|
Following the rally in equities in April and May (commonly
referred to as the 'Baghdad Bounce'), the third quarter was a
period of consolidation for markets and, as a result, the performance
was mixed among equity indices. Generally the trend was positive,
with gains generated from most major bourses. Beneath the headline
figures however, there was a divergence between the performance
of large and small-cap stocks, as well as individual sectors.
In a continuation of the trend established during the previous
quarter, investor's appetite for small and mid-cap stocks continued
over the period.
In the UK, the FTSE 100 index rose by 2.67% over the quarter,
whilst the broader Mid-Cap 250 index closed higher by 10.93%.
However, the gains were greatest among smaller companies with
the FT Small Cap index, rising by 12.71%. The IT Hardware and
Electronics & Electrical Equipment sectors generated the
best returns during the quarter as investors looked for those
companies most highly geared into a cyclical recovery. Of the
sectors that fell during the period, the Insurers led the way
(primarily as a result of the decline in Royal & Sun Alliance
after their deeply discounted rights issue), followed by the
highly defensive Tobacco stocks.
Similarly, US markets posted solid positive returns during
the period and the Russell 2000 index of smaller companies gained
9.08% over the quarter, outstripping the rises of 3.22% and 2.65%
from the Dow Jones Industrial Average and S&P 500 indices
respectively. However, once again, it was the Nasdaq index that
led the US rally, posting a gain of 10.22% at the quarter end.
European bourses closed higher, but the returns were far lower
than those seen in the previous quarter. The dominant French
and German markets rose by 1.65% and 1.12% respectively, whilst
the broader EuroTop index of the 300 largest companies climbed
by 1.88% during the quarter. Asian stock markets continued to
make progress, reflecting the superior economic growth rates
of that region. The Hang Seng index rose by 18.74% indicating
continued demand for companies exposed to the mainland Chinese
economy. In Japan, still the world's second largest economy after
the United States, the equity market improved by 12.84%, as positive
signs of an economic recovery emerged during the quarter.
The sell-off in bond markets which began towards the end of
the second quarter intensified during July and August as expectations
grew of a future tightening of monetary policy by Central Banks
as a measure of curbing inflation within an environment of economic
recovery. Ten year bond yields rose by 8.17% in the UK to close
the quarter at 4.527% and by 12.06% in the US, to 3.939%. The
most pronounced change in bond yields occurred in Japan where
a bursting of the extended bond 'bubble' resulted in yields almost
doubling during the quarter, admittedly from a very low base.
It was another volatile quarter for the currency markets.
The Yen appreciated during the quarter, closing at 111.49 to
the US Dollar, an appreciation of 6.94% over the period. The
Euro experienced a more volatile quarter relative to the US Dollar,
falling from 1.1511 at the start of the period to a low point
of 1.0809 before ending at 1.1656.
The price of Oil remained strong, closing at $28.34 per barrel
of Brent crude. A rally towards the end of the quarter followed
an announcement from OPEC for plans to cut supply quotas by 900,000
bpd in expectation of the Iraqi supply returning to global markets
once more. Following these proposed reductions, Russia is now
the leading supplier in terms of volume pumped per day. Mining
stocks performed well as base metal prices continued to firm,
benefiting both from a slightly weaker Dollar and an increase
in demand from heavy industry. Gold continued to climb, building
on gains made during the previous quarter closing at $385.35.
In a period devoid of dramatic headline events, the lack of
evidence over Iraq's hidden Weapons of Mass Destruction provided
a focal point for the media. Support for Blair and Bush has fallen
to the lowest levels since their respective elections, indicating
potential problems ahead for their re-election campaigns that,
in the case of the US, will begin shortly. The political landscape
in the UK has been dominated by the Hutton Enquiry with reporters
focusing on the allegation of exaggerated statements by the Government
in their September 2002 dossier which provided their justification
for military combat.
Datasource: Bloomberg
back to Market Review index
|
