As global equity investors turned over the calendar into the new year, they were quickly greeted with the similar gloomy themes that concluded last year on a sour note. Equity markets continued its downward trend last month due to growing concern about a U.S. led economic slowdown and general tightening of the credit market as the subprime debacle continues to unfold. Volatility was significantly higher last month. While global stock markets staged a slight rebound after announcement of a U.S. economic stimulus plan and another round of Fed rate cuts, the question whether it would be enough to fend off a U.S. recession remains on every investors' mind. For the month of January, the MSCI World Free Index tumbled 7.71%.
U.S. economic statistics released last month continued to highlight a murky outlook. The Labor Department announced that payroll unexpectedly fell by 17,000 in January, the first job loss in more than four years. And according to the latest U.S. government figures, the world's number one economy grew at a meager 0.6% annualized pace in the fourth quarter of last year, a significant slowdown compared with the 4.9% pace in the third quarter.
On January 22, the U.S. Federal Reserve lowered its benchmark rate by 75 basis points, its first inter meeting rate cut since 2001. Eight days later the benchmark rate was slashed by another 50 basis points to 3.0% after the FOMC's latest scheduled meeting, citing that “downside risks to growth remain.” On the fiscal policy front, the U.S. government has introduced an USD168bn economic stimulus plan aimed to boost private consumption and add capital to the slumping mortgage market. U.S. equity Investors reacted with the maneuvers positively, but all three major U.S. stock indexes still finished the month lower. The S&P500 retreated 6.11%, the DJIA lost 4.63% and the NASDAQ shed 9.89% last month.
European equities tumbled on the backdrop of growing worries of a U.S. led global economic slowdown, particularly in the financials sector. UBS led the decline in European banks after posting the biggest quarterly loss ever by a bank after writing down USD14bn in subprime related assets. The European market was also shocked when Societe Generale SA, the second largest French bank, announced that a rogue trader had cost the firm 4.9bn Euros in losses from unauthorized trades. The largest rogue trading loss in history is more than four times the losses suffered by Barings Plc in 1995. During the month, the ECB and Bank of England kept their respective benchmark interest rates unchanged while stressing inflation concerns. Overall, the DJ Stoxx 600 plunged 12% last month, the biggest monthly drop for the index in 20 years.
Emerging market did not fare better as the MSCI Emerging Market Index lost 12.59% last month. The MSCI BRIC Index tumbled 15.59% as investors fear a slowing global economic scene may impact these growing economies. Most emerging region indexes posted double digit losses for the month with MSCI Emerging Europe Index led the downfall by plunging 16.25%.
Top Fund Categories
As the U.S. enters a rate cutting phase and the greenback continues its slide against other major currencies, investors flock to gold as a hedge against the falling dollar and inflation. Gold prices rose to over USD900 per ounce during January, which helped valuations of miners of the yellow metal. Precious metals fund was the top fund category in the past month, posting an average return of 5.88%. Three precious metals funds, Investec GSF – Global Gold, SGAM Funds – Equity Gold Mines, and MLIIF World Gold were 3 of the top 4 performers last month with returns of 7.38%, 7.25% and 6% respectively.
The Japanese Yen and the Swiss Franc, popular currencies for funding carry trades, registered strong gains on the US dollar last month. The Japanese Yen and the Swiss Franc rose 4.75% and 4.55% respectively in USD terms, which mostly explained the strong performances by bonds denominated in both currencies. Japanese bond funds averaged a return of 5.55% last month, with UBS (Lux) Bond Fund (JPY) and Parvest Japan Yen Bond leading the way advancing 5.64% and 5.37% respectively, good for 6th and 7th place in the individual fund monthly performance league. Swiss Franc denominated fixed income fund categories also posted strong results. UBS (Lux) Bond Fund – (CHF) and UBS (Lux) Strategy - Fixed Income (CHF) leads the category with returns of 5% last month, placing both funds amongst the ten best performers in the period.
Bottom Fund Categories
As equity investors risk appetite shrinks, emerging markets with stretching valuation took the hardest hit. Besides global slowdown concerns, China was also hit by the worst snowstorm in 50 years that caused an estimated RMB22.1bn in economic losses. MSCI China lost 21.5% during January, the second largest fall amongst the emerging markets behind MSCI Turkey's 23.6% fall.
Accordingly, China equity was the worst performing fund category in the past month, losing an average of 19.7%. Closely-related categories such as Greater China equity and Hong Kong equity also slumped with an average loss of 15.8% and 15.3% respectively. On an individual fund level, seven of ten worst performers last month were China equity funds, with the Hang Seng IS - China H-Share Index Leveraged 150 being the worst overall performer with a 33.8% loss. The other leveraged offering from Hang Seng, the Hang Seng IS - Index Leveraged 150, retreated 24%, making it the worst performing Hong Kong equity fund in the new month and third place in the overall worst monthly performer.
Other emerging equities also suffered from investors sought safer grounds. Emerging Europe ex-Russia Equity was the second worst performing category with an average monthly loss of 16.8%, with Parvest Turkey's 23.2% slump the worst performing in the group. Other Asian markets also suffered from U.S. slowdown worries, particularly those with open economies such as Singapore and Korea. Singapore equity funds shed an average of 16.1% during January, ranking it the third worst performing category during the period. Korea equity and India equity funds also lost an average of 15.2% and 14.5% respectively in the past month, placing them as the sixth and ninth worst performing categories over the period.
By Morningstar Asia
Editorial &Research Team, Morningstar Asia Ltd. can be reached at hksupport@asia.morningstar.com
