Reflections on the first quarter of 2009
This first quarter of the year has
delivered relatively few surprises. In January, Citibank reported
heavy fourth quarter losses, Bank of America requested government
support following losses accumulating in newly acquired Merrill
Lynch, and, in the UK, Gordon Brown and Alistair Darling were
forced to announce a ‘second’ bank rescue plan. In February, the
Organisation for Economic Co-operation and Development (OECD)
advised that developed economies had suffered their largest
contraction in output in 50 years during the last quarter of 2008.
Furthermore, they estimated OECD economies would shrink in size by
4.9% in 2009, putting 25 million people out of work and further
predicted unemployment to rise to 9.9% in 2010 across the 30 member
countries. Meanwhile, the World Trade Organisation (WTO) advised
that manufacturing firms in the US, Europe and Asia were struggling
with the worst recession in 60 years as evidenced by corporate
earnings downgrades on a daily basis.
Capital markets have reflected the
deteriorating economic landscape with the MSCI World Index ($) down
12.5%, the S&P 500 down 11.7% and the FTSE 100 down 11.5%
during the first 3 months of the year. These numbers, however, mask
a very strong March rally in equity markets which rose sharply post
the 6th of March low where we witnessed the S&P 500
below 700 points for the first time since 1996. The same 3 indices
delivered returns of 7.2%, 8.5%, and 2.5% over the month of March.
The strongest equity returns were delivered by the developing
nations of the world, with the MSCI Emerging Markets Index ($)
returning 14.2%. The catalysts for this reversal in investor
sentiment were numerous; the continued raft of government stimulus
plans and the quantitative easing programmes announced by the
Federal Reserve, Bank of England and Bank of Japan being chief
amongst them. Spirits were further boosted by a trickle of economic
data that was much more encouraging than had been seen in previous
months. For example, in the UK mortgage approvals rose unexpectedly
to reach levels not seen since last May and in the US figures
revealed improving consumer sentiment, an increase in durable goods
orders and a rise in new home sales – the first increase in 7
months. In China, the government’s stimulus package appeared to be
gaining traction as a pick up in industrial production emerged
alongside a rising manufacturer’s purchasing managers index.
Perhaps the strongest catalyst of all was
US Treasury Secretary Geithner’s announcement of his Public Private
Investment Programme to create a market for the distressed toxic
assets held on the balance sheets of commercial banks in the US.
Market participants reacted positively to this plan and there is a
sense this could help free capital and assist the banks to commence
lending once more. This sequence of positive news flow, ahead of
what we now know has been deemed a successful and productive G20
summit, has created an air of optimism across markets. This
reaction suggests that a highly destructive deflationary depression
may now be avoided.