December saw the death of North Korea’s ‘dear leader’ Kim Jong-il, with command of
the country seemingly passing to his youngest son – the ‘great successor’ – Kim Jongun.
But with sundry generals peering over the younger Kim’s shoulder tensions are
likely to remain high, especially around the border with South Korea.

4,000 miles away in Moscow, hundreds of thousands took to the streets to protest
against the supposedly-corrupt elections won by Vladimir Putin’s United Russia party.
Putin dismissed the protests out of hand, but the uncertainty will continue until the
presidential elections on March 4th – and possibly beyond.

In all of this it was easy to forget the ongoing turmoil with the euro; but
unfortunately, life went on as normal in the conference rooms and banqueting halls of
Brussels. The pivotal moment came on December 9th when David Cameron used the
UK’s veto to protect the City of London. Initial support from Hungary and the Czech
Republic soon melted away and Britain found itself in a club of one. As the famous –
perhaps apocryphal – newspaper headline had it, “Fog in channel: Europe isolated.”
Bickering inevitably followed. The UK and France had a brief war of words, and the
Deputy Prime Minister (supported by most of the Liberal Democrats) didn’t appear to
be entirely happy with Mr Cameron’s actions. “Dear leader” possibly wasn’t the phrase
on Nick Clegg’s lips…

UK

For most of the month it was easy to be gloomy about prospects for the UK. Business
in general didn’t react well to David Cameron’s use of the veto: Sir Martin Sorrell, boss
of multinational WPP summed up the mood when he said, “Intuitively, it can’t be
helpful. I’d rather be inside the tent.”

Unemployment was the highest for 17 years: the public sector lost 65,000 jobs –
thirteen times as many as the private sector gained. Youth unemployment showed no
sign of falling; the retail trade in Scotland was hit by the bad weather and West End
shops reported disappointing takings on their first traffic free weekend as consumer
confidence reached an all-time low.

Boxing Day, however, proved a revelation, with record numbers flocking to the high
streets and credit analysts Experian reporting a 21.5% year-on-year increase in the
number of shoppers. This echoed the picture in the US over Thanksgiving weekend,
with shoppers being attracted by unprecedented levels of discounting. Whether it will
be enough to save some of the weaker retailers remains to be seen.

The UK stock market finished the year down 5.5% at 5,572: not the performance that
investors were looking for at the start of the year, but significantly better than many
major markets. In another sign that the UK is performing less badly than some of its
major competitors, growth in the third quarter of 2011 was 0.6% compared to 0.2% in
Europe.

UK interest rates are forecast to remain at 0.5% throughout 2012, which is at least
good news for homeowners. The pound is expected to do relatively well in 2012 –
although one commentator did describe it as “the best looking horse in the glue
factory.”

Europe

At the end of the month the euro hit an 11 month low against the dollar, and a ten
year low against the yen. There are worrying signs that the European banks are
starting to hoard cash: if the trend continues that means liquidity could once again
become an issue if banks refuse to lend to each other.

The major European stock markets were largely unchanged during December. Italy and
Germany fell slightly, while France moved ahead – but the figures were not significant
compared to the 12 month falls detailed below.

Worryingly, the new Spanish government of Mariano Rajoy revealed that the budget
deficit will be 8% of GDP, not 6% as forecast. A new round of austerity measures will
be introduced, including a pay freeze for public sector workers and increased taxes on
top earners.

The economic forecasters IHS Global Insight revealed their predictions for Europe in
the coming year, expecting GDP to fall by 0.7% overall. The ECB is expected to
respond to this with further cuts in interest rates. This was echoed by a BBC survey of
27 of the UK’s leading economists. 25 of them forecast a recession for Europe in 2012
and the majority put the possibility of a eurozone break-up at 30-40%.

Finally, the UK may agonize about youth unemployment exceeding one million but
spare a thought for Spain: 48% of 16-24 year olds there are without a job – a truly
depressing statistic to welcome the New Year.

