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Market Commentary
Grainne Alexander,
Managing Director,
F & C Ltd.
Top Line Market Commentary
Equity Markets over the month of March 2012:
| % | |
| FTSE Euro bloc | -0.2 |
| FTSE World ex Eurobloc | 0.8 |
| MSCI Global Emerging Markets | -2.9 |
| Irish Equities | 2.3 |
The Irish Equity Market:
Irish equities enjoyed a good start to the first quarter before making more muted gains towards the end of the period. Sentiment was boosted primarily by the success of the European Central Bank’s offer of €1 trillion of cheap funding to banks through its Long-Term Refinancing Operation (LTRO). This came, despite Ireland only having a very small financial sector which drove the rally in markets. The food producers also performed well as strong results from Glanbia and Kerry led to big rises in the share prices. The rising oil price continued to impact all airlines, most notably Ryanair and Elan with both seeing less interest from investors after periods of impressive performance.
Irish Property Comment:
An air of optimism in the market continued in March with the 2012 budget having removed the uncertainty surrounding the government’s proposal regarding rent review provisions in existing leases. The removal of this has led market participants to believe turnover will increase and a functioning market will again begin to emerge however we have only seen a precursor to this in the first quarter. Supply of investment grade stock has increased significantly in the quarter by an estimate of 55% increase over the quarter. This is expected to again increase significantly as certain banks begin the preliminary process of unwinding their distressed loan books, bringing assets and certain loan sales to the market. Interestingly institutional investors accounted for 70% of new stock coming to the market in the quarter as various asset and fund management strategies are implemented.
Demand for Irish real estate investments continues to improve as more investors, especially foreign see the market as offering attractive opportunities and returns in the medium term, especially in core Dublin office properties and block residential. Currently we estimate circa €150m worth of investments are at the Sale Agreed point, however the due diligence process has slowed down considerably seeing average transaction times of 3 months emerging. Interestingly we are seeing local investors dominate the market in lot sizes of €5m and below with international real estate funds and private equity funds targeting and dominating the larger lot sizes of €20m plus.
Other Equity Markets:
US
Hopes that the recovery of the US economy was gaining momentum were jolted when Ben Bernanke, Chairman of the US Federal Reserve, questioned whether the recent positive trend on job creation could be sustained without acceleration in economic growth. The clarification that he provided on monetary policy was well received by investors and helped the US post the strongest returns of the major markets in March.
Subsequent data however supported Bernanke’s more cautious tone. US pending home sales fell 0.5% in February against expectations of a 1% rise while durable goods orders for March increased by a below-expectations 2.2%.
UK
The UK stock market edged lower in March as global risk appetite faded following a strong start to the year. Confidence fell as rising oil prices translated into further pressure on consumers’ pockets and slowing growth in China hurt the outlook for exporters. There were signs, however, that the predicted recession for the UK economy would not materialise. The influential purchasing managers’ survey was more encouraging than expected, leading to hopes that growth had returned to the economy in the first quarter. This has however proved not to be the case in the short term.
Europe
The recovery of European stocks paused in March as the market consolidated earlier gains. Although the European Central Bank signalled a brighter outlook for the region following the success of its bank funding programme, data on the economy continued to paint a bleak picture. Unemployment across the euro zone rose to 10.8%, the highest level since the introduction of the single currency in 1999.
There was further bad news on manufacturing activity in Europe, with survey data indicating the eighth consecutive month of contraction. There were also more signs of stress in the euro zone periphery as fears grew that Portugal would need a second bailout and unemployment in Spain reached a record high.
OTHERS
Japan
The Japanese market registered a gain in March and outperformed the global average. While revised figures showed the economy contracted less than had been predicted at the end of 2011, the current account deficit grew to record levels because of rising energy imports and a weak economy. The yen continued to weaken over the month, but this gave little comfort to Japan’s manufacturers as confidence indicators remained low.
Emerging Equities
The MSCI Emerging Market Index pulled back in March, falling 3.3% in dollar terms, after a strong run year to date and on concerns about a slow down in China. EM markets underperformed developed markets and EM currencies generally depreciated vs the USD. EMEA was the weakest market down 4.1%, whereas Asia -3.2% and Latin America -3.2% marginally outperformed.
Bonds
European bonds registered a flat return in March as the rally in peripheral euro zone issues lost momentum. Although the European Central Bank signalled a brighter outlook for the region following the success of its bank funding programme, data on the economy continued to paint a bleak picture. AAA rated government bonds suffer from unappealing fundamentals, but continue to offer ‘safe-haven’ attractions. There are fears that global inflation could start to rise again in May on the back of liquidity injections and higher commodity prices.
