Global equity markets were shaken by the civil unrest in Libya and the Middle East and the massive natural disaster that hit Japan during March. Markets sold off strongly in the first half of the month before rebounding towards month end with the MSCI World Index returning -3.6% over the month in Euro terms.

Japan was unsurprisingly the worst performing developed market, down 11.5% in Euro terms. Emerging markets reversed the trend of recent months and outperformed developed markets gaining 3.1%. 

The ongoing turmoil in Libya and the Middle East continued to weigh on markets with the oil price climbing further as a result. Investors feared the higher oil price may reduce some of the upside potential for global economic growth which added to risk aversion and volatility in the financial markets.

Global markets shrugged off the Japanese news flow towards the end of the month believing Japanese economic activity is only likely to be disrupted for a relatively short period. It is still too early to definitively assess the potential long-term impact (particularly relating to the impact from malfunctioning nuclear reactors) but if past disasters can be a guide, natural or otherwise, they usually have only a temporary negative economic impact.

Elsewhere during the month the ECB indicated that they may now raise rates as much as three times before the end of 2011. This move is in response
to rising inflation and strong economic growth in Germany, despite the pain being felt in the peripheral Eurozone countries. The US Fed also acknowledged the impact which a sustained higher oil price would have on inflation and the US economy but reiterated the improving fundamentals in the US economy which has now grown for the past 6 quarters.

Corporate profits have remained strong and indications are that corporations are not being negatively affected by the increase in energy costs thus far. Indeed, hiring plans have been accelerating and the US unemployment rate is continuing to trend downwards.

The debt situation in peripheral Eurozone countries continued to occupy the headlines as Portugal was downgraded further by S&P at the end of the month. This drove the yields on the country’s debt to all time highs versus German Bunds. Beyond the downgrade, markets are beginning to sense that a bailout for Portugal is now inevitable.

Source – Kleinworth Benson Investors