At the start of 2011, developed market equities rallied and handsomely outperformed emerging market equities. This was not due to a change in the economic fundamentals for emerging markets, but rather an improvement in economic news emanating from most developed economies, and most notably the US. Developed market equity valuations were also supportive. Even Nouriel Roubini abandoned his “double-dip” mantra in early 2011.
On 11 March 2011, the shock earthquake in Japan unsettled both developed and emerging market equity markets, with values falling sharply. Fortunately, equities quickly recovered, helped partly by better than expected employment data in the US as well as an over-estimation of the extent of the damage and disruption caused by the earthquake.
Since early May 2011, global equities have lost significant value and, in the case of developed markets, are essentially back down at levels that prevailed at the start of the year. For emerging markets equities, values are below January 2011 levels, in Dollar terms.
So why the loss in equity market values since early May? As we highlighted some time ago, it would appear that a range of factors (at least 6 identifiable factors) have combined to create a ‘soft-patch’ in the global economy. This has unsettled global markets ahead of the northern hemisphere summer break. These six factors include: a stubbornly high oil price, record high food prices (and high commodity prices generally), worse than expected disruptions caused by the Japanese earthquake (even SA motor trade has been impacted), renewed concerns about sovereign risk in the Euro-area, a slowdown in China (albeit an intended slowdown) and policy uncertainty surrounding the ending of QE2.
Hopefully, this is only a soft-patch and not the start of something more sinister. That remains our base case. However, this base case does not imply that the global economic recovery is without risk. Rather, there are a number of key structural economic concerns, including a weak US housing market and high public sector debt in many developed economies (to mention just two), which suggest that the developed world will struggle to return to their historical average growth rates.
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