CAPTRUST Chief Investment Officer
2012 began with a bang for riskier asset classes with U.S. Equities registering their best first quarter performance since 1998 (+12.6%) and their strongest quarterly return since the third quarter of 2009. International Equities shrugged off a lackluster March to register strong gains led by the MSCI Emerging Markets Index which closed up over 14%. Building off of three straight up years, U.S. Real Estate Investment Trusts (REITs) continued their strong return profile (+10.5% in the first quarter of 2012). Comparatively, two sluggish performers were bonds (Barclays Capital Aggregate +.3% in the first quarter) and Commodities (Dow Jones UBS Commodity Index +.9%). Irrespective, investors will gladly accept positive absolute returns across major asset classes given 2011’s turbulence.
Global asset classes continue to be driven by two interrelated key variables; liquidity and low interest rates. First, liquidity remains a key theme with central banks striving for easier financial conditions facilitated by more capital flowing within economies. The U.S. Federal Reserve’s balance sheet grew from $870 billion in early August 2007 to $2.9 trillion at this past March’s month end. The European Central Bank responded to concerns about Euro financial institutions’ health by allowing cheap financing to the tune of $672 billion in capital through the Long Term Refinancing Operation (LTRO) program. The Bank of Japan surprised markets in mid-February by boosting its existing bond buying program by ¥10 trillion, complementing existing asset purchase and credit loan obligations. The Bank of England also strengthened their existing asset purchase program to total £325 billion.
Subdued interest rates, which some attribute to the asset purchase activities highlighted above, are also key macroeconomic drivers. Central banks have targeted low borrowing rates in what has been almost four years of highly accommodative monetary policy. Bonds have retained a “fear premium” as evidenced by the fact that global Equity market performance has more than doubled in total return since March 2009, yet bond yields (as measured by the U.S. 10-year Treasury Index) actually fell over the same period.
Investors hope 2012 neglects to follow 2011’s price patterns when riskier asset classes rose early in the year only to fall from May through October. Issues looming large include the end of the Federal Reserve’s “Operation Twist” program as well as U.S. election results, the status of the Bush Era tax cuts, and further clarity regarding U.S. Healthcare policy. Markets will digest European austerity’s impact on consumer sentiment and corporate earnings, plus the magnitude of Emerging Markets’ recent slowing trends. Given strong asset price returns so far in 2012, investors are torn between committing fresh capital to an already ebullient capital market environment or being left out of potential rallies induced by additional liquidity measures.
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