The second quarter of 2012 has seen global markets return to a 'risk-off' environment, compared to the majority of the first quarter when markets were in a more positive 'risk-on' mode. The mood began to change in the middle of March as investors increasingly began to focus on the threats to global economic growth, and this continued into the second quarter. The catalyst for this renewed pessimism was once again events in the euro-zone, most notably focused on Greece, but investors were also concerned about softening economic data in the USA and whether the Chinese authorities would be able to deliver a soft landing. These issues in aggregation provided some significant headwinds, and ensured that global macroeconomic and political events continued to be the primary drivers of markets during the second quarter, rather than company specifics and fundamentals. With this negative backdrop, global equity markets, as measured by the MSCI World (Developed Markets) Index delivered a return of -5.07% for the second quarter. However, this in itself disguised the nature of the quarter. Markets sold-off fairly persistently in April and even more so in May. This took global equity markets to levels not seen since the start of the year as markets decreased by more than - 10% during the period. The heightened fear and genuine threat of a euro-zone break-up weighed heavily on investors and it was only during June, especially following the second Greek election in the middle of the month, that fears dissipated somewhat and equity markets started to rally. This saw the MSCI World Index rise by more than 5% during June, and thus significantly reduced the effects seen over the quarter. It also meant that markets for 2012 year-to-date are back in positive territory. Turning to fixed income markets these also indicated the defensive environment seen during the second quarter. The global bond market as measured by the Barclays Global Aggregate Index rose by 0.62% for the period. This saw bond markets rise in April by over 1%, only to give back the overwhelming majority of that in May with a decline in excess of -1%. Then, in June fixed income markets produced a rise of nearly 0.5%. The low prevailing level of yields in developed markets continued with no formal changes to prevailing interest rates in the USA, euro-zone, Japan or the UK, although the European Central Bank did reduce interest rates by 0.25% to 0.75% in early July - a move that was largely symbolic and expected rather than materially significant from a stimulus perspective. Non-traditional measures of monetary stimulus continue to be employed to varying degrees in the developed world.

2012 started with international investors clearly relieved that 2011 was over, and in turn this led to a more positive outlook for markets, as investors' confidence levels rose. While the first quarter of 2012 appears relatively dull from a news event perspective compared to the first quarter of 2011, there continue to be many issues facing markets during the period. The European financial crisis continues to dominate concerns. However, the effective introduction of quantitative easing and other liquidity packages within the euro-zone has been one of the significant factors alleviating investors' concerns. This has helped restore health, at least temporarily, in the European banking system. Given the market environment global equity markets, as measured by the MSCI World Index, started the year positively and produced a return of 11.56% for the first quarter. The quarter while appearing to be quite similar to that of the last quarter of 2011, was actually quite different; the fourth quarter of 2011 was in essence a rebound from the previous quarter, but the first quarter of 2012 was a rotational change in leadership. The quarter saw quite a clear distinction between those sectors in favour and those out of favour. This was broadly a classical mix of cyclical sectors doing well and traditional defensive sectors lagging significantly. Fixed income markets reflected the overall market environment, and so given the improved sentiment it was unsurprising to see global bond markets under-perform their equity counterparts for the quarter. The Barclays Global Aggregate Index rose 0.87% for the period. This was entirely generated in January when global bonds rose 1.67%. However, in February they were flat with a marginal decline of - 0.07%, and in March, given the renewed concerns towards the end of the quarter, global bond markets fell -0.72%. Despite this relative under-performance in the first quarter, global bond markets are still out-performing global equity markets by almost 5% over the last 12 months.

The last quarter of 2011 remained very similar to the third quarter in terms of market sentiment, with the European crisis continuing to be the focus of attention. The twists and turns, largely predicated on market expectations of an announcement of a solution by European governments, dominated the period. This continued to create market uncertainty, as investors looked to the politicians to restore confidence. Europe was not the only market facing problems as the USA continued to pose a threat of returning to a recession. Meanwhile, slowing growth in China was the centre of attention in the emerging markets.

For the quarter global equity markets, as measured by the MSCI World Index, rose 7.59%. This however, has to be seen in the context of the third quarter when markets fell nearly -17%. The fourth quarter started with markets gaining over 10% in October, although this was the bounce from the lows seen in the third quarter. In contrast November was a weak month as markets once again sold-off, though the rally towards the end of the month meant that the index only finished -2.5% lower. December did see some market volatility, but as the end of the year approached markets rallied to finish the month almost exactly where it had started. As for 2011 as a whole, despite the very weak third quarter, global equity markets only finished -5.54% down. The overall market sentiment would suggest a much weaker return, although this reflects the fact that the market decline was primarily a second-half of the year event.

The negative market atmosphere would have been expected to be a positive for fixed income markets, but given the underlying issues fixed income and equity markets delivered similar experiences over the period. For the quarter global fixed income markets, as measured by the Barclays Capital Global Aggregate Index, produced a return of 0.23% in US dollar terms. Like equity markets, global fixed income markets were up in October and down in November, though in contrast to equity markets fixed income markets rallied in December

The third quarter of 2011 has been a very challenging environment for global equity markets. A renewed sense of fear and panic has dominated investor sentiment and led to an atmosphere that can only be described as similar to that of the last few months of 2008. The market's heightened concern has primarily originated from the European sovereign debt crisis, which towards the beginning of the quarter was once again firmly focused on Greece. However, concern has spread throughout the euro-zone and significant attention has now turned to Italy. The euro-zone crisis has also been coupled with a noticeable deterioration in economic growth, not just in the euro-zone, but crucially also in the USA and other developed markets. This has led many commentators to resurrect the possibility of a "double-dip" recession, and consequently investors have significantly reduced their expectations for corporate earnings, leading to equities being heavily sold off, and indiscriminately at times.

For the quarter, global equity markets, as measured by the MSCI World Index, produced a decline of -16.61%. This was the worst quarter since the last quarter of 2008 and even surpassed the decline of the third quarter of 2008. Consequently, this last quarter is the third worst quarter for global equity markets since the turn of the century. The market had previously seen falls in May and June, and this continued into July, when the market declined by almost -2%. It was in late July and early August that investor sentiment swiftly and suddenly turned sharply more pessimistic leading to a decline of over -7% in August. Unfortunately things did not improve, and contagion fears spread and led to a fall of over -8.5% in September. At the regional level no market has been immune to the global sentiment, with the European region falling by almost -23%, while the Pacific excluding Japan region fell by nearly -20%. The North America region declined by around -15%, while in relative contrast Japan, which is rebuilding post the earthquake earlier in the year, decreased by around -6.5%.

With the economic environment deteriorating further in the third quarter, fixed income markets would have been expected to produce a decent positive return, as was the case during the second quarter. In practice global fixed income markets, as measured by the Barclays Capital Global Aggregate Index, did post a positive return of 0.97% in US dollar terms for the period. This was clearly a significantly better return than that of global equity markets, but disguises the fact that global fixed income markets rose in July and August, but declined by over -2.3% in September. This was a function of overall investor sentiment and panic in light of the increasingly gloomy economic outlook.