2009 was certainly a rollercoaster ride in terms of the performance of the international capital markets. The last quarter of 2008 had seen the emergence of the global freeze in the credit markets and the near collapse of some of the world’s largest financial institutions.

In fact, it was only the massive intervention of central banks in the major financial centres that prevented a deep recession from becoming a worldwide depression. Consequently, 2009 began with a deep sense of foreboding in global financial markets.

The markets hit new lows

Indeed, the gloom and doom persisted throughout the first quarter of 2009 and bond and equity markets had hit new lows by the end of March. Both the S&P 500 (US) and the Xinhua 25 (China) indices fell by 28 per cent between January and March 2009. However, neither index tarried long at those lows and by the end of the second quarter of the year, the S&P 500 had recovered all the ground that it had lost and the Xinhua 25 had actually advanced by nearly 30 per cent from its January level. The recovery in the bond market was a bit slower and prices were still quite depressed at mid-year.

But bounced back quickly

The second half of 2009 saw a very strong recovery in both the bond and stock markets with corporate and sovereign bonds showing strong gains across the board. The S&P 500 and the Xinhua 25 finished the year up 65 per cent and 84 per cent respectively from their March lows and up 19 per cent and 33 per cent from the beginning of the year. Since then, both equity markets have pulled back somewhat and have fallen quite sharply in January of 2010, while bonds have continued to grind higher.

The tentative start to 2010 is not altogether surprising given the sharp recovery that took place in 2009, once the full effect of the fiscal and monetary stimuli took hold on the world economy. While investors are relieved at the thought that a global depression has probably been avoided and that economic recovery should take hold in 2010, there are doubts about how robust that recovery will be. The huge monetary stimulus that fuelled the recovery will begin to be withdrawn during this year and there are concerns as to the impact that this will have on the housing market in particular and the US economy in general.

The recovery is well underway

President Obama is already signalling the tightening of fiscal policy, even though US unemployment is still very high and not yet showing any signs of moderating. As the industrialised economies recover, the concerns of their policymakers will shift towards inflation and away from growth. Such a shift is likely to lead to higher interest rates, tighter monetary policy and lower government spending, in other words, to an environment that is not overly friendly to either equity or bond markets.

The upshot of all this is that 2010 is likely to be a year of considerable uncertainty as it may be some time before the strength of the recovery is clearly established. The official pronouncements suggest that the recovery will be gradual and slow and if this turns out to be the case, then the equity markets may be in the doldrums or worse yet in decline, as the market tries to determine which way the economic winds are blowing.

Stay nimble, stay alert

Conventional wisdom says that the emerging markets should lead the global recovery and the BRIC’s (Brazil, Russia, India & China) should lead the way. The Chinese equity market is certainly one to watch for the future but it is very volatile and should therefore be approached with caution.

Closer to home, the debt exchange has also created some uncertainty regarding the direction of Jamaica’s equity market. While lower interest rates are usually a positive factor for the stock market, it is not yet known exactly how the debt exchange will affect the financial position of the companies listed on the Jamaica Stock Exchange. Cautious optimism seems to be the watchword for 2010, investors will have to stay nimble and stay alert if they want to seize any opportunities that may come our way this year.

Charles Ross is managing director of Sterling Asset Management Ltd. Sterling provides medium to long- term financial advice and instruments in US and other world market currencies to the corporate, individual and institutional investor.

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