By ROBERT HARLEY 08/01/2013
The traditional Christmas equity rally was notably muted through December. In particular a lacklustre performance from the important US market dampened broad global equity index returns; more cyclical equity regions generally fared better. In fixed income, benchmark UK gilt and US Treasury yields rose marginally over the month resulting in modest losses, whilst high yield bonds continued to rally.
Positive reports from US overshadowed by fiscal deficit
Sentiment towards US equities continued to be tied to perceptions of progress over the resolution of the fiscal deficit ahead of the new year deadline. In doing so a number of positive reports relating to housing, manufacturing, household incomes and consumer spending went largely ignored. Indeed, in an effort to further support the pace of economic activity, the US Fed’s Board of Governors announced a historic adjustment to monetary policy, formally tying it to specific levels of unemployment and inflation.
Election victory for Liberal Democratic Party in Japan
In Japan an election victory for the Liberal Democratic Party raised the spectre of more aggressive monetary easing by the Bank of Japan in an attempt to kick start the faltering economy. The yen depreciated significantly in response to these expectations and Japanese equities rallied, led by the country’s export sector - the principal beneficiary of a weaker domestic currency.
Indicators suggest pace of growth in China is gathering but Europe’s slump continues
News from China continued to be more encouraging as government data on industrial output and retail sales suggested that growth may be gathering pace again. However in Europe economic indicators pointed towards an ongoing slump. Germany’s central bank cut its growth forecast for 2013, warning that Europe’s largest economy risks entering a technical recession until the end of Q1 2013.
We expect positive global economic momentum
Taking into consideration the fiscal and monetary resources that international policymakers have committed since H2 2012, we expect the positive global economic momentum continuing into the new year, providing a counterbalance to US fiscal tightening.
Please note that current or historical yields should not be considered an indicator of future performance. Different funds carry varying levels of risk depending on the geographical region and industry sector in which they invest. You should make yourself aware of these specific risks prior to investing. The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers.