Top nation not all it seems
In European markets, Germany led the way with its DAX index growing by about 29 per cent to be sitting near five-year highs.
For all its financial woes, Greece has risen off its lows in 2012 and closed up 32 per cent for the year, while the London and Spanish markets both recorded modest single-figure growth.
With the US teetering on the fiscal cliff, the S&P 500 and Dow Jones indices are hovering around 4½-year and five-year highs respectively.
Australia's ASX 200 is trading at a 17-month high, up about 14 per cent for the year but still well below pre-financial crisis levels.
But the award for the best-performing sharemarket for 2012 goes, surprisingly, to Venezuela. The Caracas Stock Exchange, or Bolsa de Valores de Caracas (IBVC), has seen an epic rise of more than 300 per cent, with some companies doubling their share price.
Naturally, one should be suwspicious of such inordinate gains, especially when the country in question is ruled by Hugo Chavez, an anti-capitalist crusader who has seized more than 1000 companies since he came to power in 1999.
Earlier in the year, many commentators credited the surge of the IBVC to the possibility of a change of government in Venezuela, stating opposition leader Henrique Capriles was a more market-friendly candidate who could alter the highly controlled regulation system surrounding investment.
But according to Dr Anthea Jones, assistant professor in international relations at the University of Canberra, who was in Venezuela between June and July last year, a regime change was never on the cards. She said: "It was very clear that Chavez would win the election and would win 10-12 percentage points ahead of Capriles, but what I noted when I got back to Australia - a lot of the international media coverage didn't actually reflect that."
The election result proved irrelevant to the sharemarket in Caracas. The IBVC dipped slightly after the October 7 election but has continued to push upward since.
Ben Ramsey, an emerging markets analyst at JPMorgan, said the rise in Venezuela's sharemarket had very little to do with elections or performances of the listed companies and more to do with strict capital controls in the South American nation.
"People who are stuck in bolivars [the Venezuelan currency] locally and can't get access to dollars, basically to protect the value of their assets, need to find other assets to invest in," Mr Ramsey said.
Miguel Octavio, head of research at BBO, an investment firm in Venezuela, said the high levels of inflation, along with the fixed exchange rate, were forcing investors to diversify their holdings.
Venezuela's fixed exchange rate of 4.3 bolivars per US dollar only adds to cash holders' headaches, with much of the country's currency trading in a black market where the exchange rate is closer to 16 bolivars to the dollar, according to Mr Octavio.
In November, the Central Bank of Venezuela reported inflation at 18 per cent, after reaching a peak of 27.6 per cent in January. According to Mr Octavio, banks offer only 10 to 12 per cent interest on deposits, culminating in a negative return for those holding cash.
But investment is not as big as one would be led to believe, with only a handful of companies actively traded on the IBVC and volumes low. On average the market traded 259,000 stocks daily during 2012. BHP averaged volumes of 10.2 million each day on the ASX.
"There are days when not a single stock trades," Mr Octavio said.
Frequently Asked Questions about this Article…
In 2012 many markets began clawing back losses from the global financial crisis. Germany's DAX was a standout, up about 29% and near five‑year highs. Greece rose about 32% for the year, London and Spanish markets saw modest single‑digit gains, the S&P 500 and Dow Jones were around multi‑year highs, and Australia's ASX 200 was up roughly 14% and at a 17‑month high (but still below pre‑crisis levels).
The IBVC recorded more than a 300% rise in 2012. Analysts in the article say the surge had little to do with company performance or election outcomes and was driven largely by strict capital controls and currency distortions that pushed bolivar holders to seek alternative assets, inflating domestic equity prices.
Caution is warranted. The article highlights reasons to be suspicious: heavy government intervention under Hugo Chávez (including past seizures), severe capital controls, high inflation, a large gap between the official and black‑market exchange rates, and very low trading volumes — all of which can distort headline returns.
With strict capital controls preventing easy access to dollars and a fixed official rate of 4.3 bolivars per US dollar (while black‑market rates were closer to 16 bolivars), bolivar holders sought other assets to protect value. High inflation and low deposit returns meant investors were forced to diversify into local equities, contributing to the IBVC's rise.
Although some commentators initially linked the rally to the possibility of a more market‑friendly opposition win, the article reports experts saying a regime change was never likely and that the election result had little to do with the sustained market rise. The IBVC dipped slightly after the October 7 election but continued upward afterwards.
Venezuela's central bank reported inflation at 18% in November 2012 after a peak of 27.6% in January. Local banks were offering only about 10–12% interest on deposits, resulting in negative real returns for cash holders and encouraging investment in other assets.
Liquidity on the IBVC was very low: the market traded on average about 259,000 stocks daily in 2012. By comparison the single stock BHP averaged about 10.2 million shares traded each day on the ASX, and local analysts noted there were days on the IBVC when not a single stock traded.
Look beyond headline returns: check liquidity, political risk, inflation and currency controls, and whether gains are driven by fundamentals or distortions. High nominal market returns in an unstable or tightly controlled economy can mask real risks — everyday investors should consider real returns, market depth and regulatory/currency factors before investing.
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