November saw a continuation of the recent rally that started after the Federal Reserve hinted at delayed tapering of its quantitative easing programme.  Japan and the US led the gains in developed markets, with the former benefiting from further depreciation in the yen and the latter from positive news in the technology sector.  China’s market also rallied after a successful meeting of the ruling Communist Party’s Central Committee, which drives the country’s economic and political decision-making.  This led to the MSCI World index being up +1.6% for the month and +23.8% YTD.  However, emerging markets, especially commodities-dependent ones, served as a drag on world indices as most commodities prices fell sharply on the month.  Gold was down -5.3%, while other metal and agricultural commodities suffered similar-sized losses.  In general, bond yields increased slightly in the US, UK, German and Japan.

South Africa’s central bank cut its growth forecast for 2013 from 2.0% to 1.9%, while the Treasury now sees 2.1% growth, down from a 2.7% estimate in February.  The downward revisions reflect growth slowing from 2.3% in the second quarter to 1.8% in the third (led by a 6.6% decline in manufacturing output).  This has been due to strike-related work stoppages, declining business confidence levels, and slowing consumer spending as a result of moderating disposable income growth and high indebtedness.

The JSE All Share index actually fared better than most emerging market indices, down only -1.1% despite a rout in commodity prices (and up +17.9% YTD), as the JSE continues to benefit from enthusiasm for the country’s exposure to emerging consumer demand in sub-Saharan Africa.

In Asia, the 370 most senior leaders of China’s Communist party met for the Third Plenum session that sets the incoming president’s agenda.  President Xi has taken a leading role in drafting the wording of the agreed policy document, which if carried out will constitute the most far-reaching reforms to the economic system since 1978.  Stated measures include floating the yuan currency, letting markets set levels for interest rates and utility prices, setting up a deposit insurance scheme, guaranteeing fair competition, reforming rural land ownership, relaxing the residence registration system to improve the rights of rural citizens, easing the country’s one-child policy, abolishing labour camps, and forcing state-owned enterprises to become more market-oriented by demanding the payment of dividends to the government.  There will be significant resistance to such an ambitious agenda, but the president has strengthened his control by setting up and chairing centralised committees to dictate reform and security matters.  If successful, these policies would significantly reorient the complexion of China’s economy, making it more market-driven and integrated with the global financial system.  The Shanghai Composite index jumped +3.7% on the month after being down much of the year (down -2.1% YTD).

Japan’s Nikkei 225 index reached its highest point since 2007 after rumours of further monetary stimulus caused the yen to decline by 3.9%, surpassing the 100 yen/USD mark on a strong move.  The Nikkei soared +9.3% on the month and is now up +50.7% YTD.  This is despite China escalating a territorial dispute over the Senkaku/Diaoyu islands, which Japan controls but China claims, by establishing an air defence identification zone (effectively control over the airspace).

To the west, Iran came to an interim agreement with the five permanent members of the Security Council (plus Germany) on its nuclear programme.  This marks another milestone in the impressive turn in Iranian foreign relations since the election of President Rouhani in June.  If a definitive agreement is achieved and respected, it would decrease Middle East tensions and change the complexion of politics in the region (it has already hurt the US’s relationships with long-standing allies Israel and Saudi Arabia, both of whom fear Iran).  There was an immediate downwards impact on oil prices.

In the Eurozone, talks began on a further bailout of Greece in the face of the 30th series of protests since the country’s debt crisis began in 2010.  However, Moody’s signalled optimism that the country is starting to return to sound financial footing by upgrading Greece’s credit rating from C to Caa3, reflecting a move away from the brink of default as the government is now running a primary budget surplus.  Moody’s competitor Standard & Poors was not so kind to other Eurozone countries, downgrading France and the Netherlands’s credit ratings to AA and AA+, respectively.  France also reported that its economy had contracted by 0.1% in the third quarter.  This exemplified the Eurozone’s continuing problem of high fiscal deficits and debt balances, which cannot be resolved (regardless of the amount of fiscal contraction) without meaningful growth.  The European Parliament approved a budget for the next seven years, capping spending commitments at EUR960bn, a reflection of the Eurozone’s current lack of financial wherewithal.

