The past year has been characterised by extreme volatility across international financial markets. During the first few months of 2011, equity markets had held on well to the gains registered in 2009 and 2010. However, as the eurozone sovereign debt crisis started intensifying and amid growing fears that the major economies around the world would slide back into recession coupled with the credit rating downgrade of the United States in early August, equity markets suffered a major setback in the summer.
The upturn in recent weeks helped equity markets enter a bull market as they recovered by more than 20 per cent since their recent lows- Edward Rizzo
The extent of the downturn and the sharp loss of confidence among investors was evident on August 8, 2011 when all the 500 companies forming the S&P 500 index in the US saw their share prices decline on the same day for the first time since 1996. During the month of August, all major equity markets entered bear market territory (a decline of 20 per cent in the value of the stock market). Equity markets remained very volatile during the summer months and some indices also touched fresh lows in October.
The S&P 500 tumbled by 21.6 per cent from its high of 1,370.58 points on May 2, 2011 to its low on October 4, 2011. Likewise, in Europe, the UK’s FTSE 100 declined by 21.5 per cent from its high of 6,105.77 points on February 21, 2011 to the low of 4,791.01 points on August 9. The German and French stockmarkets suffered sharper declines with losses of 34.7 per cent in Germany from the high on May 2 to the low on September 12 and France’s CAC 40 stumbling by 35.4 per cent from its February 16 high to its low on September 23, 2011.
However, since then, there has been a consistent upward movement across international equity markets although volatility continued to play a major role. The change in sentiment among investors came about against a backdrop of news that eased some of the major worries that had gripped the markets. Economic data coming from the US continued to positively surprise international economists and additionally although China’s rate of economic growth slowed down, this was not as much as previously feared. In Europe, there was a swift change in investor perception following the appointment of the new president of the European Central Bank Mario Draghi.
Within two months of his appointment, during November and December Mr Draghi quickly reversed the interest-rate rises of April and July 2011. The new ECB president also encouraged European governments to adopt a disciplined fiscal plan and provided banks with unlimited access to euro and dollar funding. Moreover, despite the credit rating downgrades first by Standard & Poor’s and then by Fitch, European countries also successfully managed to fund themselves at various debt auctions that took place in recent weeks. This helped sentiment improve not only in Europe but also across the financial markets in the US and in Asia.
In fact, the major world equity markets registered their best January performance in 18 years. The MSCI All World Index advanced by 5.8 per cent during the first four weeks of 2012 – the sharpest rise during the first month of the year since 1994. In the US, the S&P500 Index gained 4.4 per cent during January (its sharpest gains in January since 1997) and registered a six month high on February 3. Across Europe, the Stoxx Europe 600 Index advanced by four per cent for its best start to the year since 1998. The German equity market was the best performer in January with an increase of 9.5 per cent while the French CAC40 gained 4.4 per cent and the FTSE100 in the UK edged two per cent higher.
Following the strong gains in January, equity markets were further boosted by the news coming from the US last Friday which showed that the rate of unemployment dropped to a three year low of 8.3 per cent. This fuelled further positive sentiment across equity markets with the Dow Jones Industrial Average Index climbing to a three and a half year high and the Nasdaq technology index rising to an 11-year high (its highest level since the late 1990s “internet boom”).
The upturn in recent weeks helped equity markets enter a bull market as they recovered by more than 20 per cent since their recent lows. The S&P 500 has rallied by 25.2 per cent from its low on October 4, 2011 with the FTSE100 up 23.2 per cent from its low of 4,791.01 points on August 9, 2011. The markets in Continental Europe performed stronger following the steeper declines over the summer as the German DAX index shot up by 36.3 per cent from the recent low and France’s CAC 40 advanced by 27.3 per cent from its low on September 23, 2011.
Some critics claim that the recent bull market came about on low volumes as average daily turnover on the S&P500 is at its lowest level since 1997. This could be due to the continued warnings by the International Monetary Fund on the grim outlook for the world economy and also the protracted negotiations on the Greek debt situation which is raising fears of a Greece default by March. The IMF claims that the eurozone is likely to enter a recession even if the sovereign crisis does not worsen any further with Italian and Spanish economies expected to contract by 2.2 per cent and 1.7 per cent respectively due to the severe austerity measures, the high debt costs and an ongoing credit crunch.
Many local investors may be surprised that despite the strong upturn across international markets, in recent months the domestic equity market registered a lackluster performance. Local investor sentiment had weakened in the first quarter of 2011 following the political uprising in Libya. The MSE Share Index had shed 8.4 per cent during the first three months of 2011 and continued to weaken as the fears of contagion from the eurozone sovereign debt crisis affected the share price performances of the two large banks. Investor sentiment across the local community was also negatively impacted by the ongoing developments in Greece due to the significant investment by Go plc in the Greek telecommunications firm Forthnet S.A.
Despite the renewed confidence in Libya following the end of the Gaddafi regime in September and the encouraging financial performances by a number of the local companies during the first half of 2011, the local equity market continued to register subdued performances. The MSE Share Index slipped by 18.2 per cent during 2011 and eased by a further three per cent during the first five weeks of 2012 dropping to a 30 month low last Tuesday on sustained weak volumes in the equity market. Local investors have continued to signal a strong preference for fixed interest instruments as evidenced once again from last week’s Malta Government Stock issues when retail investors subscribed to a total of €123.2 million across the three new offerings and institutional investors acquired a further €151.5 million during the auction process earlier this week.
Although sentiment seems to be the main over-riding force dominating both the local equity market as well as the international markets, investors need to remain focused on both the macro-economic indicators as well as company fundamentals since these tend to dictate share price movements over the longer-term.
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.
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Mr Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.