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Following a poor performance in the first quarter, global
equity indices ended the second quarter by rising tentatively
into positive territory. The FTSE World Index rose by 4.5% in
Sterling terms, whilst the FT All-Share Index rose by 1.2%, narrowly
avoiding matching the record six successive negative quarters
seen in 1972/74. The opaque outlook for the US economy dominated
investor sentiment and the overhang of negative corporate announcements
has further impacted to hinder any sustained rise in global markets.
The UK market, despite posting a positive return for the quarter,
did not benefit as much as US indices from a series of cuts in
interest rates. Surprisingly, bonds produced a negative overall
return of 2.0% against a positive 1.3% for cash. Mid-cap stocks
provided the best return from UK equities (+4.4%), a reflection
of the greater dominance of old economy or value stocks. With
the manufacturing sector effectively in recession it has been
the consumer leading the economy forward. Despite the negative
undertones that have plagued major economies, the combination
of considered cuts in interest rates, coupled with an easing
of fiscal policy has placed the UK in a stronger position relative
to other major economies. This does not however gift immunity
to a concerted slowdown in the US economy and the danger that
a continuation in consumer demand and rising house prices could
fuel inflationary pressures will need to be addressed.
In the US, the Dow Jones Index rose 5.9% in the second quarter,
whilst the technology based NASDAQ bounced 21.1% following the
worst quarterly return in its history. The issue of interest
rates continued to focus the attention of investors on the actions
of the Federal Reserve. During the quarter rates were cut by
a further 1.25% to a seven year low of 3.75%. However as the
quarter developed it became clear that the use of monetary policy
on its own was not the complete solution to the very real economic
threat facing the global economy. Over the next few months we
should see the benefit of a series of tax cuts aimed at providing
an additional stimulus to the US economy. The raft of conflicting
economic data emanating from the US only served to create greater
uncertainty among investors, as key indicators such as consumer
confidence and retail sales seem to suggest a surprisingly robust
scenario. This was in sharp contrast to a US manufacturing sector
that, like the UK, was effectively in recession.
Despite the economic woes in the US, the dollar maintained
its strength against Sterling, Yen and the Euro. With negative
economic data and an unclear monetary policy being pursued by
the ECB, the Euro now remains below the level at which Central
Banks intervened in the first quarter of 2001.
In Europe ex-UK markets fell by 1.8% (in Sterling terms) both
as a result of negative economic newsflow and inertia from the
ECB to take appropriate measures. As the quarter progressed,
industrial production figures from Germany highlighted the distress
in their economy and a series of high profile corporate profit
warnings added to the negative outlook.
The Japanese market fell slightly over the period, declining
by 0.8%. Despite the election of Junichiro Koizumi as a reformist
Prime Minister, the fears of the Japanese economy sliding back
into recession further impacted the market.
As we move into the latter half of the year the rate of negative
corporate announcements appears to be accelerating. This is to
be expected as the effects of the easing of both monetary and
fiscal policies are unlikely to be felt until 2002. The consensus
opinion is that the world economy will avoid going into recession
in 2001 although as stated earlier, current economic data is
proving confusing on a month by month basis. Assuming that economic
activity will start to accelerate in 2002, stock markets usually
anticipate this trend by between six to nine months. Thus share
prices are likely to improve in tone towards the end of 2001,
as investors focus on the likely improvement in the world economy
next year.
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