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December 2012 Market Commentary

03.12.2012

It seems some time ago now, but on Tuesday November 6th Barack Obama defeated Mitt Romney to secure the White House for another four years. World stock markets had risen throughout the day, anticipating his victory.

Unfortunately the next day the President ran up against the still-Republican-dominated Congress – and with the US heading for the ‘fiscal cliff’ and threatening to take the rest of the world with it, markets duly reversed all the previous day’s gains and a lot more besides.

In Europe, November saw Greece step back from the brink – at least for the time being – and the meeting on the EU budget broke up without agreement.

In the Far East, good stock market performance was overshadowed by worries about the long term health of the Japanese economy.

UK

November was another month of depressing news on the jobs front for the UK, especially on the high street. On the fourth – the day that shoppers worldwide queued round the block for an iPad mini – Comet went into liquidation. They were apparently the victim of ‘showrooming:’ customers going into the store to look at products and then buying the same model cheaper online.

Marks & Spencer reported a 9.7% fall in profits, and even the normally much-anticipated John Lewis Christmas ad failed to lift the gloom. It was estimated that 1 in 10 high street shops is now empty, and the National Institute of Economic and Social Research added to the gloom by suggesting that the UK could stay in recession until 2014.

Away from the town centres Tata announced 900 job losses, with the Port Talbot plant particularly badly hit, and Hovis owner, Premier Foods, announced the closure of a factory with 1,000 job losses. Meanwhile, the debts of Network Rail soared to £28bn: with debts like that, an application to join the EU could well be on the cards.

There was more despondency for the UK housing market, with the Halifax reporting that prices were falling and home ownership was at its lowest level since 1988. Less than half the properties in London are now lived in by their owners.

George Osborne sprang a surprise at the end of the month by announcing that Mark Carney, head of the Canadian Central Bank, would take over as Governor of the Bank of England. According to the BBC’s Robert Peston, George Osborne sees him as the banking equivalent of Pep Guardiola. Let’s hope he doesn’t follow the example of the former Barcelona boss and decide to take a sabbatical.

Having started the month at 5,783, the FTSE encouragingly finished it at 5,867. Clearly the bad news on the jobs front was outweighed by Europe inching towards a solution on the debt crisis and the hopes that the US would avoid the Fiscal Cliff.

Europe

Events in Europe where dominated by a need to find a bailout solution for Greece – as we reported last month, Greece had warned that it could run out of money if no solution were found – and by the EU budget negotiations at the end of the month.

Having been away from the headlines for a couple of months, attention focused on Spain, Greece rocketed back to prominence as unemployment reached 25.4% in August – the peak of the holiday season. The Government passed further austerity measures against a background of yet more unrest, and commentators openly speculated on whether democracy itself could come under threat in the country.

Workers across Europe continued to protest at austerity measures, and the BBC Europe editor posed the question that must be on everyone’s mind. ‘When will patience [with austerity] run out?’ Matters did not improve when official figures confirmed that Europe had followed the UK in having a double-dip recession.

To no-one’s surprise, the EU budget meeting broke up without agreement. David Cameron had gone there determined to take a tough stance against the proposed €971bn EU budget and he was supported by Angela Merkel. With a split developing between contributor and recipient nations agreement was never likely, and more talks will be held in the New Year.

Despite this, the major European stock markets finished the month marginally higher, with Germany’s DAX index up 2% to close at 7,405 and the French CAC index up 4% to 3,557. Spain, Italy and Greece all closed the month with marginal gains as well, with their markets encouraged by a month with – for once – no unexpected shocks.

US

As reported above, the US Presidential Election was held on Tuesday November 6th. Two days previously positive jobs data had been announced for the 25th consecutive month, and the omens looked good for Obama. In the event the margin of victory was much greater than the vast majority of pundits had expected, with Mitt Romney failing to capture any of the key states he needed.

As Obama prepared for another four years in office, he still faced a battle with Congress over the ‘Fiscal Cliff.’ This is a raft of tax cuts originally introduced by the Bush administration – and subsequently extended by Obama – which are due to expire in January. If no compromise is found the reversal of these cuts will hit Middle America hard and could well lead to a slump in the US economy.

By the end of the month the President was warning of a ‘Scrooge Christmas’ and Republican leaders in Congress were still saying that no deal was in sight. Expect the bargaining and negotiating to go down to the wire.

A report published by the International Energy Agency in mid-month suggested that the US could become virtually self-sufficient in gas and oil within ten years as it continues to benefit from ‘unconventional’ sources, including shale gas and shale oil. The IEA gave a stark warning that this would allow most of the Middle East oil to be sold to China, with potentially dire consequences for global warming.

The end of November brought Thanksgiving, the time when Americans traditionally give thanks for what they have. The day after Thanksgiving is now known as ‘Black Friday’ – when Americans rush to the malls and fight over what they don’t have: ‘wild in the aisles’ as one newspaper put it. A shopper in Massachusetts went home proudly clutching a 51” flat screen television. Unfortunately he left his partner’s two year old son in the store.

On the last day of the month it was reported that the annualised rate of US economic growth for the third quarter had been revised upwards to 2.7%. But the Dow Jones index still chose to side with those worrying about the Fiscal Cliff instead of the determined shoppers, and closed the month down 71 points at 13,025.

Far East

The bald figures from the Far East stock markets made quite encouraging reading. Hong Kong finished the month 2% higher, Japan had an excellent month with the Nikkei closing at 9,446 for a rise of 6% and these more than compensated for the fall in the Chinese index to 1,974.

But look below the figures and there are some real worries, particularly in Japan, with many commentators seriously worried about the long term health of the Japanese economy. The Guardian posed the question, ‘Is Japan really on the brink of a sudden downward spiral?’ pointing to three worrying factors in the economy: the rapidly ageing population, the Government’s determination to loosen fiscal policy in a desperate bid to promote spending, and the way in the which the economy has been hit by the slowdown in Europe. Factor in that much of Japan’s traditional electronics industry has been lost to Chinese manufacturers, and the long term outlook for the country is worrying. Little wonder that the month ended with a further $10.7bn stimulus package being approved by the Japanese Government.

In China, Xi Jinping was duly confirmed as the man who will lead the country for the next ten years. The new Politburo is seen as generally conservative, with the reformers in China largely missing out on promotion.

Xi Jinping can expect to be in power when China becomes the world’s largest economy, with the OECD predicting that this will happen in 2016.

Emerging Markets

November was generally a poor month for the Emerging Markets sector. Perennial star performer Venezuela led the way with a rise of 6.5% in the month – only slightly ahead of Japan – and India was also up by 3.5%, with the SENSEX index closing at 19,171. However, there were far more negative performances with Chile, Egypt, Cyprus and Bangladesh all recording double-digit falls. Russia was down a further 1.5% (to 1,381) and many of the smaller European markets also fell.

Worryingly, figures released at the end of the month showed that economic growth in both India and Brazil had slowed. With these countries being the leading economies in their respective regions, that was not a good ending to the month.

If the content of this month's market update raises any questions regarding your current investment and savings then please give us a call on 01676 521111 or request a call back from one of our financial planning specialists.

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