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, European equity markets, as measured by the MSCI Europe Index, produced a decline of -22.61%. 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 European 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 over -3%. It was in late July and early August, that investor sentiment swiftly and suddenly turned sharply more pessimistic leading to a decline of over -10% in August. Unfortunately things did not improve, and contagion fears spread and led to a fall of nearly -11% in September.

The second quarter of 2011, although unable to match the extent and diversity of events during the first quarter, was nonetheless an interesting quarter in its own right. From a global perspective it was the renewed focus on the European sovereign debt crisis which was most noticeable. Ireland and other peripheral countries had further issues to address, but it was Greece, once again, that has been hit hardest. The situation in Greece and potential for default, led to concerns throughout the European banking system, which in turn led to the global equity market selling-off heavily during June, only to bounce back strongly towards the end of the month - once the Greek government had successfully passed the required measures.

For the quarter as a whole, the Pan European equity market, as measured by the MSCI Europe index delivered a positive return of 2.44% (in US dollar terms). In a similar fashion to overall global equity markets, this disguised a sharp intra-quarter contrast. April saw European equity markets rally hard, with a rise of exactly 8%. However, the euphoria subsided as Greece came to the fore, and consequently European markets were down in both May and June by -3.30% and -1.92% respectively. At the sector level Health Care was the best performing sector rising over 11%. This was followed by Consumer Discretionary stocks rising nearly 9.8% and Consumer Staples by over 7.5%. Of the weaker sectors Energy was clearly the laggard with a decline of -2.66%, but Information Technology, Financials and Telecommunication Services all produced absolute declines for the period. The Utilities sector was the weakest of the sectors still managing to produce a positive outcome.

European equity markets, as measured by the MSCI Europe Index, rose by +7.0% in US dollar terms during Q1 2011. Euro currency strength capped the return to Euro based investors to a mere +0.1%, whereas Sterling based investors enjoyed a return of +3.8%. It is again noteworthy that the Euro has continued to strengthen during the period under review. This is against a background of the collapse of the Portuguese government - and subsequent request for financial assistance from the EU in early April - combined with a further €24bn injection into the Irish financial system.

Exactly 12 months ago equally negative news emanating from Greece caused global investors to worry over sovereign state bankruptcy within Europe and to speculate over the very survival of the Euro. These concerns have since become secondary and hugely overshadowed by the overwhelmingly positive corporate fundamentals emanating from the region. This has again been evident in Q1 2011. It is clear from the resilience of European equity markets during the period under review that investors are more focused on corporate developments and have discounted pockets of economic woes. Further evidence of this consideration is manifested in narrowing sovereign CDS spreads with, of course, the few obvious exceptions.

Notwithstanding a near perfect backdrop for European equities the party has in part been spoiled during Q1 2011 by unforeseen events. The Tsunami in Japan combined with the tensions in selective Middle East states has introduced elements of uncertainty. The resultant rise in the price of crude oil to in excess of US $120 bbl has raised fears of inflation. The European Central Bank has chosen to stave off further inflationary pressures by tightening monetary policy via a modest 25bp increase in the central lending rate. The Bank of England is not yet in a position to follow suit, in spite of inflationary forces, given the pressures currently borne by the UK consumer.

European equity markets, as measured by the MSCI Europe Index, rose by 6.0% in Euro terms during the fourth quarter of 2010. The total return for the entire year is thus +11.2%. Investment returns in Sterling (4.9%) and US dollars (4.1%) were less impressive. It is noteworthy that in the period during which Ireland was forced to seek financial assistance from its fellow Europeans and the IMF, the Euro appreciated relative to both Sterling and the US dollar. Economic news emanating from Germany in particular has been overwhelmingly positive compared with the now rumbling theme of sovereign debt strain in some European member states. For example, employment in Germany has continued to grow at a breathtaking pace. The unemployment rate is now down to 7.5%. Manufacturing volumes in Germany, the backbone of its economy, surged 5.2% from October to November.

In what has become a familiar rhetoric throughout 2010, the period under review was characterised by the tug of war between macro-economic blackspots and a favourable corporate backdrop. Economic activity on a global scale has now stabilised and growth has resumed. The same scenario is true for Europe. Investors have, however, continued to overemphasise the only trouble spot to have persisted throughout the year - namely the high levels of sovereign debt in certain European member states. Without this issue, financial markets would have had little obvious negative news to preoccupy them. It is abundantly clear that the PIGS countries within Europe are not only having to contend with addressing their internal affairs, but are simultaneously being challenged by surging credit costs, which mean further European Central Bank and IMF action is almost inevitable. Under such a scenario there will be no winners. To highlight the situation, compared with a year ago the Greek total government fiscal deficit declined by 36.5% annually to €19.6bn, suggesting a likely budget deficit of 9.4% of GDP. The peak in 2009 was a staggering 15.4%! Austerity programs in Spain and Portugal are in place but the markets continue to push up yields in these countries. Shorting PIGS sovereign debt has dangerously evolved into a one way bet!

The broader economic and corporate environment paints an entirely different and overwhelmingly positive picture. Noteworthy economic barometers, such as commodity prices and the price of crude oil, have risen during the course of the year notwithstanding sporadic concerns over the sustainability of the recovery. Other economic indicators, such as manufacturing orders and private consumption expenditure, have further supported the argument in favour of economic recovery. Unemployment rates have stabilised - albeit at uncomfortably high levels. Foreign exchange markets have traded within a narrow range, suggesting investor fears over the Eurozone are not as profound as it seems. For example, the Euro/US Dollar exchange rate stood at Euro 1.4331 to the dollar at the beginning of January 2010. It fell to a low of about Euro 1.20 to the dollar by midyear, with many commentators predicting it may reach parity. It subsequently rallied to end the year to Euro 1.3384 to the dollar.