Unprecedented central bank stimulus sent global stocks to the biggest annual rally in three years, beating bonds, commodities and the dollar by the most since 2009 as shares surged from America to Germany and Venezuela.
The MSCI All-Country World Index of equities increased 16.9 percent in 2012 including dividends after climbing 2.3 percent in December. The Standard & Poor’s GSCI Total Return Index of 24 commodities rose 0.1 percent last year, while the U.S. Dollar Index lost 0.5 percent. Bonds of all types returned 5.73 percent, on average, according to Bank of America Merrill Lynch’s Global Broad Market Index.
Stocks rebounded after posting the worst returns in 2011 as central bankers’ efforts to push investors into riskier assets and corporate earnings growth overshadowed the third year of Europe’s debt crisis. Shares overcame the slowest expansion in China in 13 years and a U.S. government debate over how to avoid more than $600 billion of spending cuts and tax increases.
“The massive global stimulus has been a big piece of it,” James Dunigan, who helps oversee $112 billion as chief investment officer in Philadelphia for PNC Wealth Management, said in a telephone interview. “That had a big impact on reducing the fears of a recession. There was also the support from the corporate earnings side. It was just a matter of time to have stocks outperforming.”
U.S. Federal Reserve Chairman Ben S. Bernanke and European Central Bank President Mario Draghi pledged bond purchases amid the slowest global economic growth since 2009. The world economy is estimated to have expanded 2.2 percent in 2012, according to the median estimate from economists surveyed by Bloomberg. Gross domestic product may increase 2.4 percent this year, the projections show.
Bernanke said in September that the U.S. central bank will buy mortgage securities until the labor market recovers. The ECB announced a plan that involved unlimited purchases of government debt to reduce borrowing costs in the euro region. Draghi, fighting to keep the currency union intact, has also cut the benchmark interest rate to a record low of 0.75 percent, while the People’s Bank of China lowered its rate to 6 percent.
The rally in global stocks followed a 6.9 percent slump in 2011. The MSCI global index, which tracks companies in 45 developed and emerging markets, trades for 15.4 times reported earnings, or about 26 percent below its historical average of 20.7, according to data compiled by Bloomberg from 1995.
Analysts’ estimates show profit at companies in the MSCI All-Country gauge climbed 11 percent to $25.13 a share in 2012, according to data compiled by Bloomberg. That’s close to the record high of $25.30 in 2007. Analysts project earnings will continue to rise in 2013, increasing 12 percent, the data show.
Within developed markets, 23 out of 24 benchmark indexes advanced. Stocks in Europe rallied the most as cheap valuations for companies in Greece, Germany and Denmark lured investors. Equity measures in those countries climbed at least 27 percent. The price-earnings multiple of the Stoxx Europe 600 Index has surged more than 86 percent since hitting an almost three-year low in September 2011.
Spain’s IBEX 35 was the only developed market gauge to fall. Japan’s Nikkei 225 Stock Average surged 23 percent, the biggest rally since 2005, amid calls from the new government for more monetary easing.
The S&P 500 Index climbed 13 percent last year, the most since 2009. The U.S. equity benchmark sank as much as 7.7 percent from its 2012 high in September as Obama’s re-election set up a budget showdown with the Republican-controlled House of Representatives. The S&P 500 ended 1.8 percent above the average estimate of 1,401 from 14 Wall Street strategists tracked by Bloomberg. It will rally 7.3 percent to 1,531 in 2013, the average of forecasts showed.
Financial companies in MSCI’s global index posted the biggest gain last year, returning 29 percent as a group, as companies such as Grupo Financiero Santander Mexico SAB de CV, Brussels-based KBC Groep NV and Bank of America Corp. surged at least 109 percent. In 2011, the group slumped more than twice as much as the MSCI All-Country World Index.
The MSCI Emerging Markets Index of stocks gained 18 percent last year including dividends, rebounding from an 18 percent loss in 2011.
Venezuela’s benchmark climbed 342 percent including dividends, the most in the world, as inflation, which rose about 18 percent year-over-year as of November, prompted investors to buy shares as a way to preserve the value of their savings. The deteriorating health of President Hugo Chavez, re-elected in October, fueled speculation that a regime change may reverse policies that drove away investors.
The S&P GSCI Total Return Index of commodities dropped 0.6 percent in December, paring its annual advance.
Gains last year were led by a 19 percent increase in wheat futures traded in Chicago, 17 percent in soybeans and 16 percent in Kansas City wheat. Arabica coffee in New York, cotton and raw sugar fell the most among the five members of the GSCI spot index that retreated.
Crop prices rose in 2012, with records in soybeans and corn, as U.S. farmers endured the most-severe drought since the 1930s Dust Bowl. Heat waves and dry weather also curbed output in Europe and Australia.
