A good quarter for equity markets
A continuation of the benign environment of low interest rates, robust economic growth and steady corporate profits enabled global equity markets to post good returns in the fourth quarter. The MSCI World Index gained 8.5%, with currency moves favouring US dollar based investors.
The assumption that the US Federal Reserve had no further interest rate rises planned for the current cycle underpinned sentiment towards equities. That said, the US stock market underperformed in global terms – the S&P 500 Index rose by 6.7% – as investors appraised the impact of a sharply slowing housing market on economic growth. The possibility of a rate cut early in 2007 led to a sell-off in the dollar, which was exacerbated by the decision of several central monetary authorities across the world to diversify their reserves away from the currency.
The most recent earnings season in the US and other major markets was once again encouraging. While most market sectors maintained the momentum of earnings growth, there were disappointments among the larger oil companies, which suffered as the price of crude continued to fall from its summer highs. Nevertheless, metals prices recovered their poise and mining stocks resumed their upward trajectory on the back of rising global demand.
The continued heavy demand for resources from rapidly emerging economies such as China and India fuelled a strong performance from markets in the mineral-rich Latin American region. Over the quarter, the MSCI Free Latin America Index rose by 22.1%. The Asia Pacific region also performed strongly as investors chose to focus on the ongoing growth of domestic consumption rather than the geopolitical concerns raised by North Korea’s nuclear programme and the military coup in Thailand.
In Japan, less conviction in the pace of the economic recovery led to another lacklustre return by the TOPIX. The index rose by just 3.5% over the quarter despite positive company earnings announcements and solid business confidence.
Strong company data was received positively in the UK and Europe, where the main indices returned 11.2% and 12.1% respectively over the quarter. The markets were boosted by mergers and acquisitions, which had been a consistent catalyst for performance over the course of the year, and positive projections for economic growth in 2007. Performance was again led by the small and mid-cap sectors, which are the principal beneficiaries of mergers and acquisitions activity. Bullish sentiment meant that investors shrugged off rises in both UK and European interest rates, pushing markets to fresh five-year highs.
Government bond markets made little progress over the quarter. Positive factors included weakening inflationary pressures and continued demand for long-dated bonds. However, some stronger than expected economic figures from the US towards the end of the period drove bond prices lower.
Index returns source: Thomson Financial Datastream. All returns shown are total return to the end of December 2006.
This table shows how different indices, representing different geographical regions, have performed over various time periods to 31 December 2006.
| |
1 year |
2 years |
3 years |
4 years |
5 years |
10 years |
| UK FTSE All Share |
16.75% |
42.49% |
60.78% |
94.32% |
50.24% |
114.02% |
| US S&P 500 |
15.14% |
20.13% |
32.39% |
69.45% |
31.35% |
115.90% |
| Europe FTSE World Europe ex UK |
22.90% |
57.53% |
78.04% |
116.49% |
47.49% |
149.00% |
| Asia FTSE World Asia Pacific |
12.62% |
52.97% |
73.88% |
116.70% |
80.57% |
6.95% |
We’ve sourced the index figures, in sterling terms, from Financial Express to 31 December 2006. 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.
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