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After a period of consolidation during the third quarter,
equity markets responded to positive economic news by making
further advances in the final quarter to close the year with
double-digit gains from most major bourses. By region it was
the Latin American and Continental European markets that led
the performance with Asian markets pausing for breath after a
particularly strong third quarter.
In the UK there was a reversal in trends from the previous
quarter between large and small cap companies. The FTSE-100 Index
rose by 10.0% over the period with the Mid 250 and Small Cap
indices trailing, with returns of 6.9% and 4.6% respectively.
Once again IT Hardware led the sector performance, but it was
the strong returns from Mining and Telecommunications stocks
in particular that helped the FTSE-100 index lead the UK market.
Most sectors rose during the period, albeit by a modest amount
in the case of Retailers and Insurance stocks. It was only the
Electronic and Electrical Equipment sector that fell significantly,
but this was largely skewed by the poor performance of Invensys.
The investigation by the Attorney General into mutual fund
trading failed to derail US markets and the Dow Jones Industrial
Average rose 13.4% over the quarter, whilst the S&P 500 Index
closed higher by 12.2%. In the broader market the NASDAQ Composite
and Russell 2000 index of smaller companies rose by 12.3% and
14.5% respectively. These latter gains were compounded to strong
performance from previous quarters, resulting in gains for the
year of 50.6% and 46.9% respectively against rises of 27.8% from
the Dow and 28.4% from the S&P 500. European bourses benefited
from a far better quarter with significant gains from both the
German and French markets (up by 21.8% and 13.5% respectively)
and the EuroTop index of the 300 largest companies rose by 13.6%.
Despite the gains made across European markets during the quarter,
corporate credibility was knocked once again in mid-December
by the collapse of Italian food giant Parmalat, after £5
billion 'disappeared' from the company's accounts in a case of
fraud already being referred to as 'Europe's Enron'.
After a strong third quarter the pace of the Asian equity
market rally moderated during the final three months. The Hang
Seng index rose by 12.6%, largely as a result of the interest
in those stocks with exposure to the Chinese economy. Elsewhere
in the region performance was more moderate. In Japan, the Nikkei
225 index rose by just 4.5% whilst the markets in South Korea
and Singapore climbed by 16.7% and 8.9% respectively.
Notwithstanding the moderation in gains across Asia, investor
appetite remained very strong for Chinese related investments.
The IPO for China Life, capitalised at over US$3 billion based
on the float price, was heavily oversubscribed and in the two
weeks of trading before the end of the quarter, the stock rose
by almost 80%.
In the UK, the 10-year Government Stock yield rose from 4.53%
to close the period at 4.80% as interest rates were raised by
0.25% to 3.75%. There was no change in US rates, but the Fed
removed the 'easing bias' from their policy decision as the economy
picked up strength during the quarter; the 10 year Treasury fell
with the yield rising from 3.94% to 4.25% by the quarter end.
Notwithstanding the change in policy bias the Fed indicated a
desire to leave rates unchanged for the time being in order to
assist the pace of recovery in the economy. This helped to drive
the Dollar lower against both the Euro and Sterling. The fall
of -7.14% and -7.26% respectively adversely affects the translation
of returns from US assets and influenced the movement in some
non-US quoted stocks heavily exposed to US-derived earnings.
Despite the continued intervention by the Bank of Japan, the
Yen continued to strengthen against the US dollar, rising from
111.49 to 107.22.
Broadly speaking metal prices rose again this quarter, resulting
from a combination of continued strong demand from China and
US dollar weakness. The price of Gold rose during the quarter,
closing at $415.45, a gain of 7.8%. However, as a result of the
weakness in the Dollar, returns from the market for Sterling
and Euro investors were flat over the period. The Oil price traded
as high as $31 during the quarter but closed at $30.48, a gain
of 7.6%.
Datasource: Bloomberg
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