Equity markets across the globe made further progress in the fourth quarter of 2005 and ended the year on a positive note. Investors were encouraged by economic data pointing to reasonable levels of global growth, while the fall in the oil price from its record highs of August was well received.
Corporate profits growth remained strong and markets additionally benefited from the increase in merger and acquisition activity. The pick-up in bid activity has been virtually a global phenomenon, with the UK one of the most open markets for company takeovers. On the final day of October, the UK market saw its biggest one-day rise in over a year following approaches for four British companies, namely O2, P&O, Mowlem and Pilkington. Other supportive factors for global equity markets have included historically attractive valuations and the strength of corporate cash flows, which have been leading to strong dividend growth.
Among the world’s major equity markets, Japan was at the forefront of performance, with the TOPIX Index gaining 16.9% in yen terms over the quarter. In contrast, US equities lagged the other major markets, with the S&P 500 Index producing a return of 2.1% in dollar terms. The US market faced the headwind of further hikes in US interest rates. Elsewhere, in local currency terms, the FTSE Europe ex-UK Index achieved a return of 5.4%, while in the UK the FTSE All-Share Index produced a total return of 4.3%.
On the currency front, the US dollar continued to rally, supported by robust economic growth and increasingly favourable interest rate differentials with other major economies. During the quarter the US Federal Reserve raised interest rates twice by a quarter-point, so that rates ended the year at 4.25%, against 3.75% at the end of the third quarter.
Within the equity markets, mining stocks performed particularly well. Commodity prices remained firm on the back of strong demand, particularly from China, and continuing production constraints. Energy companies proved more lacklustre as the oil price weakened from its August highs.
Most of the leading government bond markets were little changed over the quarter, with the exception of the UK which performed well. Although market sentiment was helped by the lower oil price and some dissipation of inflationary pressures, interest rates moved higher in the US and the eurozone. Rates were left unchanged at 4.5% in the UK. Over the quarter, gilts outperformed the other key government markets boosted by strong liability-driven demand from pension funds ahead of the year-end.
This table shows how different indices, representing different geographical regions, have performed over various time periods to 1 January 2006.
|
1 year |
2 years |
3 years |
4 years |
5 years |
10 years |
|
UK FTSE All Share |
22.04% |
37.69% |
66.40% |
28.69% |
11.61% |
111.93% |
| US Dow Jones Industrials |
13.77% |
11.71% |
28.87% |
-0.99% |
-3.9% |
129.58% |
| Europe FTSE World Europe ex. UK |
24.08% |
41.24% |
83.25% |
33.69% |
6.89% |
143.27% |
| Asia FTSE World Asia Pacific |
38.24% |
54.17% |
92.78% |
58.31% |
25.97% |
7.76% |
We’ve sourced the index figures from Standard and Poor’s to 1 January 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 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. 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.
We strongly recommend you speak to your adviser before making changes to your plan.