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January market commentary

By January 13, 2012February 12th, 2019No Comments

December saw the death of North Korea’s ‘dear leader’ Kim Jong-il, with command of the country seemingly passing to his youngest son – the ‘great successor’ – Kim Jong-un. But with sundry generals peering over the younger Kim’s shoulder tensions are likely to remain high, especially around the border with South Korea.

4,000 miles away in Moscow, hundreds of thousands took to the streets to protest against the supposedly-corrupt elections won by Vladimir Putin’s United Russia party. Putin dismissed the protests out of hand, but the uncertainty will continue until the presidential elections on March 4th – and possibly beyond.

In all of this it was easy to forget the on-going turmoil with the euro; but unfortunately, life went on as normal in the conference rooms and banqueting halls of Brussels. The pivotal moment came on December 9th when David Cameron used the UK’s veto to protect the City of London. Initial support from Hungary and the Czech Republic soon melted away and Britain found itself in a club of one. As the famous – perhaps apocryphal – newspaper headline had it, “Fog in channel: Europe isolated.”

Bickering inevitably followed. The UK and France had a brief war of words, and the Deputy Prime Minister (supported by most of the Liberal Democrats) didn’t appear to be entirely happy with Mr Cameron’s actions. “Dear leader” possibly wasn’t the phrase on Nick Clegg’s lips…


For most of the month it was easy to be gloomy about prospects for the UK. Business in general didn’t react well to David Cameron’s use of the veto: Sir Martin Sorrell, boss of multinational WPP summed up the mood when he said, “Intuitively, it can’t be helpful. I’d rather be inside the tent.”

Unemployment was the highest for 17 years: the public sector lost 65,000 jobs – thirteen times as many as the private sector gained. Youth unemployment showed no sign of falling; the retail trade in Scotland was hit by the bad weather and West End shops reported disappointing takings on their first traffic free weekend as consumer confidence reached an all-time low.

Boxing Day, however, proved a revelation, with record numbers flocking to the high streets and credit analysts Experian reporting a 21.5% year-on-year increase in the number of shoppers. This echoed the picture in the US over Thanksgiving weekend, with shoppers being attracted by unprecedented levels of discounting. Whether it will be enough to save some of the weaker retailers remains to be seen.

The UK stock market finished the year down 5.5% at 5,572: not the performance that investors were looking for at the start of the year, but significantly better than many major markets. In another sign that the UK is performing less badly than some of its major competitors, growth in the third quarter of 2011 was 0.6% compared to 0.2% in Europe.

UK interest rates are forecast to remain at 0.5% throughout 2012, which is at least good news for homeowners. The pound is expected to do relatively well in 2012 – although one commentator did describe it as “the best looking horse in the glue factory.”


At the end of the month the euro hit an 11 month low against the dollar, and a ten year low against the yen. There are worrying signs that the European banks are starting to hoard cash: if the trend continues that means liquidity could once again become an issue if banks refuse to lend to each other.

The major European stock markets were largely unchanged during December. Italy and Germany fell slightly, while France moved ahead – but the figures were not significant compared to the 12 month falls detailed below.

Worryingly, the new Spanish government of Mariano Rajoy revealed that the budget deficit will be 8% of GDP, not 6% as forecast. A new round of austerity measures will be introduced, including a pay freeze for public sector workers and increased taxes on top earners.

The economic forecasters IHS Global Insight revealed their predictions for Europe in the coming year, expecting GDP to fall by 0.7% overall. The ECB is expected to respond to this with further cuts in interest rates. This was echoed by a BBC survey of 27 of the UK’s leading economists. 25 of them forecast a recession for Europe in 2012 and the majority put the possibility of a eurozone break-up at 30-40%.

Finally, the UK may agonize about youth unemployment exceeding one million but spare a thought for Spain: 48% of 16-24 year olds there are without a job – a truly depressing statistic to welcome the New Year.


The US was one of the few countries in the world where the stock market rose during the year, the Dow Jones index finishing 2011 at 12,170 to post a rise of just over 5%.

