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After
a very long wait, all major stock markets showed positive
returns in 2003. From the low point in March the bounce was
dramatic with the UK for example rising 32.5%. Market returns,
in local currencies, over 2003 were: |
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% |
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UK
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16.6 |
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USA |
26.4 |
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Continental
Europe |
16.7 |
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Japan |
23.8 |
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In
our October 2003 Review, we briefly looked at four key issues
for markets which could as always be viewed positively or
negatively. Over the last 5 months there have been few major
developments, so we will revisit the points we made then.
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- The
war in Iraq was quickly won but the casualties continue
to rise and peace in the Middle East seems little
closer. The oil price remains high. No change
here, if anything the peace keeping in the Middle
East is becoming more fraught and dangerous.
- There
are growing US trade and budget deficits which could
either drag Europe and Japan out of recession or derail
the engine of world growth. It looks like the
optimists are winning this one. Global trade, on the
back of a phenomenal boom in China, has taken off.
Some forecasters are estimating that trade flows may
be over 30% higher in 2004! UK GDP figures for 2003
have just been released at 2.3% - this is comfortably
within the Government’s forecast range of 2%
to 2.5% but above most city forecasters’ expectations.
Optimists now point to global economic recovery gaining
momentum in 2004 and many analysts are upgrading their
company profit forecasts.
- The
US 2004 presidential election is traditionally positive
but it could lead to more uncertainty if the recent
electoral outcome of the Californian Governor Arnold
Schwarzenegger is anything to go by! No changes
here.
-
The next interest rate move is quite likely to
be in an upward direction - a negative influence on
fixed interest stock values but a positive influence
on annuity rates. As ever a debatable influence on
equity values. Although interest rates have begun
to rise in the UK and Australia, the Federal Reserve
in America has stated that 'monetary policy will
stay accommodative for the forseeable future'.
Similarly the European Central Bank and the Bank of
Japan seem unlikely to raise rates soon. Unusually
for a period of global growth we are also in a period
of low inflation. With interest rates still at low
levels, cash returns fairly low and bond yields unlikely
to fall further, investors have either been tempted
back into equities or have at least stopped their
switching into bonds.
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We
also stated in October that ‘After the recent bounce
the markets are bound to look less attractive. However the
all important factor of investor sentiment does seem to be
changing - the bears are becoming quieter and there are fewer
of them.’ We believe this still applies although
most valuation methods now show that equities are still more
expensive than the historical average; in particular dividend
yields are low. We feel that it is unlikely that markets will
continue to roar away. There are many uncertainties which
could at any time be brought to the forefront, such as terrorism,
US protectionism, the weak US dollar and the large and growing
US current account deficit. At some stage in the future, unemployment
may rise in the UK as companies continue to switch to cheaper
Far Eastern labour and as jobs may be filled by new Eastern
European immigrants. Consumer demand and with it house prices
may then drop away, especially if interest rates are rising. |
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Two
other topical matters: |
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Cash Deposits
Cash Deposits need to be kept under review. There is now a
big discrepancy between the best and worst rates. Internet
accounts usually offer the best rates, followed by postal
accounts with branch accounts (especially High Street Banks)
very much at the bottom. You should be receiving instant access
interest rates in excess of 4%, if not please consider switching
your deposits. We have been very happy with the administrative
efficiency provided by internet accounts. Please visit www.blythetax.com/linksbf.htm
for further information.
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With
Profits Funds
Generally, these funds are invested in a similar (usually
more cautious) spread, to the ‘Unit Linked’ Balanced
Managed Funds. However they can also carry an element of ownership
of the Managing Company. This can be very positive (windfalls
on demutualisation – for example Scottish Widows) or
very negative (unforeseen liabilities – for example
Equitable Life). Companies try to ‘smooth’ the
rises and falls of the underlying funds. This process can
store up bad news in periods of sustained market falls. It
has certainly caused some funds to become more risk averse
- this limits the upside growth potential but also the downside.
As a result of these issues, predicting With Profit outcomes
is far more complex than the Balanced Managed Funds. So whilst
not encouraging a mass exodus, we don’t feel the time
is right to join.
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If
you would like our assistance on any of the points raised
or on any aspect of risk then please contact us. |
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