World finance: Another rollercoaster year for markets?

Global stockmarkets endured a torrid year of big declines in 2011, and further volatility looks to be in store in 2012. Movements in equity markets will be subject to the conflicting pulls of high risk aversion and the search for yield, given low interest rates in the developed world. Above all, however, market performances are likely to depend on the outcome of the crisis in the euro zone.

Stockmarkets almost everywhere ended 2011 lower than where they started the year. The FTSE Global All Cap US$ Index fell by about 11% during the year, compared with a 10% gain in 2010. Most strikingly, the Economist Intelligence Unit has looked at individual markets’ performances during 2011, and has found that only nine out of 92 selected indices made gains of any size during the year. This sample is not comprehensive, but it still gives an idea of how poorly most markets fared. In comparison, a similar analysis published on ViewsWire on December 10th 2010 found that 61 out of 86 selected indices had risen since the start of 2010.

The main reason why markets were much weaker in 2011 was the debt crisis in the euro zone, which weighed on sentiment throughout the year. The Eurofirst 300 FTSE Eurozone index fell 18.5%, with the main Spanish, German, French and Italian indices plunging between 15% and 25% each. Greece, perhaps unsurprisingly, props up the bottom of this year’s global league table, with the Athens market having registered a decline of 52%.

The crisis also has contributed indirectly to big declines in emerging-market equities, owing both to flight-to-safety factors and broader concerns about the impact of the downturn in Europe on the global economy. Dramatic shifts in risk appetite – between the so-called “risk-on” and “risk-off” trades – were one of the major features of financial markets in 2011. The retreat from risk that accompanied each worsening of the euro crisis had a knock-on effect for emerging-market equities, which investors typically consider high-risk.

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