The first quarter
of 2014 offered up all the excitement and chills of a thriller. First, stock
markets careened like runaway mining cars during January. Next, in her first
press conference as new Federal Reserve Chairwoman, Janet Yellen implied the
Fed might tighten monetary policy sooner than anyone expected which unsettled
markets. Finally, Russia annexed Ukraine’s Crimean Peninsula, incurring
sanctions from other countries, and tipping its economy further toward
recession. As in many thrillers, after some devastation (Russia’s stock market lost
billions as capital fled the country), the quarter ended on a more encouraging
note with many of the world’s stock markets in positive territory.
Last year was a
very, very good year for stock markets in general, thanks to a brightening
economic outlook in many parts of the world and the stimulative monetary
policies implemented by many countries’ central banks. By December 31, the
Standard & Poor’s (S&P) 500 Index had gained about 29 percent for the
year, Japan’s Nikkei was up more than 56 percent, and shares in Europe rose by about
16 percent.
January 2014 was
breathtaking, too, but for an entirely different reason. Concerns about global economic growth, company earnings in the
United States, and the resilience of emerging countries caused stock markets around
the world to give back some of the previous year’s gains. The S&P 500 lost
about 3.6 percent, the MSCI World Index lost 3.8 percent, Europe’s Stoxx Index fell
5.1 percent, and the MSCI Emerging Markets Index was down 6.6 percent.
Fortified by largely positive domestic economic data, U.S. stock markets
recovered somewhat during February. Regardless, it looked like some major indices
were going to finish March in negative territory until the Fed Chairwoman stepped
to a microphone on March 31, and told a community development conference in
Chicago:
“I think this extraordinary commitment is still needed and will be for
some time, and I believe that view is widely shared by my fellow policymakers
at the Fed. In this context, recent steps by the Fed to reduce the rate of new
securities purchases are not a lessening of this commitment, only a judgment
that recent progress in the labor market means our aid for the recovery need
not grow as quickly. Earlier this month, the Fed reiterated its overall
commitment to maintain extraordinary support for the recovery for some time to
come.”
U.S. investors celebrated the idea the Fed would not begin to tighten
monetary policy sooner than expected which pushed stocks higher. The S&P
500 finished the quarter with modest gains.
Outside the
United States, markets delivered mixed performance during the first quarter. Portugal,
Italy, Ireland, Greece, and Spain – labeled the PIIGS of Europe because of
their economic woes following the financial crisis – delivered strong
performance for the quarter.
The Shanghai
Composite fell during the first quarter as investors worried China would not hit
its growth targets for 2014. The State Council tried to assuage worries about
the slowing pace of economic growth by pledging to move forward with approved
infrastructure projects.
India was a top performer among emerging markets during the quarter. Stocks
rallied as inflation eased, the rupee stabilized, and the country’s current
account deficit was brought under better control. Markets also were boosted
when foreign investment increased in anticipation of a pro-business government
being elected.
As the new
quarter began, the European Central Bank flirted with the idea of quantitative
easing. Its overtures pleased investors who began to invest in some of Europe’s
most indebted nations – countries that had been shunned during the debt crisis.
The rally caused yields on Spain’s five-year notes to fall below those of
five-year U.S. Treasuries for the first time since 2007, and rates on Italy’s
five- and ten-year notes fell to the lowest levels they’ve reached since
Bloomberg began tracking the data in 1993.
is it time to be hopeful about global economic growth?
Certified
Financial Analysts (CFAs) are more optimistic and confident that both local and
global economies may grow this year, according to the 2014
Global Market Sentiment Survey (pg 5). Sixty-three percent of CFA Institute
members think the world economy may expand in 2014. That’s a big change from
2013 when only 40 percent were optimistic about global growth prospects (pg 8).
Overall, the survey found CFAs think stock markets in the United States, China,
Japan, and Germany may offer the best investment opportunities in 2014 (pg 11).
Optimism
at the local level varies by region. The sharpest turnaround in perspective was
among CFAs in Japan – just 11 percent thought their country could experience
economic growth last year. This year, 73 percent are optimistic. There was a
surge of positivity among CFAs in Europe, the Middle East, and Africa (EMEA),
too. Fifty-six percent have positive expectations for local growth, up from 33
percent last year. In America, 62 percent of CFAs are optimistic about growth
compared with 39 percent in 2013, and, in the Asia Pacific region, 69 percent
expect to see things improve in 2014 as opposed to 32 percent the previous year
(pgs 8-9).
Not
everyone’s outlook is rosy, however. Chinese CFAs have guarded expectations – just
45 percent expect to see their local economies grow. In Hong Kong, Brazil, and
India, CFAs are actually less optimistic than they were last year (pgs 8-9).
Survey
participants in both emerging and developed markets said one of the biggest
risks to local economic growth is political instability. Participants in the
United States, India, South Africa, and Brazil – countries that are gearing up
for general elections – shared the concern. Other risks that could affect
economic growth included the end of quantitative easing and the possibility of
a financial bubble developing in local markets (pg 14).
Since
the report was written in late 2013, CFAs’ optimism may have been buffeted by
the ups and downs of the year’s first quarter, but it could prove out over the
longer term.
Weekly Focus – Think About It
“Education is the
most powerful weapon which you can use to change the world.”
--Nelson Mandela, Former President of South Africa
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