US

The US was one of the few countries in the world where the stock market rose during
the year, the Dow Jones index finishing 2011 at 12,170 to post a rise of just over 5%.
The year ended with three pieces of good news for the US economy: growth in the
third quarter of 2011 was 1.8% and inflation fell in November to 3.4%. Perhaps even
more encouragingly, the US trade deficit fell in both September and October: although
total US debt now stands at $14 trillion (with China the biggest single holder of debt)
there are some indications that the US consumer is starting to buy more homeproduced
goods.

2012 will see President Obama going up for re-election and you would assume the
improved economic news will favour him. At the moment Obama’s most likely
challenger appears to be Mitt Romney, if he can hold off 76 year old Ron Paul and a
revitalised Newt Gingrich. With the primaries starting this month the picture will
rapidly become clearer.

Global

Stock markets in China, Japan, Hong Kong and Russia all fell during the month; again,
this was just a part of the wider falls seen around the world in 2011.

The Chinese trade gap narrowed in November, although largely as a result of the
continuing crisis in Europe meaning that fewer goods were imported from China.
Speaking in early December on the 10th anniversary of China’s entry into the World
Trade Organisation, President Hu Jintao promised to increase imports in a bid to boost
world trade, saying that they may “exceed $8 trillion over the next five years.” Last
year China bought $1.39tn from overseas so whether the promise carries much weight
remains to be seen.

Japan’s annual inflation rate fell to 0.5% in November: unemployment remained
steady at 4.5% and interest rates were unchanged at ‘virtually zero.’
As had been anticipated, China and Japan unveiled plans to promote the direct
exchange of their currencies in a bid to cut costs for companies and encourage more
trade. Bloomberg reported Ren Xianfang of IHS Global Insight as saying, “this
agreement is much more significant than any other pacts China has signed with other
nations.”

Previously, trade between the two countries had meant converting the currencies into
dollars. Whilst the move might mean the dollar weakening in the region it is likely to
be quietly welcomed by the US, as it could see the yuan – which the US has long held
to be undervalued – moving closer to its true value.

World Stock markets – a look back at 2011

For the majority of the world’s stock markets it is impossible to file 2011 anywhere
other than in the ‘bad years’ column. Only seven of the 50 markets covered by
Trading Economics managed a gain, and only one of these was in double figures. That
market was Venezuela, up a hugely impressive 80% - although it would take a brave
adviser to recommend investing in the country, and an even braver client to go along
with it. To no-one’s surprise the worst performing stock market of the year was
Greece, losing more than 50% of its value in 2011.

Most markets saw falls of around 15-20%. Germany was down by just under 15% on the
year: France by 17%. Japan fell by 17% and Hong Kong by 20%. Even the supposed
growth economies of the BRIC countries saw their stock markets hit: in Brazil, Russia,
India and China the markets fell by 18%, 20%, 15% and 22% respectively – all of which
puts the performance of the UK market (down by 5.5% on the year) into a more
favourable light.

For those wanting the numbers, the UK finished the year at 5,572; Germany’s DAX
index closed at 5,898 while in the Far East, Japan ended 2011 at 8,455; Hong Kong at
18,434 and China at 2,186. The rise in the US saw the Dow Jones index close at
12,170.

All stock markets fluctuated significantly during the year – for example, the FTSE
touched 6,015 in February and saw a low of 4,791 in August. Other markets moved
even more in percentage terms; Germany’s DAX index reached 7,527 in May and hit a
low of 5,072 in September.

These movements and all the attendant unpredictability made 2011 very difficult for
both investors and their advisers – and what 2012 will bring is hard to say. Clearly the
year is going to be dominated by the continuing efforts to sort out the euro and quite
possibly by the problems of bank liquidity.

In many ways it would be tempting to end 2011 by thinking that ‘it can’t get any worse
and at least all the bad news is out in the open.’ Whilst this might be a little naïve,
there were signs of optimism around the world in the final quarter of the year; the
strong performance of the US stock market; China’s apparent increased willingness to
trade and – hopefully – a new resolve to solve the problems of the euro. Inevitably,
there will be difficult times in the coming year, but for investors, there are some
lights at the end of the tunnel. We will – as ever – keep you up to date with all the
relevant developments in the coming year, and will always be here to answer your
questions.  Call us on 01782 710101