2012: A Look Back

7 January 2013

A time to reflect? Without a doubt! 2012 was one to look over with astonishment, as Olympics, bond bubbles, stock market recoveries, elections and health scares ruled everything from traditional to modern (social) media. Here are a few items which were of particular interest;

# Elections: US, China, Japan, Venezuela

Voters and electoral colleges alike had quite a busy 2012. Chavez’s re-election saw PDVSA/ Vene bonds take a substantial hit (5-10 pts), but these have recovered nicely and there’s no doubt that holders took some nice profits on these going into the New Year. As usual with PDVSA/ Vene, keep an eye out for a lot more volatility. Chavez has named a potential successor in VP Nicolas Maduro amid significant and frequent cancer treatments.

PDVSA 2014 – worth the risk? 15pts+ says ‘Yes’

In Japan, stocks lifted higher with the Liberal Democratic Party making a return since 2009. The LDP won 294 seats in the 480-seat lower house of parliament, and the victory marked the renewal of hopes that Japan’s economy will recover and Japan – China relations will improve. Testament to this anticipated revival is traders going short JPY and long the Nikkei.

Japan – A Source of Growth…Again?

Speaking of China, Xi Jinping is set to take over the reins from Hu Jintao in March 2013. Same party, new politics? Dubbed the ‘casual communist’ by one newspaper because of his relatively genial style, we’ll have to wait and see exactly how the administration will oversee China supplanting the U.S. in terms of total GDP. While there remains quite a bridge to gap in terms of average prosperity, the relationship between the two nations is certainly symbiotic (Shanghai Institute of International Studies).

Republican Presidential Candidate Mitt Romney in no way mixed matters on his stance on China’s trading practices, and manipulation of its currency. This takes us to the U.S. and one of the most fiercely contested elections in recent history. While Obama enjoyed an Electoral College blowout, the popular votes told a very different (and divided) story. Stocks declined heavily on the days immediately after Obama’s victory, with markets uncertain as to how the nation’s debt would be reduced. Even more glaring is the lack of a definitive solution on the ever-frustrating fiscal cliff.

# Political Dysfunction: Fiscal Cliff and Glacial Pace of Action in Europe. Getting Off The Edge, While Kicking The Can

How comfortably can you sleep while trying to hang onto a crumbling cliff? Just ask the U.S., but I’m not sure if you’ll actually get an answer.

Will there be compromise, and more importantly when? The cancellation of the last House vote (even Republicans didn’t agree with Boehner’s plan) was enough to send markets down, so let’s hope that some consensus can be achieved ASAP!

Across the pond; what’s up with Europe? After Merkel and Sarkozy graced headlines for the better part of 2012, Europe still has many an investor guessing as what comes next.

France saw Francois Hollande defeat Sarkozy in the polls, and Hollande’s 75% millionaires tax should be mentioned here as well, as it’s an extreme case of the tax- the- rich debate in the USA associated with the fiscal cliff. With this tax plan likely to be shelved, so Finance Minister Pierre Moscovici certainly has his work cut out.

Greece self- sabotaged their recovery, and has left us wondering; would have it been better if they were left to default and fend for themselves? Given the implications for Euro stability, it’s hardly likely that a lot would’ve been done differently even in hindsight. Spanish banks featured heavily as well (for all the wrong reasons), as the Spanish government reported that there is a €59.3bn shortfall in its financial sector.

Italy may continue to be the next trouble spot after Mario Monti resigned, which makes for a very interesting 2013!

# The Invisible Rally/Recovery: On The Rally/Recovery – Are You On Board?

Go against the grain, and more often than not you’ll come out ahead of the game. The bond market certainly had a stellar year but let’s not forget that the S&P 500 rose over 13% YTD, which means that equities was this year’s loudest ‘sleeper hit.’ Look out for the sequel in 2013. Concerns that the U.S. is still (and will sink back) in a recession are warranted, and compounded by mounting debt, but improving jobs numbers and increasing confidence may pave the way forward.

# Cracks In The Bond Market: Brief Discussion of How Bonds Have Started to Underperform, And Talk Of The Bond Bubble

Let me tell you, 2012 was a great year for fixed income, helped in no small part by the volatility caused by Europe. Several new issues, namely from LATAM (many of which were oversubscribed), were absolutely devoured by investors. Even in the Caribbean, Aruba and Bermuda issued bonds due 2023 but demand on Aruba has curiously been on ‘slow-go.’ We feel this will change after the customary year-end window dressing.

Since July/August, there haven’t been many slam dunks or layups available on the bond market though, as that optimism which marked the beginning of 2012, started to wane steadily. Of course there’s still value in the bond market, but trading on the secondary market is likely to see far more activity rather than the new issue craze. The bond bubble has to pop sometime, just like any other…tulips, tech, dot com etc.

# Zero dark Infinity: Quantitative Easing Globally, And “Financial Repression”

‘Easing,’ ‘Operation Twist,’ ‘Accomodative’…just a few of the expansionary buzzwords that came your way throughout 2012. In T&T the repo rate stands at a paltry 2.75%, which goes to show just how strong the emphasis is on helping the global economy get back on its feet. Bernanke has more than hinted that rates are set to be low until 2014 (if not later).

Will more sovereigns and corporates continue to issue bonds in the low-rate environment? T&T for one, has long been rumoured come out with another USD-denominated bond to no avail.

But these low rates aren’t driven by demand and supply right? Definitely not! This repression can lead to asset booms/busts, uncontrollable bouts of inflation, sudden stops in economic activity from loss of confidence, or capital flight (PIMCO).

# Locally: Political And Economic Inertia, Promising Budget, Increasing Energy Sector Activity, The Beginning Of Internationalization

On the local front, the 2012/13 budget gave us several talking points; few as over-analyzed as the removal of VAT on several food items, and the increase of the ‘Premium’ gas price. While the budget was set to be one of austerity according to most sources, prevailing economic conditions had the final say. A rising food –import bill continues to play its part in inflation figures which currently stand above 8%.

In terms of direction, however, much has to be done to achieve diversification away from the energy sector. In that vein, other energy destinations have been mooted; namely Ghana, Guyana and French Guiana. 2011 saw National Gas Company (NGC) selected by the Ghana National Petroleum Corporation in a competitive bid for a project to supply energy to power plants in Ghana (Reuters). To our knowledge, NGC has not followed up on this contract, but similar ventures outside T&T would be welcome sources of revenue going forward.

I know, I know – a lot to take in all at once. 2012 was just that type of year, but I would say that most economies are grateful for what was (by and large) a year of recovery. Investors clung onto their bonds for dear life, while adjusting their rate expectations, but we expect some migration in equities very early into 2013.

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