Almost $6.3 trillion was erased from global stock markets this year as the euro zone financial crisis reverberated across the world in the latter half of 2011, calling into question the future of the world’s largest currency bloc.
Global stock market capitalization dropped 12.1 percent to $45.7 trillion according to Bloomberg data, while the euro ended the year as the worst performing major currency after finally starting to succumb to the continent’s financial and economic woes in December.
The euro had proved resilient for much of the year – burning hedge funds that bet on a steeper decline – but on Friday touched a 10-year low against the Japanese yen, and is near lows against the dollar last touched a year ago.
“Investors were more optimistic at the start of the year, but as the year progressed they were forced to come to grips with the debt levels in the western world,” said Navtej Nandra, the international head of Morgan Stanley’s asset management arm.
The S&P 500 is flat this year while the FTSE 100 has only dropped 5.5 percent. But the Eurofirst 300 gauge of blue-chip European companies has lost 11 percent, led by the French and Italian exchanges. The MSCI Emerging Markets index has shed a fifth of its value despite strong growth in China and other emerging markets.
Asian equity markets were hit particularly hard with Japan’s Nikkei index losing 17.3 percent this year, Hong Kong’s Hang Seng index 20 percent and the Shanghai Composite 22 percent.
Assets considered to be relative havens amid the turmoil have fared better. UK government yields hit a record low on Friday and gilts were the best performing major government bonds in 2011 – notching up 17 percent returns, compared with US Treasuries’ 9.8 percent returns and 10 percent for German Bunds.
Despite efforts by policymakers to shore up the euro zone, analysts and bankers expect next year to start on a glum note, as Europe continues to grapple with its debt crisis.
One of the biggest immediate tests will be the hundreds of billions of euros worth of government and bank debt that comes due in the first three months of the year.
Countries on Europe’s periphery, on the other hand, face funding costs that remain at near record highs, despite a series of summits that have unveiled various measures to restore investor confidence in the euro zone.
There is more than 457 billion euros of euro zone government debt due to be repaid in the first quarter of 2012, according to calculations by Citigroup. Italy has to repay almost 113 billion euros in the first three months of next year – at a time when its funding costs remain elevated.
“Markets would love to think that this will be solved swiftly, but dealing with all these problems will take time,” said Philip Poole of HSBC Asset Management. “Bond yields will remain high until it’s clear how deep the euro zone recession will be and austerity packages are more fully implemented.”
The European Central Bank lent 489 billion euros to more than 500 banks earlier this month to ease concerns over bank funding, but has so far fought pressures to more actively buy euro zone government bonds directly.
While the US economy is showing signs of recovery and most emerging market countries are still growing at a healthy clip, some investors fear that China’s economy could be facing a “hard landing” next year, posing yet another danger to the fragile global economy.