Summer volatility in financial markets
Global economic conditions remained strong in the third quarter although equity markets and corporate bonds suffered a spell of increased volatility. Concerns grew over the problems in the US sub-prime mortgage market and the implications for other parts of the global financial system. The difficulties culminated in a ‘credit crunch’ as banks swiftly tightened their lending criteria. In the UK, the problems were highlighted by the loss in confidence in a major UK bank. However, market sentiment improved as central banks stepped in to support the financial system with emergency funding.
Over the quarter global equity markets experienced mixed fortunes. In local currency terms markets in the UK, Europe and Japan slipped back while those in the US, Asia and Latin America made further progress. In the US, the Dow Jones Industrial Average reached a record high, along with several other markets including China, Hong Kong and Brazil. Of the major markets, Japan was the worst performer although some stability returned in September. Japan was hit hard by concerns that its exposure to the US sub-prime market could be greater than reported.
Markets in Asia and Latin America performed particularly well given the strong economic backdrop for both regions and the belief that their exposure to the US sub-prime market was limited. The ongoing strength of the Chinese economy continued to benefit countries across Asia. There is growing evidence that Asian economies are proving resilient to a moderate slowdown in the US economy, with the strength of consumption and investment boosting growth in the economic powerhouses of China and India.
In the US, the Federal Reserve has responded to the slowing pace of economic activity, fuelled by the problems in the US housing market, by announcing a half-point cut in interest rates to 4.75% on 18 September. The cut was larger than expected and provided a fillip to equity markets.
Overall, investors have continued to focus on the strength of corporate earnings and balance sheets, which has enabled companies to increase the returns to shareholders through higher dividends and further share buybacks. The strength of takeover activity has also continued to provide support to equity markets.
Government bond markets enjoyed a strong three months as they benefited from a ‘flight to quality’ during the August setback in equity markets. Across the leading markets, yields fell and prices rose as investors sought the relative safety of government securities. However corporate bonds fell back, thereby widening the yield differential over government bonds.
This table shows how different indices, representing different geographical regions, have performed over various time periods to 30 September 2007.
| |
1 year |
2 years |
3 years |
4 years |
5 years |
10 years |
| UK -FTSE All Share |
12.19% |
28.65% |
60.64% |
85.91% |
116.96% |
80.58% |
| US -S&P 500 |
6.40% |
10.48% |
25.68% |
31.90% |
52.85% |
43.43% |
| Europe -FTSE World Europe ex UK |
20.13% |
43.27% |
86.10% |
115.14% |
172.42% |
127.49% |
| Asia -FTSE World Asia Pacific |
14.33% |
24.47% |
65.33% |
74.10% |
105.28% |
47.39% |
We’ve sourced the index figures, in sterling terms, from Financial Express to 30 September 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.