2012 in Review
By Investment Strategy Group
December 13, 2012
As we approach the New Year and contemplate the opportunities the investment landscape may offer in 2013, it helps to look back at the performance trends of 2012. Overall, the year-to-date period has seen impressive results from various risk assets, which is in line with the projections of our Asset Allocation Committee. However, ongoing concerns about volatility and Europe hampered the markets at times. Here, we provide a performance scorecard and consider potential developments in the year ahead.
2012 Asset Class Performance
Given the macro risks that existed a year ago, specifically related to Europe's ongoing sovereign debt crisis and China's decelerating growth profile, asset class performance has been extremely resilient. Aside from the brief pullback in risk assets in the middle of the year that coincided with a deceleration in leading economic indicators and a 10% decline in the S&P 500, markets have continued to overcome persistent concerns and uncertainties, helped in part by the continued actions of the Federal Reserve and European Central Bank.
ASSET CLASS 2012 YTD PERFORMANCE
Fixed income: Performance has varied dramatically in the fixed income market as the Barclays U.S. Aggregate Government Index posted minimal gains of 2.4% in the first 11 months of the year. At one end of the quality spectrum, Treasury yields have changed little and are currently within 10 basis points of their lows for the year. Spread sectors such as high yield and emerging market debt, meanwhile, have increased 14% and 17%, respectively, over the same timeframe. Both high yield and emerging market debt are still providing yields of roughly 6.5% and 5.5%, respectively, and we believe each has room for spread compression.
Equities: In comparison, equity market performance has moved in lockstep year to date, with the Russell 3000, MSCI EAFE and MSCI Emerging Markets indices all providing returns within 200 basis points of each other. Through November, 29 of the 45 countries in the MSCI All Country World Index posted double-digit gains.
However, year-to-date performance for Greece (+3%) and Spain (flat) masks the extreme volatility those markets experiencedâ€”both the MSCI Greece and MSCI Spain indices were down more than 30% at different points in 2012, but have since rebounded in the second half of the year. Equally impressive are the performances of Belgium and Germany, which were able to overcome persistent European debt and recession fears to post returns of +38% and +27%, respectively.
DEVELOPED AND EMERGING MARKET EQUITY 2012 YTD PERFORMANCE
A Look to 2013
Looking ahead, we still donâ€™t know the potential impact of fiscal-cliff negotiations on the U.S. economy and the growth outlook for Europe continues to be a question mark. Both situations could very well become a drag on market performance in 2013. With respect to asset class fundamentals, valuations across developed and emerging market equity markets are not as attractive as a year ago and yields across most areas of the fixed income marketplace remain extraordinarily low. As a result, the investment opportunities that we favored during 2012, such as U.S. equities, high yield fixed income and emerging market debt, may not deliver the same robust performance in 2013. On a positive note, we expect Fed policy to remain accommodative and believe global economic growth could begin to stabilize in 2013, which supports our continued bias towards equities over fixed income.
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