Stellar gains on global markets
Calm markets were reflected in the Vix – or fear index – hitting a six-year low of 12 and never exceeding its average
Big stories of the year included monetary stimulus in Japan and the tech sector, which was a big winner.
Like 2012, this was a year where global stock markets were shaped by central bankers and policymakers, as epitomised last February when Japan’s economic and fiscal policy minister said he wanted the Nikkei, then 11,150, to hit 13,000 by the end of March. It did just that within days of that date, and global markets in general were similarly well behaved, producing stellar gains in 2013 – the MSCI World Index is up by over 20 per cent – with the minimum of volatility.
US investors had it particularly easy, the S&P 500 advancing by almost 30 per cent whilst never suffering a pullback greater than 6 per cent. The market calm was reflected in the Vix, or fear index, hitting a six-year low of 12, and never exceeding 20 – its historical average – at any point of the year.
In Europe, most markets had lower gains and greater volatility, the Euro Stoxx 50 suffering a double-digit summer swoon before ending the year 15 per cent higher. Nevertheless the year was hardly an unnerving one, with the VStoxx – Europe’s equivalent of the Vix – hitting a seven-year low last month.
The Iseq was one of the biggest gainers, on track for gains of 30 percent after a steady but almost relentless charge higher, while Greece, Germany and Spain also outperformed.
Bull markets climb a wall of worry, as the old adage has it, but 2013 was a picnic compared to 2012s, when fears of “Grexit” and the possible demise of the euro saw European stocks hit levels unseen in decades before storming back.
Most market pullbacks in 2013 were minor, short-lived affairs, investors shrugging off fears concerning the fiscal cliff, Italian election uncertainty, US budget cuts, the Cyprus crisis, war in Syria and the US government shutdown.
There was one obvious source of angst, however – speculation regarding when the Federal Reserve would taper, or reduce, its $85 billion monthly bond-buying programme. A major “taper tantrum” erupted in global markets in May when Federal Reserve chief Ben Bernanke indicated it might gradually taper its programme of quantitative easing. Bernanke insisted tapering was not tightening; interest rates would not rise and easy money policies would remain in play.
Investors thought otherwise, however, with emerging markets (EM), hitherto awash in liquidity pumped out by international central banks, feeling the brunt of the selling. EM stocks and currencies plunged, particularly in countries with current account deficits and weak public finances, as investors pulled their money.
Indonesia, Thailand, the Philippines and Turkey, whose prime minister Tayhip Erdogan had promised to “throttle” and “choke” speculators, hit official bear market territory as EM exposure hit 12-year lows.
Japanese stocks also tumbled by more than 20 per cent, having almost doubled over the previous six months, while European indices tumbled amid double-digit corrections.
By September markets were estimating the odds of a US rate rise before the end of 2014 to be 65 per cent, up from 25 per cent in May. That month, however, a dovish Bernanke stunned investors by announcing the $85 billion bond-buying programme was to continue until there was evidence of “sustained” economic growth, prompting a global sigh of relief. Bond yields tanked as stocks roared higher, especially in beaten-down emerging economies, with the MSCI Emerging Markets Index erasing almost all of its earlier losses in a matter of weeks. Developed markets were also exuberant, the S&P 500 and the German Dax soon advancing to fresh all-time highs.
Bernanke, spooked by the “tightening of economic conditions” that had largely resulted from investors’ expectations of a policy change, continued to drill home the message that the Fed would err on the side of caution, that it was more inclined to be too late in ending stimulus than too early. That message soothed emerging markets, allowing them time to fine-tune policies and wean off easy money.
It was also accepted by markets in general, which shot to fresh highs last week after the Fed announced it was to begin tapering in January whilst simultaneously confirming interest rates would remain very low for a long time.
In Japan monetary stimulus was also the story of 2013, the Nikkei advancing by more than 50 per cent as investors bet “Abenomics” would finally lift the country out of deflation.
The tech sector was another big winners in 2013, many social media stocks trading at dotcom-era valuations. Facebook, one of the big losers of 2012, almost doubled this year, as did LinkedIn, while manic demand for Twitter shares saw a $25 billion valuation slapped on the stock following its November flotation.
It was a good year for initial public offerings (IPOs) in general, with the number in the US hitting a 13-year high and the Japanese number hitting a six-year high.
Ones to shine
Social media stocks were not the only ones to shine – unfashionable Microsoft jumped by 50 per cent this year, partly due to investors cheering the imminent departure of chief executive Steve Ballmer.
It all helped the Nasdaq to a yearly gain of more than 30 per cent and an ascent above 4,000 for the first time since 2000.
It was a second year of underperformance for Apple, which looks set to eke out single-digit gains, although a near 50 per cent rally since July has lifted investors’ spirits.
The biggest winner of 2013 has to be bitcoin, the digital currency’s stratospheric advance reminiscent of the greatest bubbles in history.
Losers? Each of the Brics underperformed this year, with particularly heavy losses seen in Brazil. Emerging market bonds were a money-loser, while US bonds look set for their worst year since 1987.
Gold lost a quarter of its value this year as crisis and inflation fears receded.
“The results of 2013 were a necessary response to the stresses inherent in the results of 2012,” says Deutsche Bank, describing the year as “an important and meaningful reversal of the 2012 risk-off trade”.
Next year may see a renewed interest in corporate fundamentals and an easing of the macroeconomic focus. In the US, lacklustre earnings meant more than three-quarters of the S&P 500’s return came from an expansion in its valuation multiple – the largest contribution to market returns in 15 years. In Europe market gains also came in the face of flat earnings, indicating further gains may depend on actual growth rather than the promise of it.