December saw a continuation of the equity market rally that initiated in November 2012 and made 2013 the best performing year since 2009 for most developed markets, as well as certain emerging market countries such as Nigeria and South Africa.  After a minor correction ahead of the Federal Reserve’s final 2013 meeting on the 18th December, the Fed’s decision to only taper its quantitative easing programme by a small amount triggered a Santa Claus rally, leading many major equity indices to end the year at or near their YTD highs.  The MSCI World index was up +2.0% for the month and +24.1% for the year, with China, Hong Kong and Brazil (all tied to China growth) being the only major indices to post meaningful losses on the month due to a renewed slowing in Chinese manufacturing.  Gold continued its decline, down -4.1% on the month and -28.3% for the year.  In contrast, the price of Brent oil continued to firm on increasing demand, up +1.0% in December and fully recovering its intra-year losses to be flat for 2013.  The Fed’s tapering and a pick-up of economic activity in Europe and Japan continue to push interest rates up.  Yields on 10-year US Treasuries and German Bunds increased to 3.03% and 1.93%, posting an Increase of 1.3% and 0.6% over the year. 2013 ended up being the worst year for developed market government bonds since 1994, the last time interest rates increased so quickly on a percentage basis.

In South Africa, former president Nelson Mandela died at the age of 95 after a long illness.  The National Union of Metalworkers (NUMSA), the country’s biggest labour union, decided in December not to back the ruling ANC in the next parliamentary elections in April 2014.  While this should not challenge the ANC’s control over South African politics, it may make necessary reforms more difficult to pass.  The rand depreciated -19.2% versus the US dollar in 2013; the country’s persistent current account deficit has been difficult to finance as the foreign investors withdraw money due to higher interest rates in developed markets.  Nevertheless, the currency depreciation has made South Africa more competitive and increased the value of its multinationals.  This has contributed to a bull market in equities, with the JSE All Share index up +3.0% in December (hitting another all-time high intra-month) and +21.4% for the year.

Further north, South Sudan descended into the potential beginnings of a civil war after battles between followers of the president and his former vice president, who are from different tribes, left over a thousand people dead.  Neighbours Congo and the Central African Republic also continued to suffer from internal conflicts, which forces from the African Union, the United Nations and France have struggled to contain.  The events highlight the divergence in political stability between many coastal countries in Africa that have benefited from significant economic growth over the past decade, and some of their landlocked neighbours that still suffer from poverty and lack of infrastructure.

In Asia, Japan’s Prime Minister Shinzo Abe caused political controversy by visiting the Yasukuni shrine in Tokyo, a cemetery that contains several convicted war criminals who killed millions of people in neighbouring countries before and during World War II.  The visit was partly to pacify ardent Japanese nationalists in Abe’s party and partly a response to China’s establishment of an air defence identification zone over the disputed Senkaku/Diaoyu islands.  Such nationalistic tendencies derailed Abe’s first prime ministership in 2007 and come at a crucial time when his reform programme has stalled.  However, the Bank of Japan has continued to assist him with an easy monetary policy which has pushed the yen/US dollar exchange rate to 105.3 as at the end of December, a depreciation of -17.6% (down from 86.8 at the end of 2012) over the course of the year, including -2.7% in December.  This has boosted the profitability of exporters and led Japan’s stock market to be the best performing amongst developed markets, up +4.0% in December and +56.7% for 2013.

China’s economy, after a pick-up in mid-year, seems to be slowing again, with its Purchasing Managers Index (PMI) for manufacturing down from a healthy 51.4 in October and November to 50.5 in December (though a reading above 50 still signals economic expansion).  This caused the Shanghai Composite and Hong Kong’s Hang Seng indices to fall -4.7% and -2.4%, respectively, for the month and down -6.7% and up only +2.9%, respectively, for the year.  Australia, which is dependent on raw material exports to China, saw its PMI index fall to 47.6, signalling economic contraction.  The country’s ASX 200 index was still up +0.6% for December and +15.1% for the year, with the flagging economy boosted by a -14.3% depreciation of the Australian dollar versus the US dollar over 2013.

Opposition protestors in Thailand tried but failed to unseat Prime Minister Yingluck Shinawatra for attempting to pardon her older brother, Thaksin (a former prime minister ousted in a military coup in 2006), from a criminal conviction on corruption charges.  Though the country’s economy is relatively healthy, poor fiscal policies, including an expensive subsidy on rice to appease the government’s rural supporters, has led to a -3.1% of GDP budget deficit.  This current situation has prevailed since Yingluck’s election in 2010 and is unlikely to resolve itself soon.  Thailand’s currency (versus the US dollar) and its stock market declined by -7.0% and -6.7%, respectively, over the course of 2013.

