Financial markets remained volatile
The final quarter of 2007 proved another volatile period for the world’s financial markets amid ongoing concerns over the global credit crunch. After the equity market volatility seen over the summer, sentiment improved from late August through to October as central banks pumped liquidity into the financial system and the Federal Reserve cut US interest rates.
November saw renewed concerns over the global credit squeeze, as the extent of leading banks’ exposure to the US sub-prime mortgage crisis became clearer. Within the US, major banks such as Citigroup, Morgan Stanley and Merrill Lynch announced substantial write-downs for losses on loans and sub-prime mortgages. Moreover, much of this sub-prime debt has been packaged into structured products which have been bought by financial companies outside the US.
Over the quarter as a whole, several of the world’s emerging markets produced the best returns, with Brazil performing particularly well. Overall, western equity markets proved more subdued. However, performance in Europe was mixed with Germany making good progress and Ireland falling sharply. Elsewhere, the Japanese market was another poor performer, with the TOPIX Index posting a negative return of 8.6% in yen terms. A combination of global and domestic factors dragged the market lower. Over 2007 the TOPIX Index fell by 11.1% making Japan the worst performing major global market by some margin.
Within the US, there were growing concerns over the impact of lower house prices and the sub-prime mortgage crisis on the broader economy. Economic growth forecasts have been revised downwards amid the tightening of lending criteria, growing pressures on consumer spending and the rise in the oil price to record highs. However, going forward slower economic growth should help to contain inflationary pressures. This backdrop should enable the Federal Reserve to cut US interest rates further over the coming year. Another notable feature has been the weakness of the dollar against other leading currencies.
During the equity market volatility, government bond markets benefited from a ‘flight to quality’ as investors sought the relative safety of government securities. Additionally, investors’ general feelings about the state of the markets benefited from two quarter-point cuts in US interest rates in October and December, with rates ending the year at 4.25%. In the UK, the Bank of England lowered rates to 5.5% on 6 December. Elsewhere, corporate bonds struggled as the fall-out from the credit crunch continued and bonds from financial issuers were hit particularly hard.
This table shows how different indices, representing different geographical regions, have performed over various time periods to 31 December 2007.
| |
1 year |
2 years |
3 years |
4 years |
5 years |
10 years |
| UK -FTSE All Share |
5.32% |
22.96% |
50.06% |
69.33% |
104.65% |
82.43% |
| US -S&P 500 |
3.36% |
4.50% |
21.97% |
24.09% |
43.27% |
40.82% |
| Europe -FTSE World Europe ex UK |
15.72% |
39.02% |
72.48% |
96.34% |
154.74% |
138.30% |
| Asia -FTSE World Asia Pacific |
8.92% |
9.24% |
51.01% |
68.41% |
110.59% |
89.65% |
We’ve sourced these index figures, in sterling terms, from Financial Express to 31 December 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 ten 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.