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.
Equity markets end the year with a flourish
The majority of world equity markets performed well in the fourth quarter, with the US achieving a double-digit return. However, some of the emerging markets, notably China and Brazil, underperformed the major indices. On 24 December, the UK FTSE 100 Index moved through 6,000 for the first time since June 2008, closing at 6,008. The market’s strong performance in the fourth quarter reflected the strength of UK corporate profits, a large proportion of which are earned overseas.
Global bond markets experienced a poor quarter despite yields on government bonds rising sharply from the exceptionally low levels witnessed earlier in 2010. Inflation has been trending higher in a number of world economies, fuelled by the strength of commodity prices. While the yield advantage enjoyed by corporate and emerging market bonds over government securities narrowed significantly over the course of the year, both continue to offer good relative value. In the wake of the improvement in the global economy, corporate default rates are at historically low levels.
World equity markets began the quarter on a strong note amid the growing belief that the weak US economic recovery would trigger a second phase of quantitative easing (printing money) by the Federal Reserve. This was expected to give a boost to financial markets, with the consequent wealth effect for US investors helping to stimulate consumer spending, which is responsible for around 70% of US economic activity. In early November, the Federal Reserve duly announced a $600bn programme of quantitative easing, which was slightly bigger than expected and was well received by investors.
US Government bond markets had risen ahead of the announcement, as the programme was expected to involve substantial purchases of US Treasury bonds by the Federal Reserve. However, soon afterwards sentiment was hit by renewed concerns over the debt problems in peripheral eurozone economies given the difficulties faced by the Irish government. On 28 November, the European Union and the International Monetary Fund agreed an €85bn bail-out package for Ireland to address its funding problems.
Risk appetite returned in December and while it was a good month for equities, government bond markets fell back. Equity investors were cheered by some positive economic data, including an upward revision to US Quarter three gross domestic product growth to an annualised rate of 2.6%, and November’s pick up in Japanese export growth. Additionally, in late November the Japanese government passed a $61bn stimulus package designed to boost the economy and create jobs.
This table shows how different indices, representing different geographical regions, have performed over various time periods to 31 December 2010.
| |
1 yr |
2 yrs |
3 yrs |
4 yrs |
5 yrs |
10 yrs |
UK
FTSE All Share |
14.51% |
49.00% |
4.41% |
9.96% |
28.38% |
43.25% |
US
FTSE USA |
18.76% |
34.45% |
17.67% |
22.60% |
24.42% |
11.15% |
Asia
FTSE World Asia Pacific |
21.88% |
45.75% |
21.77% |
32.64% |
33.02% |
67.56% |
Europe
FTSE World Europe ex. UK |
5.75% |
27.00% |
-3.47% |
11.70% |
34.19% |
43.44% |
We’ve sourced these index figures, in sterling terms, from Financial Express to 31 December 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.
January 2011