The year ended with three pieces of good news for the US economy: growth in the third quarter of 2011 was 1.8% and inflation fell in November to 3.4%. Perhaps even more encouragingly, the US trade deficit fell in both September and October: although total US debt now stands at $14 trillion (with China the biggest single holder of debt) there are some indications that the US consumer is starting to buy more home-produced goods.

2012 will see President Obama going up for re-election and you would assume the improved economic news will favour him. At the moment Obama’s most likely challenger appears to be Mitt Romney, if he can hold off 76 year old Ron Paul and a revitalised Newt Gingrich. With the primaries starting this month the picture will rapidly become clearer.


Stock markets in China, Japan, Hong Kong and Russia all fell during the month; again, this was just a part of the wider falls seen around the world in 2011.

The Chinese trade gap narrowed in November, although largely as a result of the continuing crisis in Europe meaning that fewer goods were imported from China. Speaking in early December on the 10th anniversary of China’s entry into the World Trade Organisation, President Hu Jintao promised to increase imports in a bid to boost world trade, saying that they may “exceed $8 trillion over the next five years.” Last year China bought $1.39tn from overseas so whether the promise carries much weight remains to be seen.

Japan’s annual inflation rate fell to 0.5% in November: unemployment remained steady at 4.5% and interest rates were unchanged at ‘virtually zero.’

As had been anticipated, China and Japan unveiled plans to promote the direct exchange of their currencies in a bid to cut costs for companies and encourage more trade. Bloomberg reported Ren Xianfang of IHS Global Insight as saying, “this agreement is much more significant than any other pacts China has signed with other nations.”

Previously, trade between the two countries had meant converting the currencies into dollars. Whilst the move might mean the dollar weakening in the region it is likely to be quietly welcomed by the US, as it could see the yuan – which the US has long held to be undervalued – moving closer to its true value.

World Stock markets – a look back at 2011

For the majority of the world’s stock markets it is impossible to file 2011 anywhere other than in the ‘bad years’ column. Only seven of the 50 markets covered by Trading Economics managed a gain, and only one of these was in double figures. That market was Venezuela, up a hugely impressive 80% – although it would take a brave adviser to recommend investing in the country, and an even braver client to go along with it. To no-one’s surprise the worst performing stock market of the year was Greece, losing more than 50% of its value in 2011.

Most markets saw falls of around 15-20%. Germany was down by just under 15% on the year: France by 17%. Japan fell by 17% and Hong Kong by 20%. Even the supposed growth economies of the BRIC countries saw their stock markets hit: in Brazil, Russia, India and China the markets fell by 18%, 20%, 15% and 22% respectively – all of which puts the performance of the UK market (down by 5.5% on the year) into a more favourable light.

For those wanting the numbers, the UK finished the year at 5,572; Germany’s DAX index closed at 5,898 while in the Far East, Japan ended 2011 at 8,455; Hong Kong at 18,434 and China at 2,186. The rise in the US saw the Dow Jones index close at 12,170.

All stock markets fluctuated significantly during the year – for example, the FTSE touched 6,015 in February and saw a low of 4,791 in August. Other markets moved even more in percentage terms; Germany’s DAX index reached 7,527 in May and hit a low of 5,072 in September.

These movements and all the attendant unpredictability made 2011 very difficult for both investors and their advisers – and what 2012 will bring is hard to say. Clearly the year is going to be dominated by the continuing efforts to sort out the euro and quite possibly by the problems of bank liquidity.

In many ways it would be tempting to end 2011 by thinking that ‘it can’t get any worse and at least all the bad news is out in the open.’ Whilst this might be a little naïve, there were signs of optimism around the world in the final quarter of the year; the strong performance of the US stock market; China’s apparent increased willingness to trade and – hopefully – a new resolve to solve the problems of the euro. Inevitably, there will be difficult times in the coming year, but for investors, there are some lights at the end of the tunnel. We will – as ever – keep you up to date with all the relevant developments in the coming year, and will always be here to answer your questions.