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Quarter-End Insights

Asian Markets in the Green After a Rollercoaster Year

Despite the volatility and uncertainty, markets managed to race ahead in the final lap of the year.

It has been quite a rollercoaster ride this year for global equities, as the ongoing European debt crisis, flagging growth in major economies, and more recently, the fast-approaching U.S. fiscal cliff kept investors on tenterhooks.

After clocking strong gains in the first quarter, Asian equities dipped into the red in the next three months, only to regain positive momentum in the third quarter after central banks across the globe pledged a host of measures to reinstate investor confidence.

Despite the volatility and uncertainty, markets managed to race ahead in the final lap of the year. Over the trailing three months, the Shanghai SE Composite Index added 8.9%, recovering losses from earlier in the year. Meanwhile, the Hang Seng gained 8.8%, the S&P/ASX All Ordinaries added 5.9%, while the BSE Sensex climbed 3.6%. Japan's Nikkei 225 was the Asia region's best performer during the quarter, putting up a robust 17.2% during the October-December period on the back of a weaker yen.

Yearly Gains
Most Asia markets also posted strong gains for the full year. On a year-to-date basis, the BSE Sensex is up 26% compared with a drop of 25% a year ago. Among Chinese bourses, the Hang Seng added 22% versus a loss of about 20% in 2011, while the Shanghai SE Composite Index managed to eke out a modest 3% gain year to date, which compares with a decline of over 20% in the previous year.

Australia's ASX/All Ordinaries added about 15%, bouncing back from a decline of about the same amount in 2011. Japan's Nikkei, meanwhile, rose 23% compared with a loss of 17% in the previous year.

The 'Abe' Effect
The election of Shinzo Abe--a staunch supporter of aggressive monetary easing--as Japan's top leader was a major booster for the Nikkei. Soon after the landslide victory of his Liberal Democratic Party in general elections mid-December, Abe pledged to pull the economy out of deflation and boost infrastructure spending by as much as 10 trillion yen, among a host of other measures.

That spurred investor confidence even as the yen continued to slide against major currencies, with traders anticipating more easing measures by the Bank of Japan. Toward year-end, the Nikkei Stock Average hit a new 2012 high led by exporters, as traders expected the newly appointed government to live up to its promises of stronger easing measures and a weaker currency to revive the economy.

Dragon Regaining Fire?
Chinese manufacturing activity in November sprung back to expansion for the first time in 13 months, hinting that economic growth in the world's second-largest economy was rebounding after slowing to its weakest pace in more than three years last quarter.

The preliminary reading of HSBC's purchasing managers' index hit above the crucial mark of 50 in November compared with a final print of 49.5 in October. A reading above 50 indicates economic expansion and vice-versa. The official PMI reading came in at 50.6.

China's third quarter gross domestic product grew 7.4% from a year ago, while a raft of other data on fixed asset investment, retail sales, and industrial output also topped estimates, bolstering faith that the Chinese economy was on track to stabilization.

The country also unveiled its new lineup of leaders--a team of seven men who would hold the reins of the Chinese dragon through at least the next five years.

Europe: Still a Long Way to Go
Europe continued to be in the headlines throughout the year, and though policymakers addressed a range of issues, there is still much to be accomplished.

European Union leaders agreed to set up a single eurozone banking supervisor, which is seen as a landmark step toward securing a banking union for the region to help prevent banking risks and cross-border contagions.

Experts, however, believed the mechanism was fraught with legal complications as it would weaken the powers of national regulators while extending more powers to the European Central Bank.

Greece, meanwhile, managed to secure its next tranche of bailout funds worth 49.1 billion euros to keep the debt-mired country afloat, after it successfully bought back 31.9 billion euros of bonds, as promised.

Other countries like Italy and Spain introduced austerity measures to reduce ballooning fiscal deficits and government debt levels. Though only a short-term fix, it helped soothe some concerns over the region, at least for the moment.

The Cliffhanger
The only dampener to Asia's year-end party seemed to be the looming financial crisis in the U.S.

Despite numerous rounds of negotiations, Washington leaders continued to wrangle on Dec. 31 over budgetary reforms to prevent automatic tax hikes and spending cuts from coming into effect in January. With the year-end deadline fast approaching, investors are keeping a close watch on developments around the budgetary talks.

Heather Brilliant, vice president of global equity and credit research at Morningstar, says that a lot of companies are very well positioned regardless of how the fiscal cliff gets resolved, as long as it gets resolved. "Generally speaking, if you believe there will be a resolution to the fiscal cliff eventually, even if it might take them a few more months, beyond January 1, then I think [any big cliff-related sell-off] is a great buying opportunity, Brilliant said in a Dec. 20 interview.

Nevertheless, it seems markets are destined to move in tandem with the newsflow out of Washington over the short term.

Sector Performance
On a sector basis, the financials segment topped the gainers. On average, financials in the Asia region posted a gain of 26.3% on a year-to-date basis. Over the last three months, the sector is up 8.39%.

In Indian banks,  ICICI Bank Ltd (IBN) and  HDFC Bank (HDB) both added around 60%.

Hang Seng Bank (00011) gained 29% since the start of the year, while  Industrial And Commercial Bank Of China (01398) notched gains around 20%.

Health-care stocks, which are primarily perceived as defensive picks, held up well on a year-to-date basis, despite dipping in the red during the fourth quarter as risk sentiment improved notably over the last three months, conceivably prompting investors to increase exposure to other sectors.

Astellas Pharma added 23.8% since January this year despite a drop of 2.3% in the fourth quarter. Sydney-listed  Cochlear Limited (COH) climbed 28% while Olympus Corp. vaulted more than 64% in Tokyo.

On the other hand, some blue-chip Japanese exporters, which are notably higher this quarter, are still mired in the red on a year-to-date basis. Sharp Corp. is up more than 56% over the last three months but posted a loss of 55% year-to-date. Similarly  Sony (SNE) advanced modestly in the final quarter (in local currency shares) as the yen softened, but it is still down over 30% on a year-to-date basis.

Across other asset classes, crude oil dipped 9.4% since January this year, after hitting a high of $110.55 per barrel on one hand and a low of $77.30 per barrel on the other.

Gold and silver lost some of their safe-haven appeal in the final quarter of the year, dropping around 7% and 13%, respectively, as risk-sentiment improved. However, the metals still hold gains on a year-to-date basis--up 5.3% and 6.5%, respectively.

Gazala Parveen does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.