Key points
- Investors shun risk assets
- Markets end year flat
- Volumes seasonably low
- Europe - no better, no worse
- Improved US data
UK
The end of 2011 was characterised by a ‘Santa rally’, but markets still posted a modest return, owing to high levels of intra-day volatility. Volumes in December were depressed – no surprise there, given the time of year – and defensives led the charge. Over the month, the FTSE All-Share was up 0.84%. In bond markets, the ten-year Gilt yield started December on 2.31%, ending the month at 1.98%. At one point, the benchmark yield hit 1.96%, driven by anxiety about the Euro sovereign debt crisis. Despite the obvious lack of value, Gilts continue to be perceived as a safe haven – expect to see more of this. Furthermore, quantitative easing, realised or anticipated, is suppressing yields in the short term.
Global
The Eurozone sovereign debt crisis rumbled into December, but did not worsen markedly during the month. Better US economic data meant the S&P 500 was unchanged for the year (+2.9%) – a good return, given the volatility over the last 12 months. In December, and in a broad sense, exposure to high beta areas such as the emerging markets, Asia and Germany were hit; however, we think there is potential for re-ratings in the longer term. Over the month, other main markets posted the following returns (in total return terms): Europe -1.4%; Japan +2.2%; emerging markets were flat.
Investment Outlook
Equities continue to hold up well on the back of optimism about the US and a more sanguine view of China. Lead economic indicators in the US are improving, and we are also expecting some easing from China. Europe is still a major cause for concern, as Greece now faces the likelihood of a voluntary default in March; however, the European Central Bank’s European LTRO (Long-Term Refinancing Operation) seems to be instilling some confidence in the markets, as evidenced by the relatively successful peripheral sovereign debt auctions. At the very least, we expect to see a degree of volatility over the next 12 months, although sustained good news out of the US and China could still provide a cyclical uplift. Lower levels of inflation might also act as a policy tool, reducing the ‘tax’ on growth in the UK and the US, economies that remain heavily dependent on the consumer. The caveat is a European meltdown or an oil price shock emanating from Iran, both of which could pull down markets. But at this juncture, risk assets look set to outperform. We are keeping some firepower in our portfolios ready to take advantage of this scenario.