A Look Back And Ahead
2013 will be remembered as a banner year for equity ETFs
thanks to massive economic stimulus in the U.S., Europe and
Japan, rather than earnings growth. But it's one to forget for
emerging markets and gold, which suffered most from worries the
Federal Reserve would tighten the spigot.
SPDR S&P 500 (
a fat 32% return, including dividends, booking its fattest annual
return since 1997. The underlying index eclipsed its 2007,
pre-financial-crisis high to end the year at a historic peak of
1,846. 2013 earnings are projected to have grown 5.7% year over
year. Earnings in 2014 are forecast to grow nearly 11%.
Investors pulled money out of bonds in favor of the
as rising interest rates eroded bond prices. Bond yields, which
move opposite prices, climbed in anticipation that the Federal
Reserve would start tapering its $85 billion monthly bond
purchases, referred to as quantitative easing.
Inflow into U.S equity ETFs in 2013 nearly doubled over the
prior year, totaling a record $138.1 billion, according to
TrimTabs Investment Research in Sausalito, Calif. Global equity
ETFs absorbed an epic $57.9 billion.
Bond ETF inflow amounted to $5.2 billion -- the lowest amount
since 2006. That marked a 90% plunge from the $52.8 billion seen
in 2012. The great rotation out of bonds into equities favored
Europe ETFs, which took in $21.3 billion, and Japan ETFs, which
got $17.8 billion. Some $5.8 billion flowed out of emerging
Foreign ETFs End Mixed
Emerging markets suffered from a perfect storm of "taper
tantrums" coupled with weak global demand for commodities,
rampant inflation and free-falling currencies.Vanguard FTSE
Emerging Markets (
), the largest ETF in its category, lost 6%.
Developing countries benefited most when the first round of
quantitative easing was expanded in March 2009. Investors armed
with cheaply borrowed money flocked to emerging markets in search
of higher-yielding currencies and faster-growing economies.
Countries with large trade deficits -- Turkey, India, South
Africa and Brazil -- that were heavily dependent on foreign
investment sold off as investor appetite for riskier assets waned
when the Fed indicated it would tighten stimulus.
Every country in Latin America fell by double digits but
Mexico, which confined its decline to 2%. The region's biggest
loser,iShares MSCI All Peru (
), plunged 25%.
Market Vectors Indonesia Index (
) sold off 23%. The country's trade deficit swelled to a record
high of nearly $10 billion, seen as unsustainable, in the second
quarter. The inflation rate swelled to 9%.
The flagship China ETF,iShares China Large-Cap (
), ended down 2% after a wild roller-coaster ride. The market
tumbled the first half of the year on fears of an economic hard
landing. A credit crunch midyear intensified the sell-off.
Interest rates on overnight loans peaked at 30%, igniting fears
of bank defaults. China's market bottomed after the central bank
restored investor confidence. Sweeping economic reform plans
announced in mid-November are aimed at boosting consumer spending
and making China more business-friendly.
"Investors are encouraged by finally seeing growing high-level
political consensus on reform implementation," Alec Young, global
equity strategist at S&P Capital IQ, wrote in an
international outlook Dec. 2.
IShares MSCI EAFE (EFA), tracking developed foreign markets,
returned 20%. All European countries enjoyed double-digit gains
except Norway, which gained 5%, and Portugal, up 7%. Finland, up
42%; Ireland, up 38%; and Spain, up 28%, led Europe.
The eurozone returned to growth in the second quarter after
two years of recession. Low interest rates globally and record
central bank money printing should fuel continued economic growth
in 2014, says Ned Davis Research.
"Comprehensive measures of eurozone economic activity, such as
the OECD CLI (Organization for Economic Cooperation and
Development Composite Leading Indicators), EuroCOIN (a coincident
indicator of the eurozone business cycle), and the manufacturing
PMI (Purchasing Manufacturers Index), are at their highest levels
since mid-2011," Ned Davis Research noted in a report released
Dec. 12. But economic growth will be modest as unemployment
remains near a record high and private-sector lending diminishes
at a record pace.
WisdomTree Japan Hedged Equity (DXJ) vaulted an eye-popping
41% for the year. Prime Minister Shinzo Abe enacted unprecedented
economic stimulus and yen debasement policies, which sparked
export demand and inflated corporate earnings.
The government increased spending, thereby driving domestic
sales, hiring and consumer spending. It also enacted reforms in
pension and savings plans and industrial regulations. Bank of
America Merrill Lynch's Japan equity strategist Naoki Kamiyama
forecasts the island nation's stock market will rise 13% to as
much as 33% in 2014.
"A recovery in corporate earnings and expectations for growth
in dividends, share buybacks, and wages and an improvement in
spending trends are likely to lead to structural improvements in
Japan's economy," Kamiyama wrote in a 2014 outlook Dec. 2.
"The forces that drove Japanese equities in 2013, including
low rates/weaker yen and the U.S. economy, should gain additional
support from an acceleration of the corporate capex cycle and a
populace that is more comfortable consuming and investing."
But a sales-tax increase and rapid inflation in the face of
falling wages will hurt consumers, Ned Davis Research says. And
despite massive quantitative easing, business spending has been
SPDR Gold Shares (GLD) lost 28%.IShares Silver Trust (SLV)
plunged 36%. Commodities across the board plunged owing to
China's weakening demand for raw materials in the face of
overproduction in shale oil and agricultural products.PowerShares
DB Commodity Index (DBC) -- offering exposure to agriculture,
industrial metals, energy and precious metals -- lost 8% in 2013.
Contrary to what the Fed's critics claimed, global quantitative
easing did not debase currencies or incite massive
inflation.PowerShares DB U.S. Dollar Index Bullish (UUP),
tracking the greenback against a batch of major currencies, slid
1.3% in 2013 and booked a five-year losing streak. Commodities
ETFs bled $29.9 billion in 2013, with precious metals accounting
for $27.8 billion in redemptions.
Bond Prices Down, Yields Up
The consensus on Wall Street declared the 30-year bull market
in bonds ended in 2013. Bond yields started a renewed uptrend in
May after Federal Reserve Chairman Ben Bernanke first hinted that
the central bank would start scaling back quantitative
Vanguard Total Bond Market (BND) dipped 2.1%.IShares 20+ Year
Treasury Bond (TLT), tracking long-dated bonds, tumbled a
whopping 13% -- a severe loss for a safe-haven asset.
Yields on 10-year Treasuries climbed 1.18% to end 2013 at
3.04% -- the highest in 2-1/2 years. Benchmark yields will march
toward 4% this year in anticipation of a policy rate increase and
tapering being completed by year's end, U.S. Trust's fixed-income
They expect Treasuries to lag municipal and corporate bonds
amid rising interest rates and growing state and local tax
revenues. Corporate defaults hovered well below historic averages
a fourth straight year in 2013. At the same time, companies are
sitting on piles of cash and corporate debt levels are well below
their 2010 peak, U.S. Trust wrote in a 2014 fixed-income outlook