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The poor performance of equity markets in the third quarter
continued briefly into the final quarter of 2002, before a powerful
rally in mid October broke the downtrend. During this rally,
the Dow Jones Industrial Average index experienced its biggest
four-day gain in over 70 years, rising by 13.3%. However, overall
sentiment remained nervous during the quarter and by the end
of December much of the earlier gains had been lost due to a
combination of factors, ranging from the ongoing threat of terrorism
to concerns over the consumer's ability (and willingness) to
spend in 2003. In the UK the sharp increase in the Chancellor's
estimate for Government borrowing in 2003, alongside downward
revisions to his GDP forecast, led to further downgrades in the
expectations for corporate profitability and this helped fuel
the growth in negative sentiment toward the end of the quarter.
Despite giving up ground in December, most of the main global
indices ended positively over the quarter, but in negative territory
over the year. In the UK the rally began with the more liquid
stocks although the gains broadened to the mid-cap 250 index
later in the quarter. The FTSE 100 index closed the quarter up
6.4%, but down 22.0% over the year. In the mid cap arena, the
FTSE 250 index rose by 1.4%, and fell by 24.9%, over the quarter
and the year respectively. The more broadly based FT-All Share
index appreciated by 5.7% in the final quarter although throughout
2002 declined by 22.4%. Widely reported doubts over the sustainability
of the burgeoning housing market, coupled with corporate bankruptcies,
gave rise to concerns over the banks' default provisioning and,
in-particular, the maintenance of their dividend payments in
the coming year. Much of the fall in the market over December
was accounted for by the banks, which still represent over 20%
of the UK market by capitalisation. By contrast, the Telecommunications
sector was one of the better performing areas during the period,
rising by 30.2%, albeit from levels typically some 75% below
peak valuations as positive comments from Vodafone over future
growth led investors back to the sector.
Global markets are still largely led by the US; the Dow Jones
index rose by 10.6% in Q4 to end the year down 15.0%. This picture
was replicated across the broader S&P 500, which increased
by 8.4% over the quarter but fell 22.1% over the year. Once again
it was the technology weighted Nasdaq index that proved to be
most volatile of the leading US indices, rising by 14.1% during
the period yet showing a decline of 31.3% for the year. European
markets responded well to the rallies in the US and UK, with
the Eurotop 300 index rising by 5.0% over the quarter. However,
following a very poor second and third quarter the index closed
down 30.1% on the year. In Asia and the Far East, markets were
mixed over the last quarter with the Nikkei 225 in Japan falling
by 8.5% and the Hang Seng index in Hong Kong and Australia's
ASX rising by 2.5% and 1.9% respectively. These moves were largely
driven by domestic issues such as Japan's continued economic
woes, and the strength of commodity prices which helped lift
the commodity sensitive ASX. However, after a very poor year
for world equity markets these indices all closed in negative
territory at the year-end.
A new threat emerged during December from North Korea, which
has been accused of violating nuclear proliferation agreements.
The reality of further terrorist attacks was evident during the
quarter in Bali, Kenya and off the coast of Yemen. Markets were
not affected by the individual acts themselves, but they served
as a reminder that the threats remain all too real and will continue
to undermine investors' confidence. In the Middle East tensions
remained high and as UN weapons inspectors entered Iraq to search
for evidence of weapons of mass destruction, the threats against
full compliance with the UN resolutions from the United States
continued to dominate headlines, alongside a build-up of activity
by the US military.
A strike in Venezuela (one of the world's leading Oil producers)
toward the end of the quarter, together with the threat of further
conflict in the Gulf led the Oil price higher over the quarter
by 3.9% to close at $29.99 per barrel.
Within such an uncertain climate the 'safe-haven' investments
of Gold and the Swiss Franc performed well over the quarter.
The precious metal ended the year at $347.73, representing an
appreciation of 7.5% over the last quarter and 24.8% over the
year. The Swiss currency rose by 6.6% against the US dollar over
the quarter.
In the US, the Federal Reserve continued to provide economic
stimuli by easing monetary policy; a further cut of 0.5% to 1.25%
brought rates to their lowest level for 41 years. The Euro strengthened
during the period, breaking through parity with the dollar and
ending the year at 1.049. Against a background of slowing economic
conditions in the Eurozone, the ECB cut interest rates by 0.5%
to 2.75% during the quarter, the first in over a year. Within
the UK, continued growth in the housing market led the MPC to
leave interest rates unchanged at 4%. As a result of the continued
low interest rate environment bond markets remained fairly flat
over the period. After a sell-off in late October (to accompany
the equity market rally), investors returned to higher quality
credits in December as sentiment became more risk averse in the
run up to the year end.
Data source: Bloomberg
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