Tom Elliot, global strategist at J.P. Morgan Asset Management, reviews the global markets in 2012:
"Despite continued weak global growth in 2012, risk assets performed well with both global equities and corporate bond markets outperforming risk free assets such as cash and core government bond markets by a considerable margin.
"Driving these markets was the ongoing environment of negative real interest rates, as central banks continued with aggressively loose monetary policy in order to help ease the burden of government, bank sector and household deleveraging. Central bank policies such as very low interest rates and various forms of quantitative easing mean interest rates and core bond yields are well below domestic inflation rates in the US, UK, core Europe and Japan. This in turn forced traditionally risk averse investors into higher yielding risk free assets, in order to gain protection from inflation
"Against this background three macroeconomic themes waxed and waned over the year, each for a while dominating investor sentiment. These were the eurozone debt crisis, the fear of a Chinese economic slowdown, and the fiscal cliff in the US.
"The euro crisis re-asserted itself during the spring/ early summer as Greece experienced political turmoil, and for a while it seemed that the country may elect to leave the euro zone, or be thrown out. Meanwhile it became increasingly clear that Spain may need a bailout thanks to a combination of indebted regions and ongoing bad loans in the banking sector. Water was poured on trouble waters, however, by the ECB which offered to ‘do what it takes' to preserve the euro, and by Germany which has taken a more pro-active role in 2012 in helping to solve the crisis.
"As a result, continental European equities have enjoyed a strong rally since June, making them one of the best performing asset classes.
"Chinese GDP growth re-accelerated in the third quarter of 2012, to an impressive 9.1% q/q annualised rate, which relieved fears of a prolonged period of decelerating growth. The year ends with leading indicators confirming relatively strong growth as we go into 2013, which has helped lift sentiment over emerging market stock markets in general after a very disappointing 2011.
"In the US, the risk of a $600bn cut to demand through a series of tax hikes and cuts in government spending (the so called fiscal cliff) contributed to growing investor nervousness in the second half of 2012. A recession will almost certainly follow. Already we have seen companies report curbs on investment spending due to uncertainty over future tax rates and future consumer demand. While we are confident that politicians will eventually agree to a deal to avert a sharp fall in demand, of the three risks outlined in this review it is the fiscal cliff that has the most power to disrupt investor confidence in the opening months of 2013.
"In summary, 2012 will be remembered by investors with more affection than it will be remembered by macro economists."
|
