Dec 22, 2012 05:43 PM IST | Source:

2012 review: It could have been worse

According to Mayan prediction, the world should have ended yesterday, so if you are reading this, things have turned out better than expected - and that's largely the story of investment markets during 2012, too.

According to Mayan prediction, the world should have ended yesterday, so if you are reading this, things have turned out better than expected - and that's largely the story of investment markets during 2012, too.

The year began with three key risks: that the eurozone would be subject to further severe distress, including the possible ejection of weaker members; that China would suffer an economic "hard landing", derailing commodity prices and depressing world trade; or that post-election gridlock would push the US over a "fiscal cliff" of tax rises and spending cut.

None has yet materialised. "Progress?has been made in Europe, the US election proved to be largely a non-event from investors' point of view and, and whilst not touching previous heights, Chinese growth has certainly not disappeared," said Kevin Gardiner, head of investment strategy at Barclays Wealth.

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There were also fewer "black swan" events than in 2011 - no Japanese tsunami, no repeat of the Arab Spring, no stand-off in the Straits of Hormuz. Elections in France, the Netherlands and Greece delivered results that were generally market-neutral, while the Chinese leadership transition passed off without incident.

Most economies continued to recover only weakly - at its October briefing, the International Monetary Fund cut its growth forecasts for many developed and emerging markets. It mattered little.

"If there is one key takeaway for investors in 2012 it's that there is no correlation between economic growth and stock market returns," said Fiona McRae, head of European equities at Alliance Trust, pointing to the fact that in stock market terms, sickly Europe has easily outperformed booming China.

For that, investors largely have central bankers to thank. "Central bank policies such as very low interest rates and various forms of quantitative easing mean interest rates and core bond yields are well below domestic inflation rates in the US, UK, core Europe and Japan," said Tom Elliot, global strategist at JP Morgan Asset Management. In addition to loose monetary policy, the European Central Bank's outright monetary transaction programme has materially reduced the "tail risk" of a euro implosion.

Almost all asset classes have benefited. Shares have generally traded in tight ranges - the UK's FTSE100 between 5,000 and 6,000, for instance - while volatility has dropped to unusually low levels. But investors have not appeared convinced, anecdotal and statistical evidence suggests that many are still running high cash balances, while money has poured into bond funds in the UK, Europe and the US. Many proposed flotations were abandoned during the year, and those that did make it - Manchester United, Facebook, Direct Line - relied either on lots of hype or keen pricing and blockbuster acquisitions were as likely to fail (G4S/ISS) as succeed (Glencore/Xstrata).

One surprise, given the proactivity of central banks around the world, was the relatively disappointing performance of gold, which struggled to retake the highs of 2011. Adrian Ash, head of research at precious metals market BullionVault, said this was down to slower physical demand in India and China and the lack of an acute moment of crisis. "Things have calmed down a lot," he said.

Industrial commodities remained mostly rangebound, with the stimulus of central bank cash offset by weaker physical demand. Most of the action was in soft commodities, where prices were boosted by poor weather conditions.

Among alternative asset classes, the wine bubble continued to deflate; prices for investible Bordeaux vintages, in the shape of the Liv-Ex 100 index, fell by 11.3 per cent over the year. There was talk of a peak in the decade-long boom in farmland prices, but fine art continued to command fabulous prices; a record £74m was paid for one of Edvard Munch's "The Scream" back in May.

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