Knowledge Centre Archive
Annual Market Update to 31 December 2011
The 12 months ending in December witnessed a continuation of the sovereign debt crisis in the eurozone, political turmoil in North Africa and the Middle East, an earthquake and tsunami in Japan and growing fears about the high level of U.S. debt. Volatility persisted, as global equity and bond markets faltered in the wake of bad news, but investor appetite nonetheless remained resilient for much of the year. Events escalated during the latter part of the year and consequently, investors experienced a dramatic and highly volatile third quarter. However, the markets rallied again towards the end of the year. News of combined action on behalf of some of the world’s leading central banks intended to help ease the spread of the sovereign debt crisis in Europe was announced and once again boosted confidence levels. Risk avoidance was a key theme throughout much of the period and consequently defensive assets, particularly government bonds, were favoured.
- The Barclays Capital Global Aggregate Index, which represents global bond markets, gained ($) 5.64% over the year.
As market volatility increased, bonds were favoured over equities. Reflecting this “flight-to-safety”, global government bonds performed best and riskier fixed income investments – emerging market and high-yield debt, which is rated below investment-grade – lagged slightly in comparison. Highlighting the popularity of government bonds over corporate debt, credit spreads (the difference in yields between government and non-government bonds) widened during the period. Within government bonds, yields in general fell as demand increased. This was particularly the case for U.S., U.K. and German government debt, as investors expressed a preference for traditional “safe haven” issuers. Greek government debt (and to a lesser extent, the debt of other struggling eurozone nations) was a notable outlier, as yields here rose significantly due to falling demand.
- The MSCI AC World Index, used to gauge global equity performance, fell by ($) 7.35% in the period.
Equity markets experienced the brunt of continued market uncertainty throughout the year. Volatility peaked during early August, when stock markets across Europe experienced their biggest one-day losses since 2008. Globally, sectors which tend to do well when confidence is high and economic growth is anticipated (known as pro-cyclical sectors and are sensitive to economic fluctuations and tend to correlate with the overall business cycle), sold off the most in the year. More defensive sectors, like Healthcare and Consumer Staples, fared better. The Materials and Financials sectors lagged notably, the latter largely because of worries about banks’ exposure to eurozone government debt.
We no longer favour stocks over bonds, but rather have a neutral perspective. Within equities, we favour a tilt toward U.S. large company stocks. U.S. economic activity has rebounded, although the overall growth outlook remains moderate at best. We favour the U.S. versus international equities as the debt crisis in Europe continues to spread, resulting in a slowing of growth in the core economies of Europe (those with the strongest economies) and near or outright recession in the debt-burdened periphery countries (those with the weakest economies). The economic and financial problems in Europe also could harm the growth prospects of emerging-market exporters. We favour high-yield fixed income versus investment-grade fixed income. Bond markets have exhibited surprising resilience. While U.S. treasuries continue to be viewed as a safe-haven play by investors whenever market turmoil intensifies, in our view relative-value opportunities are more attractive in the high-yield space (although the ride has become quite bumpy in recent months).
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