FINANCIAL MARKETS IN 2013： THE YEAR IN REVIEW

FINANCIAL MARKETS IN 2013: THE YEAR IN REVIEW Macro: • Modest upswing in global growth; the beginning of a certain rebalancing with an upswing in developed economies and persistent weakness in major emerging countries • Balance of payments crisis in several emerging countries • Muted growth in China due to the objective of a transition to a new growth model; announcement of new reforms, especially a liberalisation of the economy; further steps towards an internationalisation of the yuan • Japan: Abenomics • US resilience in the face of the fiscal cliff; shutdown in October; budget compromise in December • End of the recession in the euro zone in mid-2013 but renewed risk of deflation; progress on the banking union Monetary policies: • Policies remained highly expansionary in developed countries; close to zero interest rate policies were maintained; unconventional policies were continued • Fed: QE3 continued throughout the year; first discussions in May on a possible start of tapering purchases before the end of 2013, which eventually was not decided until December • ECB: Two new rate cuts in May and November (refi rate at 0.25%), introduction of forward guidance in July • BoE: Introduction of forward guidance in August • BoJ: Announcement in April of a doubling of the monetary base over two years Sovereign bonds • Short-term interest rates remain at very low levels (forward guidance), but expectations of an end to the Fed’s QE3 generated volatility in longer maturities. Major upward pressure, especially on US long-term interest rates, only Japanese JGBs succeeded in decoupling from this move. • Very positive context for European peripheral bonds: Irish and Spanish 10-year spreads against Bunds tightened by more than 170bp, and that of Greece by more than 400bp. Credit: • High Yield and bonds issued by peripheral euro-zone countries benefited from investors’ search for yield. • Investment Grade bonds suffered, particularly in the United States. • The fundamentals of the asset class remained stable overall (default rates) or improved from 2012 (upgrades/downgrades, credit conditions). In the primary market, issuance by financials remained at a very low level in 2013, but activity in the non-financial segment was strong with the second largest annual volume recorded since 2001. Equities: • Excellent performances in all developed countries: best performance of S&P500 since 1997 (30%) ! • Still significant impact of monetary policies, especially on the Nikkei, which was very significantly boosted, while emerging equities, in contrast, were negatively affected by tapering expectations. • A decline in risk aversion, which was favourable for peripheral euro-zone countries in particular. • The ranking of performances was affected by the atypical nature of the recovery, especially in the United States (outperformance by small- and mid-caps, and sectors linked to wealth effects). • Risky assets decorrelate from each other, and priority is now given to idiosyncratic risks. January 8, 2013 - No.1 Economic Research Department N° 1 I 2 Commodities: • 2013 was a very bad year for gold (-28%, i.e. the worst year since 1981!), putting an end to a decade of rising gold prices. • Brent ended the year virtually unchanged after a sharp fall at the beginning of the year. • The fall in the copper price in 2013 reflected the Chinese slowdown and the high level of stocks. FX: • The rise in US long-term interest rates, linked to uncertainties/announcements about the slowdown in the Fed’s asset purchases, led to a sharp correction in emerging currencies, while the EUR and the GBP appreciated against the USD. • The very aggressive policy mix implemented in Japan, in particular with a doubling of its monetary base and an inflation target of 2%, led to a pronounced depreciation of the JPY. Hedge funds: • Solid performance in most strategies (except CTAs), indices exceed their 2011 highest. • Long equity bias strategies benefited from quite an exceptional stock market environment. Emerging managers recorded a positive performance despite the bearish market. • Impressive regularity, Fixed Income arbitrage remains one of the most interesting regarding both return / risk. • Investors continued to consider alternative management as a source of diversification to generate alpha in a context of lower risk concentration. Net inflows were positive for the year with a preference for Long Only, Emerging and Event Driven strategies, which illustrates investors' risk appetite and the great rotation that took place throughout the year. Macroeconomic context: Towards a rebalancing of global growth 2013 was characterised by a certain rebalancing of global growth with an improvement in growth prospects in developed countries and persistent weakness in the large