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CHaIrman’S reVIeW Unit Trust Corporation Annual Report 2012
roughly TT$3.97 billion recorded at the end of
2012. The local capital market continues to
be plagued by weak private sector credit demand
and high net domestic fiscal injections
which served to depress short-term rates.
GlObal maRkets
Investor fears were rattled at the beginning
of 2012 with the credit downgrade of nine (9)
Eurozone countries by Standard & Poors’ Credit
rating agency. Both France and Austria lost
their AAA credit rating, with both countries
being downgraded to AA+. The credit ratings
of Italy, Spain, Cyprus and Portugal were
also downgraded by two notches to BBB+, A,
BB+ and BB respectively. Confidence was restored
however as the ECB issued the second
three-year Long Term Refinancing Operation
and Euro area finance ministers agreed on
a second rescue package for Greece worth
€130 billion (US$172 billion).
The fallout of Europe’s recessionary pressures
was felt in several emerging economies as
export demand from Europe waned. As a
consequence, growth in several emerging
economies moderated, led by China whose
economy slowed from 8.1% in Q1 2012 to
7.6% in Q2 2012 while Brazil’s GDP grew 0.50
in Q2 2012, down from a gain of 0.80% in
the prior quarter. In an effort to arrest the
slowdown in economic activity, many central
banks in Asia and Latin America began to
ease interest rates. Brazil’s central bank lowered
the Selic rate from 9.75% at the beginning
of the year to 8.50% by the end of June
2012. Similarly, China’s central bank lowered
its Regulated Reserve ratio from 20.5% in
January to 20% in June while India’s central
bank reduced both its cash reserve ratio and
policy rate.
In the last six month of 2012, governments
and central banks around the world stepped
up their efforts to shore up their economies.
In June 2012, the US Federal Reserve expanded
the Operation twist progam with the objective
of creating further downward pressure
on interest rates in an effort to boost the economy.
Six months later, in December 2012, the
Federal Committee extended the asset pur-
chase program which included buying an additional
$45 billion in Treasury bonds a month,
supplementing the $40 billon a month it is
already buying in mortgage onds.
Active measures by the Federal Reserve
which aided in keeping interest rates low,
helped boost the US housing market. After
declining over 21 consecutive months, in
July 2012, home prices in the US began to
recover, with the S&P/Case-Shiller index of
property values rising by 6.84% yoy in December
2012 – the most in 6 years.
During the last quarter of 2012, a certain
degree of volatility entered the US market
as the deadline to address the “fiscal cliff”
approached. Such uncertainty was reflected
in the US economic performance in the
last quarter of 2012, as the economy slowed
sharply to 0.10%, down from a gain of 3.1% in
the prior quarter. The moderation in the US
economic performance was largely driven by
contractions in gross private investment and
government spending which fell 1.5% and
6.9% in the quarter.
In Europe, there was a noticeable shift in the
ECB’s stringent stance towards troubled nations.
After lowering the refinancing rate to
a record low of 0.75% and the deposit rate
to zero from 0.25%, in August 2012, the ECB
announced its commitment to purchase unlimited
quantities of secondary, sovereign
bonds with maturities of one to three years
of troubled Euro nations. In addition, the ECB
made concessions with Spain and Greece as
both countries secured extensions to achieve
their respective budget deficits. Eurozone finance
ministers agreed to give Greece two
more years to restore its finances and on november
27 an agreement was reached that
eased Greece’s emergency aid.
Despite the intervention by the ECB, the European
region continued to contract. Recessionary
pressures in the Euro area worsened
in the last quarter of 2012 as GDP fell 0.60%
and represented the sharpest decline since
the first quarter of 2009. The contraction in
output was led by a slump in economic ac-
tivity in the region’s three biggest economies
– Germany, France and Italy.
The Uk benefitted greatly from hosting the
Olympics in August of 2012 as the GDP rebounded
in the third quarter of 2012 by
expanding 1% following two consecutive
quarterly contractions. Once the effects of
the spending associated with the Olympics
waned, GDP fell to 0.30% in Q4 2012.
Canada’s economy lost its momentum in the
latter half of 2012 as GDP slowed from 1.9%
in Q2 2012, to 0.70% in Q3 2012 and 0.60% in
the last quarter of 2012. The moderation in
economic activity was largely influenced by
waning investment activity and export levels
that was negatively impacted by lower commodity
prices and a strong Canadian currency.
InteRnatIOnal CaPItal
maRket PeRfORmanCe
In line with a more accommodative monetary
policy implemented by several central banks,
the interest rate environment remained low,
with policy interest rates in Europe and Brazil
reaching record lows in 2012. Policy rates in
the US, Canada and the Uk remained at 2011
levels of 0.25%, 1% and 0.50% respectively.
Yields on 10 year industrialized bonds also fell
during the year, with the largest decline occurring
in Europe as 10 year yields declined
51 basis points to 1.32%.
GLOBAL BENCHMARk RATES
Region
Dec 2012
(%)
Dec 2011
(%)
Y/Y
(bps)
US 0.25 0.25 -
Canada 1.00 1.00 -
UK 0.50 0.50 -
Japan 0.10 0.10 -
3 Month Libor 0.31 0.58 - 0.27
Euro Zone 0.75 1.00 - 0.25
Brazil 7.25 10.75 - 3.50
Table 1: Global Benchmark Rates
GLOBAL 10 YR. BOND RATES
Region
Dec 2012
(%)
Dec 2011
(%)
Y/Y
(bps)
Euro 1.32 1.83 - 0.51
Japan 0.79 0.99 - 0.20
US 1.76 1.88 - 0.12
Canada 1.80 1.94 - 0.14
UK 1.83 1.98 - 0.15
Table 2: Global 10 Year Bond rates