Agricultural commodities were also among the biggest decliners as a record coffee harvest in Brazil added to a global glut that drove arabica futures to a 37 percent retreat, the biggest drop since 2000. There were also supply surpluses in raw sugar after Brazilian output expanded; futures in New York slumped 16 percent.
Lead was the best-performing industrial metal among the members of the GSCI spot index, advancing 14 percent, as Morgan Stanley predicted the biggest shortage in seven years in 2013. Gold gained 7.1 percent in London, rising for a 12th consecutive year, the longest streak since at least 1920. Holdings through exchange-traded products rose 12 percent to 2,631 metric tons, more than the reserves of all but two central banks.
“If you look at returns for managers in the commodities space it has been challenging, but there have been opportunities,” said Colin O’Shea, the head of commodities at Hermes Investment Management Ltd. in London, which manages about $2.3 billion of raw-material assets. “What we’ve seen over the course of the last 12 months is a lack of a trend. There haven’t been significant trends for long periods of time, and that’s what’s made things difficult for some.”
Citigroup Inc. analysts said in a report in November that the “super cycle” of returns in commodities has ended, while their counterparts at Goldman Sachs Group Inc. and Morgan Stanley are forecasting higher prices. The S&P GSCI gauge has more than doubled since the end of 1998.
Brent crude futures advanced 3.5 percent last year, the smallest annual gain since prices collapsed in 2008, as threats to Middle Eastern supplies offset the drag on oil demand from Europe’s sovereign debt crisis. Prices posted a record annual average of $111.68 a barrel, buoyed by new international sanctions on Iran and the risk that conflict in Syria will spread. Brent rose as high as $128.40 on March 1, and fell to $88.49 on June 22.
“Although oil ended 2012 at almost the level as it began, the danger of a major supply disruption in the Middle East put a floor under the market,” said Christopher Bellew, a senior oil broker at Jefferies Bache Ltd. in London. “Oil came under pressure in the summer as Europe was gripped by recession, Chinese growth slowed, and Saudi Arabia made up for any supply shortage. But the price slump that some had expected did not materialize.”
Intercontinental Exchange Inc.’s Dollar Index fell in December amid signs the U.S. economy is continuing to grow. The gauge will rise to a reading of 80.6 in the first quarter of 2013, from 79.8 at the end of December, according to the median of 11 analyst estimates compiled by Bloomberg.
The 17-nation euro rallied 1.8 percent against the dollar in 2012 and 7.4 percent since July 26, when Draghi assured markets that he would do “whatever it takes” to save the common currency.
“If I had to pick one event, it’s the stabilization that we’ve seen in the Europe, and a lot of that is Draghi’s pledge,” Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc., a currency brokerage, said Dec. 26 in a telephone interview. “The ECB has essentially committed to backstopping government borrowing and has been supportive of the euro.”
Bank of America Merrill Lynch’s Global Broad Market Index was little changed in December after climbing for the previous five months. The gauge, tracking about 20,000 fixed-income securities with a market value of about $46 trillion, returned 5.73 percent last year as of Dec. 28. Average yields rose one basis point, or 0.01 percentage point, last month to 1.6 percent on Dec. 28. The yield fell to 1.57 percent on Dec. 6, the lowest level since at least 1996, from 2.24 percent at the end of 2011.
Global investment-grade corporate debt returned 0.35 percent including reinvested interest in December, a ninth consecutive monthly gain in the longest advance since 1998, a Bank of America Merrill Lynch index shows. The securities gained 10.9 percent in 2012 through Dec. 28, the most in three years. An index of high-yield bonds returned 1.78 percent last month as of Dec. 28 and gained 18.72 percent in 2012. Speculative-grade debt is rated below Baa3 by Moody’s Investors Service and less than BBB- by S&P.
U.S. Treasuries lost 0.35 percent in December, reducing the 2012 gain to 2.31 percent, the third straight annual advance. Yields on 10-year U.S. government debt are forecast to climb to 1.88 percent by the end of the second quarter, from 1.76 percent at the end of December, according to the median estimate of 81 economists surveyed by Bloomberg News.
Greek bonds were the best performers in December and for 2012 among the 26 sovereign markets tracked by Bloomberg and the European Federation of Financial Analysts Societies, rising 30.5 percent and 97.4 percent. Portugal’s returned 3.4 percent and 57.1 percent, while Italy’s rose 0.5 percent and 20.8 percent.
“We’ve been reminded of the old saying, ‘Don’t fight the Fed,’” Andrew Slimmon, Chicago-based managing director of global investment solutions at Morgan Stanley Smith Barney, said by phone. His firm has $1.7 trillion in client assets. “This is exactly what happened in Europe. They’re much earlier in the accommodative process so the gain coming off from the bottom is going to be bigger.”