The Japanese markets ended the year with a flourish. The Nikkei rose 13.62% in December, leaving it 17.3% up on the year and helping it catch up with other developed markets. Its performance is now in line with the FTSE 100, which was up 18.65%, the Dow Jones, up 15.52%, and the FTSE Eurofirst, up 22%.
The last-minute boost came largely on the back of a weakening yen, which relieved the pressure on exporters. After the month end, Japan’s new finance minister said he supported a weaker yen – a significant reversal in policy from his predecessors. He added he would work to ensure the yen remained at around 95 to the dollar, a target set by Japanese business leaders. The yen is currently trading at around 93 to the dollar.
Markets were also given a boost by the success of individual companies. Canon won approval for its takeover of a Dutch rival Oce while brewers Kirin and Suntory also benefited from M&A activity. Technology shares took the lead from their US rivals and moved up substantially last month – US technology groups had reported an improvement in earnings and investors expected similar earnings upgrades in Japan.
December also saw a new stimulus plan from the government. Only in Japan could a plan to deliver average growth of 2% be called ‘ambitious’, but the government said it wanted to create new markets in environmental technology, healthcare and tourism. The initiative, if successful, should create nearly five million new jobs.
However, it costs money Japan simply doesn’t have – ¥77,200bn (£520bn), to be precise – and December also brought bad news on the recovery. This was weaker than expected, with third-quarter growth revised down from 1.2% to 0.3%, and raised the real possibility the economy may begin to slow again in early 2010. Business investment remains the weak spot with private consumption still stable. The economy still has the fog of inflation hanging over it as well as the risk of debt downgrades.
Japan funds achieved the ignominious position of the worst-performing sector of 2009, with the average fund dipping 3.1%. It was the only sector, apart from UK Gilts, which actually lost money for investors during the year. That said, the average fund figure did mask a broad range of underlying fund performance, which varied between -11% and +11% for the full year. In general, Japan managers were simply too cautious, not trusting in the recovery. They may be right in the long run, but the markets did not agree in the short term.
Wednesday, 20 January 2010
Can Emerging Markets continue there top performace
emerging markets maintained their momentum in December, capping a spectacular year for investors. Economic data continues to suggest they will be crucial in leading the world out of recession, with Eastern Europe as the only remaining weak spot.
The Shanghai 180 A Share index rose 2% over the month, giving it an overall gain in 2009 of 88.3% – and indeed China was one of the few countries revising its GDP data higher. It pushed its 2008 GDP figure from 9% to 9.6% and said that growth figures for 2009 were also likely to be higher than originally forecast. This means China should surpass struggling Japan as the world’s second largest economy this year. Growth has been seen across the board and analysts have been particularly encouraged by the growth in the service sector.
The country’s economic success also dragged up the rest of the region, in spite of Singapore’s surprise fall in GDP growth in the fourth quarter. The Purchasing Managers’ Index (PMI) rose in China, South Korea, Taiwan and India, with China’s domestic carmakers seeing particular strength. Inflation returned in December after a year of falling prices with consumer prices up 0.6% over one year. This made some analysts nervous, particularly with house prices shooting up, though others saw it as an inevitable consequence of higher growth.
India’s benchmark index – the S&P CNX 500 – rose 3.7% in December, leaving it with a full year gain of 79.6%. Strong PMI data assuaged concerns that manufacturing might be slowing. In the meantime a report by the London School of Economics suggested India would retain its outsourcing dominance for at least another 15 years.
Eastern Europe had a strong month, in spite of ongoing worries about its economic position. The MSCI Emerging Europe index was up 6.6% in December, leaving it 65.1% up on the year. Russia also had a good month - the RTS index was up 5.3% in December, making it one of the top performing markets of the year with a gain of 130.5%. Russian GDP rose 1.9% in the fourth quarter, with Prime Minister Putin claiming the “active phase of the crisis” was over.
Brazil’s Bovespa index was up 2.3% for the month and 70.43% for the year. That said, the economy is expected to be largely flat in 2009 as third-quarter growth disappointed – the economy grew 1.3%, compared to consensus expectations of 2%. The weakness came from the agricultural sector, but the country saw strength in domestic consumption and investment.
The IMA Global Emerging Markets sector was top of the league tables for the year as the average fund delivered 58.6%. Asia Pacific was next, with the average fund returning 53.4%. Whereas other ‘risk’ trades such as smaller companies seem to have lost momentum going into the new year, emerging markets appear to maintaining their spark.
The Shanghai 180 A Share index rose 2% over the month, giving it an overall gain in 2009 of 88.3% – and indeed China was one of the few countries revising its GDP data higher. It pushed its 2008 GDP figure from 9% to 9.6% and said that growth figures for 2009 were also likely to be higher than originally forecast. This means China should surpass struggling Japan as the world’s second largest economy this year. Growth has been seen across the board and analysts have been particularly encouraged by the growth in the service sector.
