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January 2013 Market Commentary

04.01.2013

December’s least surprising headline duly arrived on January 1st: Deal reached on Fiscal Cliff. For the whole of December (barely pausing for Christmas) President Obama and Congress argued over the deal needed to avoid the ‘Fiscal Cliff,’ the raft of tax rises that would have been a body blow to Middle America and impacted severely on the US economy and – by implication – the wider world economy.

It was always going to go down to the wire, and sure enough, there was still no deal when the UK welcomed the New Year. But for anyone able to focus on their laptop when they woke up on New Year’s Day, there was the headline: White House and Republicans reach deal to end crisis.

Well, this particular crisis anyway…

2013 promises to be another year when your glass is either half full or half empty. Good news and bad news relentlessly traded blows throughout December and, in that respect at least, the New Year looks very much like more of the same.

UK

In the UK the normal pattern of 2012 continued right up to the end of December – good news one day; bad news the next. Chancellor George Osborne produced his Autumn Statement early in the month and included some cautious good news on the UK’s borrowing. But normal service was resumed two days later with the Office for National Statistics reporting a faster than expected fall in factory output and commentators raising the spectre of a ‘triple-dip’ recession.

Unemployment in the UK fell as private sector jobs hit an all time high and first time buyer mortgages rose by 14% – both positive signs for the economy. But on Christmas Eve a survey was released showing that almost twice as many people were ‘gloomy’ about 2013 as opposed to those who were optimistic, with the glass-half-empty team winning by 43% to 24%.

There were more fears for the High Street as the lights finally went out at Comet and experts warned that more chains could follow suit in the coming year. However John Lewis struck back, reporting their best ever Christmas with sales up 26.5% on a year ago. Rumours that the John Lewis Snowman had asked for a bonus should not be entirely discounted …

A hardly-new but still-worrying trend for the UK was the continuing North-South divide. Figures were released showing the areas with the biggest house price rises in 2012, with eight of the top ten being in London and the South East. Southend led the way, with the average house there now costing £198,418. Not surprisingly, the biggest falls were seen in the North, Scotland and Northern Ireland, with house prices in Craigavon, Northern Ireland, falling 18% in the year.

The FTSE finished the month at 5,898 – which was a rise of 5.84% on the calendar year.

Europe

At the end of a turbulent year for Europe, December proved to be a relatively quiet month. The Bundesbank slashed its growth forecast for 2013, as did the Austrian Central Bank. Both warned that the coming year would be worse than expected.

There was an interesting story at the end of the month, when the Guardian reported that Germany was ‘exporting its old and sick’ to Eastern Europe and the Far East. Germany has one of the fastest-ageing populations in the world, and clearly the costs of health care and long term care are going to be significant. This is a trend that can only continue in the future.

In France, Premier Francois Hollande’s bid to introduce a 75% top rate of tax was thrown out as ‘unconstitutional and unfair.’ However, Hollande seems determined to press ahead with the tax as he seeks to avoid the austerity, which so many other countries in Europe have introduced.

December is traditionally a time for end-of-year awards, and Greece was the recipient of one such gong. Sadly it was for the EU’s Most Corrupt Country. There was better news though, when S&P raised the country’s credit rating from ‘selective default’ to the dizzy heights of B minus.

All the major European stock markets moved ahead in December, with the German DAX index rising 3% to close at 7,612. In total the index rose by 29% in 2012 – an outstanding performance given the turmoil in Europe. The French index finished the month at 3,641 – up 2% on the month and just over 15% for the year as a whole.

US

Inevitably, December in the United States was dominated by the need for the President and Congress to arrange a deal on the Fiscal Cliff. Barack Obama cut short his holiday and, as reported above, a deal was done in the 59th minute of the eleventh hour.

Had the deal not been done then there would have been serious problems for the US and world economies – and the US would have come perilously close to breaching its debt ceiling. But for now everything is well: until the next time …

Everything was certainly well at Facebook HQ, Palo Alto. The share price continues to disappoint those who bought in the IPO, but with the company paying just £2.9m tax on £840m profits clearly someone is certainly in line for a Christmas bonus. That £2.9m of tax included the princely sum of £238,000 in UK Corporation Tax.

The Dow Jones index closed the year at 13,104 – up less than 1% in December, and showing a rise of 5.90% on the year as a whole.

The Far East

Twenty-one months after the tsunami of 2011, Japan woke up on December 7th to reports of another earthquake off its North East coast. This one measured 7.3 on the Richter scale, but mercifully the tsunami it generated was short-lived and insignificant.

The same day it was reported that China was taking on Mother Nature head first, with stories that the Government planned to flatten 700 mountains in Lanzhou province to make way for a new ‘metropolis in the desert.’

But it was politics – rather than economics – that made the month’s headlines in the Far East. The hawkish, right of centre Shinzo Abe was voted back in as Japanese Prime Minister – which immediately fuelled tensions over the disputed Senkaku Islands. South Korea elected Park Guen-hye (the daughter of former dictator Park Chung-hee) as its first female Premier. She gazed upwards to see a North Korean rocket ‘orbiting normally’ – a bird of ill-omen if ever there was one.

The main Far Eastern markets did well in December, with Japan rising 10% to finish at 10,395; China up 13% to 2,233 and Hong Kong showing a more modest rise of 3% to end at 22,657. Over the year both Japan and Hong Kong were up by nearly 23%. Despite its well-documented troubles, China’s strong performance in December helped it finish the year with a rise of 1.54%.

Emerging Markets

On December 18th a story in the Guardian described how ‘new wave countries [were] coming up fast’ and suggested that the new economies ‘could well overtake the west by 2050.’

This is certainly born out when you look at the top performing stock markets in 2012, which were all emerging markets. Nigeria, Egypt, Pakistan and Turkey all saw rises of 40-50% but they were easily eclipsed by Venezuela, where the stock market rose by the small matter of 302% in the year. To counter that, all the worst performers were also emerging markets. Ukraine, Bangladesh, Morocco and Slovakia all had years to forget – however the wooden spoon goes to Cyprus, with the stock market falling by 60% over the past 12 months.

However, the lower cost of labour in emerging markets is going to continue to make them a serious rival to the more established economies through the coming years.

As for stock market performance, Brazil (up 5%), India (up 1%) and Russia (up 7%) all finished the month ahead, and all of these leading emerging markets were ahead on the year as well. Brazil rose 7.4% to close 2012 at 60,952: Russia was up 5% at 1,475 and India enjoyed an excellent year, gaining 25.7% to finish at 19,427.

And finally …

Baby-faced North Korean dictator Kim Jong-un has been a regular source of stories throughout 2012, and he was not surprisingly voted ‘Sexiest Man Alive’ by the American satirical magazine The Onion. The Chinese People’s Daily fell for this hook, line and sinker and duly ran a 55 page photo-special on the Irresistible Leader. Readers of Time Magazine rushed to get in on the act and – ignoring dull-but-worthy candidates like Barack Obama and European Council President Herman van Rompuy – duly voted Kim ‘Person of the Year.’

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Regular contact, valuations, knowledge of the market. Mr W - Gloucestershire

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