World equity markets were distressed for most of the third quarter. The MSCI World Index fell 1.6% in rand terms. However, this relatively shallow fall was predominantly due to the sharp devaluation of the rand at the end of September, itself a symptom of investors withdrawing from higher risk assets. In local currency terms, the MSCI World Index fell 15.3% through the quarter.

European markets were the hardest hit, reflecting investors' overriding concerns about the Eurozone sovereign debt. Greece fell 37%, and Italy 18.9%. Core European countries also fell heavily. Germany was down 18.2% on the quarter in rand terms and 25.5% in euro, while France fell by a similar magnitude. The UK, which is not in the Eurozone, fell 0.6% and Switzerland, outside the European Union, fell 2.2%. The US saw a small rise, 1.4%. Far Eastern markets, however, were more generally positive, with Japan rising 9.92%. This was, however, predominantly currency related, with the yen rising strongly on its perceived safe-haven virtues. In yen terms, the Japanese market fell 11.54% in the second quarter.
Relatively defensive sectors were the best performing. Consumer staples rose 10.3% in the quarter, in rand terms, led by household & personal goods. Information technology also did well in the period, rising 7%, led by software & services. Telecoms and utilities were also positive. Materials, by contrast, fell sharply, down 12.0% in rand and 22.6%, in local currency terms. Consumer discretionary and financials were also especially negative, in part reflecting exposure of European institutions to Eurozone government debt.

Equity markets in June were generally negative, with the MCSI All World Index down 2.5% in rand terms. But it was an uneven month. While the index fell through most of the first half of the month, it turned positive in the last week. Year to date, it is up 15.9%. There were few clear themes. Despite the defensive mood, large cap stocks underperformed small and mid-caps, but developed markets outperformed emerging markets. Chinese markets were the worst performing, with the MSCI Golden Dragon Index falling 5.2%. Japan was among the very few markets with a positive return, rising 0.7%. Germany was also positive, rising 1.2%. The US and UK were both negative. The view from a sector level was similar. Among the few bright spots were textiles, luxury goods and automotive components.

Signs of slower global growth; the persistence of inflation; and the ongoing crisis in the Eurozone periphery, centred on Greece, were the main sources of investor concerns. As the month progressed, it increasingly appeared that growth would remain positive, if at a lower level than previously forecast. Greece, meanwhile, voted through austerity measures related to the further funding of its debt. In our view, equities look oversold. A return to stock and sector fundamentals and the ongoing revival of mergers and acquisitions should be positive. There is still also the potential for strong investment inflows.

The FTSE Global All Cap Index rebounded from its mid-March low to gain 0.3% for the month, and 4.6% for the first quarter of 2011. Equities fell following Japan's earthquake and tsunami on 11 March, with the FTSE All Cap Japan Index declining by over 14% for the year to date, before rebounding to end the quarter 2.2% lower.

In a reversal of the pattern earlier in the year, emerging markets outperformed developed markets in March. The FTSE All Cap Emerging Index rose 3.5% during the month, to end the quarter 0.2% higher. By contrast, the FTSE All Cap Developed Index fell 0.7% in March, to end the quarter up 3.9%. For the same period, developed markets were led by the US (FTSE All Cap US +6.3%), followed by Europe (FTSE All Cap Europe +2.7%) and the UK (FTSE All Cap UK +1.1%), while Japan was the laggard.

Strong corporate earnings and US labour reports have boosted optimism, and the US Business Roundtable's economic outlook index has risen to 113, the highest point since records began in 2002. However, this contrasts with pessimism among American consumers and a still-sluggish housing market. Global equities may remain volatile on concerns that the economic recovery may be hindered by uprisings in the Middle East and North Africa (pushing up the oil price), worries over Eurozone sovereign risk, and speculation that the Federal Reserve may end QE2 (the second round of quantitative easing - a $600 billion programme of government debt purchases) earlier than planned.

Equity markets took a positive turn in the fourth quarter of 2010. Almost all the major markets advanced, though developed markets, which have tended to lag in recent periods, made the greatest gains. Looking at the MSCI indices, the US rose 11% and Japan rose 8.9%. Europe ex UK was weaker, rising 4.2%. This was partly due to the strong rise seen in the region in the previous quarter and partly due to the eruption in Ireland of another episode of the sovereign debt crisis. At a business level, recovery is well entrenched. Companies have largely succeeded in reducing their debts, cutting costs and restoring free cash flow. This is leading to a rise in mergers and acquisitions as well as to special dividends and share buybacks. The main cross-market theme continued to be emerging market capital formation, particularly in East Asia. This in turn has ensured firm demand for commodities and manufactured goods. The best performing sectors included mining, steel, chemicals, automotives and engineering. The weakest included financials, telecoms and retailers.

The positive returns would appear to reflect a distinct shift in investor sentiment. Valuations are low by historical standards and yields relatively high. German recovery has been especially strong, driven by its competitive dominance in Europe and demand for its capital goods in Asia. The extension of both quantitative easing and Bush-era tax cuts in the US had a positive impact on equities. Although the US unemployment rate remains high, monthly job creation figures have been broadly positive, as has business confidence. There remains an overlay of concern surrounding European sovereign debt and China's ongoing struggle to contain asset price inflation, particularly on property. But fears of a "double-dip" recession have all but disappeared now that the largest developed economies have recorded four straight quarters of consistent economic growth.