Global equity market outlook
Equity Market fears resurface
Yet again! The mood swings of the markets tormented investors, eroding feeble hopes and restoring major fears. The optimism that embraced the first quarter 2012 vanished in the second quarter, halting the equity rally that preceded the downturn. Global economic recovery relapsed. The European debt crisis resurfaced. Risk aversion prevailed. The landscape had changed quite quickly and although along a too familiar path, market participants could not predict the turn of events.
Sentiment improved as the year commenced buoying global equities and reviving hopes of economic stability worldwide. The ECB's longer-term refinancing initiative and improved US data played significant roles in the strong market returns gained in the first quarter. However, equity markets turned volatile in April and by late May, concerns about the financial health of Europe's sovereigns coupled with fragility in US and China stoked widespread volatility.
Amidst global equities struggle to sustain the gains from the first quarter, US equities still managed to produce the strongest return for the first half of 2012, closing the period with returns of 8.3 per cent, reflected by the S&P 500 index's performance. The moderation of Europe's equities' performance was no surprise given the fear that re-emerged in this region within the second quarter.
The MSCI Euro posted returns of -2.4 per cent, underperforming its peers for the first half 2012. The BRICs trailed closely behind, as they succumbed to the global slowdown, ending the first six months of 2012 with negative returns of 1.8 per cent. Asia's emerging markets performed in line with most developed countries as represented by the MSCI Asia ex Japan Index's and MSCI World Index's return of 4.5 per cent respectively. Global markets started off the year on a positive note until the inflection point that reversed some of its early gains. (Exhibit 1)
Performance of the US Market
The first quarter 2012 which showed signs of recovery for the US Markets was followed by a sluggish second quarter as indices responded to weak US Economic data. The US's S&P 500 Index witnessed a volatile second quarter following a first quarter rally of 12.0 per cent. Three consecutive months of disappointing job data has left unemployment rates unchanged from April 2012 at 8.2 per cent. Consumer spending stalled in May as stagnant wages and slackening employment impacted the US economy. As US economic recovery faltered and Europe's crisis spiralled, the Fed intensified their commitment to spur growth hinting at another round of quantitative easing to provide support for local assets including equities.
Performance of European Markets
While Europe's financial dilemma faded into the background in the first quarter, it never really went away. Greece's failure to form a new government in May 2012 sparked political problems threatening its membership in the EU and posing risks to its rescue package. Spain's ailing banking system could no longer bear the strains of its nation's debt burdens resulting in Spain's' request for assistance to support its fragile banks.
The debt of the 17 euro nations climbed to 87.2 per cent of gross domestic product in 2011 from 85.3 per cent the previous year substantially above sustainable levels of 50 per cent Debt/GDP. Fears of default risk shunned investors from Greece's, Spain's and Portugal's capital markets driving equities downwards within the first half of 2012. Spain's equities were the worst performer in the first six months of the year returning — 19.0 per cent, as reflected by the UBEX35 Index followed by Greece's and Portugal's equity markets returns of approximately 12.0 per cent each as reflected by Greece's Athex Index and Portugal's PSI General Index. Germany remained the top performer within the European region gaining 6.3 per cent as at June 29, 2012, reflected by the Dax Index's performance.
the Bric's Markets
The BRIC's half year performance was dragged down by the China equities' muted performance of 0.2 per cent, reflected by the Shanghai SE Composite Index, and Brazil's equity market loss of 11.0 per cent, reflected by the Bovespa Index. (Exhibit 3) Among the big four economies, China and Brazil have the heaviest weightings in the MSCI BRIC Index contributing 70 per cent to the index's performance. Economic activity weakened in all countries with Chinese manufacturing output declining for the past four quarters. Overall, these regions witnessed a moderation in GDP Growth from the last quarter 2011 as China slowed to 8.1 per cent in Q1 2012 from 8.9 per cent, Brazil slowed to 0.8 per cent from 1.4 per cent and India slowed to 5.3 per cent from 6.1 per cent with the exception of Russia increasing to 4.9 per cent from 4.8 per cent.
Brazil's currency, the Real, was the worst performer in the first half of the year declining 7.6 per cent and weighing on its equity performance. The biggest currency falls were in commodity currencies (Brazil) followed by countries with current account deficits (India). Coupled with the volatile global climate, India's economy experienced internal pressures as its currency fluctuated heavily and growth slumped to a nine-year low in the first quarter. Notwithstanding India's slowdown, the regions' equities emerged the top performer amongst its peers in the first half of 2012 gaining 7.6 per cent, reflected by the BSE Sensex 30 Index. Foreign Institutional Investors continued to propel India's equity markets in the first half of 2012 with the strongest inflows of US$8.5 billion within the last 5 years.
Performance of the
Asian equity markets finished the first six months on a positive note although having declined from the highs of Q1 2012. Smaller players within the Asian space outperformed the typically stronger constituents demonstrated by Philippines' equity market returns of 24.8 per cent, reflected by the Philippine SE Index, followed by Thailand's return of 14.3 per cent, reflected by the Thai Index. Singapore's Strait Times Index also posted strong gains of 11.5 per cent as at the ending of June 2012. Philippines's economy has performed well expanding 6.4 per cent in the first quarter, the fastest pace since 2010 and exceeding IMF's 3.5 per cent growth forecast for the global economy this year. Combined with China's economic slowdown, Asia's heavyweights such as Taiwan and South Korea barely contributed to Asia's equity performance as their high dependence on exports innerved investors.
International equity investors remained cautious throughout the first half of 2012 as they began the year with an uncertain outlook and witnessed another turbulent quarter. Market participants had to employ innovative strategies to endure equity markets' volatility.