MAY 2010

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

 

 

International equity markets fell precipitously in May amid the European sovereign debt crisis that spurred investors into a global flight to quality and away from the euro.  Developed market equities fell 11.3%, as measured in U.S. dollars by the MSCI EAFE Index, bring year-to-date returns down over 12.0%.  The large decline in the euro against the U.S. dollar detracted from returns for U.S. investors, with the index declining 7.4% in local currencies.  Emerging market equities were also caught in the decline of risk assets, falling 9.7% when measured in U.S. dollars.  Emerging market currencies declined against the U.S. dollar and detracted from returns for U.S. investors, as equity declines in local currency terms were less substantial, down 5.2%.  International small cap stocks were the weakest performers for the month, declining 12.7% in May and bringing year-to-date returns to          -7.0%.  The MSCI All Country World ex-U.S. Index, which includes both developed and emerging markets, fell 10.7% for the month.  Performance of the MSCI Indices is shown in the following chart.¹  

 

 

The U.S. dollar rose against almost all major currencies, up a considerable 8.0% against the euro, 7.1% against the Swiss franc, 5.2% against the pound sterling, and 9.9% against the Australian dollar, but fell 3.1% against the yen.  Most emerging market currencies weakened against the U.S. dollar, with the dollar climbing most notably against the Brazilian real (5.0%), the Indian rupee (4.5%), the Russian ruble (5.7%), and the Korean won (8.4%).²

 

 

Developed Markets

(All returns in local currency unless otherwise indicated)

 

The fiscal crisis in Greece forced policymakers in Europe to take strong action to stabilize the financial markets after the initial attempts in May were underwhelming to the markets.  The initial offering from the European Union (EU) and International Monetary Fund (IMF) of €110 billion and changes in collateral eligibility requirements for Greek government debt could not stem spread widening in Greek and Spanish debt.  The €750 billion support package that followed consisted of €440 billion in emergency loans for at-risk euro zone countries, another €60 billion from an EU balance of payments facility, and €250 billion in loans from the IMF.  The European Central Bank also established a new Securities Markets Programme and extended its repo operations to buy troubled euro zone member debt.³

 

Stocks in Europe fell almost 6.0% for the month, as the stronger nations of Germany (-3.4%) and France (-5.9%) declined with the region in spite of some positive economic signs, such as increasing German auto exports.⁴  The PIGS nations of Portugal (-8.7%), Ireland (-13.1%), Greece (-19.6%), and Spain (-9.7%) suffered the greatest equity declines.  Despite the support package, investor concerns over European financials’ exposure to the debt crisis weighed on the equity markets and drove the financials sector down nearly 10% in the region, with Greek financials falling over 23%.  In Spain, the largest banks suffered double-digit losses and smaller banks were consolidated or seized by the Bank of Spain.

 

In the U.K., stocks fell 6.1%, as the results of the U.K. election weighed on the market.  Concerns eased after Gordon Brown stepped down and David Cameron of the Conservative Party was named Prime Minister.  The first action of the Conservative Party’s coalition government with the Liberal Democrat party was to begin spending cuts and ease the nation’s budget deficit.  BP suffered further declines amid the worsening oil disaster in the Gulf of Mexico that is now the largest oil disaster in U.S. history and has government officials poised to seek retribution against the company. 

 

Japanese equities fell 11% for the month, as the global flight to quality strengthened the yen almost 12% against the euro and hurt Japanese exporter stocks.  The negative Japanese equity market performance occurred with the broader macro environment despite exports from Japan rising for the fourth consecutive month and over 40% since one-year ago.  In Australia, the economic recovery prompted the central bank of Australia to continue raising its key rate, up 25 basis points to the 2008 level of 4.5%.  The global economic concerns, however, weighed on the Australian equity markets, driving shares down 7.5%.  Stocks in Hong Kong fell 6.1%, amid fears of constrained monetary policy in China.⁵ 

 

 

Emerging Markets 

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

 

The Eastern European region suffered dramatically with the euro zone debt crisis, sending stocks down 12.6%.  Russian equities fell 11.2% with the decline in commodity prices that came with concerns about the sustainability of global economic growth.  Hungary warned that the IMF’s deficit targets could not be maintained, sending Hungarian equities down 22.5%.  Conversely, fears of excessive positive economic growth and the formation of a real estate bubble in China sent stocks in that nation down 5.5%.  In Korea, stocks declined 13.3%, as tensions with North Korea escalated after the sinking of a South Korean navy vessel at the hands of North Korea.  In Thailand, stocks outperformed those in other regions (-2.7%), with political tensions easing after government opposition leaders surrendered and called for an end to the protests that led to violence in the nation’s capital.  In Taiwan, information technology stocks declined over 10%, with all sectors performing poorly.  Indian equities dropped 8%, with materials stocks declining over 17% amid concerns of monetary tightening.  Telecommunication shares fell 15.3%, as auction competition between telecommunication companies for the next generation of phone service licenses led to a $15 billion windfall for the Indian government.  Brazilian equities fell 10.5% amid fears of exceedingly strong economic growth, with industrial output, unemployment, and retail sales all showing signs of improvement.  Yet the continued rising of consumer prices increased expectations of further rate hikes by the Brazilian central bank.⁶

 

 

¹ All performance data from http://www.mscibarra.com.  MSCI Barra.  Accessed on 10 June 2010.

² Bloomberg L.P.  Accessed on 10 June 2010.

³  Schweitzer, Stu and Efeyini, Ehiwario. Monthly Market Monitor.  J.P. Morgan Insights.  May  2010.

⁴ Associated Press. “German car exports up by nearly half in May.”  2 June 2010.

^5-6 “World Markets Review.”  Capital Guardian Trust Company.  April 2010.