everyone else involved...

SATURDAY | 29 AUGUST 2015

Volunteers from the Capital International Group gave up their Saturday and got involved in ‘Doing it for Debs’ at the Relay For Life Isle of Man.

Relay For Life is an overnight community event that celebrates cancer survivors, remembers those lost and rallies everyone to fight back so we can see a day when all cancers are cured.

Kirsten Gorry would like to thank those from the Group that got involved as well as all her friends and family who took part and supported such a worthy cause. So far ‘Doing it for Debs’ raised £2,815.50. We at the Capital International Group would like to thank all those who participated and were involved from across the Isle of Man in this fundraising event!

28 Page


Group AnnouncementsIsland Participation

Neil Cullington Cole Hayes

John Venables


Pete Miller recently returned to work after his holidays. Whilst on holiday, Peter took part in the 2015 Tower Insurance Isle of Man 100 Miles Event which was held in

Castletown over the weekend. Around 100 people entered the event and only 49 people finished the full 100 mile course. Pete finished the course with a time of 23 Hours 38 Minutes averaging 4¼ miles per hour. This is an amazing achievement - congratulations to Pete and all who took part!

All those who finished are now eligible to join The Brotherhood of Centurions which is a club for racewalkers who have completed a distance of 100 miles in Britain within 24 hours.

Pete Miller


A massive congratulations to all that took part and completed the ToughMann 2015 Challenge, and especially to our own who entered as the Capital International Team.

Over 10,000 metres with 25 obstacles, 1,000ft ascent and 6 tons of ice the whole course was designed to test physical strength and mental courage.

It was a tough course to complete, but all Capital members did it!

TUESDAY | 21 JULY 2015

We would like to congratulate Corinthians for winning the 2015 Capital Cup beating Douglas Athletic Football Club 1-0 in the final game of the day, with the winning goal

being scored with the last kick! The Capital Cup is a 7 a side football tournament that features 8 men’s senior teams. Capital International Group are proud to sponsor the tournament in aid of Manx Cancer Help. A huge thank you must go to the players, clubs and referees, including Colin Coole, for yet another hugely successful tournament that has raised £600 for Manx Cancer Help!

CIG

- In

vest

men

t Rev

iew

Q3

- 201

5 - V

1.01

-09.

15

This document has been prepared for information purposes only and does not constitute an offer or an invitation, by or on behalf of any company within the Capital International Group of companies or any associated company, to buy or sell any security. Nor does it form a constituent part of any contract that may be entered into between us.

Opinions constitute our judgement as of this date and are subject to change. The information contained herein is believed to be correct, but its accuracy cannot be guaranteed.

Any reference to past performance is not necessarily a guide to the future. The price of a security may go down as well as up and its value may be adversely affected by currency fluctuations.

The company, its clients and officers may have a position in, or engage in transactions in any of the securities mentioned.

The regulated activities are carried out on behalf of the Capital International Group by its licensed member companiesCapital International Limited, Capital Treasury Services Limited, Capital Fund Services Limited Capital Financial Markets Limited and Capital International Fund Managers Limited are all licensed by the Isle of Man Financial Supervision CommissionCILSA Investments (PTY) Ltd, trading as Capital International SA, is licenced by the Financial Services Board in South Africa as a Financial Services Provider (FSP No 44894)Capital International Limited is a member of the London Stock ExchangeRegistered Address: Capital International Group, Capital House, Circular Road, Douglas, Isle of Man, IM1 1AGRegistered Address: CILSA Investments (Pty) Ltd, Office NG101A, Great Westerford, 240 Main Road, Rondebosch 7700, South Africa

Isle of Man | Head OfficeCapital International GroupCapital HouseCircular RoadDouglasIsle of ManIM1 1AG

www.capital-iom.com

T : +44 (0) 1624 654200 F: +44 (0) 1624 654201 E: [email protected]

South Africa OfficeCapital International SAOffice NG101AGreat Westerford240 Main RoadRondebosch 7700South Africa

www.capital-sa.com

T : +27 (0) 21 201 1070 E: [email protected]


in

Documents

Capital International Group | Investment Review