2014 in numbers: More woes for Europe

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FOR the second year running, European stock markets continue to underperform global peers due to a multitude of negative factors ranging from weak economic growth to corporate scandals.

Russia, which was itself embroiled with a slump in commodities earnings as well as the invasion of eastern Ukraine, saw its stock market plummeting as the country braces for another prolonged recession.

Russia’s benchmark RTS Cash Index fell 53% to 673.50 points to date, making it the world’s worst-performing index. The decline was attributed to capital flight from Russia due to sanctions initiated by the US and the EU over the country’s annexation of Ukraine’s Crimea region earlier this year.

Apart from the precipitous decline in oil prices, which accounts for more than half of Russia’s total exports, the rouble has also shed almost 50% against the dollar to date, prompting fears of a major contraction in the Russian economy over the coming years.

The instability caused by the Crimea crisis had also impacted Ukraine’s stock market, which is the world’s second worst performing index after losing 44% this year. In all, seven European countries made up the top 10 indices with the biggest losses, underlining investors’ concerns over the continent’s growth potential.

Portugal and Greece saw major declines in their respective stock markets this year, which serve as a stark reminder that the two countries have yet to recover economically following the 2008-2009 financial crisis.

Political risk is set to play a prominent role for the two countries. The Greek stock market tumbled by 34% to date, with a major chunk of the decline a result of Prime Minister Antonis Samaras calling for a snap presidential election this month.

In Portugal, corruption inquiries loom large over its own general election next year. The detention of a former president over fraud allegations, as well as the downfall of banking giant Banco Espirito Santo, seems to have soured investors’ sentiment in Portugal’s PSI 20 Index. To date, the index has fallen by 35%.

Meanwhile, developing markets in Asia remain favoured investment destinations. China’s Shanghai Stock Exchange recorded a gain of 39% to date, partly due to speculation that the Chinese government may further ease its monetary policy following disappointing growth numbers this year.

The rise in stock trading activity as well as the recent link up with Hong Kong’s stock exchange may also have contributed to Shanghai’s impressive gains.

Another notable performer is Pakistan’s Karachi 100 Index, which the world’s third-best performing stock market this year. In spite of the political stability as well as conflicts with Islamist insurgents, the index has maintained its spectacular rise, having previously been Asia-Pacific’s best performing market over the last two consecutive years.

The outperformance of Asian markets may be related to the weakening currencies of their respective countries against the US dollar. A weaker currency is expected to boost exports and the earnings of manufacturing-based businesses, which has an established footprint in the region due to the cheap labour and easy access to raw materials.

Five Asean stock markets were among Asia-Pacific’s 10 best performing indices this year, underlining the prospect of further economic growth in the region. Apart from markets such as the Philippines, Thailand, and Indonesia, fledgling economies such as Vietnam and Laos also made the cut.

It is worth noting that while other Asean peers saw their respective stock markets posting healthy gains for the year, Malaysia’s own FBM Kuala Lumpur Composite Index failed to appear in the top performers list after losing some 10% to date.

The continuing outflow of foreign money from its equities market, as well as from Malaysia’s sovereign bonds, have dampened prospects of a swift recovery for the time being. As a petroleum producer, the country is also exposed to the oil price slump as petroleum exports make up a major chunk of its government revenue.

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This article first appeared in The Edge Malaysia Weekly, on 22 - 28 December 2014.