Market View - January 2013

The American fiscal cliff fiasco attracted much derision on both sides of the Atlantic as President Obama and senior Republican Senators reached a fudged solution on New Year’s Eve, which was then passed by both the Senate and the Republican controlled House of Representatives on the first day of this year!

In one of its editorial leaders titled “America’s European moment – The troubling similarities between the fiscal mismanagement in Washington and the mess in the euro zone”, The Economist newspaper summed up the irony of developments when saying “For the past three years America’s leaders have looked on Europe’s management of the euro crisis with barely disguised contempt. In the White House and on Capitol Hill there has been incredulity that Europe’s politicians could be so incompetent at handling an economic problem; so addicted to last minute, short term fixes, and so incapable of agreeing on a long-term strategy for the single currency. Those criticisms were all valid, but now those who made them should take the planks from their own eyes. America’s economy may not be in a bad a state as Europe’s but the failures of its politicians – epitomised by this week’s 11th hour deal to avoid the calamity of the “fiscal cliff” – suggest that Washington’s pattern of dysfunction is disturbingly similar to the euro zone’s”.

The article goes on to detail how America’s failures have resembled Europe’s in three depressingly similar ways, namely the inability to progress beyond patching up, the reluctance of those involved to set aside political self-interest for the greater good, and an inability to be honest with voters as to the real cost and sacrifice necessary to solve both crises! Just as worryingly the article suggests that US indecision risks sending a dangerous leadership message to the developing world!

The Economist concludes “This week Mr Obama boasted that he had fulfilled his mandate by raising taxes on the rich. In fact, by failing once again to clear up America’s fundamental fiscal trouble, he and Republican leaders are building Brussels on the Potomac.” So we start 2013 much as we did 2012 with current and future debt issues continuing to dominate American and European markets although the global equity market response to the fudged US fiscal cliff solution has been very positive while bizarrely the price of precious metals such as gold and silver, (which are ordinarily expected to benefit from increased debt) have been falling!

Interestingly, despite all the doom and gloom from some of the market’s most respected commentators (including hedge fund guru John Paulson predicting a collapse of European stocks and Morgan Stanley and Credit Suisse forecasting declines on Wall Street), that prevailed at the beginning of last year, 2012 turned out to be a rewarding year for investors. This was especially true for those with a relatively high risk appetite as the MSCI World Equity index rose more than 18% on a Total Return basis (or TR i.e. with dividends reinvested) including almost 2% during December!

All the major global equity markets provided positive returns over the last twelve months with India the star of the show (MSCI India TR) up almost 30%, Hong Kong following closely behind (Hang Seng TR) 27.46%, Japan (Nikkei 225) up 22.94%, Europe (MSCI Europe TR) 18.09%, the US (S&P 500 TR) up 16%, the UK (FTSE 100 TR) up 9.97%, and even China (Shanghai Composite) following an incredible 14% rally during December finishing up 3.17% for the year! Most bond and commodity markets were also positive during 2012 with emerging market bonds (JP Morgan (EMBI Global) returning 18.63%, gold bullion (in US$) up 5.68%, UK government bonds (10 year Gilts) up 1.84%, US Government bonds (10 year Treasury Bills) up 1.79%, global bonds (JP Morgan Global GBI Unhedged TR) up 1.30% and the global commodity index (S&P GSCI TR) up 0.08%.

While the debt and policy headwinds the market faces remain substantial as mentioned above, there have also been some very positive developments during the last quarter, most especially in the emerging world which suggest that 2013 could be even better for global equity markets! Included among these was the change of government, together with indications of much needed reforms in China, with The Economist newspaper suggesting that the explosive growth in the number of Weibo (a Chinese form of Twitter) account holders to more than three million in the last year could be a real game changer in terms of the country’s progress towards a more open society over the longer term.

Additionally many market commentators are enthusing about the continuing potential offered by the Indian market, despite it having already grown by almost 500% over the last ten years! Over the past few months, foreign investors have ploughed more than $20 billion into the Mumbai Stock Exchange on the premise that the reforms to the retail and energy sectors initiated by the government last year are but the start of much wider reaching reforms which when allied to expectations of reducing inflation and increasing corporate earnings over the next year make this one of the most exiting markets over the next year or so.

Finally, there is optimism that both Washington and Brussels will continue to succeed to kick their respective debt cans down the road, thereby avoiding market panics. If they are successful in this, and modest economic growth ensues, and 2013 does not experience any major black swan events, there is consensus optimism that even American equity sectors can advance again this year despite challenging historic valuations!

So as we peer out over the dawn of 2013, we envisage another challenging year from an investment perspective albeit with attractive opportunities to hopefully not only preserve capital in real terms but also secure some additional appreciation for minimal risk! From all of us as Ash-Ridge Asset Management, we would like to wish you a Happy and Prosperous New Year!