Performance of leading stock indices

Since their top in 2007-2008, leading stock markets indices around the World have significantly declined, making this five year period one of the worst performance ever. As the chart below shows, we can distinguish three groups:
  1. The worst performers are the South European indices: Greek (ATHEX), Italian (MIB) and Spanish (IBEX) indices are down over 59%, badly hit by the Euro crisis and subsequent double-dip recession. For those countries, their membership in the Eurozone is put in question, their financial systems are strained by a loss of confidence and large outflows of money. This financial sector stress is having a depressing effect on the real economy, through reduced loans to companies and dampened business confidence. The particularity of this group is that they are now trading at their lowest level since the 2007-2008 crisis because the second crisis (Euro crisis) is hitting them much more than the first crisis (sub-prime then global financial crisis).
  2. The second group is composed of 3 indices which declined around 50% under very different circumstances. Although they are now off their lows, their recovery is being dragged by different factors. For the French index (CAC), the heavy weight of banks and insurance companies in the index means that as French banks are dragged by their exposure to Southern Europe, so is the index. For the Japonese index (NIKKEI), the March 2011 tsunami hit the Japonese economy very severely. In particular, the closure of nuclear power plants means that Japan now has to import massively fossil fuels at a much higher cost, which is affecting the competitiveness of its industry. As for China, it is now clear that their was a stock market bubble in 2007 and it is suffering from the burst of this bubble. There are also concerns whether the government can manage an economy that has become the second biggest in the World ahead of Japan, using the same tools and processes as when it was still a developping nation.
  3. The last group is composed of the indices which, although they are still down compared to five years ago (10-20%), have significantly recovered from the first crisis and managed to escape - so far - the Euro crisis. India (NIFTY) is benefiting from a healthy growing economy which is more balanced than that of China. The USA (SP500) has recovered surprisingly fast from what was probably their worst financial crisis ever. The stimulus passed at the beginning of the Obama presidency probably helped to put the economy back on its feet. In the UK, the FTSE benefited from a decline of its currency compared to the Euro and a very aggressive Bank of England (Quantitative easing, slashing of interest rates). In Germany, the DAX managed to perform better than its Euro peers because of the strength of German exports. In particular, the reforms performed by former Chancelor Gerhard Schroder on the labour market are paying off, with German industry's competitiveness steadily rising in the last ten years compared to other European industries.

However, it should be noted that a deepening of the Euro crisis could affect economies that have been insulated from it so far, especially Germany.

Stock markets leading indices performance (source: Yahoo finance)

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