REG-BH Macro Limited: Monthly Shareholder Report - December 2015 <Origin Href="QuoteRef">BHMG.L</Origin> - Part 2

BH MacroAnnouncement

29/01/2016 13:40

- Part 2: For the preceding part double click  ID:nPRrT01E2a 

accelerating recovery and convergence      
                to price stability will be greatly disappointed look particularly elevated.          
                Should that be the case, pressure on the ECB to ease monetary conditions again,      
                making use of all its available instruments, will increase.                          
                                                                                                     
                UK                                                                                   
                Entering the seventh year of its expansion, the UK economy has lately been           
                marked by a dichotomy between developments on the real and nominal sides: while      
                indicators in real, or volume, terms have proved resilient - although not            
                completely immune to the global slowdown - indicators in nominal, or price,          
                terms have remained sluggish. For instance, while real GDP likely expanded by        
                about 2.2% in 2015, both headline and core inflation remained low, at 0.0% and       
                1.2% y/y, respectively. Similarly, while on-going strong job growth led to a         
                further drop in the unemployment rate, the tightening of the labour market           
                failed to translate into meaningful upward pressure on nominal wages. As             
                inflation keeps undershooting the Bank of England's 2% inflation target, the         
                Bank remains in no hurry to hike rates in the near future, especially as the         
                economic outlook in the short term has become more clouded. First, the past          
                appreciation of Sterling still poses a headwind to the economy, weighing on          
                exports. Second, fiscal policy should become slightly more contractionary this       
                year, compared to the last couple of years. Thirdly, the uncertainty                 
                surrounding the EU referendum may result in companies putting investments on         
                hold until the uncertainty over the UK's future in the EU has been removed.          
                Thus, even in a scenario where the UK remains a member of the EU, confidence         
                may be adversely affected in the run-up to the referendum. In the alternative        
                scenario, where the UK votes to leave the EU, the economy would likely suffer        
                more, at least in the short term. Moreover, such a scenario would rekindle           
                fears over a break-up of the UK, as the question of Scotland's independence          
                could come back on the table.                                                        
                                                                                                     
                In our base case, the UK economy will continue its expansion and make up for         
                any pre-referendum slowdown in the data once the referendum has been held,           
                driven by robust gains in incomes in real terms - due to inflation rates even        
                lower than nominal wages growth - over the past couple of years and an on-going      
                need for housing and infrastructure investment. The gradual erosion of spare         
                capacity and the further tightening in the labour market should eventually set       
                the scene for the first rate hike, but only once wages growth have shown             
                clearer signs of acceleration. However, the risks remain skewed towards a later      
                rate hike, due to a weak global backdrop, the sensitivity of the currency,           
                uncertainty about the new level of the non-accelerating inflation rate of            
                unemployment (NAIRU) and an elastic supply of labour to the UK from the EU.          
                Lastly, the Bank of England may well decide to implement macro-prudential            
                measures to tackle any signs of overheating, which could weigh on economic           
                activity and act as a substitute to monetary tightening.                             
                                                                                                     
                Japan                                                                                
                While 2014 was marked by a large swing in activity due to the introduction of        
                the consumption tax hike, 2015 saw steadier, modest gains for the most part.         
                The output gap stepped down 1 percentage point at the start of the year and was      
                flat thereafter.  The unemployment rate maintained its downward trend seen over      
                the previous five years and looks to end 2015 at its lowest level since 1997.        
                For the most part, survey measures like the Tankan and Shoko-Chukin survey of        
                small and medium-sized businesses moved sideways over the year, and industrial       
                production was flat on balance.                                                      
                                                                                                     
                Looking to 2016, Japanese growth is likely to be tepid, averaging fairly close       
                to the slow rate of potential output growth.  Solid momentum in private              
                domestic demand, supported by ongoing income gains, should be partially offset       
                by a difficult external outlook due to the recent strength in the yen, as well       
                as ongoing weakness in major Asian export markets.  Government spending could        
                be a slight drag on the economy, and we see no reason to suppose that the            
                upcoming corporate tax rate cut will materially boost aggregate demand in the        
                near term.                                                                           
                The inflation performance was mixed over the year.  Abstracting from the             
                effects of the consumption tax increase, the year-on-year change in core prices      
                was relatively flat in 2015, remaining within a thin band straddling 0%              
                throughout the year, as falling energy prices, which are included in Japan's         
                definition of core inflation, held down the aggregate.  On the other hand, the       
                12-month change in consumer goods excluding food and energy steadily moved up.       
                Stable 0.1% seasonally adjusted month-on-month gains were added to the 12-month      
                change, while essentially flat readings in 2014 dropped out.                         
                                                                                                     
