Global stock markets rebounded in the third quarter of 2012 as central banks around the world finally gave the investment community what it was looking for — a reason to believe in the value of equities. U.S. equity markets hit multi-year highs in the period, while the S&P/TSX jumped more than 6%. European and emerging markets also shot higher.
Sadiq S. Adatia, chief investment officer of Sun Life Global Investments, is a little less enthusiastic. “From our perspective the global economy continues to struggle, and even the recent actions by the U.S. Federal Reserve and the European Central Bank won’t help the economy grow significantly,” he says in his Q3 market update. “However, these measures have certainly increased consumer confidence. We feel stocks remain relatively cheap, and with greater consumer confidence we could very well see a continuation of the positive returns into the final three months of the year.”
Equity markets this year are behaving much the way Adatia has predicted — so far. Three months ago he identified the second quarter as the likely low point of 2012, with better days ahead through the latter half of the year.
The U.S. has once again been a primary driver of global equity returns. The S&P 500 rose almost 6% in the period, putting its year-to-date return at just shy of 15% at the end of September. The NASDAQ, with its focus on technology-related stocks, was a particular standout thanks in part to record highs from Apple and Google. By the end of September the index was up a whopping 20% since January.
The danger of the “fiscal cliff”
And even though Adatia says the U.S. market rally still has “legs,” he’s not without concern. “There are still a few major uncertainties. Most important is the pending “fiscal cliff,” and to a lesser extent, the election,” he says.
The fiscal cliff is a congressionally imposed deadline. On midnight of December 31, a package of spending cuts and tax measures aimed at reducing the country’s debt by about $600 billion is legislated to go into effect — unless Congress changes the legislation. A government budget watchdog known as the Congressional Budget Office estimates that if the measures are enacted as planned, the shock to the country’s balance sheet would tip its economy into another recession.
In Canada, equity market gains were largely driven by the energy and materials sectors. Oil climbed roughly US$8 per barrel, or about 10%.
After repeated warnings about the unsustainability of Canadian real estate values, Adatia says he’s seeing evidence the housing market is finally beginning to cool: “We expect to see [price] declines beginning in 2013, and we stand by our 10-15% decline scenario as being the most probable one.”
Central banks take action
In mid-September, the U.S. Federal Reserve unveiled its much-anticipated third round of quantitative easing. To quote a media release from the central bank, the additional purchases of certain long-term debt securities “should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.” Such moves by the Fed tend to send global stock prices higher, and this time was no different.
Then there’s the European Central Bank, which in early September took steps to boost investor confidence by demonstrating its commitment to supporting the euro — and to helping put an end to the region’s debt crisis. The central bank introduced a mechanism for buying sovereign bonds in the secondary market — a tool the ECB calls “a fully effective backstop to avoid destructive scenarios.” The announcement sent stock markets soaring that day.
What does all this mean for investors besides a potential lift to their equity portfolios? Sadiq Adatia characterizes the central bank moves as “important” steps. But there’s a caveat. “Central bank actions will not necessarily have a significant impact on the economy,” he cautions. “Most of what was unveiled helped prevent a significant downside event rather than fix the problem.”