The country’s economic success also dragged up the rest of the region, in spite of Singapore’s surprise fall in GDP growth in the fourth quarter. The Purchasing Managers’ Index (PMI) rose in China, South Korea, Taiwan and India, with China’s domestic carmakers seeing particular strength. Inflation returned in December after a year of falling prices with consumer prices up 0.6% over one year. This made some analysts nervous, particularly with house prices shooting up, though others saw it as an inevitable consequence of higher growth.
India’s benchmark index – the S&P CNX 500 – rose 3.7% in December, leaving it with a full year gain of 79.6%. Strong PMI data assuaged concerns that manufacturing might be slowing. In the meantime a report by the London School of Economics suggested India would retain its outsourcing dominance for at least another 15 years.
Eastern Europe had a strong month, in spite of ongoing worries about its economic position. The MSCI Emerging Europe index was up 6.6% in December, leaving it 65.1% up on the year. Russia also had a good month - the RTS index was up 5.3% in December, making it one of the top performing markets of the year with a gain of 130.5%. Russian GDP rose 1.9% in the fourth quarter, with Prime Minister Putin claiming the “active phase of the crisis” was over.
Brazil’s Bovespa index was up 2.3% for the month and 70.43% for the year. That said, the economy is expected to be largely flat in 2009 as third-quarter growth disappointed – the economy grew 1.3%, compared to consensus expectations of 2%. The weakness came from the agricultural sector, but the country saw strength in domestic consumption and investment.
The IMA Global Emerging Markets sector was top of the league tables for the year as the average fund delivered 58.6%. Asia Pacific was next, with the average fund returning 53.4%. Whereas other ‘risk’ trades such as smaller companies seem to have lost momentum going into the new year, emerging markets appear to maintaining their spark.
European Equities look to continue gains in 2010
Positive data towards the end of last month suggested the eurozone may maintain economic momentum, having moved out of recession in the third quarter. Even Ireland, one of the hardest hit of the eurozone economies, managed to drag itself into positive territory, rising 0.3% in the third quarter.
There was plenty of grand talk among Europe’s laggard economies of sharp cuts in spending. The governments of Spain and Ireland both announced wide-reaching cuts to address their deficits, while a team of EU enforcers headed to Greece to check on the credibility of its austerity plans. Delivering on their promises may prove crucial in 2010.
Eurozone inflation began to rise again during the month with consumer prices up 0.5% in the year to November. This had been widely expected and was welcome news for the European Central Bank, suggesting further stimulus may not be necessary to avoid deflation.
Private sector spending in both manufacturing and services rose at its fastest rate for two years, while the Purchasing Managers index reached its highest level since October 2007. The rate of job losses slowed, bringing some welcome respite for policymakers.
But the month was not without its problems. The crisis in Greece looked set to test the credibility of the union to its limits. Fitch downgraded the country’s credit rating, while S&P revised its outlook for Spain from ‘stable’ to ‘negative’. There were also ongoing worries about the exposure of Austrian banks to bad debts in Eastern Europe.
Austerity measures remain a concern for countries whose citizens rely on a strong public sector with predictions of civil unrest as spending cuts hit home. German industrial production figures slowed on weaker consumer demand and the Bundesbank warned the recovery may have lost momentum. Much of this weakness came from the ending of the car subsidy scheme, but it gave analysts pause for thought.
However, the eurozone’s stockmarkets were undeterred and were among the top performers of the developed markets. The FTSE Eurofirst index ticked up 6.1% over the month and rose 22% for the full year, leaving it ahead of the FTSE 100 and S&P 500. The individual markets of France and Germany were weaker, both for the month and for the full year. The CAC 40 rose 5.81%, while the Dax rose 5.3%. The CAC in particular has lagged UK and US markets in spite of France’s relatively strong economic performance.
European funds lagged the UK All Companies sector by 11.5% for the full year, delivering an average return of 19.46%. This was in line with US funds and well ahead of Japanese funds, which dipped 3.1%. That said, European funds have yet to reflect the superior performance of the larger eurozone economies and they will be hoping to catch up in 2010.
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There was plenty of grand talk among Europe’s laggard economies of sharp cuts in spending. The governments of Spain and Ireland both announced wide-reaching cuts to address their deficits, while a team of EU enforcers headed to Greece to check on the credibility of its austerity plans. Delivering on their promises may prove crucial in 2010.
Eurozone inflation began to rise again during the month with consumer prices up 0.5% in the year to November. This had been widely expected and was welcome news for the European Central Bank, suggesting further stimulus may not be necessary to avoid deflation.
Private sector spending in both manufacturing and services rose at its fastest rate for two years, while the Purchasing Managers index reached its highest level since October 2007. The rate of job losses slowed, bringing some welcome respite for policymakers.
But the month was not without its problems. The crisis in Greece looked set to test the credibility of the union to its limits. Fitch downgraded the country’s credit rating, while S&P revised its outlook for Spain from ‘stable’ to ‘negative’. There were also ongoing worries about the exposure of Austrian banks to bad debts in Eastern Europe.
