Investment market review quarter two 2011
'So foul and fair a day I have not seen' - Macbeth,
Act 1, Scene 3
For those of us who studied Shakespeare at school,
you may remember this quote from the play. In this scene Macbeth is
referring to the battles in which he and his best friend, and
fellow captain, Banquo had fought. The foulness referred to the
ugliness of the fighting and the fairness referred to the victory
secured. The statement is a paradox, a contradiction in terms. It
is referring to a good day and a bad day - a bit like describing a
day that is sunny and warm, but a day that is also windy and
wet.
This quote has been at the forefront of our minds as
we have seen the events of the last few weeks unfold across
markets. Through May and June we witnessed increasing panic as
investors scrambled to protect themselves against a sovereign
default in Greece. Global equity indices began to slide and
commodity prices fell sharply, particularly oil, which declined by
20% from its peak on 29 April, to 24 June. Another 'risk-off' phase
was quickly sweeping across the investment landscape. This panic,
however, quickly turned to exuberance at the end of June as George
Papandreou, the Greek Prime Minister, successfully navigated his
government's austerity measures through parliament and thus secured
further funding from the EU and IMF. A crisis, for now, was averted
and the paradox of investor sentiment stuck in panic mode one day,
and exuberance the next, was clearly evident.
If we analyse market data more deeply, we are able
to find a number of indicators that are paradoxical in their
signals. For example, the Swiss franc is the preferred safe haven
of investors during times of market and economic stress, and we
have seen the currency hit a series of new highs, particularly as
the issues in Greece came to a head. At the same time, we have seen
the Australian dollar hit record highs against the US dollar.
Heavily exposed to commodities and China, the 'Aussie' depends on
global growth to justify its strength. We are witnessing both the
safest and one of the riskiest currencies doing well at the same
time.
Looking across other asset classes, the same mixed
messages can be found at the end of this second quarter of the
year. Since the beginning of April 2009, the price of gold has
risen by 65% as nervous investors have sought sanctuary in this
traditional store of value. Over the same period, the S&P 500,
the barometer of corporate America, has risen by the same figure.
The supposed safe asset has delivered the same return as the high
risk asset. Turning to bonds, US Treasuries have delivered a solid
2.35% for the half year ending June, which compares to 4.65% from
high yield debt over the same period. These returns are atypical
and point to an investor mindset which is split between doom and
boom.
Policymakers also have to deal with contradictory
signals as they assess the state of their relative economies. None
more so than Ben Bernanke, the chairman of the Federal Reserve, as
he evaluates the success, or otherwise, of his second tranche of
quantitative easing which concluded at the end of this quarter. The
policy has been successful in keeping mortgage rates low, but it
has not stimulated a recovery in the residential housing market.
The policy has been successful in keeping corporate borrowing costs
low, but business spending has not risen as he would have hoped.
The policy has been successful in arresting near-term deflation,
but excess liquidity has driven commodity prices higher. Finally,
the policy has been successful in reflating share prices, but this
positive 'wealth' effect has not been able to shore up consumer
confidence, or spending. How will this policy ultimately be judged?
Only time will tell, but today it appears to have been a successful
policy that has failed to deliver the required outcomes. Quite a
paradox.
Turning to the performance of markets through the
quarter, the late June rally in equities nudged developed market
indices into the black - just. Despite the rally, the S&P 500
was down 1.67% in June, but returned 0.10% for the quarter. The
FTSE 100 fell 0.36% in June, and was up 1.70% over the quarter. The
DJ Eurostoxx reflected a fall in European equities of 2.66% in
June, however, the index managed to climb 0.82% over three months.
Emerging market equities delivered a negative return of 1.0%.
Across fixed income markets, credit was once again a rewarding home
for investors' capital. US, non-financial, investment grade credit
rose 2.28%, and European high yield debt, despite a widening of
spreads through June, was able to deliver 0.67%, and an attractive
3.58% year-to-date. UK gilts also performed strongly, rising 2.59%
through the quarter. Despite the exuberance referred to earlier,
commodity prices were significantly lower, with the broad index
down nearly 6%.
These negative numbers for riskier assets were a
result of softening global economic data, especially out of the US,
running in tandem with the deteriorating position in Greece.
Preliminary estimates suggest the US economy grew at a sub par 2%
during the first half of the year. According to BCA Research, given
the depth of the recession, if this was a normal recovery, growth
should have averaged 6% over the last two years. In fact, it has
averaged only half of this. BCA goes on to say, since 1960, each
time year-on-year GDP growth has fallen below 2%, a recession has
followed. Growth is estimated to fall to 2.4% year-on-year in the
second quarter of 2011 - not far away from this 2%
threshold.