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2007 Full of Surprises

This Review looks at the performance of the global economy and markets in 2007 and implications for the health sector.

Long queues of anxious savers waiting to withdraw their cash in a first run on British banks since the last century formed one of the defining images of 2007, contrasting the optimistic outlook at the beginning of the year.

The sub-prime mortgage meltdown which occurred in the US in August and continued weakness in the dollar took a slice out of the US economy in 2007. Does this unprecedented crisis in credit markets threaten to derail the five-year long bull run for equities?

For the time being the answer seems to be no. Despite near paralysis in lending during the second half of the year, equity markets everywhere managed to register respectable gains in 2007.  But investors would be wise to approach 2008 with caution.

Economic Performance

Three factors defined overall economic performance in 2007:


  • A global credit crisis with its roots in US subprime lending;
  • Growth in emerging markets; and
  • Strength in commodities – driven in large part by strong demand from China


Before the sub-prime debacle, the global economy had been expanding vigorously, with growth running above 5 percent in the first half of 2007.

This growth was largely due to a few high performing developing countries. China's economy gained further momentum, growing 11½ percent. India continued to grow at more than 9 percent and Russia grew by almost 8 percent. These three countries alone had accounted for one-half of global growth over the past year.

Robust expansions also continued in other emerging market and developing economies, including low-income countries in Africa.

Rapid growth in the emerging markets counterbalanced continued moderate growth of about 2¼ percent in the United States in the first half of 2007 and slowing in growth in the euro area and Japan. 

IMF Projections

Developed Markets

In the US, Europe and UK, the credit crunch resulted in sharp falls in equity markets August. Once the Federal Reserve responded to the credit crisis and started to loosen monetary policy, equities rallied strongly as investors took comfort from the fact that interest rate cuts have usually proved a strong a buy signal for stock markets.

Overall, the US equity market gained 4.1 percent this year and the UK rose 5.4 percent.

Erosion in investor confidence was most spectacular in Ireland where stocks dropped 17.9 percent and persistent deflationary pressures in Japan drove stocks down 5.9 percent.

Emerging Markets

More spectacular, emerging markets reached a record high in late October 2007, massively outperforming their developed market counterparts. The FTSE All World emerging markets index gained 36.7 per cent this year, while the equivalent index for developed markets rose just 7.6 per cent

Brazil spearheaded the way with a gain of 76.2 per cent, closely followed by India up 74.1 percent, Turkey up 68.2 percent and China up 61.3 percent.

China’s capital markets overtook both New York and London in the amount of capital raised from inital public offerings, a major milestone for developing country markets.

At the end of the year, widespread paralysis affecting money markets and inter-bank lending threatened to turn the US credit crunch into a global economic downturn which could affect developing markets as well


Some sectors performed very well in 2007.


China's rapid growth has led to a significant increase in demand for basic resources such as metals and energy. This resulted in a rise in commodity prices in both developed and emerging markets. It also put oil prices within striking distance of the $100 level, reaching $99.29 in late November.

Geo-political tensions helped push gold to a high of $843.20 a troy ounce, within striking distance of its record of $850 which was reached in January 1980. Other base metals came under pressure from rising stocks and deterioration in the outlook for the global economy. Both nickel and lead prices registered sharp corrections although copper ended the year 7 percent higher.

Competing requirements for food for human consumption, animal feed and rising bio-fuel consumption drove up agricultural commodities such as wheat, corn and soybean prices.


Despite the credit-market woes, equities led by the high-tech industry did well in 2007. Pharmaceuticals and biotech stocks did well in 2007, outperforming the S&P 500. Health care and medical supplies did less well.

There are 10 sub-industry indexes in the S&P Health Care Index (12.2% of the S&P 500 index), with Pharmaceuticals being the largest at 53.4% of the sector's market value. The Health Care Index was in a long-term uptrend until 2007 when it started drifting sideways.

In 2007, the market-weighted Health Care Index registered a 5 percent gain compared with a 5.8 percent gain in 2006. Although, the Index has traced out a lower high than in the past, it has not registered a lower low.

During the same time, the S&P 500 Index did poorly, gaining only 1.6 percent in 2007 compared with its 13.6 percent gain in 2006.

As a result, although the Health Care Index remains in a long-term downtrend, it broke out to the upside of the S&P 500 Index during 2007 because of the weaker relative strength of the latter.

This out-performance by the Health Care Index compared with the S&P 500 Index had more to do with the defensive characteristics of the health care industry where prices have not dropped as much as the overall market.

Towards the end of the year, prices were sitting between the 17-week and 43-week exponential. The weekly momentum, which was neutral towards the end of the year, did not give any clues about the future direction of the sector.


It is evident that conditions in money markets remain a long way from normality. Many investors anticipate further easing in monetary policy on both sides of the Atlantic in 2008 but rising inflationary pressures could constrain policymakers room for manouvre. The threat from inflation, slower economic growth, downward revisions in profits forecast and a widespread lack of confidence pose severe challenges for equity investors at the start of 2008.

The massive losses which occurred in structured credit markets overshadowed developments in government bond markets. Total returns from the JP Morgan global government bond index reached 10.9 per cent in 2007 compared to a return of 12.7 per cent on the FTSE All World global equities index.

In emerging markets, spreads over US Treasuries sank to historic lows. The JP Morgan EMBI+ stripped sovereign spread fell to 148.6 basis points in June and had only widened to 239.3 basis points by the end of the year, reflecting the improvment in economic fundamentals across many emerging markets.

Contact details

Alexander S. Preker

Health Investment & Financing
14 Wall Street, 20th Floor
New York, NY
United States of America

Office: 1 (212) 348-1866
Cell: 1 (202) 667-8286
Fax: 1 (212) 348-2866

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  January 01, 2008