Knowledge Centre Archive
February 2012 Market Update
- Investor confidence received a boost from the Greek debt restructuring and bailout agreement.
- Equity markets gained, with risky assets among the strongest performers. Bond market performance was held back by waning demand for government debt.
Equities continued to rally into February, while global bonds lagged in comparison. Investors generally remained positive and market volatility remained calm. Consequently, assets that are perceived to be riskier were favoured once again during the month. In particular, measures by the European Central Bank (ECB) to support the banking system and progress towards resolving Greece’s sovereign debt troubles fuelled a hopeful outlook.
Ratification of the second bailout package for Greece took place during the month. The deal, which was agreed in 2011, provides €130 billion for Greece from the European Union and the International Monetary Fund. This should help to ensure that Greece is able to avoid defaulting on its next debt payment of €14.5 billion on the 20 of March. However, the terms of the bailout were severe. One of the key conditions of the deal is that private sector Greek government bondholders need to agree to take a loss on what is owed to them. This is to be achieved through a bond swap, also known as debt restructuring. The replacement debt would be worth less than the original and would also pay interest at a lesser rate, equating to a 53% loss on a holder’s initial investment. Despite these terms and uncertainty surrounding the number of private investors willing to accept the losses, news of the agreement buoyed the markets.
Other activity in Europe also served to improve optimism during the month. The ECB introduced three-year loans - known as long-term refinancing operations (LTROs) - in January, with the intention of helping to ease short-term money-supply pressures on the region’s banks. This provision was welcomed by the markets at the start of the year and continued to have a positive impact on sentiment in February as additional funding (so far totalling approximately €1 trillion) filtered through to banks.
Economic data was mixed for the month, although largely positive news coming out of the U.S. helped to counterbalance generally disappointing data releases from the eurozone. Eurozone unemployment reached 10.7% in January, with Spanish unemployment continuing to track above 20%. U.K. jobless numbers reached their highest in 16 years in January, at 8.4%, but U.S. unemployment declined to 8.3%, its lowest level in 3 years. Eurozone inflation decreased in January to 2.6%. Inflation in the U.K. fell to a 14 month low in January (3.6%) as the impact of the Value Added Tax hike at the start of 2011 wore off. Inflation in the U.S. rose marginally, with the gain attributed to rising fuel prices. Retail sales in the eurozone declined by 0.4%, gained 0.9% in the U.K. and 0.4% in the U.S in January.
Global bond markets as a whole declined in February, masking a large disparity between asset types. Government bonds generally fell out of favour as investors left “safe haven” debt to embrace risk. Fixed income assets that are perceived to be riskier therefore performed strongly in February. High yield debt did particularly well, followed by emerging markets debt. As demand for government bonds slowed in February, yields (which move inversely to prices) in the U.S., U.K. and Europe rose. Within Europe, the yield on Greek government bonds increased notably. Portugal’s government debt was an exception, as yields here finished the month lower due to purchases by the ECB in the final days of February.
Cyclical sectors performed well once again in the equity markets. Financials, Consumer Discretionary and Energy recorded the highest returns for the month, while more defensive sectors, such as Healthcare and Utilities lagged. The Energy sector also benefited from oil prices, which rose during the month due to tensions resulting from Iran’s nuclear programme and fears that oil supplies could be impacted.
- The MSCI AC World Index, used to gauge global equity performance, gained ($) 5.03% in February.
- The Barclays Capital Global Aggregate Index, which represents global bond markets, fell by ($) 0.07% over the month.
- The Chicago Board Options Exchange Volatility Index (VIX), a measure of implied volatility in the S&P 500 Index that is also known as the “fear index”, fell from 19.44 to 18.43 during the month.
- WTI Cushing crude oil prices, a key indicator of movements in the oil market, rose steadily throughout much of February, moving from $98.48 a barrel at the end of January to $107.07 by 29 February.
- The Japanese yen weakened against most currencies during the month, while the euro strengthened and the U.S. dollar was mixed. The U.S. dollar fell against the euro and sterling, but gained against the Japanese yen. The U.S. dollar ended February at $1.59 against sterling, $1.34 versus the euro and at 80.94 yen.
We no longer favour stocks over bonds.
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 the eurozone continues to spread, resulting in a slowing of growth in the core economies of Europe and near or outright recession in the debt-burdened peripheral countries. 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 opportunities are more attractive in the high yield space.
Glossary of Financial Terms
- High yield debt: High yield debt is rated below investment grade and is considered to be riskier.
- Cyclical sectors or stocks: Cyclical sectors or stocks are those whose performance is closely tied to the economic environment and business cycle.
- Core eurozone countries: Core eurozone countries are those in the eurozone with the largest economies.
- Peripheral eurozone countries: Peripheral eurozone countries are those in the eurozone with the smallest economies.
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