Quarterly investment commentary – third quarter 2009

A strong quarter for financial markets

Over the third quarter, equities and corporate bonds continued their strong rally from the lows of early March. By the end of the quarter, in one of the most dramatic reversals of fortune ever witnessed, the UK FTSE All-Share Index had risen by nearly 50% from its lowest point in March. (It increased by 6% over 12 months to the end of the quarter.) In the third quarter alone, the FTSE All-Share Index posted a total return of 22% and the FTSE 100 Index saw its best quarter in the 25-year history of the index. The Japanese stock market was the only one to go against the positive global trend. Improved economic data, the stabilisation of the western banking system and better-than-expected second quarter corporate earnings all helped to buoy investor sentiment.

Companies have been adept at imposing strict cost controls that have boosted productivity and corporate profitability. After the severe inventory destocking in the winter months, manufacturing has been boosted by companies rebuilding their stocks. Overall, historically low interest rates and the huge fiscal stimulus from governments have already begun to revive the global economy.

In August, the Federal Reserve commented that the worst of the US recession could be over, and the US housing market appears to have stabilised. In Europe, France and Germany have moved out of their year-long recessions, recording modest growth in the second quarter. There was also good news from Asia where Hong Kong and Japan emerged from recession in Quarter 2. Elsewhere, China saw an acceleration in the pace of industrial output and retail sales. The UK economy remained in recession, contracting by 0.6% in the second quarter.

The Bank of England believes that any recovery in 2010 will be fragile. In order to support the economy, the Bank added a further £50bn to its quantitative easing programme, bringing the total available to £175bn. Quantitative easing entails pumping money into the financial system through purchases of government securities and high-quality corporate bonds, and so has continued to support these asset classes. Both investment grade and high yield corporate bonds outperformed government securities in Quarter 3 amid the continuing improvement in risk appetite.

Many companies have taken advantage of the improving economic and market environment to strengthen their balance sheets through rights issues, which have been surprisingly well received. Other companies have viewed attractive share valuations as an opportunity to launch takeover bids, such as the high-profile offer for Cadbury from Kraft Foods and Dell’s approach for computer services company Perot Systems.

This table shows how different indices, representing different geographical regions, have performed over various time periods to 30 September 2009.

We’ve sourced these index figures, in sterling terms, from Financial Express to 30 September 2009. 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 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.