The Exchange

Global Markets: Some Upside Surprises in the First Quarter

Currency traders talk each other at the foreign exchange dealing room of the Korea Exchange Bank headquarters in Seoul, South Korea, Monday, Jan. 9, 2012. Asian stocks dropped Monday, ignoring signs of job improvement in the U.S., as traders continued to fret about Europe's unfolding sovereign debt drama. South Korea's Kospi fell 1.1 percent to 1,822.42. (AP Photo/Lee Jin-man)
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The first quarter of 2012 is now a memory, but it is leaving a distinct impression: Wall Street saw its best start to the year in more than a decade, and the S&P 500 logged  its most impressive quarter since 3Q 2009. But what of the global picture?

Stories from across the ocean continued to impact U.S. markets in Q1, sometimes negatively (the seemingly interminable Greek bailout drama helped hand Wall Street its worst day of 2012 so far).  But U.S. investors who traveled to foreign investing lands were rewarded overall: Every international mutual fund category saw healthy gains, and foreign ETFs were also up for the quarter.

Here's how some major international markets fared in the first quarter — and what investors will be looking toward in the second.

Europe: Bailout Fund Boosted, Dark Clouds Remain

On the final trading day of Q1, euro zone ministers agreed to boost the emergency rescue fund (the European Financial Stability Facility) by €200 billion in an effort to contain the sovereign debt crisis that has plagued the region — and roiled markets here and abroad — over the past two years.

The news continued to offer relief to European markets, as overall fears of a euro collapse have lessened considerably in the past several months: the FTSE Eurofirst 300 (E300:IND), an index of top European shares, ended Q1 up nearly 7 percent — its best quarterly run since 2006. But real skepticism remains over whether this beefed up firewall will be enough to manage the continuing crises in countries such as Spain and Italy, particularly if those PIIGS members need the kind of bailout already provided to fellow swine Greece, Ireland and Portugal. Meanwhile, Greek Prime Minister Lucas Papademos on Friday said a third bailout for the beleaguered country cannot be ruled out.

According to Morningstar, European mutual funds saw close more than a 12% average rise for Q1. When breaking down the PIIGS for the quarter, the index performances show some range. Spain was a major focus as the quarter wound down, unveiling — amid citizen protests — an austerity package on Friday that cut deep, slashing 27 billion euros from the remaining 2012 budget. Spain, which has the highest unemployment rate in the 17-nation euro zone, saw a 7.6% decline in its major index (IBEX 35) in the first quarter; in the past year, it has declined more than 25%. Some economists are concerned that the budget cuts will only further deepen Spanish woes, and the country could announce further cuts by year's end.

Portugal's main index (PSI 20) saw a rise of just under 1% for Q1; the country will benefit from a €78 billion bailout but is also suffering from high unemployment and is expected to experience a 3.3% GDP contraction this year. Greece secured its second bailout in the last month of Q1; its main index (ASE) rose about 8% in 2012's final quarter. The one-year numbers for the country show a much grimmer picture, with a plunge of more than 51%.

In December, Global X launched the first ETF tracking Greek stocks (GREK); year to date it's up more than 12%. Rounding out the PIIGS: Italy's FTSE MIB is up 5.4% in Q1, while down more than 26% in the year-long view. Ireland, the second of the PIIGS to receive a bailout, rose more than 12% in Q1.

Meanwhile, Merkozy (otherwise known as Angela Merkel and Nicolas Sarkozy) did well in Q1, as Germany's DAX saw a rise of more than 16% and France's CAC 40 was up more than 7%. It may soon be the end of the Merkozy era, as Sarkozy is facing a challenge to his French presidency, with the first round of voting to take place on April 22.

Asia: China Worries Rule

China concerns came to the forefront in Q1; the country cut its GDP target for the year to an eight-year low of 7.5% early in the year, and recent signs of a manufacturing squeeze as well as a spike in energy costs, lessened demand from struggling Europe and signals of a coming housing-market collapse have some investors worried about a hard landing for the world's No. 2 economy.

Furthermore, the leadership change expected by the end of the year (Xi Jinping, the current vice president, will replace current leader Hu Jintao, who has been in place since 2002) could add to regional instability.

The Shanghai composite was up just over 2% in Q1, but it has seen a fall of around 7% in just the past month. Some analysts say this could be the time to embrace the long-term opportunities in China (according to Morningstar, China funds were up 9% in Q1) and emerging markets (EEM) in general, but volatility could remain high as worries persist.

The top Asian performer for Q1: Japan's Nikkei, which saw a 19.3% rise — its best first-quarter showing in 24 years (although the beaten-down index is, of course, still far lower than it was at its 1989 high). Japan has benefited this year from a long run of stronger U.S. data, global Central Bank easing, earthquake reconstruction efforts and a slipping yen. March 11 marked the one-year anniversary of the disastrous earthquake and tsunami in Northeast Japan; the Nikkei plunged more than 10% on that day. It hit its highest closing level since that day on March 27, 2012.

Some other Asian market highlights for Q1: Hong Kong's Hang Seng is up 11.8%, India's Bombay Sensex is up 10.4%.

A Surprise Winner

Some investors might be surprised at what is the global stock market index of the year so far — Egypt. Its main index rose 38.5% in Q1, the largest lift of any other country. This is after it plunged almost 50% early last year as protests unseated longtime president Hosni Mubarak in February 2011, accelerating the extraordinary Arab Spring movement that launched in Tunisia at the end of 2010 and continues to shake up the territory.

Continued political turmoil, violence and instability in the Arab region have some fund managers urging caution on Egypt, whose 2011 GDP was second only to Saudi Arabia among Arab countries; much could rest on the presidential elections, set for May, and the fate of the country's currency, which some analysts say could see a fall in value.

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