A volatile quarter for global equities
During April global equity markets continued to build on the gains made in the first quarter. However, mid-May witnessed a sharp correction before markets began to recover lost ground in mid-June. The increase in risk aversion was triggered by worries over the pick-up in global inflation and the course of US monetary policy. There were concerns that US interest rates could be raised to a level that could endanger economic growth. In the event, the latest hike in US rates to 5.25% on 29 June was accompanied by more reassuring comments from the Federal Reserve. This helped to calm investors’ fears and fuelled a significant market rally.
In local currency terms, equity markets in the UK and US were among the most resilient in the second quarter, with the FTSE All-Share Index and US S&P 500 Index recording negative total returns of 1.8% and 1.4% respectively. Europe reported a larger loss, with the FTSE Europe ex UK Index recording a total return of -3.8%, while the Japanese market witnessed the sharpest decline, with the TOPIX Index producing a total return of -8.1%. The weakness of the dollar was another notable feature during the review period.
While government bond markets saw some benefits from a short-lived ‘flight to safety’, they generally suffered from the same concerns as the equity market, notably the rise in inflation and the upward pressure on interest rates. In addition to the rise in US rates, the European Central Bank raised interest rates by a quarter-point to 2.75% – the third increase since December last year. The European economic recovery is gathering pace and the move was designed to dampen accompanying inflationary pressures.
Consequently, over the quarter as a whole, bond yields generally rose and prices fell. Among the major government markets, US Treasuries achieved the best performance in local currency terms. Emerging market bonds were the worst performers over the quarter, having suffered selling for much of June. However, towards the quarter-end investors became more discerning with much bond selling from countries with current account deficits, such as Turkey, which also saw marked currency weakness.
Within the equity markets, energy and mining stocks experienced some of the greatest volatility as investors sought to lock-in profits after the strong run earlier in the year. However, sentiment towards these stocks improved towards the quarter-end as commodity prices rallied from their lows and oil moved back above $70 a barrel.
This table shows how different indices, representing different geographical regions, have performed over various time periods to 3 July 2006.
| |
1 year |
2 years |
3 years |
4 years |
5 years |
10 years |
| UK FTSE All Share |
19.65% |
42.06% |
66.07% |
49.91% |
27.76% |
114.34% |
| US Dow Jones Industrials |
7.67% |
9.67% |
18.36% |
8.79% |
-9.95% |
100.87% |
| Europe FTSE World Europe ex. UK |
24.03% |
47.65% |
75.35% |
53.04% |
31.50% |
137.71% |
| Asia FTSE World Asia Pacific |
25.74% |
41.08% |
78.35% |
50.74% |
23.15% |
1.11% |
We’ve sourced the index figures, in sterling terms, from Standard and Poor’s to 3 July 2006. The indices mentioned above are measures of the markets they represent. For example, the FTSE All Share Index averages the performance of 98 to 99% of companies trading on the London Stock Exchange.
A long-term commitment
We believe it’s important, where possible, to take a long-term view when investing. Looking back over the years, volatility has always been a feature of world stock markets, with each setback followed by a recovery – some taking longer than others. One of the best and most accepted ways to deal with volatility is to invest for the medium to long term – a period of at least five to eight years.
It’s important to find the right funds, and this depends upon your investment objectives and attitude to risk. If either has changed, your adviser will help you review your investment to make sure it continues to meet your needs. Although we can’t give you investment advice, we do offer a wide range of funds suitable for almost all investment objectives and attitudes to risk.
Are you investing in a property or protected profits fund?
If you have chosen to invest in a property or protected profits fund, we would like to remind you of some key points to help you decide this continues to suit your objectives and your attitude to risk. If you’re unsure what fund or funds are right for you, please contact your adviser. They will reassess your financial situation and will then be able to recommend any changes to suit your needs.
Investing in a property fund?
Over time a fund which invests totally in equities is likely to offer greater potential for higher returns, but with it greater volatility. A property fund is likely to offer lower potential for returns and lower volatility over the short term, but historically has achieved similar results to equities over the long term.
Investing in a protected profits fund?
A protected profits fund protects your investment from some of the effects of stock market falls and so it tends to appeal to the more cautious investor. Alternatively, it may appeal to those looking to balance their portfolio of funds by including a protected profits fund as one fund in a range of funds. For example, if you choose to invest in a number of more risky funds, one of the protected profits funds may add some stability to your overall portfolio. A protected profits fund combines the returns from a range of equity funds chosen by the managers and a cash fund, and its unit price won’t fall below 80% of the highest-ever price. We pool the money you invest with other investors’ money in your chosen protected profits fund. This combined money is then used to achieve returns from a mix of equities and cash.
We strongly recommend you speak to your adviser before making changes to your plan.
You shouldn't take past performance as a guide to future performance or as the main or sole reason for deciding to invest. It may have been achieved in a more favourable economic period that may not happen again, and tax conditions are unlikely to be the same. We don't guarantee the value of your investment and any income, which can go down as well as up.