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Regional equities underperformed in 2011

2011 was a difficult year for investors. Equities generally performed poorly, while bonds and commodities were extremely variable, according to analysis by QNB Capital.

Last year began with a degree of measured optimism about the global economy, which had partly recovered from the 2009 recession. There were widespread expectations of steady growth in most economies, albeit at a lower trend than before the financial crisis. As a result, many equity markets had climbed back nearly to their levels in autumn 2008.
The first factor to disturb the outlook was the onset of the Arab Spring in parts of the Middle East. This had a regional impact, depressing stockmarkets, as well as a global impact through higher oil prices.
Oil was one of the best performing assets, with Brent crude up by 13% at the year end, and by over 25% at its peak in April. The Japanese tsunami was another shock to the global economy, although its impact proved to smaller and more localized than was initially feared.

Bond and commodity performance, 2011
(% change, bonds in blue).

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The main story that drove markets came in the second half of the year, as the focus increasingly shifted to the high levels of public debt and fiscal deficits in Europe and the US. Concerns grew about the risk of imminent default of peripheral Eurozone debt, and even leading countries like the US began to lose their cherished AAA credit ratings. At the same time, there were signs of weakness in their underlying economies and growth forecasts were revised down.

Ironically, some government bonds actually performed extremely well in this environment, as investors sought safe havens from a potential financial crisis. US and German 10 year bonds were the best performing major assets, appreciating by 16.9% and 14% respectively, over the year. Meanwhile, peripheral Eurozone debt plummeted in value, with Italy’s 10 year bonds ending the year 8.2% lower.

Commodities had a mixed performance over the year. Gold was one of the strongest performers, despite a weak final quarter, up 10.1% over the year. However, silver was down by a similar amount. Similarly, although oil managed to hold its value in the second half of the year, despite the worsening global outlook, other growth-linked commodities such as copper declined sharply.

Almost all major stockmarket indices were down on the year. The US Dow Jones Industrial Average was a rare exception, up 5.5%, but it is a narrow and misleading measure of US corporate value. The much broader S&P 500 index of US companies was flat on the year.

Japan and Germany were two of the worst performing developed markets, down 17.3% and 14.7% respective. An overall measure of developed markets, the MSCI World index, was down 7.6% on the year.

Most Arab markets also performed poorly, with Egypt posting the worst result, down 49%. Saudi Arabia and Palestine had the smallest declines, both around 3%, because their economies are somewhat decoupled from wider trends. Only Oman and Qatar saw positive growth over the year, although it was only very slight, 0.3% and 1.1% respectively.

Stockmarket performance, 2011
(% change in index, Arab markets in blue)

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2012 has started with some positive momentum, according to QNB Capital, as some better than expected economic data has come out in Europe as well as the US. However, concerns about government debt are likely to linger and most asset managers are expecting another difficult year.


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