2005 – an encouraging start
The first few months of 2005 have seen the UK equity market continue the solid performance started at the end of 2004.
In the UK, small and medium companies are again performing better than the market leaders, pushing the FTSE 250 Index to a new high. By contrast, the FTSE 100 Index has just reached the same level it last achieved in May 2002. However, it’s still some way short of its peak at the end of December 1999.
(The FTSE 250 Index averages the performance of 250 mid-sized companies and the FTSE 100 Index averages the performance of the 100 largest companies trading on the London Stock Exchange.)
While this market recovery is encouraging the professionals, the private investor has stayed cautious. This isn’t too surprising considering how volatile markets have been since 2000. At the time, ISA sales reached an amazing £18 billion a year, whereas in 2004 they reached just over £2 billion.
In the US, interest rates are still low and the inflation outlook remains favourable – all good news for investors. Continuing capital spending this year should allow earnings to grow around 7% to 8%, with many companies growing much faster than this. Growth stocks should be rewarded in the long term.
Low consumer spending in Germany, Italy and France could lead to subdued growth in Europe during 2005. Peripheral economies, such as Greece, Scandinavia and Ireland, should continue delivering above average growth. As an example, Greek banking has benefited from increased use of consumer credit products. Growth in Eastern Europe should continue as a prominent theme during 2005. Exporters are finding the strength of the Euro problematic, although cost cutting and productivity gains are offsetting this, particularly in Germany.
In the East, Japan’s economy is improving after a slowdown in the middle of 2004. Consumer confidence is starting to show signs of improvement, which bodes well for a sustainable economic expansion.
Sentiment for the bond market has been, and remains, unsure. Original expectations of an economic slowdown and interest rate cuts soon reverted to a likely rise following the release of more encouraging figures. It’s likely the UK base rate will stay at 4.75% for the time being.
This table shows how different indices, representing different geographical regions, have performed over various time periods to 1 March 2005.
|
1 yr |
5 yrs |
10 yrs |
| UK - FTSE All Share |
15.03% |
-3.27% |
126.01% |
| US - Dow Jones Industrial |
-1.97% |
-12.86% |
120.27% |
| Euro - FTSE World Euro. ex UK |
12.90% |
-21.64% |
103.19% |
| Asia - FTSE World Asia Pacific |
12.54% |
-21.98% |
-9.39% |
We’ve sourced the index figures from Standard and Poor’s to 1 March 2005. 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.
Looking to the future
Looking ahead, the pace of the global economic recovery has slowed to a more sustainable pace. Equity market volatility will always feature, but we believe the environment for equities is good - with continuing economic growth, moderate inflationary pressures and interest rates that are still low by historical standards. Because of the encouraging interest rate backdrop, we’re now more optimistic for bond prospects.
A long-term commitment
We believe it’s important 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.
One of the best and most accepted ways to deal with volatility is to invest for the long term. This way you simply bypass the volatility along the way. Taking a long-term view allows your investment longer to grow, which should make up for any short-term fluctuations.
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.
March 2005