Through March 13, 2012, the Brazilian and Japanese equity markets have been among the top performers, but were among the worst in 2011, Rebecca Patterson, chief markets strategist, institutional, J.P. Morgan Asset Management, explained during an institutional client call.
Also for 2012, emerging market stocks have started the year off strong, and they are up more than 12%. Gold, which was up 10% in 2011, has furthered is gains in 2011, and is up 8% in January through February alone. On the other hand, Patterson said cash remains steady, earning little for investors prior to inflation.
Paul Quinsee, chief investment officer, U.S. equities, J.P. Morgan Asset Management, said that when investors are worried about the world, they become worried about stocks that are less predictable. So far in 2012, people have become less worried about the world; therefore, stocks with less predictable earnings have seen growth.
Strong Start in 2012
Patterson said the strong market start in 2012 is due to four factors.
One of these factors is that fears surrounding Europe have died down. Between December and February, the European Central Bank issued EUR1 trillion in three-year funds, alleviating liquidity-related worries for Europe. At the same time, both business and consumer confidence surveys in most of Europe improved modestly into 2012. Also, European peripheral bond yields stabilized, with Italian 10-year bond yields back around 5% (as of mid-March).
Another factor is global central bank support beyond what was expected. As of March 9, developed market policy interest rates averaged 58 basis points, up only five basis points from the crisis. “We believe the bias is for even lower rates at least through the coming year,” Patterson said.
Developed market central banks are adding unprecedented amounts of liquidity to the financial system. Patterson stated that on average, G-4 central bank assets have risen from 11% of GDP at the end of 2006 to more than 24% of GDP today, with more likely to come in the future.
The third driver to better markets in 2012 is economic data. U.S. data trends have remained mixed, with consumption flat in recent months. However, other parts of the consumption story have been surprisingly upbeat and there has been improving jobs data, which is hard for investors to dismiss. Jobs and retail have risen in the U.S. There has also been an increase in vehicle sales so far in the U.S. for 2012. Patterson said this has propelled global vehicle sales, which have produced a record-high for global car sales this year.
In emerging markets, the PMI rose to more than 52 in February. Exports have seen an increase in Korea and Taiwan. China data, however, has shown a “soft landing” view. The outlook for China is notably brighter than it has been for the past 12 months. The data from China in recent months has been difficult to interrupt because of the lunar holidays. However, inflation in China has eased and Chinese GDP growth is expected to be 8.5%.
The fourth factor for growth in 2012 is positioning. Between the end of 2007 and the end of 2011, U.S. investors left cyclical markets for cash and bonds. As of the end of 2011, there were nearly $800 billion in deposits above end of 2007 levels. In 2011 in particular, emerging market equities were hit hard, with net outflows from dedicated emerging market funds larger than those seen during 2008.
Quinsee said that moving forward in 2012, investors are going to be very focused on margins. Margins in some groups are pretty high by some standards, and it might be a bit too good to be true right now.
Patterson said that investors should still be cautious toward Europe; however, some companies there are still offering good dividends.
In terms of other regions, topics is up more than 18.5% in Japan. “This reflects better global growth sentiment,” said Patterson. “We are nervous about some of Japan’s structural issues. Tactically local markets can see more upside. Emerging markets should also benefit from more growth from central banks.”
Patterson added that in equities, there has been a simple demand for yields. “We don’t expect that is going to disappear,” she said.
“We are still seeing spreads narrow. Almost all $49 billion of bonds priced have been used for refinancing,” said Patterson. “Nearly two-thirds of it has been used for refinancing. As it now stands, only $32 billion of high-yield bonds and loans reduced this year. We have maturities to think about it. In terms of other yield- related investments, we are focusing on emerging market debt.”
In terms of U.S. bonds, Patterson said U.S. 10-year yields broke out of recent trends, and are up 40 basis points from the state of 2011. She predicts this will continue.
Patterson added, “I would highlight that we think the forces that have helped us year-to-date will continue.” Also, emerging markets have been especially helped by their central banks. The central bank policy will keep a search for yields going. Patterson said she has continued optimism emerging market debt, leverage loans and real assets for 2012.
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