Q4 Global Market Overview

 January 31, 2014
 

Major Global Stock Market Indices

Index 1 Month 3 Month 2013 2012
FTSE 100 1.6% 5.1% 18.7% 10.0%
FTSE 250 3.3% 7.5% 32.3% 26.1%
FTSE Small 3.8% 16.1% 43.9% 36.3%
FTSE All Share 1.8% 5.5% 20.8% 12.3%
Dow Jones 3.2% 10.2% 29.7% 10.2%
S&P 500 2.5% 10.5% 16.3% 16.0%
DAX 1.6% 11.1% 31.8% 29.1%
CAC 40 0.3% 4.2% 22.2% 20.4%
Hang Seng -2.4% 2.2% 6.6% 27.5%
Nikkei 225 4.0% 12.7% 56.7% 22.9%
China SE -4.7% -2.7% -6.7% 3.2%

Source: Datastream 31st December 2013

United Kingdom

Despite a positive return UK equity indices trailed most US and European indices in the final quarter of 2013. The FTSE 100 increased by 5.1%, the FTSE All Share increased by 5.5% and the FTSE 250 by 7.5%. In December, a total return of 1.8% from the FTSE All-Share index reflected generally good news on the economy, a positive Autumn statement from the Chancellor of the Exchequer and, as is often the case in December, a rising level of UK investor optimism. This optimism was reflected in the way investors took in their stride the “tapering” of the high level of US monetary stimulus which had been anticipated for months.

October’s industrial production showed a monthly rise of 0.4% which took the annual growth rate to 3.2% and that was the best performance since January 2011. This increase would have been even bigger had it not been for weakness in demand for energy generally, which was down 10% on an annual basis due to October’s unseasonably warm weather. This positive data on production was however offset by some disappointing news on the UK trade account which resulted in a drag on the Q3 GDP of about 2.3%.

The sector performances of the FTSE All-Share index during December reflected the rising level of optimism that the recovery had started to take hold. This can be seen from the better performing sectors being the more cyclical chemical and industrial companies versus the declining sectors such as general retailers and tobacco. Unlike the S&P 500 and Dow Jones, the FTSE 100 has still not eclipsed its all-time high during 2013 of 6930.2, which it achieved way back on 30th December 1999.

Europe

Despite the weak recovery in the Eurozone, European equity markets rounded off a very good year with positive performance during the fourth quarter of 2013 with the German Dax index increasing by an impressive 11.1%, the Spanish Ibex 35 increased by 10.1% and the French CAC 40 increased by 4.2%. More robust macroeconomic data, alongside improving corporate results in selected areas, have also been supportive of equity markets. In macroeconomic news, third quarter Eurozone employment data added to evidence that the region’s labour market is finally stabilising.

In quarterly terms, Eurozone employment growth was flat for the second quarter in succession as the region recorded a net loss of 6,000 jobs in Q3, its smallest drop since early 2010. This pushed up the annual growth rate from -1% to -0.8%. A fall in industrial employment was offset by a rise in service sector jobs. The geographic breakdown was also fairly encouraging. The German labour market continued to create jobs at a reasonable rate, while Portugal recorded its second consecutive rise in employment. Meanwhile, the jobs count was flat in France and Italy and Spain shed jobs again. But the rate of job losses in Spain is on a downward trend. The Eurozone December manufacturing PMI came in-line with the flash reading of 52.7. Overall, the PMIs brought a more positive-than-expected outcome for Italy and Spain, while the gap between Germany (52.7) and France (47.0) continued to widen.

United States

US equity markets rose strongly over the final quarter of 2013, with an increase of 10.2% in the Dow Jones, 10.5% in the S&P 500 and 11.1% in the NASDAQ. The S&P 500 index ended the year at another all-time high. In sector terms, the economically sensitive ‘cyclical’ areas of the market outperformed their traditionally ‘defensive’ counterparts as they have throughout 2013. Over the year as a whole, it was cyclical areas which saw the strongest gains, alongside the traditionally defensive healthcare sector, which has been another consistent performer over the year.

Improvements in economic activity led the US Federal Reserve to announce mid-month that it would begin tapering its quantitative easing programme in January. The current US$85billion per month purchases of mortgage-backed securities and longer-term treasuries will be reduced by US$10billion per month in total. However, the central bank reassured markets by indicating that its key interest rate would likely be kept near zero until well after the US unemployment rate falls below 6.5%. Though US equity markets initially fell on the announcement in December, they subsequently rallied strongly for the remainder of the month.

In economic news, the final estimate for third quarter gross domestic product growth showed that the economy grew at a better-than-expected annualised rate of 4.1%. This was higher than the initial estimate of 2.5% and the second estimate of 3.6%, which were released in November. Much of the upward revision for the third quarter reflected improved consumer spending. Indeed, consumer spending rose 0.5% in the month of November, driven by an increase in spending on durable goods such as autos.

There was evidence of continued strength in the employment market as the unemployment rate fell to 7% for November, its lowest level in five years. In fact in December 2009 the unemployment was nearly 10%, so the latest figures show a dramatic improvement since then. The Bureau of Labor Statistics announced that total non-farm payroll employment rose by 203,000, which was higher than anticipated. Notable increases were achieved in areas including transportation and warehousing, healthcare and manufacturing sectors.

