December 21, 2011


by Alpha Now Research Team

This may have been a bumpy year, one that not all of us are eager to revisit. But we hope that the series of charts that follow will give new perspective on the events of 2011 and fresh insight into the economic landscape within which we will be navigating come January 1, 2012.

Unquestionably, the economic story of the year has been the sovereign debt crisis in Europe and the ongoing debate over its effects both within the Euro Zone and beyond. In the chart above, the toll the crisis is taking on the unemployment rate of Europe’s younger citizens – those 25 or younger – provides food for thought. While the introduction of the Euro caused youth unemployment rates to converge, there has been a sharp divergence since the financial crisis began in 2008. Today, while the youth unemployment rate is falling in Germany, it hovers close to an astonishing 50% in Spain and Italy.

Fears of bond market contagion became reality in 2011 as the crisis moved from the Euro Zone’s periphery – Greece, Ireland and Portugal – to engulf some of its larger economies, such as Italy, Spain and even Belgium. As the chart above shows very dramatically, after a decade in which investors viewed Euro Zone government bonds as largely interchangeable and during which yields of Euro member nations converged, we now see them diverge more widely than was the case before monetary union took effect as investors turned toward the relative ‘safe haven’ of German Bunds and dumped holdings of sovereign debt issued by nations on the Euro Zone’s periphery.

If any region of the world rivaled Europe in the level of uncertainty investors felt for it and its prospects, that region was China. Just how hard a landing might the Chinese economy suffer as growth rates begin a real decline for the first time since the 1990s? The charts above show the trends in Chinese growth as well as the trends in the Chinese government’s reserve requirements for the country’s largest banks. China began loosening monetary policy in late 2008, and has very recently resumed cutting reserve requirements for banks, potentially marking the start of a longer easing cycle and reduce the risk of a hard landing as economic growth moderates.

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There’s not much room for easier fiscal policies, putting the spotlight on central banks and their efforts to keep the financial system as open for business as possible. Quantitative easing was again in the headlines, as central banks in the US, UK and Euro Zone came under pressure to step up their purchases of bonds and supply more liquidity to financial institutions.

A decade ago, hedge funds consolidated their reputation by offering investors safe haven from market turmoil and generating returns in tough times. Not now, however. Not a single major hedge fund strategy is on track to end the year with a profit, with only a week or so left of trading. Worst hit were the value strategies, with many cheap stocks – like banks – proving to be value traps, just getting cheaper with every month that passed.

As the chart above demonstrates, the second half of 2011 generated a lot of positive economic surprises as data came in showing a stronger-than-expected performance by the U.S. economy. That wasn’t enough to translate into higher yields on Treasury securities, however; their role as a safe haven for nervous investors fearful of an economic collapse in the Euro Zone outweighed the market impact of the good economic news.

In fact, investors who decided to tilt their portfolios in favor of economically sensitive asset classes suffered most in 2011, as the chart above shows. In the commodities arena, for instance, copper lost a quarter of its value (and was the worst performing asset of those surveyed) while gold – valued primarily a safe haven and store of value – is still ahead 12.2% for the year despite its recent setback. The pattern of asset returns reflects the widespread investor uncertainty that characterized much of 2011.

Just how powerful had consumer electronics giant Apple become by the year its founder, Steve Jobs, died? As seen in the chart above, its market capitalization now exceeds that of all the publicly traded Italian, Irish, Greek, Spanish and Portuguese banks – combined.

One of the biggest political stories of the year has been the ongoing turbulence across the Middle East, one that has been watched closely by oil investors. As the charts above show, while crude oil production has recovered and stabilized in recent years, with the exception of Libya, where it fell sharply during the recent conflict that led to the overturning of the regime of longtime dictator Muammar Qadaffi. Now, Libya’s new rulers will be hoping they can follow the pattern set by Kuwait in the wake of the first Gulf War of 1990, and get the country’s oil production back on stream rapidly.

Earthquakes have an unpleasant habit of rattling not only Japan’s infrastructure and the nerves of its citizens, but the country’s economy. Since the Kobe earthquake in the mid-1990s, Japan has underperformed other OECD nations, and sure enough, the Fukushima quake of March 2011 has also dented the country’s GDP. Investors will be watching to see if the perennial laggard will be able to close the GDP gap dramatically illustrated in the chart above.

Here at AlphaNow, we look forward to offering you fresh insights into the economic and financial market trends of 2012 as they happen.

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