Austerity measures remain a concern for countries whose citizens rely on a strong public sector with predictions of civil unrest as spending cuts hit home. German industrial production figures slowed on weaker consumer demand and the Bundesbank warned the recovery may have lost momentum. Much of this weakness came from the ending of the car subsidy scheme, but it gave analysts pause for thought.
However, the eurozone’s stockmarkets were undeterred and were among the top performers of the developed markets. The FTSE Eurofirst index ticked up 6.1% over the month and rose 22% for the full year, leaving it ahead of the FTSE 100 and S&P 500. The individual markets of France and Germany were weaker, both for the month and for the full year. The CAC 40 rose 5.81%, while the Dax rose 5.3%. The CAC in particular has lagged UK and US markets in spite of France’s relatively strong economic performance.
European funds lagged the UK All Companies sector by 11.5% for the full year, delivering an average return of 19.46%. This was in line with US funds and well ahead of Japanese funds, which dipped 3.1%. That said, European funds have yet to reflect the superior performance of the larger eurozone economies and they will be hoping to catch up in 2010.
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UK Equity funds look forward to 2010
UK equity income fund managers will not be sorry to have put 2009 behind them. The FTSE 350 Higher Yield index underperformed its FTSE 350 Lower Yield counterpart by 26.5% during the year, returning just 12.7%. Dividend cuts for 2009 are expected to come in at around 15%, leaving UK equity income managers with a much depleted pool of stocks.
Markets in December showed signs of a long-awaited change in sentiment. The Higher Yield index was up 3.8%, compared to a rise of just 3.1% for the Lower Yield index. The trusty dividend stocks, such as the oil majors, telecoms and pharmaceuticals, have been out of favour for some time and many are now saying they look undervalued. A number of companies are producing a higher yield on their equity than on their corporate debt – a rare anomaly.
Meanwhile, a recent survey by Deloitte’s has suggested finance directors are the most optimistic they have been for two years. They are increasingly willing to take financial risk while worries on liquidity have faded. As these are the people who hold the purse strings, it suggests the worst might be over for dividend cuts. Market consensus is suggesting dividends will start to rise again in 2010.
Dividend stocks may also benefit from the weakness in sterling. Approximately 40% of dividends come from companies reporting in dollars and these are seeing their earnings flattered by the falling currency.
However, there are still some companies where the dividend is seen as vulnerable, the most notable being United Utilities. Merrill Lynch analysts issued a critical note on the company, forecasting a dividend fall of 20%, which hit the shares during the month. Equally, the Basle Committee on banking supervision threatened to block banks from paying dividends where they didn’t meet certain capital adequacy criteria, making a return to the days of high payouts unlikely.
There are still worries over the concentration of income stocks, with a huge chunk of the available dividends coming from just a few companies. As a result, managers are tending to look down the market capitalisation scale or abroad to diversify their income stream.
The average UK Equity Income fund returned 24.59% in 2009, which was just over 5% behind the UK All Companies sector. It was ahead of the UK Income & Growth sector although this still looks better over three and five years. Ultimately, managers in the sector will be hoping that 2010 brings a change in fortunes.
Markets in December showed signs of a long-awaited change in sentiment. The Higher Yield index was up 3.8%, compared to a rise of just 3.1% for the Lower Yield index. The trusty dividend stocks, such as the oil majors, telecoms and pharmaceuticals, have been out of favour for some time and many are now saying they look undervalued. A number of companies are producing a higher yield on their equity than on their corporate debt – a rare anomaly.
Meanwhile, a recent survey by Deloitte’s has suggested finance directors are the most optimistic they have been for two years. They are increasingly willing to take financial risk while worries on liquidity have faded. As these are the people who hold the purse strings, it suggests the worst might be over for dividend cuts. Market consensus is suggesting dividends will start to rise again in 2010.
Dividend stocks may also benefit from the weakness in sterling. Approximately 40% of dividends come from companies reporting in dollars and these are seeing their earnings flattered by the falling currency.
However, there are still some companies where the dividend is seen as vulnerable, the most notable being United Utilities. Merrill Lynch analysts issued a critical note on the company, forecasting a dividend fall of 20%, which hit the shares during the month. Equally, the Basle Committee on banking supervision threatened to block banks from paying dividends where they didn’t meet certain capital adequacy criteria, making a return to the days of high payouts unlikely.
There are still worries over the concentration of income stocks, with a huge chunk of the available dividends coming from just a few companies. As a result, managers are tending to look down the market capitalisation scale or abroad to diversify their income stream.
The average UK Equity Income fund returned 24.59% in 2009, which was just over 5% behind the UK All Companies sector. It was ahead of the UK Income & Growth sector although this still looks better over three and five years. Ultimately, managers in the sector will be hoping that 2010 brings a change in fortunes.