Sunday, January 21, 2018

International equities rebound in 2012


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"For better or for worse" was the mantra that resonated in the minds of investors and financial markets for what was a turbulent 2012. Better prevailed, strengthening investors relationship with the equity markets. Global equity markets rallied in the fourth quarter of 2012, as uncertainties concerning two of the three major qualms that dominated the investment landscape had diminished. These included the eurozone debt crisis and the fear of a prolonged period of low growth for the Chinese economy. The third worry, the US fiscal cliff, became the dominant global macro news story by the end of the year with a settlement of sorts reached on the 1st January 2013.

The top performing index for 2012 was Venezuela Stock Market Index posting incredible market returns of 302.8 per cent (in US dollar terms). European and Asian countries were amongst the worst performers with Cyprus tumbling over 60.5 per cent during 2012.

Table 1

The performance of global equities substantially improved in 2012 when compared to 2011. The World Index was up 13.2 per cent as compared to—7.6 per cent in 2011. Emerging markets advanced as a Bloomberg tracked Emerging Market Index and a similarly monitored Asia Ex Japan Index climbed 15.1 per cent and 19.4 per cent. Emerging markets generally performed well during the year as investor sentiment continued to improve. This was partly due to some continued stabilisation of the eurozone debt crisis, where yields on peripheral government bonds continued to fall.

Developed markets also witnessed improved

equity performance in 2012. The US S&P 500 Index was in line with the performance of one World Index gaining healthy returns of 13.4 per cent. Bloomberg data reported that a European Index ended the year at 15.5 per cent, the second best performer amongst the major world indices and the star performer for the fourth quarter posting returns of 6.6 per cent. Uncertainty generated by the fiscal cliff contributed to consumer confidence weakness in the fourth quarter with the US posting negative returns of 1 per cent.



India, the world's ninth-largest economy, saw its stock market rebound after a weak 2011 and became a star performer for Asia in 2012. The BSE 100 Index rose 26 per cent (Exhibit 2) making up much of the ground it lost in the prior year. Investors have access to the Indian market through the Savinvest India Asia Fund managed by Bourse.

India's performance lagged behind only that of Germany's in the top ten markets of the world. With a new finance minister in place, a government that has pushed through overhauls on attracting foreign investment, and inflation finally abating, the rally in India could continue.

The RBI opted to keep policy settings unchanged, leaving interest rates at 8.0 per cent and Cash Reserve Ratio at 4.3 per cent. During 2012, Foreign Institutional Investor (FII) inflows to India were over US$24 Billion.

The Rupee commenced the year at 53.06, peaked at 57.12 in June 2012 but ended the year at 54.99, a YTD depreciation of 3.6 per cent.

China stocks staged an unexpected December sprint to end the year in positive territory. The Shanghai Composite Index ended the year up 3.2 per cent brought about by a 15 per cent surge in December alone (9.7 per cent in the fourth Quarter).

Investors have been encouraged by the newly elected leaders of China's Communist Party in November, who have accentuated urbanisation, a driver of growth, as a key policy goal. The market has low valuations reflected by a Price to Earnings (P/E) ratio of 12.58 times compared to a 5 year average of 18 times. This combined with China's high growth compares favourably to other countries on a valuation basis.


The US proved a haven amid the global worries despite the uncertainty in the run-up to the presidential election in November and Fiscal Cliff. Newly re-elected President Obama led attempts to avoid the so-called fiscal cliff, which would have resulted in an automatic USD 600 billion worth of fiscal tightening taking place during the first quarter of 2013. A deal announced on 1st January 2013 saw some tax hikes but no agreement on spending cuts.

Nonetheless, economic data from the US continued to be generally positive. This reflects the improvements seen in labour and housing markets, both of which are key to the economic recovery, and translate into increased consumer spending.

The United States also experienced its worst drought in more than half a century which affected the prices of livestock and food prices. Hurricane Sandy and the war between Israel and Gaza were also problems that strained the US ability to make a healthy recovery.



Brazil's Bovespa index was down 2 per cent, as slow growth and the sharp decline in global commodity impacted the economy. Signs that China, Brazil's biggest trading partner, was picking up steam in the fourth quarter gave some hope that demand for Brazil's coal, iron ore and soybeans would come back in 2013. Mexico's IPC stock index is two-thirds composed of consumer stocks (defensive) whereas Brazil's BOVESPA has a strong commodity weighting. This is essential in explaining Mexico's 27 per cent return compared with Brazil's —2 per cent.

On the last trading day of December the Mexico index was trading at 21.7 times forecast earnings and the Brazil index was trading at 14.9 times indicating that Mexican shares are more expensive compared to that of its Brazilian counterpart.

The Andean region (Peru, Chile and Colombia) continues to show resilience to external shocks and these economies remain well placed to deal with any further negative external shocks.

Standard & Poor's raised Chile's sovereign credit rating a notch in December to AA-minus from A-plus which makes Chile the highest-rated sovereign in Latin America.



Markets in Europe closed 2012 much as they closed 2011: with relief that the euro zone hasn't ruptured, but concerned for what comes next. The euro crisis rumbled on, but with credit spreads narrowing over the quarter.

This reflected not only repeated reassurances by the European Central Bank (ECB) that it stood behind the euro, but also progress on the creation of a Eurozone banking union.

At the end of 2012, another ECB program (the Outright Monetary Transaction) has relieved some of the market's fear. Both Spain and Italy were pulled back from the brink of fiscal disaster. In November the Eurozone however still managed to plunge into its first recession since 2009.

The German Market continues to drive the performance of the Euro Region. The German Dax was up 31.67 per cent, France CAC was up 17.3 per cent and the United Kingdom's FTSE was up 10.8 per cent. Generally speaking, 2012 fared well in the International Equity Markets resulting in improved sentiments and confidence among investors.