Q3: International equity markets rally strongly
It may be surprising to many investors that despite the challenging global economic conditions, international equity markets rallied strongly during the summer months. Investors seem to have shrugged off the news of the potential double dip recession in the US, the negative impact from the slowdown of China on the global economy and the continued fears of the threat of a breakup of the eurozone.
Despite these threats from across the world, Germany’s DAX registered double-digit gains. The German index was the best performer among the major markets (+12.5 per cent) bringing the year-to-date performance to over 22 per cent. The other European stock markets also performed positively during the third quarter of the year with the French CAC40 up five per cent and the FTSE100 in the UK adding 3.1 per cent. The Spanish and Italian markets were particularly volatile in anticipation of the European Central Bank meeting in early September.
Despite the wide volatility from one week to the next, both markets reported solid gains during the quarter with the Spanish IBEX35 up 8.5 per cent and Italy’s FTSE MIB advancing by 5.8 per cent. However, these two markets remain among the worst performers this year following the declines registered during the first half amid concerns on their respective government’s finances.
The US markets also performed positively during the past three months with the Dow Jones Industrial Average adding seven per cent and the broader S&P500 index rising by 8.9 per cent and touching its highest level since 2007. Moreover, the Nasdaq index gained 6.2 per cent to a 12-year high pushing its year-to-date rise to almost 20 per cent. However, various financial market commentators state that the surge in the share price of Apple Inc (+14 per cent in Q3 and +64.7 per cent since the start of 2012) had a disproportionate weighting on the performance of both the S&P500 and the Nasdaq as the technology giant represents 4.8 per cent of the S&P and 13 per cent of the Nasdaq.
Some may ask what spurred such a strong summer rally. The unprecedented stimulus measures by the major Central Banks in response to the renewed global economic slowdown boosted investor confidence and appetite for equities. The European Central Bank announced an unlimited bond-buying programme early last month while on September 13, the US Federal Reserve pledged a third round of asset purchases to revive the economy after unemployment stayed above eight per cent for 44 consecutive months. Additionally, the Bank of Japan unexpectedly expanded its asset-purchase fund and India’s central bank lowered the cash reserve ratio for lenders.
The local equity market also performed positively during the summer months. Sentiment improved especially towards the larger capitalised companies and although trading activity declined from Q2, it is encouraging to note that volumes across the equity market increased by 10 per cent over the summer of last year. The MSE Share Index advanced by 3.8 per cent in Q3 helping the local equity market recover from the losses incurred in the first half of the year to currently stand in positive territory for 2012 (although with a mild appreciation of a mere 1.3 per cent).
The two major banking equities recovered by close to 10 per cent each during Q3 following an encouraging set of interim financial statements by HSBC as well as support for BoV shares which entered the market after the equity slumped to a three-year low of €2. The third largest cap International Hotel Investments plc also gained in the last three months (+5.9 per cent) as it became evident that the sale of the luxury apartments in London is drawing closer.
On the other hand, Malta Post plc and Lombard Bank Malta plc rank as the worst performers as the postal operator confirmed in its interim statement that the downward trend in profitability reported for the six months to March 31, 2012, will also be reflected in the second six months of the company’s financial year which ended on September 30, 2012.
Malta Post confirmed that this trend will continue and even accelerate until such time as the regulatory framework is adequately revised. Another significant loser in Q3 was Go plc with an overall decline of 19 per cent after a particularly volatile period for the share price which had rallied by 40 per cent in the previous quarter. The renewed downturn came about immediately as the company announced on August 28 that its board will be meeting to decide on whether or not to participate in a rights issue of the Greek company Forthnet. The meeting was meant to have taken place by the end of September but a further announcement late last Friday placed renewed uncertainty among investors as a decision was delayed pending further information expected from Forthnet related to the rights issue.
Although equity markets rallied, bond markets also performed positively in Q3. The Rizzo Farrugia MGS Index (measuring the price performance of Malta Government Stocks) advanced by 1.3 per cent during the last three months following a strong rally in July and August ahead of the announcement by the ECB.
The heightened concerns over Spain and Italy increased appetite for safe haven German bunds leading to a sharp decline in the eurozone benchmark 10-year yields during July. Yields dropped from 1.60 per cent at the start of July to an all-time low of 1.126 per cent on July 23, 2012. The sharp downturn in yields during July was reflected in an upward movement in Malta Government Stock prices, especially those of a longer-term nature. In fact, the price of the 5.20 per cent MGS 2031 surged to a high of 104 per cent while the 5.1 per cent MGS 2029 which was initially offered to the public at 101 per cent in June rallied by 283 basis points to 103.83 per cent. However, yields then jumped up above 1.70 per cent to a five-month high on September 17 as the ECB statement quelled market fears of a eurozone breakup.
Despite the unprecedented stimulus measures by the major Central Banks, some international commentators believe that equity markets are still vulnerable to a correction following the summer rally. The threats to the continued recovery of the stock markets are various, with one of the major uncertainties coming from the upcoming US presidential election and the so called ‘fiscal cliff’. Under a law passed in the US last year amid the debt-ceiling impasse, the failure of lawmakers to agree on some mix of spending cuts and tax increases could result in automatic cuts and accompanying tax hikes in January 2013 totalling as much as $1.2 trillion.
The Congressional Budget Office in the US believe that this could have a significant negative impact on US economic growth which could be as high as 2.9 per cent in the first half of 2013. Moreover, despite the reassuring announcement by the ECB to maintain the euro intact, Europe still remains a threat as Spain continues to haunt markets amid further uncertainty that the government will agree to more austerity in exchange for the European Central Bank’s financial aid. Additionally, the Greek government requires ratification of further spending cuts of over €13.5 billion to receive the next tranche of the required bailout funds.
The developments across the eurozone naturally also impact local investor sentiment. However, the main focus for local investors will be on the announcements in the weeks ahead which could influence the overall market direction in the coming months. The full-year financial statements from Bank of Valletta plc are always among the most important announcements on the local market.
These are normally released by the end of October. Likewise, the interim statements due to be published by mid-November from most equity issuers also help provide additional information to the market on the circumstances of each of the companies. The market is also patiently waiting for a further update from FIMBank plc on the possible introduction of Kuwait’s Burgan Bank as a majority shareholder following the initial announcement made on March 13. Moreover, the possibility of an early general election could also impact investor behaviour and trading activity in the months ahead.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd, RFC, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.
© 2012 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.
Mr Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.