Market Commentary - 2012 - Quarter 1 July 2012

Market Commentary - 2012 - Quarter 1

The first quarter of 2012 has been very positive for equity markets generally. The rotation of markets to what many describe as a ‘risk on’ phase has seen some healthy returns for both Western and Emerging markets. The FTSE World index has climbed 11% since January 1st, which has been its strongest quarterly performance since September 2010 and best start to the year since 1998.

The main push has come from the US and Asian markets. The US market has been bolstered by strong gains for banks and technology stocks, with the 50% hike in Apple’s shares alone accounting for 14% of the S&P’s 12% rise. Its blue-chip Dow Jones Industrial Average finished the quarter up 8.2%. Meanwhile, the MSCI Asia Pacific index has risen 13.5% since the start of the year.

Japanese stocks have been the top performers, with the Nikkei 225 up 19.3%, as exporters benefited from the weakening of the yen against the dollar. The FTSE All Share, however, is only up 6.1% (FTSE 100 up 3.7%) this year mainly boosted by the mid and small cap area which saw a 14% rise in the quarter. In contrast, Greece’s stock market has gained more than 7% after falling over 60% in 2011.

The confidence in markets can be built around a number of core factors, the most important of which has been the steadying of the issues in Europe with the Greek crisis, if not resolved, certainly moved out of the way for a long enough period to allow investors to focus elsewhere. This focus found its way to the US where data had been steadily improving from the end of 2011 and into the first quarter. In particular employment and PMI data improved, leading investors to feel more confident about global growth, as US growth forecasts were revised. The threat to Chinese growth has been tempered with more confidence about a soft landing boosting Asian and Emerging markets further.

There are still some mixed signals, however, even though we have seen some normality return to the equity / bond relationship. In February we saw bond yields rise as equity markets were rising indicating that perhaps the relationship was reverting to the historic norm. This was short lived as the trend has not continued. The trading volumes remained quite low although this did improve further into 2012 perhaps helping to explain why bonds remained supported. With volatility remaining high during this period many managers are staying relatively benchmark neutral in asset allocations as it is too difficult to determine market direction. Although volatility has reduced, it remains at levels which can see large enough swings to concern investors and lead them to continue to hold safer assets.

Overall the positive start to the year has slowed down towards the end of the quarter as investors look for more positive economic data to support what established the initial rally. As is usual in these post recessionary periods, confidence ebbs and flows because data is not convincing enough to maintain any upward trend. Commentators have noted how this year has started much as 2011 did with sentiment shifting quite rapidly on the slightest of data changes.

Market commentary provided by Rayner Spencer Mills – Quarter 1 2012

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