International equities review for 2013
Today we at Bourse review the performance of the international equity markets for 2013. The year brought with it considerable gains and declines across stock market indices of major world players and emerging financial markets alike. Amidst a slew of side stories, the decision announced by the Fed in the fourth quarter to begin tapering its monthly bond purchases while keeping interest rates near zero undoubtedly took centre stage. Tapering intentions, hinged on evidence of economic recovery, buoyed developed markets such as the US and Europe throughout the year while Emerging Markets’ performances were subdued.
The major gains were, to the surprise of many, enjoyed in the developed markets of the US and Europe (Exhibit 1). In contrast, 2013 proved a mixed bag in terms of EM market performances.
India, Asia’s star performer in 2012, reported slower momentum in 2013 but outperformed other emerging markets in the third quarter. The BSE Sensex 100 declined 3.4 per cent in US$ terms year-to-date (Table 1).
Japan’s government stimulus – dubbed ‘Abenomics’ – has lifted the economy, ended the period of deflation, and caused the Nikkei 225 Stock Index to jump 29 per cent in US$ terms in 2013. This gain represented one of the highest returns in the Asian region and the biggest gain for the index since the Japanese bubble of the 1980s. Japan was the fourth largest equity market by market cap in the world for 2013 (Exhibit 2).
China’s Shanghai Composite Index declined 3.9 per cent year-to-date in US dollar terms to end 2013 on a slightly lower note.
Despite its muted performance in 2013, China remains an attractive destination to investors with the Government entering a period of structural and economic reforms intended to promote a more market-driven economy and stimulate growth.
LATIN AMERICA CORRECTS
The stock market indices of Mexico, Colombia, Chile, Brazil and Peru all declined during 2013. The Chile Stock Market Select Index (IPSA) recorded negative returns of 21.7 per cent and the Brazil Ibovespa Index recorded -26.6 per cent in US dollar terms (Table 1).
The worst hit Latin American index was Peru’s IGBVL index which dropped 30.33 per cent in US dollar terms and was also the worst performing index in the world.
The MEXBOL was the best performing of the remaining Latin American markets, slipping 3.61 per cent. Despite slow economic performance in 2013 which could have been tied to the country’s political cycle, investors remain positive with the recently passed energy reform in Mexico and the current decline which could represent an attractive entry point into the Mexican market.
A decline in stock market indices coupled with weaker currencies could potentially pose good buying opportunities in the Latin American region. With yields projected to remain low in the US, emerging markets still present an attractive investment prospect.
PERFORMANCE OF US MARKETS
In 2013, S&P 500 experienced record highs and ended the year at 1848.36. The broad market index was the top performing index of large market cap markets for 2013.
On December 18th, the Fed announced its decision to begin tapering its asset purchases in January, 2014, a positive signal about the strength of the US economy. Asset purchases will be reduced by US$10Bn to US$75Bn, with interest rates remaining near zero. As a result, US markets rallied with the S&P 500 showing a daily gain of 1.66 per cent, following the day of the announcement. The value of the Fed’s assets currently stands at approximately US$4 trillion.
Economic data from the US continues to be positive reflecting improvements in labour and housing. During the third quarter, the US reported GDP growth of 4.1 per cent, which showed considerable growth from the previous quarters. Analysts project 2.6 per cent to 3 per cent GDP growth for 2014 versus 1.9 per cent in 2013.
GOOD ENTRY POINT?
The world economy, particularly developed markets, began to show some signs of strength in 2013 with a global economic growth rate of 2.4 per cent. Global growth is estimated to be 3.2 per cent in 2014, driven by a continued rejuvenation in the developed economies of the US and Eurozone.
The vigilant investor may have noticed that the S&P 500 has not generated any negative returns over the past 5 years. In fact, an investor who would have bought the index at the end of 2008 would have been up 105 per cent on his investment, roughly a 15 per cent annualised return (excluding dividends). The question stands, can the S&P 500 and other developed markets sustain this momentum, will 2014 follow suit with the same momentum? While the Emerging Markets under-performed in 2013 relative to the S&P 500, they arguably present a good entry point for investors with global growth expected to pick up in the year ahead. New reforms and policies are expected to help insulate these vibrant economies from external shocks while encouraging growth. The World Bank projects growth in developing economies will pick up from 4.8 per cent in 2013 to 5.3 per cent this year, 5.5 per cent in 2015 and 5.7 per cent in 2016.
Aside from GDP growth, it is often more rewarding to pay attention to policies that encourage economic growth when trying to predict outperforming global markets.
For more information on these and other investment themes, please contact Bourse Securities Limited, at 628-9100, e-mail us at Research@boursefinancial.com or visit us at any one of our three offices located in Port-of-Spain, Chaguanas and San Fernando. Investors can also visit our website at www.bourseinvestment.com or Bourse Securities Limited Facebook page.