However, there are signs that Eurozone countries are beginning to face this reality.  Ireland is expected to exit its bail-out programme with the European Union and the International Monetary Fund in December despite abandoning a partial sale of the state gas company due to the lack of reasonably valued bids.  Ireland is now economically competitive and growing, and it is making inroads into cleaning up its banking sector.  Meanwhile, Italy’s ex-Prime Minister Silvio Berlusconi was ejected from the Senate over his conviction for tax fraud after a significant portion of his PdL party defected to form a new grouping which backs the government.  As a result, the present government now has a stable coalition until the next election to focus on economic issues rather than the latest saga concerning Berlusconi.  Germany’s chancellor Angela Merkel was also able to finally form a grand coalition government with the main opposition SPD party, with the main points of the agreement being the introduction of a minimum wage and Eurozone stability.  This eliminates the leadership vacuum in the Eurozone.  Germany’s DAX 30 was up +4.1% in November on the news (and up +23.6% YTD), while France’s CAC 40, Spain’s IBEX 35, and Italy’s FTSE MIB indices were down -0.1%, -0.7% and -1.7%, respectively, on the month (up +18.0%, +20.4% and +16.9%, respectively, YTD).

Across the Channel, the recovery in the UK is strengthening as the Bank of England raised its growth forecast slightly to 1.6% for this year and 2.8% for 2014.  This is on the back of the unemployment rate declining to 7.6% in the third quarter from 7.8% in the second.  The annualised inflation rate also declined to 2.2% in October from 2.9% in June.  However, this bevy of positive news caused investors to pull forward expectations of higher interest rates, hurting UK equity markets.  Coupled with the large decline in commodity prices, which has a negative effect on the commodity-heavy FTSE 100, this resulted in the index declining -1.2% on the month (though still up +12.8% YTD).

Over in the Americas, Brazil’s government was able to conduct successful auctions of franchises to operate two of its primary airports and a major highway.  This is one positive note in an otherwise bleak economic outlook.  The economy has slowed to a 2.5% growth rate after achieving more than 4.0% only a couple of years ago, while inflation has steadily increased to 6.2% this year due to a credit bubble which has resulted in a current account deficit of -3.5% and a fiscal deficit of -3.0%.  Brazil’s central bank raised interest rates for the sixth time this year to 10.0% to counter the higher inflation.  The country’s main issue is the lack of reforms to reduce bureaucracy and relax restrictive labour laws to improve productivity.  This lack of economic efficiency was reflected by a crane collapse at a stadium that killed two people; the government has had to race to complete preparations for the 2014 World Cup after running significantly over budget and time.  The BOVESPA index fell -3.3% in November (and is down -13.9% YTD), in line with other commodity-dependent emerging markets.

In the US, Twitter became the latest Internet IPO to soar on its debut, gaining over 50% on its first day of trading and valuing the company at over $20bn despite not yet turning a profit.  The NASDAQ Composite index (mainly consisting of technology-oriented names) also closed above 4,000 for the first time since the dot.com bubble in 2000.  The NASDAQ is the best performing major market after Japan this year, up +34.5% YTD, aided by rises in stocks like Netflix (+292%) and Facebook (+74%).  This reflects the impressive way the US economy is able to regenerate itself and create new businesses.  However, several of these companies are now trading at multiples last seen during the dot.com days.

The US Senate removed the ability of opposition lawmakers to block legislation with only 40% of the vote (called the filibuster).  This is intended to break the gridlock that has paralysed the US government over the past few years.  However, the Republicans, who still control the House of Representatives, are unlikely to cede ground with President Obama’s approval ratings at all-time lows (42%) after the computer system for his healthcare plan crashed on the first day of use.  Still, the S&P 500 and the NASDAQ rose +2.8% and +3.1%, respectively, in November.

As mentioned in last month’s commentary, the US budget battle was the last major potential negative event for 2013 (the Federal Reserve has a final meeting in December but is unlikely to taper quantitative easing until spring 2014), so while equity markets seem fully priced, there is little to suggest the rally will not continue in December.  The continuation of US budget negotiations into January will likely dictate the start of 2014, while likely tapering of quantitative easing in the US and UK will provide a headwind for markets next year.  In addition, Slovenia will need to recapitalise its banking sector and may become the sixth Eurozone nation to seek a bailout in order to finance this process.  To counterbalance this, successful implementation of President Xi’s new reform programme may provide a significant boost to the Chinese market.  In addition, Japan’s economic recovery seems likely to continue, which may mean decent growth prospects in the world’s three largest economies for the first time in a decade.

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

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