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Global equity markets started the year on a positive note
with commentators forecasting gradually rising equity markets
in 2006. The main feature of Q1 has been the high degree of Merger
and Acquisition (M&A) activity that has helped to produce
buoyant returns across all markets. Hostile bids alone totalled
$234bn in the first three months of the year. European markets
led this trend by deal value and, perhaps by no coincidence,
led the gains over the quarter. Asian markets, building on previous
gains, reacted well to data reaffirming the superior economic
growth being generated within the region. US markets, though
higher over the quarter, produced mixed returns with smaller
companies making new highs whilst the larger cap stocks remained
relatively sluggish.
In the UK gains were led once again by the mid-cap FTSE-250
Index that touched a new high towards the end of the quarter,
closing at 9,935.0, a rise of 13.0% during the period and 38.7%
over the last year. Returns from both the FTSE-100 and Small
Cap Indices were positive, with rises of 7.6% and 9.9% respectively.
Resource stocks led the market over the period, posting significant
gains in line with underlying commodity prices. Bids for BOC
Group, P&O and BAA together with approaches to ITV and Prudential
buoyed the market, with many more companies across the dominant
resources and financials sectors rumoured to be the subject of
further M&A activity, as the value of corporate deals (globally)
reached the highest level since the late 1990s.
Despite continued growth in the economy, US markets remained
the global laggards during the quarter. Alan Greenspan stepped
down after 18 years as Chairman of the Federal Reserve to be
replaced by Ben Bernanke, an appointment that seems to have been
taken well by markets at this early stage. The Dow Jones Industrial
Average and S&P 500 Indices rose by approximately 5.0% whilst
the NASDAQ gained 7.0%, the highest quarterly gain since the
Technology bubble burst in 2000. The smaller companies Russell
2000 Index, perhaps more closely reflecting domestic America,
rose by 13.8%, closing at a new all time high level.
European markets, as a result of both increased M&A and
an improvement in the economic outlook, rose strongly over the
period. Social unrest in France failed to deflate market enthusiasm
and the CAC-40 Index of leading companies rose 10.7%. In Germany
the picture was broadly similar with the DAX Index climbing by
11.5%. Further upgrades to the outlook for growth were made during
the quarter, building upon the momentum from the latter half
of 2005: in response, the broader EuroFirst 300 Index rose by
10.8%.
Asian markets returned further gains over the period as the
outlook for GDP growth was raised over the quarter in some key
markets. Japan experienced a more volatile quarter as the scandal
surrounding the high-flying internet company 'Livedoor' threatened
overseas enthusiasm for Japanese equities. However, the move
by the Bank of Japan to end its quantitative easing policy, in
effect signalling the end of deflation provided a further boost
to confidence and by the end of the quarter the Nikkei 225 Index
was higher by 7.0%. Elsewhere in Asia markets performed well
with the Hong Kong, Australian and Singaporean indices higher
by 8.2%, 9.3% and 8.4% respectively. The notable exception within
the region was Korea, falling by 0.4%, reflecting consolidation
after the near 40% rise over the second half of 2005.
Continuing monetary tightening in the US and Europe led to
poor returns from bonds over the quarter. The yield on 10-year
Gilts rose from 4.10% to 4.39% and in the US 10-year Treasuries
saw yields rise from 4.39% to 4.85%. In Germany, where historical
lows on the 10-year Bund had been reached in the latter half
of 2005, yields remained broadly unchanged over the quarter at
3.31%.
Commodity prices, especially precious metals, increased markedly
over the quarter. Gold, traditionally perceived as a hedge against
inflation and a weaker US dollar closed at $588.50, a rise of
13.8% and Silver gained 36.3% to close at $11.72. Both metals
now trade at their highest levels for over 22 years. The Oil
price, having fallen earlier in the period, gathered momentum
toward the quarter end to close at $67.16, a rise of 14.1%.
The major currencies traded in a fairly narrow band throughout
the quarter.
(Data source: Bloomberg)
NB: All returns in local currency terms
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