March 2012

Fixed income 

Credit markets continued to make progress over March, though the pace of the rally slowed significantly and total returns were unable to match those of the first two months of the year. The recent strength in forward looking economic data, especially in the US, muted slightly over the month, prompting a reassessment of the short-term outlook for all risky assets. Consequently, there was less dispersion in the performance of different sectors of the corporate bond market, with financial credit failing to repeat its strong outperformance of recent months.

With credit markets being relatively quiet it was the turn of the ‘quality’ government bond markets to make headlines. Having stubbornly refused to acknowledge the improvement in investor risk appetite and macroeconomic outlook, global government bond yields seemed to finally recognise it mid-March. This prompted some to predict the start of a long-term bear market for government bonds. Ten-year gilt yields rapidly approached the key level of 2.50% before the slowdown in the pace of economic improvement and the realisation that global central banks were still set on an exceptionally loose monetary policy prompted a return to normal service. Yields steadily fell back to the middle of their unshakable range by the end of the month. Generic 10-year US yields were similar, rising from 1.97% to 2.21%, having touched 2.40% mid-month. Index-linked gilts outperformed conventional gilts in March, though they delivered a negative return too. German bunds fared slightly better than other core markets, but in the European periphery, concerns about the strength of the global economic recovery returned in March and news that Spain would miss its budget deficit target pushed government bond yields higher.

UK equities 

The FTSE All-Share index lost almost 1.0% in March. Given some disappointing economic news, the UK market was unable to carry on its year-to-date gains and allow the FTSE 100 index to break through the 6,000 mark. It was confirmed that the UK economy contracted in the fourth quarter, and by more than expected – a fall of 0.3%. Additionally, house prices in the UK had their worst monthly fall in two years (down 1.0% month-on-month) in March according to mortgage lender Nationwide.

On the other hand, results from the corporate sector were mostly positive. For example, ITV climbed after reporting good profits thanks to expanding services that rely less on advertising. HSBC reported profits up 28%, helped by strong growth in fast-growing markets, such as Asia and Latin America.

US equities 

The S&P 500 index completed its best first quarter since 1998 by rising a further 3.3% in March. US equities outperformed most other major markets over the month thanks to some good news on the economy and a more upbeat tone from the corporate sector. The closely-watched non-farm payrolls released in March showed the jobs market continuing to improve, with employment up by 227,000 in February. However, towards the end of the month economic figures weakened slightly which served as a reminder of the fragility for US economic recovery.

Another factor that helped differentiate the US market from other regions was the corporate sector; a higher proportion of US companies beat analysts’ earnings expectations than in Europe or Asia. Good results were released from heavyweights Ford and The Gap, while Wal-Mart, Hewlett Packard and American Express all announced plans to increase their dividend payments.

European equities 

European equities were among the weakest performers in March with a loss of 0.3% in sterling terms, as measured by the FTSE World Europe ex UK index. Germany, the Netherlands and Switzerland all made gains, while Spain and Italy fell. Spain was the worst performing European market, as investors became increasingly wary of the new government’s ability to bring down its budget deficit. In presenting the Spanish budget, prime minister Rajoy announced €27bn of austerity cuts. But the budget risks a deeper recession: a 1.7% GDP contraction is expected this year, while unemployment remains above 22%.

Economic news from Europe was mixed, with the divide between Germany and the rest seemingly growing wider. There was more good news from Germany, where the IFO Institute's business climate index unexpectedly rose in March, while unemployment fell to a new record low. Elsewhere, GDP figures revealed that Italy, Portugal, Greece and even the Netherlands experienced weak results in the fourth quarter of 2011.

Japanese equities 

The Japanese equity market enjoyed another monthly gain, based on the FTSE Japan index return of 1.3% in sterling terms. In local currency terms Japan has performed particularly well over the first quarter as economic news has shown some improvement and the Bank of Japan’s actions have provided come crucial support to exporters; the Bank of Japan’s decision to announce an inflation target in February was a significant market driver in March. Exporters such as Sony, Toyota and Nintendo were beneficiaries of the yen drifting lower.

More positive news came from the Japanese economy, which has shown some green shoots of recovery. It was revealed that quarter-four capital spending for all industries was up 7.6% year-on-year, with manufacturers up 5.7% and non-manufacturers up 8.6%. Japan also reported an unexpected trade surplus for February and higher-than-forecast exports, as the yen’s decline made exports more competitive.

Far East equities 

The MSCI AC Asia Pacific ex Japan index fell by more than 3.0% in March. This was a disappointing period for parts of developed Asia, which underperformed the US and Japan largely because of concerns over weakening growth across the region, especially in China. Chinese policymakers cut the country’s economic growth target to 7.5% from 8%, a target that has been set in stone since 2005. This proved a significant headwind for equities in the region. China then reported its biggest trade deficit since at least 1989. Chinese shares were very weak, and dragged down those in Hong Kong, and to a lesser extent Taiwan.

India loosened monetary policy to ease an economic slowdown, as the central bank cut the amount of deposits lenders need to set aside as reserves. This move came after Indian GDP rose just 6.1% in the final quarter of 2011 from a year earlier, the weakest expansion since the first quarter of 2009. Elsewhere, Australian GDP growth in quarter four was relatively disappointing, rising 0.4% quarter-on-quarter against expectations of a gain of 0.8%. While this was poor for the market, it fuelled expectations for a further interest rate cut, and equities ended the month higher in local currency terms.