Asia Pacific Region

Most Asian equity markets provided less robust returns than many of their global market counterparts in the fourth quarter of 2013, Japan bucking this trend. The Hong Kong Hang Seng rose by 2.2%, The Japanese Nikkei 225 increased by 12.7%, the Indian Mumbai Sensex 30 index increased by 9.7%, the Singapore Times increased by 0.4% and the Chinese SE Shanghai Composite fell by 2.7% as another liquidity squeeze in China sent investors running for cover.

Japanese equity markets ended the year on a positive note, as the outlook for global growth continued to show signs of improvement. While the US Federal Reserve confirmed that it would begin to taper its asset purchases, the Bank of Japan pledged to maintain its monetary easing until it hits and maintains its inflation target of 2%, with the yen depreciating further against other major currencies over the month. It is interesting to note the weakness in the yen has virtually mirrored the rise in the Nikkei 225. If there is a reversal and the yen strengthens, this could be negative for Japanese equities.

Emerging Markets

Global emerging equity markets had a positive start to the month, drawing benefit from strong US economic data and political progress over US fiscal issues. The US Federal Reserve’s (Fed) decision to scale back its US$85 billion a month monetary stimulus passed by smoothly as the central bank emphasised its decision to taper was not a prelude to higher interest rates. With economic recoveries in the developed world gaining traction and the Fed beginning to unwind its quantitative easing programme, attention turned once more towards emerging countries with current account deficits. As a result, equity markets in Brazil, Thailand and Turkey came under selling pressure, prompting the MSCI Emerging Markets index to lose ground and register a small loss for December.

Global Fixed Interest

During the final quarter of 2013 most bond markets in December continued their dismal performance of 2013 echoing some of the major themes of 2013 as a whole. Returns were broadly negative as core government bond yields rose in anticipation of rising growth and less accommodative US monetary policy. The theme continued in the final quarter of 2013 in the corporate bond market with lower quality corporate bonds (higher yielding bonds) significantly outperforming high quality (lower yielding bonds), boosted by high levels of income and some credit spread tightening, a scenario we expect to continue in 2014.

Economic Picture

Following the announcement in December, the Fed indicated that further reductions will come in “measured steps” as long as the economic evidence continues to support the committee’s outlook. Recent US data has been generally positive. Non-farm payrolls rose by 203,000 in November, helping to push the rate of unemployment down to 7.0%. Consumer confidence hit a five-month high in December and retail sales rose 4.7% in the year to November from a level of 4.1% the month before.

Macroeconomic data from Europe has been less positive. The annual rate of industrial production growth in the Eurozone was just 0.2% in October. Consumer and business confidence data has been modestly stronger in recent weeks and data for the third quarter of 2013 showed the level of employment across the single currency area stabilising. However, this data is consistent with only modestly positive GDP growth in coming quarters.

The picture is brighter in the UK, where unemployment fell to 7.4%, the lowest level since 2009. However, the 2% annual growth rate in retail sales in November is indicative of still-cautious consumers.

While growth is picking up, inflation remains relatively subdued. Headline CPI inflation was 1.2% in the US in November, well below the Fed’s target of 2%. Capacity utilisation has risen in the US, reaching 79% in November. However, it remains a long way below previous cyclical peaks. In the same month, headline inflation was 2.1% in the UK and 0.9% in the Eurozone. These levels do not challenge the assumption that neither the Bank of England nor the European Central Bank will raise interest rates in the near-term.

The 10 year gilt yield closed 2013 at 3.02%, up 0.25% on the month and 1.19% for the year. German Bund and US treasury yields saw similar rises in December. According to data from Merrill Lynch, conventional gilts achieved a total return of -1.2% for the month and -4.3% for 2013. Corporate bonds outperformed modestly, with sterling investment grade bonds returning -0.9% in December.

Interest Rate Outlook

Since the first mention, in May 2013, of the possible reduction by the Federal Reserve (Fed) of its quantitative easing (QE) programme of asset purchases, bond yields in the US and other markets (including the UK) have risen to reflect the markets’ expectations in relation to the future path of central bank policy rates. The Fed announcement in December is a small move, and a long way from a proper unwinding of QE (e.g. a sell-off of the assets that have been purchased under the QE programme). However, this first small step allows the Fed to consider a further reduction in January and, above all, it is an important one in the long road towards unburdening markets of the weight of QE. It also focuses attention on the possible path of interest rates in the US and in other markets, including the UK.

Crucially, the Fed’s tapering announcement was offset by a stronger doveish tone on rates, suggesting that they will remain near zero beyond the point that unemployment falls below the Fed’s 6.5% threshold, set as a parameter in its forward guidance. This reassurance that rates will remain on hold has been enough to allow equity markets to remain positive, and for emerging markets not to react badly, although the spectre of higher inflation will have to watched very closely in the US.

In the UK, there has been no suggestion of a change to the Bank of England’s Asset Purchase Facility target, which remains at £375 billion. However, the Bank of England has acknowledged that the speed at which the unemployment rate has begun to fall would mean that the 7% threshold, as set out in its own forward guidance, is likely to be reached sooner than originally anticipated (in 2015 rather than 2016). For forward guidance to be meaningful and given how much has been said of the need to keep rates lower for longer in the UK, the unemployment threshold may need to be reviewed as in the US. We believe that rates will remain at their current 0.5% level over 2014.