A dramatic start to 2008
2008 began on a dramatic note for equity markets across the globe as the falls in US house prices and continuing fall-out from the US sub-prime mortgage crisis caused investors to become increasingly risk averse. The problems surrounding the global credit crunch intensified. Banks in leading western economies became increasingly reluctant to lend to each other, amid fears over the extent of their exposure to sub-prime mortgage defaults and associated investment vehicles.
March witnessed the rescue of leading US investment bank Bear Stearns through a proposed takeover by JP Morgan. Against this difficult backdrop, the banking sector performed poorly. Banks and financial companies account for a large proportion of western equity markets, and consequently their performance dampened overall investment returns.
In response to these challenging conditions, the US Federal Reserve cut interest rates sharply to 2.25% from 4.25% at the start of the year. The US central bank has now cut rates six times since they started to reduce them last September. The Federal Reserve has also pumped considerable liquidity into the financial system to help ease the credit squeeze and improve the scope for bank lending.
The harsher environment has hurt both consumer and business sentiment. The pressure on household incomes has intensified through higher food and energy prices, while the US employment market has softened. There have been growing fears that the US economy could experience a recession this year.
Central banks in the UK and Europe have also reacted to the credit squeeze by increasing the funds available to the banking sector. To date, only the Bank of England has lowered interest rates as the European Central Bank remains concerned over inflationary pressures. However, there are already signs that economic growth is slowing in both the UK and Europe and rates are expected to be lower in both economies by the year-end.
While equities experienced a poor start to the year, government bonds benefited from their safe haven status. As risk appetite fell sharply, investors sought the safety of government bonds, where the backdrop of slowing economic growth and lower interest rates proved supportive. In contrast, corporate bonds performed poorly. A large portion of the investment grade market comprises bonds from banks and financial companies, which have been hurt by the tighter credit conditions and the turmoil affecting this part of the market.
This table shows how different indices, representing different geographical regions, have performed over various time periods to 31 March 2008.
| |
1 yr |
2 yrs |
3 yrs |
4 yrs |
5 yrs |
10 yrs |
UK -
FTSE
All Share |
-7.74% |
2.54% |
31.27% |
51.70% |
98.72% |
41.41% |
US -
S&P 500 |
-6.86% |
-8.41% |
10.85% |
14.33% |
32.16% |
13.54% |
Euro -
FTSE
World Europe
ex UK |
2.84% |
15.60% |
57.27% |
86.55% |
155.42% |
84.53% |
Asia -
FTSE
World
Asia Pacific |
-3.91% |
-5.33% |
36.35% |
39.76% |
101.42% |
70.30% |
We’ve sourced these index figures, in sterling terms, from Financial Express to 31 March 2008. 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.