The year 2012 proved to be a good one for most investors, in particular those who invested in global equity markets. Central bank stimulus by banks in the two major economic blocs of the US and the EU sent global stocks rallying, providing the highest returns since 2009. ECB’s Mario Draghi pledged to buy unlimited amounts of euro periphery bonds to combat borrowing costs low in these countries while Federal Reserve chairman Ben Bernanke said that the Fed will stock up on mortgage securities in a bid to revive its labour market.

We expect 2013 to be challenging, particularly to bond markets where yields stand at multi-year lows in most developed country markets- Vincent Micallef

Last year, the MSCI All Country World Index (ACWI) of equities increased by 16.5 per cent when one includes dividends. This index is a free float-adjusted market capitalisation weighted index comprising of 45 country indices, 24 of these in developed countries and 21 in emerging countries, and is often used as a common benchmark for global stock funds.

If one had to look at sub-sets of the broad index, the MSCI Emerging Markets Index returned 17.3 per cent, the FTSE-100 Index just under 10 per cent, in the US, the S&P 500 rose by 14.2 per cent, while the top 30 German listed companies as represented by the DAX index rose by a whopping 29 per cent.

The reader should bear in mind that all indices listed in this article are in local currency (in other instances, in the currency they are published), and hence they are not hedged into one common, comparable, currency. All returns are inclusive of dividend reinvestments.

Within the bond market, the BofA Merrill Lynch Global Broad Market (Bond) Total Return Index returned 5.7 per cent last year. The same index provider also releases the Global Broad market Sovereign Plus index, which increased by 2.1 per cent, and the Global non-Sovereign Index, up 7.3 per cent.

Sub-investment grade bonds as measured by the BofA ML Global High Yield Index was up 19.3 per cent – helped in no small way by:

a) investors’ search for yields superior to those which investment grade bonds were providing, and

b) historically low default rates. The JPM Emerging Markets Bond Index Global returned 18.5 per cent. More on the credit market and its out­look for 2013 in next week’s article.

The S&P GSCI Commodities index rose by a mere 0.3 per cent last year. A global production-weighted commodity index, in 2012 it was composed of 24 liquid, exchange-traded futures contracts, broadly split into: precious and industrial metals (3.2 per cent and 8.1 per cent respectively), energy (67.5 per cent), soft commodities (16.8 per cent) and livestock (4.3 per cent) futures contracts. Weightings for each commodity (and hence each class) change on a yearly basis, depending on their respective economic importance.

We expect 2013 to be challenging, particularly to bond markets where yields stand at multi-year lows in most developed country markets. One would need to keep a weary eye on inflationary pressures, weak economic growth and how the euro periphery nations stories will develop, especially in the politically unstable Italy and the Spanish ‘will they/will they not’ formal request for a bailout.

The fiscal cliff resolution in the US last month will need to be tackled again by end February.

www.curmiandpartners.com

This article is the objective and independent opinion of the author. The information contained in the article is based on public information. Some of the opinions express­ed here above are of a forward ­looking nature and should not be interpreted as investment advice, nor should it be considered as an offer to sell or buy or subscribe to any investment vehicles or strategies that might have been mentioned in the article. Curmi and Partners Ltd. is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.

Vincent Micallef is an executive director at Curmi and Partners Ltd.

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