Coming into the last few weeks of the year, one can reflect on a year when many of the investor concerns during the year failed to materialise. The euro zone had probably its most stable year in the last five, with the exception of the small hiccup in Cyprus in March. The US did not fall of the fiscal cliff, and China continued to grow at a satisfactorily level. Despite threats to the contrary the West kept its distance when it came to dealing with the troubles in the Middle East. Inflation remained subdued allowing central banks to keep monetary policy loose. Stocks are by far and away the best-performing asset class so far this year, global equities up over 20%, bonds in contrast are down 1% and commodities down 4%. As many predicted this year has been one of rotation into equities and out of bonds. Consumer services, which includes pharmaceuticals has performed the best this year, the worst sector continues to be materials.
As we enter the last few weeks of the year investors seem pretty bullish, the AAII weekly survey suggests there are as many bullish investors as at anytime this year. The weekend press has been full of the improving British economy, on Thursday George Osborne is expected to say that next year the UK economy could grow at 2.3%, and some analysts believe the UK could be the best performing economy in the G7 group of nations. On the base of that information one would have thought the FTSE 100 would have been one of the best performing indexes this year. In fact compared the Dow Jones up over 20%, the euro first index up 12%, the Nikkei 225 up 46%, the FTSE 100 up just over 10% is the worst of the group. Part of the explanation can be the FTSE 100 is relatively resourced based with the mining and oil stocks making up nearly 16% of the index. The other explanation could be the FTSE 100 is a victim of the economic success. The pound has rallied strongly in the past 6 months against the US dollar and the Euro, as interest rate expectations have changed. The UK is now being thought of as the first of the major global economies that could raise interest rates, possibly as early as Q4 2014.
I have included a chart of the ratio between the FTSE 100 and the DJII since the FTSE 100 came into being in April 1984. The FTSE 100 has got close this year to breaking the previous all time high reached in December 1999 of 6930. The gap between the performance of the FTSE 100 and Dow Jones Industrial average is getting close to being as stretched as it has been over the past 30 years. As one can see from the chart the under-performance of the FTSE 100 relative to the DJII reached similar levels in 2003 as to today. As economic growth improved that gap reduced, lets hope the same will occur this time.