Investors last week faced a tug of war between signs of an improv­ing U.S. econ­omy and lin­ger­ing con­cerns about Europe’s debt malaise. The Euroland wor­ries moved to cen­ter stage on Fri­day when Stan­dard & Poor’s down­graded the credit rat­ings of France, Aus­tria, Italy, Spain, Por­tu­gal and four other Euro­pean coun­tries. Also dent­ing sen­ti­ment were rum­blings out of Greece, sug­gest­ing that the recently agreed bailout terms were now in doubt.

After start­ing off the year bet­ter than any other since 2006, the S&P 500 Index had its worst day of the year on Fri­day, but nev­er­the­less remained in pos­i­tive ter­ri­tory for the week as a whole.

Trad­ing on stock mar­kets dur­ing the sec­ond week of 2012 was again char­ac­ter­ized by light vol­ume, but it was nev­er­the­less a good week for most risky assets such as stocks, cor­po­rate bonds, and pre­cious and indus­trial metals.

Equi­ties gained ground for the sec­ond con­sec­u­tive week as shown by the per­for­mance of the two prin­ci­pal global equity bench­marks: the MSCI World Index closed 0.8% higher and the MSCI Emerg­ing Mar­kets Index surged by 2.8%. In a clear rever­sal of last year’s pat­tern, emerg­ing mar­kets have so far this year out­per­formed devel­oped mar­kets by a fac­tor of 2.5.

Click on the table below for a larger image.

On the issue of mature ver­sus emerg­ing mar­kets, well-known investor Marc Faber said: “What we had in 2008 was the out­per­for­mance of the U.S. and emerg­ing economies’ stock mar­kets and com­mod­ity mar­kets got hit very hard, but it lead to a major low in emerg­ing stock mar­kets that bot­tomed out between Octo­ber 2008 and March 2009. After that emerg­ing stock mar­kets out­per­formed the U.S. until the end of 2010. So I think we may get a sim­i­lar pic­ture. I read all the strate­gies that say we should invest in the U.S. I say maybe that’s cor­rect for the next three months or so but I would rather be look­ing at an entry point in emerg­ing mar­kets over the next six to nine months.”

As far as the U.S. is con­cerned, all the bench­mark indices ended the week in pos­i­tive ter­ri­tory, with the S&P 500 and the Dow Jones Indus­trial Aver­age gain­ing 0.9% and 0.5% respec­tively. But the real star was the Rus­sell 2000 Index that improved by 1.9%. This is a good sign for the over­all mar­ket as out­per­for­mance by small caps is nor­mally asso­ci­ated with ris­ing markets.

Al the U.S. indices are also higher for the year to date, rang­ing from +1.7% to +4.1% – in the case of the tech-heavy Nas­daq Com­pos­ite Index.

When one con­sid­ers the 10 eco­nomic sec­tors of the S&P 500 Index, it is clear that the cycli­cal sec­tors were the stronger ones over the past few days. These are sec­tors such as Mate­ri­als (+3.9%), Finan­cials (+3.1%) and Indus­tri­als (+2.6%). Not shown, Home­builders (+7.5) surged on the back of Lennar report­ing a solid increase in new orders. The lag­ging sec­tors were the defen­sive ones such as Util­i­ties (-0.4%) and Con­sumer Sta­ples (-0.3%). Energy also fared badly and was down by 1.4%. This pat­tern of cycli­cal sec­tors out­per­form­ing defen­sive sec­tors is what one would expect in the bull phase of a stock market.

Source: U.S. Global Investors – Investor Alert

Mov­ing beyond the U.S., most stock mar­kets ended the sec­ond week of the year in the black. Among mature mar­kets, strong per­form­ers included Sin­ga­pore (+2.8%), Aus­tralia (+2.2%), France (+1.9% – notwith­stand­ing the country’s credit rat­ing cut) and, sur­pris­ingly, Spain (+1.9%). In the emerg­ing mar­kets cat­e­gory China at long last rebounded, clos­ing 3.7% higher. Also per­form­ing well were Hong Kong (+3.3%) and Brazil (+2.3%). The notable down­mar­kets included Por­tu­gal, New Zealand, Hol­land and the U.K.

Prior to last week’s improve­ment, the Shang­hai Stock Exchange Index dropped by more than 30% from its high of August 2010. The trig­ger for the turn­around was Chi­nese bank loans and M2 money sup­ply both ris­ing more than expected as Chi­nese offi­cials started tak­ing action to stim­u­late the econ­omy. Chi­nese equi­ties look attrac­tive from a val­u­a­tion point of view and it would seem that investor con­cerns about slow­ing eco­nomic growth and a fur­ther shake-out in the prop­erty mar­ket have already been dis­counted by stock prices.

Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.

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