| INVESTMENT REVIEW FIRST QUARTER 2007
The first quarter provided positive returns for equity investors
albeit with a greater degree of volatility as markets see-sawed
in response to concerns over the impact of a slower US economy.
By the end of the period most major indices were higher by, on
average, a few percent, with strong gains from Germany, in response
to an improving domestic economy, and Australia where the market
closed at a record high, partly reflecting the general strength
in commodity prices.
Investor confidence faltered in late February as concern mounted
over the deterioration of the US sub-prime mortgage market. After
a period when rates have risen from 1.0% to 5.25% and consumer
demand for credit has massively expanded, it is perhaps inevitable
that pressures would be exerted upon the sub-prime market, but
anecdotal evidence suggests the trouble was fairly entrenched
with 49 US sub-prime mortgage lenders either no longer operating,
or filing for bankruptcy by the quarter end. Investor concern
over the impact upon the wider economy, combined with a more cautious
tone being adopted by the ex-Chairman of the Federal Reserve,
Alan Greenspan, led to a spike in volatility and a sharp sell-off
in global equity markets.
Markets subsequently recovered their poise and by the end of
the quarter the FTSE-100 closed up 2.8%, though still lagging
the UK mid and small-cap indices which rose 6.6% and 3.4% respectively.
The Merger and Acquisition theme remained a dominant feature,
with approaches made for Sainsbury’s, Alliance Boots and
Bodycote. The flow of capital from private equity (PE) continues
to buoy expectations of further activity, although it is notable
that some PE veterans, in both the UK and US, have decided to
capitalise on the current appetite by the wider market by announcing
plans to float their businesses.
US markets shrugged off concerns over the weak housing market
by rising to record highs before closing relatively unchanged
by the quarter-end. The Dow Jones (DJIA) and S&P 500 indices
closed higher by just 0.8% and 1.8%, with the NASDAQ and smaller-company
Russell 2000 indices up by 2.3% and 3.3% respectively. The DJIA
had risen to a new high in late February before the turmoil surrounding
the sub-prime market, with those gains being all but erased in
the following two weeks as investors tried to assess both the
impact of the weakening housing market and the effect upon the
lenders within the wider financial system.
European markets once again provided investors with good returns
over the quarter as markets welcomed improving corporate news
with the impact of higher interest rates already reflected in
equity prices. Within the key markets Germany led the gains with
the Xetra Dax closing 7.6% higher, a rise of 17.8% over the prior
12 months. The more broadly based Eurotop 300 index rose 5.4%
over the quarter.
Asian and Emerging markets performed well, albeit with a fair
degree of volatility. Investors continued to be attracted by the
outlook for faster economic growth. Despite a concerted effort
by Central Banks in the region to curb this growth by raising
interest rates in order to keep inflation under control, markets
performed strongly over the quarter. The Chinese market, having
more than doubled in 2006, rose a further 24% as the speculative
appetite for exposure to this fast growing economy resulted in
many leading shares trading at valuations in excess of their peers
in more developed markets. The Indian market, another very strong
performer in 2006, succumbed to profit taking, closing down 6.8%.
Elsewhere the Japanese Topix index rose a more modest 2.4% and
the wider MSCI Emerging Markets index closed higher by 4.1%.
Facing a backdrop of global monetary tightening, fixed interest
investments remained a disappointing asset class over the period.
In the UK the benchmark 10-year Gilt yield rose from 4.74% to
close the quarter at 4.99%, with the comparable German Bund rising
to 4.10% from 3.95% at the end of 2006. However, in the US, the
10-year Treasury fell from 4.70% to 4.68% reflecting concerns
over the slowing of the US economy as evidenced by the weak housing
market. US interest rates remain on a plateau at 5.25% and US
bond yields are reflecting the growing feeling that the next move
in US interest rates is now likely to be down in the second half
of the year.
Commodity prices continued to reflect the buoyant global economy,
with the CRB index rising 3.4% to close at 317.6. Gold closed
5.9% higher at $674.45 and Silver was 6.4% better at $13.73. The
oil price continues to be affected by political developments in
the Middle East and increasing tensions in Iraq and Iran resulted
in the price rising 13.9% over the quarter to $68.51, the highest
closing quarterly level since June last year.
Currencies moved within a relatively tight trading range over
the quarter, with Sterling closing at $1.9709 and €1.4676.
The Dollar, remaining weak against a basket of currencies, fell
to $1.343 and ¥118.74 by the close.
April 2007
(Data source: Bloomberg) - All returns in local currency terms
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