Despite ongoing angst, it was a year of historically low volatility
Europe’s volatility index fell to 15, less than half levels seen 12 months ago
European recession and debt woes, fears of “Grexit” and the possible demise of the euro, US political uncertainty, a fragile global economy – among all the angst, investors ultimately enjoyed double-digit returns and historically low volatility in 2012.
It was a year in which troubled macro fundamentals were countered by unprecedented monetary intervention, a year when investors were “more reliant on our politicians and central bankers to manipulate and shape markets and returns than perhaps ever before”, as Deutsche Bank’s Jim Reid put it.
Markets gave policymakers the benefit of the doubt. Almost every European index gained, the Iseq’s 15 per cent advance identical to that of the Euro Stoxx 600, while the German Dax soared by 30 per cent. In the US, the SP 500 rose 15 per cent, with nine of 10 sectors gaining, while investors in India (25 per cent) and Japan (17 per cent) will remember 2012 fondly.
The year began as 2011 had ended, with European concerns centre stage. Standard Poor’s downgraded nine euro zone countries in January, with France losing its AAA rating, while a €130 billion rescue for Greece followed in February. Nevertheless, encouraging US economic data and tentative optimism over Europe meant markets enjoyed a strong first quarter before going down, almost in a straight line, between late March and June.
In Greece, May elections proved inconclusive. Fears of Grexit grew, especially with polls showing strong support for anti-bailout forces. Banks exposed to Greece saw their stocks tumble, while sovereign bonds hit alarming highs in two “too big to fail” countries – Spain and Italy.
Signs of crisis everywhere
All too familiar crisis indicators abounded – soaring bond yields, emergency EU summits and brinkmanship, bank bailouts (this time in Spain), short selling bans.
Stock valuations were almost unprecedented. Italy’s Mib index, which topped 50,000 back in 2000, fell below 12,500 in July. Greek stocks hit a 20-year low, Spain’s a nine-year low. European stocks hit a four-decade low relative to US valuations, while accounting for their lowest percentage of global stock market capitalisation since 1989.
Relative to German bonds, they were at their cheapest in 90 years. Globally, fund managers were holding more cash than at any time since January 2009.
When things look that dire, any catalyst has the potential to light a fire under stocks. And while Greek tensions eased after election victory for the pro-bailout New Democracy party, the real turning point was ECB chief Mario Draghi’s August promise to “do whatever it takes” to save the euro. Spanish and Italian indices soared by a fifth in a fortnight as markets priced in the potentially unlimited bond-buying programme they desperately wanted.
Draghi unveiled just that in September, the ECB unveiling its outright monetary transactions (OMTs) plan. Synchronised money printing by central bankers in the UK, Japan and the US, where an open-ended bond-buying programme is in operation, has seemingly convinced investors that authorities have a grip on the situation. Sovereign bond yields have fallen steadily since July while stocks – particularly banks – have ripped higher.
Euro concerns drove US markets, whose trajectory was almost identical to European indices. Still, it’s simplistic to suggest US markets simply shrugged off a weak domestic economy – economic growth of just 2 per cent – and were propelled higher by central banks alone.