Last year it was the snow that was missing as Christmas and the New Year approached. This year it looks as if it will be the end-of-year equity market rally that misses the party and puts a damp note on things.
Developed equity markets fell by 4.39% in November, and emerging equity markets lost 6.18%. "World equity markets turned lower in November as the financial liquidity crunch, as well as the related earnings charges, continued to weigh down the markets," says Howard Silverblatt, senior index analyst at Standard & Poors. "While the last week of the month saw some advancement, the global damage remained widespread."
According to S&P, 24 out of 26 developed equity markets turned negative in November. erasing strong October returns, with only Portugal (+0.6%) and Spain (+0.68%) managing positive returns during the month. Iceland (15.48%) and Canada (11.17%) suffered the steepest drop in returns during the month.
Emerging markets performed slightly better on average than developed markets. Of 26 emerging markets, 19 posted negative returns, with China (12.68%), Taiwan (11.82%) and Peru (11.56%) posting double-digit losses. Strong positive returns, however, were posted by Nigeria (+10.59%) and Jordan (+6.02%). Despite the rough month, all 26 emerging markets remain positive for the 12-month period, with Nigeria (+111%) now outpacing China (+101%).
Investor sentiment has been highly risk averse since September, when institutional investors began a broad-based retreat from equities. State Street Global Markets, which tracks investment flows and characterizes investor sentiment in terms of five regimes, says that investor sentiment is now at "riot point", its most negative regime, and has been so since September. This is only the second time that investor sentiment has been in this most extreme of negative regimes for three months in a row. The last time was when the US economy was tipping into recession in 2001.
Institutional investors are clearly signalling concern about economic growth, a concern that extends far beyond the US and suggests that the once popular notion that the rest of the world can decouple from a slowdown there is looking increasingly over-optimistic. Cross-border flows into emerging Asia hit a fresh monthly record low at the start of December, lower even than at the height of the Asian crisis in the summer of 1997.
JPMorgan believes that the pressure on equities is likely to continue well into 2008 but that things might begin to look up in the second half of the year.