The March quarter was a very strong one for equity markets in the developed world after an incredibly tough 2011 year.  For example the US and German markets were up 12% and 18% respectively (in their own currencies) although the Chinese market lagged, being up “only” 3% for the quarter.   The New Zealand sharemarket was in the pack, with the NZX 50 Gross Index up 7% for the quarter – still a very good performance.

After a very volatile 2011 markets calmed down in the March quarter.  This is shown by the Vix, which is a good measure of the market’s assessment of the volatility or risk in the US sharemarket (the S&P 500).   The Vix is at a 5 year low and indicates markets are pretty relaxed at present with “risk on” being the current theme.

The markets’ strength is partly due to increased liquidity in the system (particularly from the European Central Bank), which has also decreased the chance of European bank failures.  However, Europe’s issues are not solved through the ECB’s actions.

There is still potential for a shock to global markets from this part of the world with Spain and Italy the obvious areas to watch.  For example Spain has unemployment of over 20%, house prices down at least 20% (and probably still over valued at this level), some insolvent banks and personal debt to GDP of 220% – and this is before they really start their austerity drive!

It means that, at best, much of Europe will have low growth or recession for some time..  So the Vix looks very low given the issues in Euro-land are still material and we could easily see “risk off” becoming prevalent again.

The market expression of “sell in May and go away” may be apt for 2012 – particularly for Europe.

Anthony Quirk