World markets review: Europe buoyed by US demand "There was a very sharp change in the middle of the year in the US," said Bank of America Merrill Lynch strategist John Bilton. In the first quarter numbers this year, the earnings performance of European firms was dismal. In the second quarter it actually began to improve and I think that's the point when US investors thought 'actually it looks as if Europe is coming through the worst"." As investors have brought themselves back up to market weight in Europe, they've bought the indices they didn't own. So in the second half of this year, it's been very clear that the biggest outperformers have been Italy, France and Spain. Germany's held up throughout the year because most investors are comfortable that its economy is robust. Cyprus, which almost went bankrupt in March, is evidently one country with which fund managers have not felt comfortable. Hit by its bail-out crisis, the Cypriot General Market Index has fallen 10.1pc, making it one of the world's worst performing stock indices this year. And London's FTSE 100, up 14.4pc, has been held back to some degree by renewed investor interest in the eurozone. "In the early part of the year, investors were holding the UK as an alternative to the eurozone, but in the second-half of the year when they were willing to buy the eurozone, the UK market ran out of fresh buyers," Mr Bilton said. Meanwhile, the ISEQ in Ireland, which earlier this month became the first eurozone nation to exit its bailout programme, has rallied 33.6pc. Greece, another rescued nation, has seen its ASE index put on 28.1pc. However, despite the overall gains in Europe, it has not been an uninterrupted ascent. In May and June equities around the world fell sharply when the Ben Bernanke, the outgoing chairman of the US Federal Reserve, first suggested the central bank would start to scale back - or taper - its $85bn-a-month quantitative easing (QE) programme. The Fed's massive stimulus programme had boosted the appeal of shares by pushing down bond yields and there were fears that slowing QE could hurt demand for stocks. The emerging markets, one of the main beneficiaries of the central bank's loose monetary policies, were hit hard by taper concerns and indices such as the Brazilian Bovespa - down 15.5pc for the year - slumped. Nevertheless, following the initial sell-off, markets - mainly in the developed world - soon recovered their poise. Indeed, in the US the Dow Jones Industrial Average and the S&P 500 went on to touch record highs when the Fed in December announced that it would taper its bond purchase programme by $10bn to $75bn-a-month. The Dow is up 26.3pc and the S&P has risen 29.6pc. "The Fed are starting to taper because they see the economy improving, so when you look at it on a logical basis, it does make sense that equity markets should hold up," said Mr Bilton at BofA. Are you going to buy the asset - bonds - which the Fed has said it's not going to buy as aggressively any more, or are you going to buy equities, the asset that is most geared to the reason why the Fed is tapering, which is that they're seeing growth come back? Massive economic stimulus has also been the major factor behind the performance of Japan's Nikkei 225, up 56.7pc in what has been its best year since 1972. Under Prime Minister Shinzo Abe, Japan has embarked on huge monetary easing to bolster the economy and boost inflation, which has in turn lifted investor confidence. The easing programme has also weakened the yen against the dollar and kept government bond yields at record lows, giving investors yet further impetus to pile into Japanese equities. Still, while impressive, the Japanese index's rise pales in comparison with the surge experienced by the Venezuelan IBC Index, the world's best-performing equity gauge with a leap of 480.5pc. The IBC shot higher as local investors scrambled to invest in equities as a safe-haven from the devaluation of the bolivar. The Merval in Argentina has advanced 88.9pc, pushed upwards by domestic investors who, restricted by currency controls, bought equities to shield themselves against rampant inflation. Elsewhere among the world's biggest rising indices, Dubai's DFM General Index has climbed 107.7pc, buoyed by the recovery in the emirate's property market following the 2009 crash. The ADX in neighbouring Abu Dhabi has also risen 6.13pc. Investors tapping into African growth have sent Ghana's GSE Composite Index 78.9pc higher over the course of the year. But what of 2014? In Europe, Mr Cau at JPMorgan says the focus will be on earnings. We went from a low price-earnings (P/E) multiple at the start of the year to a slightly above average P/E today, so valuations have normalised. The next stage will be much more about the earnings. In Europe, earnings should be up for the first time in three years and that should be the main driver of the market. Following a period of "consolidation" - when fund managers switch out of more speculative European stocks into "higher quality" companies - Mr Bilton at BofA also expects earnings to come to the fore in the second half of the year. Provided the ECB is able to tackle risks around disinflation in the eurozone, then I would expect to gradually see earnings growth come back in as company margins begin to improve and their top-line growth gradually starts to pick up.