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2012 Global Markets Overview - Deal Making and Earnings Drive Gains

Author: Manish Shah
Last Update: 11:56 AM ET February 15 2013

For the world’s equity investors, 2012 turned out to be a rather good year. Despite a marked slowdown in global economic activity, softer commodity prices, persistently high unemployment, uncontrolled debt, and financial uncertainties, the world’s16 largest stock markets closed in positive territory. Spurred on by easy money policies from central banks, investors pushed up riskier assets and corporate deal making came back to life.

In the US, economic growth slowed to a tepid pace as state and local governments pulled back and businesses sat on their cash. It was consumer spending, and specifically the automobile sector, which was operating at a four-year high, that kept the economy moving forward. In addition, the housing sector appeared to have finally turned the corner and was no longer acting as a drag. In yet another sign of normalcy, the Federal Reserve exited from its bailout investments, which it had acquired during the 2008 financial crises.

Banks were a major focus of many investors throughout 2012. Early in the year, banks benefited from improving economic conditions, rising home sales, and stabilizing loan conditions, as well as from cheap capital. But after a decade of lax oversight, regulators began to tighten their noose, adding uncertainty to the banking sectors outlook.

Spurred on by the rapid growth of online social media, Internet commerce deepened its reach into the retail economy. This was particularly evident in consumer electronics, but the trend into other retail segments continued rapidly spreading.

For the year, the S&P 500 index gained more than 14%, while the benchmark indexes surged 32% in Germany, 23% in Japan, 24% in India, and 22% in Hong Kong. In Brazil and Russia the benchmark indexes gained just over 7%.

International and emerging markets continued their multi-year growth trends. Thailand surged over 35% for the third time in four years, while India advanced for the eighth time in ten years more than 16%. Mexico enjoyed a double-digit gain, which was the seventh time in the last thirteen years, while Indonesia’s double-digit gain was the ninth time during that same period.

The picture in commodities was mixed: coffee plunged 35% and oil declined 13%, while wheat surged 24% and gold gained 7%, twelfth annual increase since 2000. Sugar fell to prices last seen in 2008.

2012: Q1

From the first trading day of January, stock markets around the world
opened strong and crude oil futures surged above $103 a barrel. Markets
were primed to move higher after the European Central Bank had
committed to add one trillion euros of liquidity to financial system fi ve
weeks earlier. Even with the prospects of weakening economic growth in
Europe, rising debt levels, bank de-leveraging, and mandated austerity in
Greece, both the New York and European markets continued to climb the
proverbial wall-of-worry. China was focused on engineering a slower pace
of growth with a soft landing and Japan battled one of the worst natural
disasters in its history.

Accelerating inflation was the dominant economic issue in Russia, India
and Brazil, but not in the US or EU countries. In early January, the yield on
the 10-year US Treasuries traded near 1.97%, and the 30-year bond traded
at 3.02%. For the first time, Germany sold bonds with negative yield as the
concern in the sovereign bond markets pushed rates to record highs.
Market optimism was widely shared by large corporations as reflected in
the size and number of deals that were consummated. The year began with
several large deals in the resource sector. Chile based Codelco exercised its
option to buy 49% stake in Anglo American Sur for $6 billion, Chesapeake
agreed to sell its shale gas assets for $2.32 billion, and Japan based Marubeni
acquired 35% stake in Eagle Ford Shale. In pharmaceutical sector, Bristol-
Myers Squibb agreed to acquire Inhibitex, Inc. for $2.5 billion. And, all of
this was all done in the first week of the year. But the deal making was
not without setbacks as the European Commission blocked a proposed
merger between NYSE Euronext and Deutsche Boerse.

Market sentiment remained buoyant throughout January by the fi rm
belief that the central banks would continue providing cheap money. By
the end of the month, market indexes were flirting with multi-year highs.
The Nasdaq Composite Index soared to highs last seen in late November
2000, while the S&P 500 and the Dow made new highs five week in a row
and traded near a 4-year high. While new home sales in the US in 2011
had declined to 304,000, the fewest annual sales since 2003 when record
keeping began, home builders and real estate agents were optimistic
about 2012.

In early February, a multi-billion dollar settlement was announced between
49 US states and the largest mortgage lenders over foreclosure abuses.
The settlement was announced by Attorney General Eric Holder and five
largest banks – Bank of America, Wells Fargo, Citigroup, JP Morgan Chase
and Ally Financial – agreed to pay $26 billion to reimburse home owners
and reform mortgage lending. The settlement would cover mortgages
originated between 2008 and 2011 and apply only to privately held

While, European politicians and policy makers were struggling with the
cost of bailing out Greece, as it struggled with a multi-year recession, the
highest unemployment in the euro zone and falling tax receipts, Spain’s
debt problem exploded and Italy was not far behind. Spain estimated that
it would need at least €50 billion to rescue its banks and the Greek bailout
was estimated to cost €115 billion. To expand liquidity in the banking
system, the European Central Bank mounted its second liquidity operation
at the end of February attracting €530 billion demand from 800 banks. The
effort increased the total liquidity in the system by more than €1 trillion.

The US Congressional Budget Office estimated a 2012 federal budget
deficit of $1.1 trillion with continuing sluggish growth and unemployment
remaining above 8%. The projected deficit amounted to 7% of US GDP, 2
percentage point less than the 2011 deficit, but still higher than any annual
deficit between 1947 and 2008. The level of the deficit and how it should
be reduced became one of the primary talking points of the ongoing
presidential election campaign.

U.S. Treasury and Federal Reserve continued to take advantage of market
conditions and sell the stakes acquired in AIG and Citigroup. AIG lowered
its stake in its Asian insurance unit and raised $6 billion in March and the
Treasury said it sold off the final tranche of mortgage securities it purchased
to save Fannie and Freddie during the 2008 crisis. Treasury also announced
its plan to sell its remaining stake in the company that will yield $5 billion
to taxpayers and the Fed will exit with $17.7 billion.

Deal making in the resource sector reached a new peak after Glencore
and Xstrata agreed to form a $90 billion merger. The world’s largest mining
group, BHP Billiton, had recorded record fi rst half sales, December 2011, on
strong iron ore sales to China – but the industry’s fortunes were about to
change. Rio Tinto was forced to take $8.9 billion charge linked to its failed
Alcan Aluminum business purchase, and the largest steel maker, Arcelor
Mittal, reported a wider, December 2011, quarterly loss.

Across the Atlantic, Greece was finally forced to restructure its debt and
complete a debt swap of €177 billion. The bond restructuring was the fi rst
default in the euro zone and the nation was increasingly debating whether
or not to leave the euro zone. At the same time, European policy makers
weighed the cost of pushing Greece out of the currency union.

By late March, market conditions in Japan were improving. The benchmark
Nikkei index had rebounded to a level last seen on March 11, 2011, when
triple disaster crippled the nation and killed 19,000 residents. Tokyo Electric
Power, once the largest utility company in Asia, agreed to exchange a
majority stake in the nuclear power unit for 1 trillion yen, or $12 billion,
from Japanese government.

On the technology front, Apple stock, was riding a the wave of successful
product launches, including a series of mobile phones and other wireless
gadgets, rose to a new high. The company had a record holiday sales
and announced plans to distribute $45 billion over the next three years,
consisting of a quarterly dividend of $2.65 per share and a $10 billion stock
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Sources: Data collected by 123jump.com and Ticker.com from company press releases, filings and corporate websites. Market data: BATS Exchange. Inc