Monday, 11 February 2013

In the Year of the Snake, will investors get bitten?

Stock markets have started 2013 on a positive note.

According to the Morgan Stanley Capital International All Country World Index, stocks rose 4.5 percent in January and 0.2 percent in February.

Renewed concerns over Europe's sovereign debt have restrained markets in recent days. European stocks in particular posted a second weekly drop last week amid political uncertainty in Italy and Spain.

In Italy, a survey showed that former prime minister Silvio Berlusconi, an opponent of austerity, has narrowed the lead of front-runner Pier Luigi Bersani. In Spain, Prime Minister Mariano Rajoy was hit by a political scandal involving alleged corruption.

However, global economic data have been more encouraging for investors. Purchasing managers surveys in particular have shown that the global economy grew at the start of the year.

According to Markit, the JPMorgan global all-industry output index came in at 53.3 in January, indicating growth in global output. This was slightly down from December. However, most of the major sub-indices showed improvement in January compared with December.

JPMorgan Global All-Industry Indices
New orders52.552.6
Input prices55.055.4

Still, continued global economic growth is not guaranteed, especially with the prevailing political uncertainty and fiscal tightening trends. While Europe has to overcome popular discontent to implement austerity measures designed to reduce the risk of sovereign default, the United States government faces its own form of fiscal tightening in the form of automatic federal spending cuts that will go into effect in March.

While fiscal policy may threaten growth, central banks have at least been very accommodative with monetary policy. These accommodative policies were left unchanged after recent monetary policy meetings at the Federal Reserve, European Central Bank and Bank of England.

The Bank of Japan at its latest meeting introduced a two percent inflation target, and the announcement last week of an early departure by BoJ governor Masaaki Shirakawa paves the way for monetary policy there to be loosened even further.

Meanwhile, in China, markets will be quiet for a while. On Sunday, the Chinese celebrated the arrival of the Lunar New Year and will mostly be on holiday this week.

Based on the Chinese zodiac, the current year is the Year of the Snake. Historically, this has not been an auspicious animal for investors.

In a commentary last month, Jeffrey Kleintop, chief market strategist at LPL Financial, said that among the 12 animals of the Chinese zodiac, the year of the snake has produced the worst returns for the US stock market. Since 1950, it is, together with the year of the horse, one of only two zodiac years to have produced negative average returns.

However, this year could be an exception. According to feng shui expert Raymond Lo, this particular Year of the Snake is symbolised by two elements, with water sitting on top of fire. He says that while water represents fear, fire generates optimism. He thinks this year could bring substantial economic improvement and increased investor confidence.

Which would mean that the positive start to 2013 for the global economy and stock markets could yet continue.

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