February 8, 2013

January 2013: The Month in Charts

by Alpha Now Research Team

Investors threw themselves into “risk-on” investments at the start of the new year, although the odds of greater volatility and uncertainty remain high.

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After a wary and uncertain end to 2012, investors celebrated the advent of 2013 by once again embracing the concept of risk. They seized on respectable if not dramatic gains in corporate profits that U.S. companies began reporting early in January as a reason to drive equity prices higher in North America. That helped make it the best January that U.S. equity markets had seen since 1997, and investors responded by putting more cash into equity mutual funds than had been recorded since the year 2000, according to data from Lipper, a division of Thomson Reuters.

In other parts of the world, too, the pendulum moved back in favor of “risk on” investments once more, if not with quite the same dramatic effect. In Europe, markets outside the eurozone proved to be the leaders, with Switzerland, the United Kingdom and Sweden setting the pace, although bargain hunting helped Greek stocks to post a double-digit gain as well. More significantly for the global economy, signs that the Chinese economy will avoid a hard landing and may see an uptick in growth this year helped boost that country’s equity markets as well. In Japan, a new prime minister and a new set of economic policies – dubbed “Abenomics – that rely not only on stimulus measures but also unspecified structural reforms encouraged investors to leap back into Japanese stocks, as did the decline of the yen, which will make the country’s exports more competitive in global markets.

Storm clouds certainly still hover on the horizon. The eurozone’s fiscal and banking crises are nowhere near to being solved, even if they appear to have been contained for the present. True, bank deposits are recovering, signaling that capital has stopped fleeing the region. But this is the third year in row in which European markets have begun the year on an upbeat note; in the last two, that optimism has dissipated rapidly. Elections are looming in Germany, and while most major parties favor hanging on to the euro and monetary union, electoral squabbles over Chancellor Angela Merkel’s decisions in how to handle the crisis may make it harder to continue to push forward with structural reforms. The rise in the value of the euro against the dollar and the yen also may make it harder for European companies to shake off the lackluster growth in their domestic economies by selling goods overseas. Meanwhile, in the United States, Congress is gearing up for a second round of marathon negotiations aimed at averting (yet again) forced, across-the-board spending cuts.

What is still lacking worldwide is any degree of visibility, with respect to global growth (the United States surprised every economist around by reporting a small decline in fourth quarter GDP), corporate earnings, or the timing and even the nature of the risks to an extension of January’s “risk on” rally.

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