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Most equity markets rose over the quarter, ending the year
on a positive note with double-digit percentage gains across
many markets. As in the previous quarter the gains were strongest
in Asia, with Korea closing at an all time high and the Japanese
market, reacting to improving economic data, posting its greatest
annual rise since 1986. The notable laggards during the quarter
were China and Hong Kong, where the Hang Seng Index posted a
decline over the quarter as analysts cut their forecasts for
corporate earnings in 2006 on concerns over the outlook for consumer
spending in the face of rising interest rates.
Gains in the UK market were led by the mid-cap FTSE 250 Index
closing at 8,794.3, just below its all time high and a rise of
10.6% over the quarter, 26.8% for the year. M&A activity
buoyed the mid-caps, with approaches made to 7 companies within
the index during the fourth quarter alone. The Chancellor's pre-Budget
statement in early December contained few surprises - tax rises
from North Sea oil and gas operations were announced, though
no windfall taxes mentioned. Confirmation that GDP growth for
2005 would be in the region of 1.75%, about half the level forecast
in the spring, had been widely expected and failed to dent the
sense of optimism in the marketplace toward further M&A activity.
Large cap stocks, as measured by the FTSE-100 Index, rose by
2.6% over the quarter to their highest level since July 2001.
With a rise for the year of 16.7%, 2005 was the best performing
year for the Index since 1999 when a rise of 17.8% drove the
Index to a record high. Small cap stocks rose by 4.1% over the
period, closing the year up 16.4%.
US markets rose marginally over the quarter with gains led
by the NASDAQ Index, higher by 2.5% at the close. The Dow Jones
Industrial Average and S&P 500 indices rose 1.4% and 1.6%
during the period, but with returns for the year of -0.6% and
3.0% lagged other developed markets by a wide margin. Despite
the more muted returns from equities, economic releases remained
positive and the Federal Reserve continued to raise rates, though
signalling a plateau toward the end of the quarter with the removal
of the 'accommodative stance' from its accompanying statement.
European markets performed well over the quarter as economic
data suggested a recovery in the Eurozone economy. An upgrade
to the forecast for GDP in 2006 and 2007 by the ECB in December
provided a further boost to investor sentiment. The strength
of the US Dollar in 2005 helped exports, particularly Germany.
Domestic demand remained fragile, but falling unemployment and
signs of a recovery in the housing market resulted in increased
mortgage lending. The new German government is likely to encourage
industrial reform and modernisation of working practices. Alongside
these positive signals the EuroFirst 300 Index closed higher
by 4.5%, with the French CAC-40 and German DAX indices rising
2.5% and 7.3% over the quarter and 23.0, 23.4% and 27.1% for
the year.
Asian equity markets led the gains globally both over the
quarter and for the year. The broad recovery in Japan and the
continued strength in the Chinese and Indian economies underpinned
positive sentiment toward the region, particularly from Western
investors. Gains were led by South Korea and Japan, whose KOSPI
and Nikkei 225 indices rose 14.2% and 18.7% over the quarter,
up 55.7% and 40.2% over the year. Resources provided a further
boost to Australian equities, with the ASX closing higher by
2.6%, a rise of 17.6% for the year. Despite an upward revision
to GDP growth in China during December, providing a boost to
share prices, the FTSE/Xinhua China 25 Index fell 2.1% over the
quarter; the Hong Kong market also retreated by 3.6%.
Bond markets provided mixed returns to investors over the
period. The 10-year Gilt yield fell to 4.10% from 4.29% despite
confirmation in the Chancellor's statement of a substantial increase
in issuance over the coming year. In the US, the 10-year Treasury
yield rose marginally, from 4.33% to 4.39% and a sell-off in
Europe (alongside expectations of the tightening of monetary
policy) saw the 10-year German Bund fall, with the yield rising
from 3.15% to 3.30%. The European Central Bank raised interest
rates by 0.25% to 2.25% during the quarter, the first change
for 2_ years.
Precious metals shone during the period, with Gold, Silver
and Platinum all posting substantial increases. Gold, the most
widely monitored of the three, closed at $517, a level not seen
since the 1980s. Other commodity prices performed less well during
the period and the CRB index declined by a modest 0.3%. The Oil
price (as measured by Brent), having experienced a rollercoaster
year in 2005, fell by a further 5.9% to $58.87, 12.8% below its
August peak but still some 46.3% higher than the end of 2004.
The dominant feature in currency markets over the quarter
was the continued weakness of the Yen. Despite staging a small
recovery toward the end of the quarter the Yen closed lower by
3.7% at 117.75 to the US Dollar. Elsewhere, the major currencies
rose marginally against the Greenback, with the Euro closing
at $1.1849 and Sterling at $1.723 against levels of $1.2026 and
$1.7643 the previous quarter.
(Data source: Bloomberg)
NB: All returns in local currency terms
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