Quarterly investment commentary – fourth quarter 2009

Another good quarter for equities

A strong fourth quarter rounded off an extraordinary year for the world’s financial markets. Having reached multi-year lows in early March, equity markets rallied strongly over the rest of the year. Investors became increasingly encouraged by signs of a recovery in global economies as the financial system stabilised. Of the G20 nations, only the UK remained in recession by the third quarter. One of the key supports for financial markets has been the high level of ease with which investments can be converted to cash at their present market value as central banks across the world have kept interest rates at historic lows. In the West, quantitative easing – effectively printing money – has supported both government and corporate bonds, helping to ease some of the concerns over their increased issue. Since March, the authorities have continued to buy back high-quality bonds from banks and other financial institutions. The loose monetary conditions combined with government spending to influence the economy have helped to foster renewed growth in the world economy. While Australia and Norway have begun to raise interest rates again, rates in western economies are expected to remain low over the coming year.

Economic data released in the fourth quarter highlighted the continuing recovery in global growth and during this period the UK is also expected to have emerged from recession. In the UK, unemployment is now expected to peak at a significantly lower level than earlier forecast. House prices have continued to strengthen, while December’s Purchasing Managers’ Index revealed that UK manufacturing activity grew at its fastest pace since July 2007.

There have also been some positive signs in Japan, which was hit hard by the downturn in overseas demand for the country's manufactured goods. Although domestic demand remains weak, the latest data for the manufacturing sector was stronger than expected, boosted by the improved demand for Japanese exports. China, the world’s third largest economy, is one of the key drivers of global economic activity. For 2009, China is expected to deliver gross domestic product* growth of around 8.5%. Over the course of 2009, the Chinese economy benefited from a £354bn government incentive programme, which included spending on major projects to boost domestic activity. Sentiment towards Asia and other emerging markets was buoyed by the renewed strength of these economies and their equity markets were the strongest performers in 2009. The US is still the world’s largest economy and during the quarter sentiment benefited from some positive data on housing, employment and retail sales, and better-than-expected corporate news. While the eurozone economies are also on a recovery path, concerns have focused on countries with large budget deficits. In the Middle East, debt problems were also highlighted by the recent repayment difficulties faced by Dubai World.

* The market value of all goods and services made within the borders of a country in a year.

This table shows how different indices, representing different geographical regions, have performed over various time periods to 31 December 2009.

We’ve sourced these index figures, in sterling terms, from Financial Express to 31 December 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. 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. The usual way 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 find the right product and 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 don’t give 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.