Fairbairn logo - go to homepage
| Home | | On-Line Demo | Which Services? | Links | FAQ's |
Search
Go

Market review quarter 4 2010

A raft of improving economic data, particularly in the US and 'core' Europe, coupled with a Santa Claus rally through December resulted in most asset classes generating good returns for 2010. Equity markets were particularly strong, with the returns in the final month of the year accounting for nearly half of the return for the calendar year as a whole. For example, the FTSE 100 delivered a total return of 13.04% in 2010, with the return in December, alone, being 6.82%.

This story was repeated in the US, with the S&P500 rising 15.06% through the year, in local currency terms, and 6.68% in December. The surge in confidence was attributable to elevating US growth expectations which did signal a rise in government bond yields through the quarter. This was ironic given that QE2 'set sail' in November and asset purchases were expected to keep yields lower for longer. Investor reaction suggests they believe this policy by the Federal Reserve will be successful in stimulating the economy and yields have adjusted to reflect this more optimistic outlook. Notwithstanding this rise in yields, US treasuries delivered a healthy return of 5.81% for the year, with both German and UK benchmark government bonds similarly impressing with returns of 6.30% and 7.63% respectively. The performance of gilts is in stark contrast to expectations at the turn of the year when the twin fiscal and budget deficits were prompting some commentators to call into question the AAA credit rating enjoyed by the UK, and the incumbent Labour government had lost the majority of popular support. The prospects for sterling and gilts were particularly gloomy; however, a clearer political landscape generated by the coalition and a determination to reduce the twin deficits has been well received by markets.

Finally, to complete our review of asset classes, with corporate credit delivering high single digit returns, the broad commodities complex up by the high teens and REITs posting double digit numbers, it is safe to say investors have captured returns ahead of forecasts circulating this time last year.

These numbers do, of course, mask the periods of high volatility investors have endured as the year has unfolded and this fourth quarter was no different with European sovereign credit issues again coming to the fore as Ireland agreed a bail-out jointly funded by the EU and IMF. In return for this funding the Irish government was forced to pass an emergency budget, which introduced a further wave of deeply unpopular austerity measures. The tenure of the government is likely to be short-lived with a general election looming and uncertainty will follow as the new government assesses its budgetary policy. This 'muddling through' approach to policymaking by European authorities is at the centre of investor criticism surrounding the funding problem faced by some euro-member states and until a satisfactory solution is found European debt woes will continue to stalk financial markets in 2011.

Volatility through the quarter was also sparked by escalating tensions across the Korean peninsula that proved a sharp reminder geopolitical issues transcend the market-shaping forces which investors tend to focus on. The economic power of China forced it into the spotlight in terms of fulfilling the role of regional peace-keeper and this was another event which illustrates how the old world order has started to shift. Despite this setback, China and the wider region remained the beneficiaries of strong investor flows which prompted some governments to introduce capital controls to dampen these flows and arrest damaging speculative bubbles. China, itself, chose Christmas Day to announce a rise in interest rates as it seeks to cool an over-heating property sector and also curb rising inflation. Like European sovereign funding issues, the ability of the Chinese authorities to deliver an economic 'soft landing' will be a key focus area for investors in 2011.

All data herein is sourced from local exchanges via Reuters, Bloomberg and other vendors. The information herein has been obtained from public sources believed to be reliable. Fairbairn Private Bank makes no representation as to the accuracy or completeness of such information.