In India, Arvind Kejriwal was sworn in as chief minister in Delhi, the capital city, after his anti-corruption party, formed only months ago, won the plurality of seats in municipal elections.  This poses a problem for parliamentary elections in 2014, as a strong showing by Kejriwal’s party would likely lead to no coalition being able to attain a majority and make any potential government even weaker than the current one which has been unable to make meaningful reforms.  Despite the political paralysis, India’s economy still grew +4.9% in 2013, aided by the rupee currency’s -11.5% depreciation versus the US dollar.  The SENSEX index was up +1.8% for the month and up +9.0% for the year.

Further west, Turkey’s Prime Minister Recep Tayyip Erdogan suffered a series of cabinet resignations over alleged bribery in construction contracts and deals with Iran, leading to demonstrations that were dispersed by police force.  The scandal is seen as part of a power struggle between the prime minister and prominent cleric Fethullah Gulen, who has actively worked to counter Erdogan’s increasingly totalitarian government.  The country has benefited from foreign investor flows over the past decade, which has fuelled a consumer boom.  However, Turkey now has a -7.4% current account deficit that is largely financed with short-term borrowing and has a high likelihood of a currency crisis in 2014 (the lira currency has already depreciated -17.2% versus the US dollar in 2013).  The BIST index was down -13.3% for the year.

Russia suffered two terrorist bombings in the southern city of Volgograd, which killed 34 people, forcing the country to significantly tighten security ahead of the next Winter Olympics, which will commence in February 2014 in the Black Sea city of Sochi.  This is on top of the economy ministry’s downward revision in the country’s GDP growth rate from +2.5% to +1.4%.  In addition, a widespread boycott of the Sochi Olympics’ opening ceremonies due to the government’s human rights abuses forced President Putin to make a conciliatory gesture by granting amnesty to 20,000 prisoners, including Mikhail Khodorkovsky (a leading political activist and former head of oil company Yukos), members of the dissident band Pussy Riot, and protestors from Greenpeace.  The MICEX index was up +1.6% for the month and only +1.9% for the year, helped by a -7.0% depreciation in the value of the ruble currency versus the US dollar.

Neighbour Latvia, which is recovering from an economic meltdown suffered during the global financial crisis (the country incurred too much foreign debt) and now has the highest GDP growth rate in the EU, became the 18th country to adopt the euro currency.  All of the major European indices achieved double-digit returns in 2013 due to improving economic prospects for the region.  The UK’s FTSE 100, Germany’s DAX 30, and France’s CAC 40 indices were up +1.5%, +1.6% and +0.0%, respectively, in December and up +14.4%, +25.5%, and +18.0%, respectively, for the year.

In the Americas, Brazil’s economy contracted by -0.5% in the third quarter, meaning the country will likely fall far short of the government’s +4.5% GDP growth target for the year (revised estimates are roughly around +2.5%).  The country has also been plagued by persistent inflation (expected to be 5.8% for 2013) due to government overspending, low productivity and excessive regulation.  The Bovespa index was down -1.9% in December and down -15.5% overall in 2013; this is on top of a -13.1% depreciation in the real currency versus the US dollar over the course of the year.

In contrast, the US economy is going from strength to strength.  The Conference Board reported its consumer confidence index increasing to 78.1 in December from 72.0 the prior month, while the Case-Shiller home price index rose at an annualised rate of +13.6% in October compared to a year earlier, its strongest pace since 2006.  The strong data and Fed chairman Ben Bernanke’s desire to start tapering the quantitative easing programmes he initiated before his tenure ends in January 2014, likely led to the Federal Reserve’s decision to cut its monthly securities purchases to $75bn from $85bn.  Equity markets reacted positively to incoming Fed chairwoman Janet Yellen comments that further tapering will only take place if economic activity continues to strengthen, leading to a rally in the second half of December.  This was aided further by Congress’s agreement, albeit a modest one, on the federal budget, avoiding the prospect of another government shutdown in 2014.  The S&P 500 was up +2.4% for the month and +29.6% for the year.  The NASDAQ Composite index of more growth and technology-oriented companies was up, even more, +38.3% for the year, to reach its highest point since the peak of the dot.com bubble in 2000.

Sources:  RisCura, Bloomberg, US Energy Information Administration, The Economist.

More information?

To have the monthly International Commentary delivered to your inbox, please subscribe here.

Media contacts

For media enquiries in South Africa, please contact Courtney Atkinson via email or on +27 (0)21 673 6999.
In the UK, contact Andrew Slater via email or on +44 (0)7930 442 883.