JANUARY 2010

(All returns in U.S. dollars unless otherwise indicated) 

 

International equity markets fell in January, as concerns over sustainable economic growth and governments’ retreats from stimulus brought risk aversion back to the forefront.  International developed markets fell 4.4% for the month, as measured in U.S. dollars by the MSCI EAFE Index.  The strengthening U.S. dollar and weakening euro detracted from returns for U.S. investors, with the index declining 3.5% in local currency terms for the month.  Emerging market equities fell more than developed markets, down 5.6% in January after posting tremendous returns in 2009.  Most emerging market currencies declined against the U.S. dollar, detracting from returns for U.S. investors, as local currency returns were -4.3% for the month.  International small cap stocks outperformed large cap stocks, falling only 1.0%.  The MSCI All Country World ex-U.S. Index, which includes both developed and emerging markets, fell 4.9%.  Performance of the MSCI Indices is shown in the following chart.¹  

 

 

The three major central banks, the Bank of England, European Central Bank, and Bank of Japan held target rates steady, as did the Bank of Australia, which increased rates last year.  The news, however, was centered on events in Greece and China.  In Greece, the fiscal deficit reached 12.5% of GDP and raised concerns that aid from other euro zone nations would be required to stabilize the nation’s finances.  China announced plans to curb bank lending, which triggered investor fears that the nation’s economy was overheating and the global benefits of Chinese growth would wane.  Loan growth in China, while reduced from 2009 levels, remained targeted almost 80% higher than 2008 levels.² 

 

In the U.K., economic growth turned positive for the fourth quarter of 2009 with an initial measure of 0.1% growth.  France and Germany increased their growth forecasts, although unemployment reached 10% in the euro zone for the first time since the creation of the euro.  Deflation remained the dominant economic concern in Japan, as easy monetary policy remained in place and accommodative government spending led Standard and Poor’s to threaten a downgrade of Japan’s debt.  Australian employment news was positive, with unemployment down to 5.5%, while higher than anticipated inflation reduced the near-term probability of a future interest rate hike.  The U.S. dollar fell 2.6% against the yen, but strengthened 3.0% against the euro, 2.0% against pound sterling, and against most emerging market currencies.³

 

  

Developed Markets 

 

Equities fell 5.9% in Europe and 4.8% in the U.K. in January. Fears of a decline in Chinese growth weighed most heavily on material stocks, which fell over 8%.  China, an essential importer of commodities, was not the only headwind for the sector; the potential for higher mining related taxes in Australia added to the negative news from China.  The financials sector fell almost 9% in the euro zone with trepidation from investors that regulatory restraint would cascade across the pond when news broke from the U.S. of the proposed Volcker Rule, which would limit the risk profiles of deposit-taking banks.  The Bank of Ireland stock price fell after soliciting shareholders for permission to enter the government’s plan that would allow the bank to raise more capital, diluting shareholders’ interests.⁴  In the U.K., the troubled Royal Bank of Scotland, which is majority owned by the U.K. government, rose amid speculation of balance sheet restructuring through a preferred stock buyback that would lead to a sizeable gain.  The bank’s performance aided U.K. financials, which fell only 5.5%, outperforming euro zone financials.⁵

 

Japanese equity returns were positive for U.S. investors, due primarily to yen strength.  Japanese telecommunications stocks were up almost 6.0% amid the largest telecom deal in years, in which KDDI bought a stake in Jupiter Telecommunications, gaining half of the nation’s cable television market.  The automotive industry was hit with news of Toyota’s recall of multiple models in North America, Europe, and China due to dangerous accelerator pedals.  Hong Kong stocks fell 6.6% amid China’s reduction of lending, which sent Hong Kong financials down over 10%.  Equities in Singapore declined 6.0% with the most substantial losses in the financials and consumer discretionary sectors, although exports were better than expected.  In Australia, fears of reduced infrastructure spending in China stemmed equity returns, down 7.0%, and hurt material and energy stocks most substantially, down almost 10%.⁶

 

 

Emerging Markets 

 

Emerging market equities fell over 5% in January, the largest decline since February of last year.  Chinese monetary tightening hampered emerging market equity returns and pushed the energy and materials sectors down most substantially.  The Chinese government curbed loan growth and raised reserve requirements, including a higher requirement for the banks that led the growth in 2009 lending, which increased their rates above peers and effectively stopped their lending in late January.  Chinese equities fell 8.6%, with financials (-11.5%) and materials (-10.3%) declining further than other sectors.   In Korea, equities dropped 4.5% amid China induced fears, while information technology and telecommunication stocks outperformed.  In order to address increasing demand, Samsung Electronics and TSMC, the world’s largest semiconductor manufacturer, announced plans for capital investment.  Indian equities declined 5.3%, with inflation warnings from the Indian central bank, which also increased reserve requirements for banks. 

 

Brazilian equities, down 10.9%, underperformed most other emerging markets due primarily to restraint of Chinese growth that would reduce demand for Brazilian commodities.  The consumer discretionary sector in Brazil fell 18.8% amid disappointing retail results.  The telecommunications sector also underperformed, falling 14.2%.  Mexican equities dropped 6.2%, with the materials sector -14.1% underperforming, as commodity prices fell globally.  The decline in commodities also lowered South African equities, which fell 5.3%.  Russian equities were up 2.4%, aiding emerging European equity returns.  Russian gas producer, Gazprom, and mining company, Norilsk Nickel, outperformed pushing the utilities and materials sectors in Russia up 8.9% and 7.5%, respectively.⁷  Emerging Europe, up 1.8%, was the only region to post positive returns in January.

 

  

¹ All performance data from http://www.mscibarra.com.  MSCI Barra.  Accessed on 9 February 2010.

² Schweitzer, Stu and Efeyini, Ehiwario “Monthly Market Monitor.”  J.P. Morgan Insights.  (January 2010). 

³ Bloomberg L.P.

⁴ Michele Maatouk and Sarah Turner, “Earnings Fears Hit European Stocks.” Wall Street Journal, 12 January 2010.

⁵  “World Markets Review.”  Capital Guardian Trust Company.  (January 2010).  

^6-7  Ibid.