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 there’s something you don’t understand, please contact your adviser. It is not an offer to buy or sell any investments or shares.
A strong quarter for equities and bonds
Most financial markets achieved a strong performance in the third quarter of the year, although Japanese equities posted a modest negative return. Stock markets in the UK, US, and emerging markets recorded double-digit gains, and bonds also enjoyed a good quarter.
At the start of the quarter, world equity markets experienced an early spell of ups and downs, but a later rally gathered pace towards the end of the period. At first, risk aversion rose on the back of weaker-than-expected US economic data. The US recession officially ended in June last year, but the recovery seems to have lost momentum, with quarter 2 growth revised down to 1.7%. Initial estimates had suggested quarter 2 growth would be 2.4%, and 3.7% for quarter 1. The US has seen a jobless recovery with unemployment proving stubbornly high at almost 10%. With the pace of recovery faltering, some commentators are forecasting a double-dip recession. However, this is unlikely as the Federal Reserve seems prepared to adopt further measures to prevent another sharp downturn. Besides, with the mid-term congressional elections due in November, voters will be looking for new polices to boost employment.
With US interest rates already close to zero, the Federal Reserve is likely to embark on a further round of pumping cash into the financial system to create liquidity, which should filter through to the wider economy. The first phase came to a halt in March having successfully supported both bond and equity markets. Consequently, sluggish growth will not necessarily detract from the prospects for equities. Indeed, 2010 has already seen a disconnect between the fortunes of the US economy and the stock market due to the strength of company earnings. The latter have benefited from strict cost-cutting programmes, continuing corporate restructuring and, importantly, renewed organic growth as strong companies have thrived as weaker competitors disappeared.
In contrast to the US, quarter 2 economic growth in the UK and Europe exceeded expectations, the latter buoyed by a strong performance from Germany. German growth was not solely attributable to the buoyant export sector, where the weaker euro has proved helpful, but from a notable pick-up in domestic consumption and higher investment. Pan-European economies are expected to continue their recovery despite the restraints placed on consumer spending by pay cuts and other measures.
The third quarter proved a strong period for government bonds, which benefited from concerns over growth in the developed world and the generally low inflation environment. Meanwhile, on the commodity markets gold continued to attract support, with the price reaching a record high.
This table shows how different indices, representing different geographical regions, have performed over various time periods to 30 September 2010.
| |
1 yr |
2 yrs |
3 yrs |
4 yrs |
5 yrs |
10 yrs |
UK
FTSE All Share |
12.49% |
24.63% |
-3.10% |
8.71% |
24.66% |
31.94% |
US
FTSE USA |
11.80% |
16.42% |
4.71% |
12.04% |
17.68% |
-8.90% |
Asia
FTSE World Asia Pacific |
10.44% |
37.26% |
8.07% |
23.56% |
34.51% |
29.70% |
Europe
FTSE World Europe ex. UK |
1.18% |
17.85% |
-5.38% |
13.67% |
35.56% |
39.19% |
We’ve sourced these index figures, in sterling terms, from Financial Express to 30 September 2010. 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 you take from it, 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 strongly recommend you speak to your adviser before making any changes to your plan.
October 2010
