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August Monthly Investment Bulletins Bedlam Asset Management August 20, 2013 All OK - except for the black hole

of China For the first seven months of the year the portfolio rose by 25.2% vs. 19.3% for the index. During the month, the 6.4% gain was 150 basis points ahead. Three trends continued: the gradual increase in fund flows into equity markets relative to other asset classes, slightly improving economic data across most developed countries, and a mild deterioration in many developing nations. Without shame we admit to being trend junkies in preference to statistical data points. On 1 August every American was $1,783 “better off” than the night before, because of revisions to calculations of official statistics. These also showed a milder recession and a stronger recovery than previously believed. Yet not long before, investors had swooned over the depth of the former and the weakness of the latter. Thus, reacting to statistically “precise” data points often leads to missing the wood for the trees. Trends are clearer. Currently, several patterns stand out. Japan's radical policies are working, such as the leap in nominal and real exports (chart 1, page 4). This pattern is mirrored by rising inflation. Now that Prime Minister Abe and the LDP party have triumphed in the Upper House elections, the next phase of the Abenomics experiment will commence imminently, and propel domestic equity prices higher. America's recovery remains relatively weak and statistically dodgy. Allegedly, second quarter growth annualised was 1.7%, yet simultaneously first quarter growth was revised down by 38%, from 1.8% to 1.1%! Moreover, the June quarter data showed a significant 64% rise in inventories to $57bn, rarely a good indicator of strong growth. European data shows a modest expansion, with fractional improvements in employment, but the recovery overall is weak. Unusually, only UK data seems genuinely strong - such as July's PMI manufacturing index at 58.2, a whopping 29% increase. These improvements may simply be because of robust investment by foreign businesses and individuals (high net worth immigration is off the scale) due to an overall friendly investment climate despite some awesomely bad 19th century infrastructure. Central bankers have a new 'let's pretend' game – guaranteed long term interest rate forecasts. The Fed, ECB, and Banks of Japan and England have all commenced publishing long-term guidance, often based on unemployment. It stretches belief that investors will trust in such malleable guarantees for long, given that employment data can be easily manipulated to include (or exclude) as required, factors such as zero hour contracts, participation rates or the black economy. Central banks seemingly believe that they can micromanage investment flows. It has never worked so far. Although they may incrementally reduce their bond purchasing programmes, our guess is that they will be reversed to re-emerge in different guises for many quarters, for two reasons. The first is persistently weak domestic credit growth (to non-financial companies). Without government support to create credit, a return to a recession becomes probable. American overall credit growth has halved this year and for the private sector has turned negative; it is already so in the eurozone. Only Japan has improved significantly, from -3% to +3% over the 12 months to end-June. For all the cheer in many developed countries about rising house prices, for its effect on “personal balance sheets”, caution is advisable because housing as a percentage of GDP is now small. In America for example, it

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or requiring robust trade or credit growth. heavy industry (Caterpillar's recent results showed a collapse in exports to Asia). China accounted for 49.6% of world GDP growth. Europe‟s modest expansion would cease overnight. politically devaluation is the easiest option.9% for 2012. look horrible. Inc. then growing out of control.5% in the first quarter of 2013.4%.2% rate in 2010. 6. Yet even as China's looming black hole becomes the talking point. flows into developed market equities should continue to surprise. Trends in China are especially worrisome. vs. Despite the politburo seemingly paralysed by the hard choices. portfolio construction is relatively simple. China‟s manufacturing boom was hollowing out many industries internationally. It is worth recalling that in the first quarter this year. The second reason is the increasing signs of deflation taking root. one is the economy failing to rebalance at all. Japan exports (real and nominal): devaluation works Page 2 ©Advisor Perspectives. real urban incomes from 9% to 6%. They are now redeveloping a competitive edge. many economies and sectors will benefit or adapt. but because globally the deflationary and slow growth trends are already clear. Other patterns include exports and producer prices in June down 3. Old solutions of infrastructure expenditure and pumping liquidity into the banks no longer work. 1. less unreliable external data shows various patterns. but this remains politically and socially unacceptable. domestic consumption has fallen this year from 35% to 33%. page 4). .3% at the peak in 2005. accelerating the steady downward trend in world trade (chart 2. even if valuations were low. Timing a renminbi devaluation is impossible. a shock to capital markets. Therefore a currency devaluation seems inevitable.6% to 5. because margins and revenue will be affected simultaneously. autos. Yet on rebalancing. high-end consumption and industrial mining stocks. The economy is being squeezed. Even official data shows ROE for the dominant state–owned enterprises at 5. The deflationary impact will be considerable and quickly exported. Although our credence in its home-baked statistics is zero. These include shipping. It is no coincidence that German factory output has risen in tandem with China‟s bank lending since 2008. nearly half the 10.accounted for 2.1% and 2. Those sectors with significant overcapacity. The rational action would be to close capacity and redirect credit to non state-owned industries. China-dependent emerging markets must continue to disappoint overall.7% year-on-year and corporate profit margins collapsing from 7. All rights reserved. Only five years ago.

.2. Bedlam Funds plc is regulated by the Central Bank of Ireland pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations. A global recovery with weakening world trade? Bedlam Asset Management plc is authorised and regulated by the Financial Conduct Authority (212757). Inc. All rights reserved. 2003 as amended by the European Communities (Undertakings for Collective Investment in Transferable Securities) (Amendment) Page 3 ©Advisor Perspectives.

bedlamplc. (c) Bedlam Asset Management www. All rights reserved. This document is not investment advice or a recommendation to purchase. its most recent prospectus. Past performance is not a re liable indicator of future results. Shares in Bedlam Funds plc may only be sold on the terms of. hold or sell a security.Regulations. Inc. .com Page 4 ©Advisor Perspectives. 2003 (the "UCITs Regulations") and is a recognised collective investment scheme for the purposes of section 264 of the United Kingdom Financial Services and Markets Act. 2000. and pursuant to.