Monday, 31 December 2012

Global stocks gain in 2012 thanks to quantitative easing

Despite all the anxiety over sovereign debt in Europe for most of the year and then the so-called fiscal cliff in the United States towards the end of the year, global stock markets managed to put up a good performance in 2012.

With just one trading day left in the year, the Morgan Stanley Capital International All-Country World Index is up 12.58 percent from the start of the year. The table below shows the gains made by the major stock markets around the world according to the Morgan Stanley Capital International indices.

 Percentage gain
Local currency
US dollars

The strong gains by stocks were achieved not only despite European sovereign debt concerns and potential US fiscal tightening but also despite weak global economic growth.

While the US economy maintained growth through the first three quarters of the year, the eurozone economy contracted 0.2 percent in the second quarter and 0.1 percent in the third quarter, which means that the latter has technically fallen into recession. Japan's economy can also be said to have fallen into recession after contracting 0.03 percent in the second quarter and 0.9 percent in the third quarter. China's economy also slowed in 2012.

There is no mystery to what fuelled markets in 2012 in the face of so many headwinds: quantitative easing by central banks.

The Federal Reserve launched its initial round of asset purchases in 2009 during the last recession and has continued to add to its purchases since, the most recent boost coming earlier this month.

The Bank of Japan, which had begun quantitative easing way back in 2001, also expanded its asset-purchase programme this month, its third increase in four months.

The European Central Bank introduced its own form of quantitative easing under the Long Term Refinancing Operation in December last year in response to the sovereign debt crisis, and followed that up with a pledge by President Mario Draghi in July this year to “do whatever it takes to preserve the euro”.

Government bonds are the direct beneficiaries of quantitative easing, but the depressed bond yields that result have forced investors to reach for return in higher-risk equities, thus pushing up prices of the latter.

However, while quantitative easing has boosted stock prices around the world, it has not prevented recession in Europe and Japan, although it may have helped keep the US economy growing.

It remains to be seen how much quantitative easing will help markets as well as the real economy going forward.

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