Measured progress for global equities
After a turbulent second quarter, global equity markets made measured progress in the third. Statements from the US Federal Reserve suggesting they were unlikely to tighten monetary policy much further reassured investors. There were positive geopolitical developments as a peace deal was brokered in the conflict between Israel and Lebanon, while a fall in oil and other commodity prices boosted the outlook for economies with a bias towards growth.
The global economy continued to perform satisfactorily over the quarter, although concerns grew that the US economy was on the brink of a sharp deceleration. Data suggesting the housing market was cooling quickly led to a downturn in sentiment, as home values are a key support of consumer confidence. High gasoline prices at the start of the quarter worsened fears that retail spending would come under significant pressure. Equity investors took heart, however, from the benign outlook for interest rates given slackening inflationary pressures in the US. The S&P 500 Index broke through to a five-and-a-half year high during the quarter as corporate earnings generally met expectations.
Despite a further rise in interest rates to 3.0%, European stocks registered the strongest return of the major equity regions; the FTSE World Europe ex UK Index gained 8.0% over the quarter in local currency terms. The encouraging performance of the eurozone’s core economies – notably Germany and France – confirmed domestic recovery was on track, while mergers and acquisitions regained momentum.
In the UK, the Bank of England raised interest rates by a quarter-point to 4.75% in August. Already somewhat surprised by the move, the market performed sluggishly as the large integrated oil producers offered weak leadership following the slippage in crude prices. Previously high-flying minerals stocks such as Xstrata and Lonmin were also hit as commodity markets struggled.
The pull back in materials prices offered a fillip to Asia, where cheap resources are needed to fuel economic expansion. The MSCI AC Asia ex Japan Index gained 6.0% over the quarter in local currency terms as the ongoing improvement in domestic demand appeared to confirm the region’s growing self-sufficiency. Japanese stocks underperformed in global terms over the quarter. Concerns over the impact of the government’s withdrawal of liquidity earlier in the year proved a contributory factor and the Topix Index fell by 2.0% in yen terms.
Government bond markets benefited from a weakening of inflationary pressures, signs of a slower US economy and a fall in the oil price. However, euro and sterling issues underperformed US government bonds, as investors sensed that domestic interest rates had further to rise. Corporate bonds and emerging market bonds gained from the general improvement in investors' risk appetite.
Index returns source: Thomson Financial Datastream. All returns shown are total return to the end of September 2006.
This table shows how different indices, representing different geographical regions, have performed over various time periods to 30 September 2006.
| |
1 year |
2 years |
3 years |
4 years |
5 years |
10 years |
| UK FTSE All Share |
14.67% |
43.18% |
65.71% |
93.38% |
53.17% |
110.20% |
US S&P 500
|
10.16% |
22.88% |
39.20% |
72.22% |
36.32% |
119.54% |
| Europe FTSE World Europe ex. UK |
20.29% |
57.50% |
86.24% |
113.40% |
56.94% |
150.25% |
| Asia FTSE World Asia Pacific |
17.06% |
51.72% |
70.62% |
93.22% |
84.84% |
-8.44% |
We’ve sourced the index figures, in sterling terms, from Financial Express to 30 September 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 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.
We strongly recommend you speak to your adviser before making changes to your plan.