Commentary: The Year of Living Dangerously
2011 is the Chinese year of the rabbit. More like the rabbit in the headlights. Two years ago, on 4th October 2009, a snap election brought in a new socialist government in Greece. Two days earlier Greece had reported to Eurostat, the European Union’s statistics office, that the Greek deficit for 2008 had been 5% of GDP and that the forecast deficit for 2009 would be 3.7%. Seventeen days after the election, on 21st October, the new Greek government presented revised figures to Eurostat. The 2008 deficit was revised up to 7.7%, and the forecast for 2009 to 12.5%.
Two years on and the Greek fiscal crisis that this revision revealed is still eating away at the eurozone, its banking system and global financial markets. This past weekend saw the latest leaked announcement that Chancellor Merkel and President Sarkozy will have a “big plan” in place for the next G20 meeting in November, which will resolve the crisis. Apparently part of it involves revising the terms of the previous “big plan”, from July, in order to accommodate a worsening situation in Greece and the tensions in the eurozone banking system.
Last week Reuters reported the head of the IMF delegation to Greece suggesting it needed to implement “much stricter structural reforms”. These reforms already included a nominal 15% cut in public sector pay and the merging or closure of 2000 schools. During the week the French and Belgium governments rescued the Belgian banking group Dexia, crippled by its exposure to regional government debt and unable to borrow. On Friday the ratings agency Fitch further downgraded Spain and Italy. This week Slovakia votes on the EFSF.
Having been oversold heavily in the last two weeks of September, equity markets once again lapped up positive headlines about a resolution in Europe and rallied sharply in the first week of October, with “risk on” sectors – Materials, Energy and IT – leading the way. European markets were strongest. On the week, the MSCI All Countries Index (ACWI) was up 1.6% in sterling, led by the developed markets with MSCI Emerging Markets lagging, up only 0.2% on the week. Bonds eased off once again, with the US 10 year yielding 2.08%, up from 1.91% the week before. Commodities were positive. Oil was up just under 5% and copper was up 4%.
Two years ago global equity markets had rallied strongly from their March lows and would go on to enjoy a positive twelve months. A year ago they stood poised for a fourth quarter rally after the summer stumble as the eurozone problems first emerged. The ACWI has lost 4% (sterling total return) over the last twelve months, while reported earnings for 2010 were up 40% and are forecast to be up 14% in 2011. The S&P 500 is flat (dollar total return), Europe is down 10% (euro total return), and Japan is down 11% (yen total return). Emerging markets, the great hope for growth, are off 16% (sterling total return) over the last twelve months. Bonds, for the major developed nations, have produced strong returns over the past twelve months despite the sovereign concerns.
The outlook for the United States has improved with recent data releases. On Friday payroll employment gains in September, at 103,000, were much better than expected and the prior monthly gains were revised up. Retail sales for September in the US will be revealed this coming Friday. GDP forecasts for the final quarter of 2011 are now being revised up. The US earnings season begins this week, and revisions to 2011 earnings forecasts have been relatively modest at -0.7% over the last month. The world as a whole has seen downward revisions of -2.7%.
Issued by: Rupert Caldecott, CIO of the Global Asset Allocation Team, Dalton Strategic Partnership LLP, an investment management boutique in London founded in 2003 by the late Andrew Dalton