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2013: a good vintage year for the equity markets

6 January 2014, Wealtheon

The evidence is clear: the vast majority of the equity markets turned in good performances in 2013 against the background of a modest economic recovery worldwide. By contrast, the same conclusions cannot be drawn for other asset classes, in particular gold, which lost over one-quarter of its value. The buzzword for 2013: “tapering”!


Annus mirabilis. Yes, it can indeed be said: 2013 was a good year on the equity markets. And yet when reviewing the past twelve months, we can see numerous events that might have changed how the cards fell. First of all, there was the fiscal cliff in the US, which was not resolved but merely deferred. Next in line was Cyprus. This issue may have been quickly forgotten, but in fact it was a bail-in without precedent. The country was rescued in part by savings and was another tough blow for Europe. The events in Syria were also in the mix, not forgetting the shutdown in the US. But the main thing to recall from 2013 was the Fed’s tapering, which will begin this month and have a more significant impact on bonds. Let’s get back to the main subject.

In the United States, numerous leading indicators confirm the strength of the economic recovery. The ISM manufacturing index is at its highest since April 2011. Same scenario for the Chicago PMI (purchasing managers index). As far as consumers are concerned, confidence continues to improve. This optimism is being fed in part by the recovery in the real estate market (building permits, housing starts and the sharp rise in prices via the S&P/Case Shiller index) and the fall in unemployment (7% in November). With these figures, growth in GDP is nudging 2%. As can be seen, the US equity markets performed well in 2013: +38% for the Nasdaq (thanks to Twitter and Facebook!) and nearly +30% for the Dow Jones and S&P 500. 

But in the Old Continent, not all of the indices followed quite the same trend. The DAX rose by +25%, compared with +18% for the CAC 40. In Belgium and the Netherlands, the Bel 20 and AEX offered returns of +18%. There were also good performances in peripheral debt: +28% in Greece, +21% in Spain and +16% in Italy and Portugal. Overall, the EuroStoxx 50 index rose +18% in 2013. While Europe has not yet emerged from its crisis, some leading indicators are showing signs that the bottom has been reached. With attractive valuation levels, investors have turned to this zone to the detriment of others (emerging markets, for example).

In 2013, one of the major winners was undoubtedly Japan. The Nikkei rose +57% in local currency, although +24% in euros… We have to take our hats off to the Japanese Prime Minister, Shinzo Abe, who managed to win his wager to create inflation. But where there are winners, there have to be losers. 2013 was not a good year for emerging countries. China lost 10%. India offered a small yield, although this was turned into a loss (-10%) if the exchange rate is taken into account . Apart from Argentina, which turned in a staggering performance (+90% in local currency), Latin America as a whole sank deep into the red: Brazil and Chile were down -15% (-30% in euros) and Mexico -2%. Closer to home, Russia is also in difficulty.

Rates & Credit

In the area of bonds, 2013 was far from a smooth ride. To taper or not to taper? We had to wait until mid-December to find out the answer to the question that every bond investor had been asking all year long. Now the timetable is more or less set. This month the Fed will start spending $10 billion less each month on its purchases of Treasuries and MBS (mortgage-backed securities) compared with the current monthly total of $85 billion. Bernanke will relinquish his post to Janet Yellen, who is unlikely to make any short-term changes to monetary policy, which will remain expansionist. There were already questions being asked about tapering back at the end of May, which had a clear-cut effect on the markets.

10-year American interest rates reacted clearly, rising from 1.70% to 3% by the end of December, representing a tightening of almost 130 bps. On the other hand, there was no change on the short part of the curve. In Europe, the ECB intervened twice during the year, lowering the Refi rate by 25 bps, which now stands at 0.25%. As a result, the strong core countries saw negative performances in 2013. In fact, rates tended to follow the US, albeit to a lesser extent. The Bund, Germany’s 10-year rate, rose by over 60 bps to 1.93%. In France, where the right figures were not forthcoming, the rate is currently 62 bps higher at 2.55%.

By contrast, there were good performances for peripheral debt, where borrowing was at significantly more comfortable rates than in the past.  Spain (4.13%) relaxed by 115 bps, with 42 bps in Portugal (6%), and 37 bps for Italy (4%). Their spread with the Bund is still high at +2%. Not genuinely comparable, but still worthy of note, Greece declined by 310 bps to 8.2%: clearly, risk pays! In terms of credit, the same can be said of sovereign credit (euro zone). The quest for returns was conducted mainly in peripheral countries to the detriment of core countries. This meant that 2013 was a good year for High Yield. The iBoxx HY gained over 7,5%, compared with 2.4% for the Overall € Corp. Among the iTraxx indices, the CrossOver tightened significantly to 286 bps (down 193 bps). The same trend was seen in the HiVol and Main Europe, which gave up 71 bps and 47 bps respectively. 2013 was also one of the better years for primary corporates (non-financial). On the money markets, the Eonia has been under pressure since October, fast approaching the Refi (0.446). Meanwhile, the Euribor 3m has gone past it, to 0.287%


Commodities offered rather modest returns. In energy, natural gas rose by over 30% in 2013 in the wake of falls in stocks (reserves) prompted by the cold snaps and long winter of 2013. A barrel of WTI crude rose 8%, driven by tensions in the Middle East and North Africa, as well as by higher-than-anticipated demand in the US. Base metals were rather negative. The lowering in demand from emerging countries boosted stocks and dragged prices downwards. Copper lost 8%, aluminium 15% and nickel 17%. It was virtual carnage for precious metals. Gold lost nearly 30%, to $1201 per ounce. There were a number of reasons why it didn’t rise: low levels of purchases by central banks (+ fears of the depletion of reserves following Cyprus), weakness in demand from India, the sale of physical index funds, an improvement in the US economy and tapering.  Silver slumped 34%. In cereals, corn and wheat fell 39% and 22% respectively after particularly good harvests in 2013. The same applied to coffee and sugar. Cocoa, on the other hand, rose 25%. There is likely to be a shortfall in supplies for next season.


In 2013, the euro strengthened against the dollar, particularly in recent months, rising from 1.28 in July to 1.38 at the end of December. Remember that for 2013 there was a clear-cut fall in emerging currencies (India rupee -17% vs. €, Brazilian real -20% vs. €), as well as with currencies such as the yen (-25% vs. €) and the Australian dollar (-22 % vs. €).


With the modest economic recovery in mind, the worst of the crisis behind us and many leading indicators improving, the outlook for equity investors seems moderately positive. Add to this the fact that yields on savings accounts and bonds will remain low, we assume that equities will remain attractive in 2014.




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