Tuesday, 26 November 2013 - 20:00
Seed Weekly - The Year That Was
As we approach the end of 2013, it has proven to be a very good year for investors around the world.
This was, however, not necessarily apparent at the start of the year, especially if one considered the prevailing news headlines of the day. We have looked back at some of the major financial news items through the year.
Towards the end of 2012, the global financial markets were fixated with the so called Fiscal Cliff. This was the end of previously enacted US tax laws, which ended in December 2012 and would have had an estimated $ 600bn impact on the US economy. A last minute resolution was passed that saw some modification of benefits. The US Senate passes the American Taxpayer Relief Act of 2012 as partial resolution to avert the ‘fiscal cliff’.
In January the newly elected Japanese Prime Minister, Shinzo Abe, announced a campaign of additional fiscal stimulus. This followed two decades of lacklustre growth and deflation since the early 1990’s. The mere announcement of the large step up in new monetary creation had the desired effect of weakening the yen against other currencies and boosting share prices on the Japanese stock market.
In February there was focus again on US budget cuts from March, known as budget sequestration and the possible impact on the economy.
In March it was noted that the both the announcement and the tone from the US Federal Reserve kept the expansionary monetary policy in place with the target federal funds rate at 0.25% and the open ended $ 85bn per month asset purchase program.
Also in March, at the opening of the National People’s Congress, Chinese Premier, Wen Jiabao, announced that the government had set a new target growth rate of 7.5% per annum. This was the most conservative growth rate from this country since 2004. However, even at this level China continues to grow and for the 3rd quarter announced annual GDP growth of 7.8%.
Quarter 1 saw GDP in the US rise to 2.8% annualised, led by consumer spending. At the same time the economic growth outlook for Eurozone countries remained very weak. This level of growth has remained in place for quarter 3.
In May, the European Central Bank reduced its main policy rate by 0.25% and said that it was committed to keep policy accommodative “for as long as needed”, while the US Federal Reserve hinted in its minutes that tapering of its enormous asset purchases (read printing to buy its own bonds), may start to commence mid 2013. This had an immediate negative impact on global markets as the US 10 year bond yield moved up from around 1.95% to 2.97% in September.
As a consequence of the “tapering talk”, June saw the start of global currencies declining relative to the US dollar. The “risker” currencies were hardest hit, including the rand, but all emerging market currencies and also members of the G10 like the Australian dollar, Norwegian Krone, Swedish Krona and Canadian dollar, fell relative to the US dollar.
The US treasury reached their ceiling on borrowings in September, and following disagreement as to the terms of raising the debt limit, the US Government went into a partial shutdown on 1 October. An act was passed on 16 October agreeing to fund the government to mid-January 2014 and suspending the debt ceiling to 7 February 2014. Ultimately the problem is merely postponed.
Against this backdrop of mixed economic news, the stock markets have been on a tear in 2013. So far as we near the end of November, the Dow is up 22.6%, the S&P500 up 26% - both at new highs - and the technology laden Nasdaq up 32%.
The MSCI World Index is up 21.3%, while the Nikkei 225 index is up 49% in yen terms and 27% in US dollar terms. This follows 2012, where unprecedented central bank monetary stimulus saw the biggest rise in prices of global shares since 2009. In 2012 the MSCI All Country World index rose by 16.9%.
Above is the chart of the MSCI World Index. While no one knows exactly where global equity markets will end in 2014, what we do know is that a preponderance of negative news is no hindrance for prices.
Ian de Lange
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