2012 – Against the odds, a bullish Year For Equities
Just when everyone was thinking that the worst of the crisis was already behind us, a new wave of concern laid the markets low and caught many off guard. In the end, ECB head “Super” Mario Draghi started a high stakes game bluff that, luckily for him, he emerged the winner in late Summer when he was successful in reflating equities.
The second quarter of 2012 in particular was a really tough one, with many European markets dropping around 7% and the Nikkei more than 10%. It seemed that everything was pointing to yet another ugly August like the one in 2011 but Draghi’s strong words that he would “do whatever it takes to save the Euro and keep it alive” turned the ship around. With such unexpectedly strong wording, investors bet heavily that the ECB would step in and engage in some kind of monetary easing as the FED is doing in the U.S. with the FED.
At the ECB meeting on September 6, the ECB announced an asset purchase program designed to retain stability within the Eurozone. Although the program had several limitations, as it was not exactly the same as printing money and expanding the bank’s balance sheet and additionally the program imposed several onerous conditions for a country to benefit from it, it was enough to appease investors and changed the course of the market. European markets entered a major uptrend to close the year with stellar performances. The Nikkei took up the mantle in the last 2 months as Shinzo Abe’s new pro inflation party swept to power and the Yen, finally, began to weaken.
Ben Bernanke, ever the punch bowl server joined the monetarists party and announced QE3 – a seeming “infinity” commitment to get unemployment down in the US – someway, somehow… Everything worked like a charm and as we can see in the table below, most equity indices ended positive with the DAX topping our list and which had rose almost 30%.
We still believe the Nikkei undervalued and expect that it will be at the top of our performance lists for some time. US markets closed the year with significant gains but it was not without a fight. Note the large difference between the Nasdaq 100, S&P 500, and the Dow, showing 16.8%, 13.4%, and 7.3% gains respectively. The final part of 2012 was poor for US equities as negotiations on the fiscal cliff dragged down investors confidence.
The FTSE 100 index performed very poorly when compared with the rest of the list, rising just 5.8. The Olympics gave some impetus to the domestic economy but GDP may have turned negative yet again during the fourth quarter. It was a case of the Miners holding the index back but we expect this to reverse substantially in 2013.
Unlike equity traders, commodity traders need to hold short positions in 2012 to make profits as many commodities ended in negative territory for the year. Oil tumbled during the second quarter and the subsequent recovery wasn’t enough to put the Light Sweet contract in positive terrain. The gap between Light Sweet and Brent continues to seduce many to implement a pairs trading strategy but problems with distribution and an excess of supply in the US should still be borne in mind. Nevertheless, the differential continues to narrow.
Gold and silver ended higher, rising 7.1% and 8.5% respectively but that is short of many analysts estimates at the start of 2012. Contrary to expectations, not even QE3 could boost interest in the precious metals. Fiscal cliff negotiations, better than expected economic data and probably a lot of unwinding of long positions by some large institutional investors (and likely very shortly Mr Paulson!) all weighed negatively and will likely continue to hurt through 2013.
In the forex market the stand out mover was the Japanese Yen. After nearly 5 years of seemingly unbreakable strength, the Japanese Yen finally broke to the downside and lost almost 13% to the US Dollar as Shinzo Abe made a serious threat to devalue the Yen and generate inflation to put an end once and for all to the zombification of the Japanese economy started decades ago. We believe he is serious about that and over the next few months it will be interesting to watch the evolution of the Yen.
Finally our last comments go to the FTSE. Even though the market underperformed its European counterparts with an anaemic 5% rise, interestingly 77% of the FTSE 100 components and 81% of the FTSE 350 ended positive. Lloyds climbed 85% to top the FTSE 100 list while Eurasian Natural Resources Corporation (ENRC) lost 55% and bottomed it. This last mining company has been experiencing a tough year but at a discount relative to its peers and with iron ore climbing 60% in the last four months of 2012, its luck may well be just about to change…
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