Equities rebounded swiftly from a spell of volatility
The first quarter proved a volatile period for global equities. Most world stock markets made further progress in January but suffered a short setback at the end of February and beginning of March, before rebounding strongly towards the quarter-end. Overall, markets made good progress over the period.
Ahead of the market setback, February had seen equity markets continue their upward trajectory amid reassuring comments from Ben Bernanke, chairman of the Federal Reserve, that the US economy was seeing reduced economic risks from the weaker housing market. However, subsequent comments from former chairman Alan Greenspan proved more bearish and helped trigger the fall in global equities. Investors were also worried by problems in the high risk, US sub-prime mortgage market. A 9% fall in the Chinese stock market on 27 February was another key factor behind the decline in global equities, although a day earlier the market had reached an all-time high, having risen 50% since November. Following a strong rally, the Shanghai Composite Index set a new record high in late March.
The path of global interest rates continued to exert a strong influence on the markets. At the start of the year, sentiment within the UK was adversely affected by the surprise hike in UK interest rates to 5.25%, as analysts had expected rates to move higher later in the spring. However, the UK economy has proved stronger than expected and this has pushed up consumer price inflation. The Bank of England reacted quickly to help contain inflationary pressures and any resultant feed through to wage demands. Elsewhere, US interest rates were held at 5.25% over the quarter, while central banks in Europe and Japan raised rates by a quarter-point in response to stronger economic growth.
Takeover activity remained a supportive feature and at the end of January, India’s Tata Steel won a bid battle for Corus. In the UK alone, potential bid targets include Alliance Boots and Sainsbury’s. There is also the prospect of a mega-merger between Barclays and Dutch bank ABN Amro, while Imperial Tobacco is seeking to acquire Spain’s Altadis. Additionally, George Wimpey and Taylor Woodrow plan to combine to create the UK’s biggest housebuilder.
During February’s bout of equity market volatility, government bonds benefited from their safe-haven status. Moreover, the US bond market reacted positively to the Federal Reserve’s decision to soften its stance on US interest rates, hinting that the next move could be downwards.
On the currency front, February saw the pound reach a 14-year high against the US currency, at almost $2, although the dollar strengthened modestly later in the quarter. Elsewhere, the Japanese yen initially weakened against the dollar but recovered some ground in March.
Index returns source: Thomson Financial Datastream. All returns shown are total return to the end of March 2007.
This table shows how different indices, representing different geographical regions, have performed over various time periods to 31 March 2007.
| |
1 year |
2 years |
3 years |
4 years |
5 years |
10 years |
| UK FTSE All Share |
11.15% |
42.29% |
64.44% |
115.39% |
51.18% |
109.20% |
| US S&P 500 |
11.20% |
23.55% |
31.00% |
76.08% |
31.78% |
111.32% |
| Europe FTSE World Europe ex UK |
15.98% |
56.19% |
79.74% |
156.50% |
50.25% |
163.75% |
| Asia FTSE World Asia Pacific |
9.01% |
54.20% |
62.63% |
139.70% |
79.56% |
58.37% |
We’ve sourced the index figures, in sterling terms, from Financial Express to 31 March 2007. The indices mentioned above are measures of the markets they represent. For example, The FTSE All-Share Index represents 98-99% of the UK market capitalisation. It is the aggregation of the FTSE 100, FTSE 250 and FTSE Small Cap Indices.
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, both of which can go down as well as up.
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 invest in the right funds, and this depends on 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.
We’ve written this commentary assuming you have some experience of investing in stocks and shares. This means that although we have tried to write as much as possible in plain language, we may have used certain words or phrases that might not be familiar to anyone new to investing. If you don’t understand any part, please contact your adviser.
We strongly recommend you speak to your adviser before making any changes to your plan.