Peripheral Eurozone equity markets* rose by only 1.5% during 2012 versus a 13.2% gain for the MSCI World index. So far this year, they are up by 15.6% versus a 13.8% increase in the global index. This turnaround reflects better monetary trends and an associated improvement in economic prospects.
The first chart shows year-to-date price performance of various markets relative to MSCI World. Peripheral markets were weak during the first half but have surged since mid-July. They are now ahead of core markets and closing in on the US and Japan; the UK and emerging markets have underperformed, as have Canada and Australia.
The rebound follows a recovery in monetary trends. The six-month change in real narrow money in the periphery was still negative in December 2012 but had risen to the top of the global ranking by April 2013 – second chart. The turnaround reflects ECB support for peripheral economies since late 2011 in the form of rate cuts, long-term liquidity operations and the "outright monetary transactions" (OMT) programme – these measures have restored confidence, causing capital flight to reverse and increasing the demand to hold narrow money as spending intentions revive.
Will outperformance continue? The recent surge has probably been driven by underweight investors covering their positions. This process could extend further but six-month real money growth in the periphery has moderated since April and is now in the middle of the global pack – second chart.
The strong rebound in peripheral equities may offer a cautionary message to investors expecting further weakness in emerging markets: surveys indicate that these markets are significantly underowned, while emerging E7 monetary trends have improved since late 2012 – second chart.
*Spain, Italy, Ireland, Portugal and Greece, weighted by market capitalisation.
