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INVESTMENT REVIEW FOURTH QUARTER 2006
Equity markets performed well over the quarter, responding
to a stabilisation of the oil price and a continuation of the
buoyant environment for Mergers and Acquisitions. Most major
indices closed materially higher by the quarter end, with double-digit
returns (in local currency terms) achieved across many regions
over 2006. Bonds struggled over the quarter against the background
of a 0.25% rise in UK interest rates and a 0.50% increase by
the European Central Bank (ECB). Unsurprisingly the yield on
10-year bonds rose in the US, UK and Europe. However economic
data suggested a more benign outlook for inflation in 2007.
Investor sentiment remained buoyant during the final quarter
of the year. In the UK, gains were once again led by the mid
and small cap stocks where the respective indices rose by 11.8%
and 11.2% supported by a number of bids, both rumoured and actual,
within this segment of the market. For the year as a whole, the
indices rose by 27.1% and 20.1%, a credible result following
a strong 2005. The larger cap stocks, as measured by the FTSE-100
index, lagged their smaller peers but still posted a 4.4% rise
over the quarter and 10.7% over 2006.
Three themes dominated the US market over the quarter: Iraq,
the mid-term elections and uncertainty over the strength of consumer
confidence. After a buoyant start the US housing market declined
in the second half of the year, with new home starts under pressure
and over-supply adding to concerns going forward. The deteriorating
market remains a negative theme for 2007. The mid-term elections
proved to be tough for the Bush administration, confirmed by
the Democrats taking control of Congress, but with the war in
Iraq being more openly criticised in the US and support for an
ongoing presence faltering, this was largely expected by the
markets. Stocks closed higher across the board with the Dow Jones
Industrial Average and S&P 500 indices up 6.7% and 6.2%,
with the NASDAQ and Russell 2000 indices rising 7.0% and 8.6%.
For the year as a whole those indices rose 16.3%, 13.6%, 9.5%
and 17.0% respectively.
Asian and Emerging markets generally performed well over the
quarter, but Japanese equities (particularly within the smaller
companies indices) proved to be disappointing over the year.
In Asia gains were led by a resurgence in demand for Chinese
stocks, fuelled by a stream of new public offerings, including
the Industrial and Commercial Bank of China (ICBC) floatation
that raised over $19bn, the largest single IPO ever completed
and oversubscribed by over 40 times as investors sought to gain
exposure to growth in that region. Chinese stocks surged higher,
with the Shanghai Composite index closing up 52.7% over the quarter
and 130.3% over 2006. Elsewhere in Asia the Bank of Thailand
conducted a disastrous attempt to curb excessive speculation
in the Baht, providing investors with a reminder of the potential
dangers of investing in emerging markets and pushing the local
index into negative territory for 2006. Elsewhere markets provided
positive returns during the quarter with the Japanese TOPIX index
rising 4.4%, though after a difficult first half higher by just
1.9% for the year, the broader MSCI Asia ex-Japan index rose
13.4% over the quarter and 25.2% for the year. Global Emerging
Markets performed well, rising 17.3% and 29.2% for the period
and the year respectively.
Bonds proved to be the weakest asset class during the period,
with yields rising as prices fell in the main developed markets.
With investors still uncertain as to the direction of future
interest rate moves, the UK 10-year Gilt yield rose from 4.52%
to 4.74% and the comparable US Treasury from 4.63% to 4.70%.
The ECB continued their tightening, with two further rises of
0.25%, taking the rate to 3.25%, and the 10-year German Bund
yield rose to 3.95% from 3.71%.
Commodity prices ended the period unchanged, as measured by
the CRB index closing at 307.3 from 305.6 in September. Precious
metals rose further, with Gold closing higher by 6.4% at $636.7
and Silver by 12.8% at $12.9. Having slipped by over 16% in the
last quarter from the record highs witnessed in August, oil closed
marginally lower at $60.1.
Currency markets were dominated by the weakness of the US
Dollar. Against most major currencies the Greenback slipped further,
almost touching $2 to the Pound in early December, a level not
seen since 'Black Wednesday' in September 1992. The Dollar closed
at $1.959 by the quarter end, a decline over 2006 of 13.7% against
Sterling. The US currency fell against the Euro as well, which
rose to $1.32 by the quarter end, a rise of 4.1% over the period
and 11.4% for the year as a whole. However the Yen just marked
time, closing at 119.1, a fall of 0.8% for the quarter and 1.1%
for the year.
January 2007
(Data source: Bloomberg) - All returns
in local currency terms
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