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Market Commentary
Grainne Alexander,
Managing Director,
F & C Ltd.
Top Line Market Commentary
Equity Markets over the month of January 2012:
| % | |
| FTSE Euro bloc | 5.6 |
| FTSE World ex Eurobloc | 3.9 |
| MSCI Global Emerging Markets | 10.4 |
| Irish Equities | 3.8 |
The Irish Equity Market:
Irish equities started the year on a positive note rising by 3.9%. Investors continued to react positively to the ECB’s decision to provide unlimited funding to banks at 1% for three years. This together with better economic news from the US and a positive reaction to the plans of new governments in Spain and Italy has helped markets everywhere rise. With this backdrop it is therefore not surprising that Bank of Ireland was the strongest performing larger company in January rising 39%. Airline stocks were also strong as Ryanair reported good results and increased guidance for the full year and Aer Lingus rose on hopes that issues with pension deficit could be satisfactorily dealt with. Surprisingly, CRH was down slightly in the month as there was a lack of new news and the buying necessitated by the stocks entry into the FTSE100 came to an end. As could be expected in a more positive market the less economically sensitive stocks such as Kerry and Aryzta under-performed and fell slightly.
Irish Property Comment:
The reduction in stamp duty from 6% to 2% led to a temporary uplift in property values in December 2011,if this reduction had not been introduced, the property market at the end of 2011 would have experienced a further decline. The other property related reforms announced in the December 2011 Budget consisting of Capital Gain Tax reliefs and the news the Government will no longer proceed with the retrospective rent review provision may take time to filter into Irish property values, as economic conditions remain challenging and the lack of credit persists. It is forecast that there will be an increase in the number of transactions in the second half of this year as it is believed the banks and NAMA will begin their disposal strategies. This activity is welcome news as it will create some real time pricing again in the market.
Other Equity Markets:
US
The pace of US economic growth increased in the final three months of 2011. The economy grew at an annualised rate of 2.8%, up from the 1.8% annual rate recorded in the previous quarter, although it was slightly lower than the 3% rate predicted by analysts. However, the growth largely came from businesses stockpiling goods they had produced, rather than selling them. The pace of consumer spending picked up to 2% from 1.7% in the previous quarter. Investors remain wary of those stocks reliant on growth but more defensive stocks are no longer cheap.
UK
The UK economy shrank by 0.2% in the last three months of last year. It marks a sharp drop relative to Q3, when it expanded by 0.6%. The contraction was driven by a 0.9% fall in manufacturing, a 4.1% drop in electricity and gas production and a 0.5% fall in construction activity. Unemployment rose to 2.69 million in November, pushing the rate to 8.4%.
We prefer larger companies which will be more resilient to the slowing economy and have been selling those mid caps that are directly exposed.
Europe
German business confidence rose for the third month in a row, reflecting a positive start to the year for Europe’s biggest economy. Confidence among manufacturers grew particularly strongly, however, confidence in the retail sector fell sharply. France and Austria were hit by credit rating downgrades and Spain’s economy shrank by 0.3% in the last quarter of 2011. The Spanish statistics office also confirmed that there had been zero growth in the third quarter. Against an uncertain backdrop there are opportunities for companies in a dominant position to grow strongly, prices are cheap now.
Others:
Japan
Japan announced its first annual trade deficit in more than 30 years, a setback for a country known for its exports including cars and electronics. Japan’s imports rose 12% and its exports fell 2.7%, compared to the previous year. The decline in exports was attributed to the impact from the earthquake and tsunami on 11 March 2011. We believe that the Japanese market is very cheap at current levels and offers significant upside once economic conditions improve. Japan remains a highly cyclical economy as the main drivers of growth are exporting companies.
Emerging Equities
The MSCI Emerging Market Index had a strong start to 2012, rising by 11.3% in dollar terms in January. EM markets outperformed developed markets, as global growth prospects improved and investors became more comfortable with the global liquidity situation after the ECB’s large LTRO operation and the possibility of QE3 in the US. EM currencies generally appreciated vs. the USD. Latin America was the strongest performer, up 12.6%, closely followed by EMEA +12.1%. Asia performed slightly below this +10.6%.
India (+21.0%) was strongest of the major EM and Asian markets, as investors bought into the laggards of 2011. The large bounce was also partly due to the recovery in the Indian Rupee (+7.4%). Inflation data improved. China (+10.8%) slightly lagged EM but outperformed the regional markets due to a rebound in its Purchasing Manager Index and leading indicators. Korea (+10.5%) was inline with the region on more positive global growth prospects. The same applied for Taiwan (+9.0%) but there was also positive news flow in the re-election of President Ma. In Thailand (+8.3%) the proposed tax in the banking sector was a drag on the market. Indonesia (+3.9%) was the weakest EM market after a strong year in 2011 and rising concerns about inflation.
In Latin America, Brazil (+15.2%) was strong as the central bank signalled further rate cuts and the macro data remained strong. Also, global investors bought the big Brazilian energy and materials stocks on greater optimism over growth following encouraging numbers from China and the US as well as calmer European markets. The strengthening currency accounted for a significant part of the rise, appreciating 6.6%. Chile (+7.4%) lagged due to its low beta, safe haven status. In Peru (+10.3%) economic data continued to weaken. Mexico (+7.4%) underperformed despite a 7.3% appreciation in the Peso. Domestic macro data was mixed.
Bonds
The ECB left rates on hold as it assessed the outcome of its December decisions and so far those have been a success. The Bank reiterated that the economic outlook remains subject to high uncertainty and substantial downside risk. We remain underweight France as this economy is forecast to struggle somewhat over the coming year and are overweight inflation-linked and covered bonds. Corporate bonds performed very well and are, in Europe probably now well priced.