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Following the gains made over the latter part of 2003, equity
markets paused for breath during the quarter under review. Most
major indices rose over January and early February, only to surrender
those gains in March. The combination of slight fears over slowing
global economic growth, coupled with the impact of the Madrid
bombings led to a more cautious approach towards markets. In
a reversal of fortunes from the previous quarter it was the Asian
markets that posted the highest returns with European and US
markets slightly positive.
In the UK, returns were greater within the Mid 250 and Small
Cap stocks after earlier gains made in the FTSE-100 index were
largely eroded toward the quarter end. The FTSE-100 closed marginally
higher, up 1.44%, whilst the Mid 250 and Small Caps rose by 9.62%
and 7.03% respectively. The disclosure from Shell that their
proven oil reserves were to be cut by 20% shocked the market
and led to a decline of 12.3% in their share price. The Oil sector
remained weak over the quarter, alongside declines seen in Banks
and Pharmaceutical stocks. The better performing areas in the
UK over the period included the Construction and Building Materials
sectors, seen as a beneficiary of increasing Government spending
and a buoyant property market. During his Budget speech in March,
the Chancellor of the Exchequer predicted a Public Sector Borrowing
Requirement (PSBR) of £33bn for 2004/5 and £27bn
for 2005/6, compared to forecasts of £27bn and £24bn
respectively a year earlier.
Unsurprisingly, with a General Election no more than 18 months
away, any substantive increases in taxation to reduce this deficit
have been deferred.
US stocks closed only marginally higher over the quarter despite
a more positive tone being adopted by many companies reporting
their Q4 2003 earnings. The cautionary tone from Federal Reserve
Chairman Greenspan regarding continuing high unemployment prompted
a degree of profit taking later in the quarter and the Dow Jones
Industrial Average closed up 1.52% whilst the S&P 500 and
Nasdaq Composite indices returned 3.90% and 3.89% respectively.
Smaller companies fared better once again, with the Russell 2000
index rising by 9.18%. In Europe the picture was a little a more
opaque, with concern over the strength of the Euro fuelling worries
over the fragility of the economic recovery. The German IFO index
of business and consumer confidence, having risen over the latter
part of 2003, began to show signs of stalling and the DAX index
in Germany rose 2.1% over the period. Elsewhere in Europe equity
markets were stronger and the EuroTop index of the 300 largest
companies rose 6.61% over the quarter.
Foreign interest in Asian equities resulted in their markets
moving higher during the quarter. Japanese equities benefited
from better than expected economic data and a long-awaited growth
in consumer spending. At the end of the period the Nikkei 225
index had risen by 12.48% and 47% for the fiscal year, the highest
yearly return in more than 30 years. The Chinese economy continued
to surge during the quarter and the authorities, recognising
the need to engineer a more controlled period of economic growth,
announced a tightening of the short term lending rate to banks
by 0.63% to 3.33%. Elsewhere in Asia, markets were broadly higher
over the quarter and the South Korean and Singaporean indices
closed higher by 9.04% and 7.57% respectively.
Interest rates in the UK were raised by 0.25% to 4.0% as the
MPC continued to target the growth in consumer borrowing. The
corollary of this rise was a strengthening in the value of Sterling
against both the US Dollar and the Euro. At the closing level
of $1.821 and ¤1.5152 the Pound had risen by 1.73% and
6.97% against these currencies respectively. Despite inflationary
concerns in the US, rates remained unchanged over the quarter.
European rates also remained on hold over the quarter, although
weakness in the Euro toward the end of the period signalled concern
over a possible reduction in rates by the ECB as a result of
the anaemic economic outlook.
Bond markets remained fairly static in the UK, despite the outlook
for higher rates, and the yield on 10 year Gilts rose marginally
to close at 4.92%. In the US, bond markets moved sideways over
the quarter and the yield on 10 year Treasuries fell from 4.25%
to close at 4.21%, as investors concluded that US interest rates
would not rise significantly in 2004.
Commodities maintained their upward trend over the period,
although the difficulty in identifying actual demand against
alleged stockpiling by the Chinese has made some commentators
cautious toward the sustainability of current levels. At the
end of the quarter Gold closed marginally higher at $415.65 while
weakness in the Oil sector contrasted with the strength in Brent
Crude which rose 2.40% to close at $31.21.
Datasource: Bloomberg
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