                After significantly boosting its bond buying in October 2014, monetary policy        
                was essentially on hold throughout the year.  The Bank of Japan ("BoJ") tweaked      
                its policy at the December meeting by extending the maturity of the bonds it         
                will buy from ten to twelve years, and introducing a new program to buy              
                exchange-traded funds of stocks issued by companies actively investing in            
                physical and human capital.  Markets initially rallied, thinking that it             
                represented a true increase in policy accommodation, but then they pulled back       
                once they realised their extremely limited nature.  The Bank went on to              
                describe its actions as a technical adjustment.  All told, it served to raise        
                questions as to whether the BoJ will revert back to incremental policy changes,      
                without actually moving the needle on accommodation.  Governor Kuroda had said       
                a month earlier that the BoJ needs to lead markets in pushing up inflation           
                expectations; it cannot simply rely on wages to pick up on their own.  With          
                Governor Kuroda's aide recently saying that the conditions are in place, more        
                accommodation looks to be under serious consideration.                               
                                                                                                     
                Indeed, the need for further accommodation has increased of late as the              
                re-inflationary backdrop has deteriorated.   In the second half of December,         
                the yen appreciated over 2% against the dollar and then opened the year              
                strengthening another 2%.  Oil took another step down, and while the BoJ is          
                capable of separating the direct effects of oil on its definition of core            
                inflation from changes in the underlying trend, there are still some spillover       
                effects to non-energy prices.  Consumer inflation expectations appear to have        
                stumbled in the last few months with a weighted average of household inflation       
                expectations falling 0.6% from its first-quarter average.  Spring wage               
                negotiations appear to be disappointing.  All told, while the 12-month change        
                in core prices should move up due to base effects as the previous sharp              
                declines in energy prices fall out of the calculation, in this environment           
                further inflation gains excluding food and energy are not in the offing.             
                                                                                                     
                China                                                                                
                2015 was a most challenging year for China, gripped by an extremely challenging      
                combination of high and still rising leverage, and slowing underlying growth,        
                both in real and nominal terms, as large overcapacity in a number of sectors         
                induced deflationary pressures. Attempts by policy makers to ease monetary           
                conditions in the form of cuts to the reserve requirement ratio ("RRR") and          
                official interest rates, showed diminishing returns in terms of their ability        
                to generate credit and boost economic activity. This is perhaps unsurprising as      
                the transmission mechanism tends to lose its effectiveness in a high leverage        
                environment. As a result, in 2015 GDP growth slowed from 7.7% to 6.9%, the           
                lowest in 30 years, although broadly in line with the government "about 7%"          
                target. Speculation on the accuracy of the China growth data has risen, as many      
                analysts believe that the actual growth rate is lower than the published             
                figure. Moreover, China's stock and foreign exchange markets witnessed great         
                turbulence. Indeed, on the one hand the Shanghai composite index after nearly        
                doubling from November 2014 to mid-June 2015, subsequently collapsed returning       
                to its January 2015 level. On the other hand, the Yuan depreciated by                
                approximately 3% from mid-August 2015 to year-end, despite massive intervention      
                by the People's Bank of China ("PBoC") aimed at stabilising the exchange rate        
                until it joined the IMF SDR basket on 30 November. Importantly, capital outflow      
                pressures persisted thereafter. Throughout the whole of 2015 foreign exchange        
                reserves contracted by more than US$500bn, to US$3.3tn.                              
                Looking forward, 2016 looks as if it could be another turbulent year for China.      
                In particular, capital outflow pressures are likely to persist despite               
                tightened capital controls and a large current account surplus, along with the       
                rising demand from onshore corporates and households aimed at diversifying           
                their assets from RMB into USD. The on-going anti-corruption campaign could          
                also exacerbate capital flight. As such, the PBoC will likely encounter              
                increasing difficulties in smoothing out the pace of the depreciation, as the        
                costs in terms of reserves' depletion are likely to rise. The official GDP           
                growth target for 2016 is likely to be lowered to about 6.5%, a result which         
                may be a challenge to achieve given the increasing ineffectiveness of the            
                monetary transmission channel and the limited room to ease monetary policy           
                conditions amid rising outflows. Fiscal policy is likely to be expanded, but         
                not to an extent which can stabilise the economy, as only small-scale fiscal         
                easing measures are poised to be introduced after the March National People's        
                Congress. Last, but not least, elevated volatility in financial markets is           
                likely to persist, at least until such a time as the exchange rate is let freer      
                to adjust to market forces, thus damaging growth prospects.                          
                                                                                                     
Enquiries       Northern Trust International Fund Administration Services (Guernsey) Limited         
                Harry Rouillard +44 (0) 1481 74 5315                                                 

Important Legal Information and Disclaimer

BH Macro Limited ("BHM") is a feeder fund investing in Brevan Howard Master
Fund Limited (the "Fund").  Brevan Howard Capital Management LP ("BHCM") has
supplied certain information herein regarding BHM's and the Fund's performance
and outlook.

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Information and opinions presented in this material relating to BHM and the
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fluctuation, especially during periods of high market volatility or disruption.
Any estimates should be taken as indicative values only and no reliance should
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AMOUNT ORIGINALLY INVESTED AND YOU MAY LOSE ALL OF YOUR INVESTMENT.  PAST
PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE RESULTS.

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• The Fund is speculative and involves substantial risk.

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increased market volatility, less favourable or unstable tax provisions,
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The above summary risk factors do not purport to be a complete description of
the relevant risks of an investment in shares of BHM or the Fund and therefore
reference should be made to publicly available documents and information.



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