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Market
returns, in local currencies, for 1 January 2005 to 8 October
2005: |
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•
UK (FTSE All Share) |
+11.4% |
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•
USA (S&P 500) |
-0.1% |
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•
Europe (FTSE Euro 300) |
+15.9% |
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•
Japan (Nikkei) |
+15.1% |
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•
FTSE Global |
+2.4% |
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The
markets other than in America have been surprisingly strong
since we last wrote in May 2005. At that time we expected
stockmarkets to continue to trade in a narrow range with equity
returns likely to be below 10% per annum for the foreseeable
future. |
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So,
other than in the most influential market of America, we have
exceeded our expected total annual return in less than half
a year! In the UK this has happened despite the government’s
GDP growth range of 3% to 3.5% being too high with reality
now looking like a much lower 2% in 2005. Rising UK public
expenditure is keeping our economy afloat and the Chancellor
is in danger of breaking his golden rule of balancing the
books. The concerns of May are still present and in some cases
(like the price of oil after the recent hurricanes) are even
greater. So, the three economic trends that we expected to
dominate the next few years are still of concern. These are:
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1.
The economic rise of China and India |
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2.
The tight oil market |
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3.
Rising world interest rates |
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In
the UK we have continued to see weakening UK retail sales
and a flat housing market. The UK economy is slowing and retailers
are in trouble but the UK stockmarket as a whole is being
buoyed up by corporate activity and cost cutting. For UK companies
the world economy is actually more important than the UK economy
- 60% of the FTSE 100’s profit (excluding banks) comes
from overseas business. Corporate balance sheets and cash
flow have been strong providing a source for higher dividends.
The UK stockmarket is up an impressive 63% from its March
2003 low but the prospective price/earnings ratio (the most
common measure of value) has hardly changed and is still only
13x compared to the USA at 15x and the world as a whole at
14x. Most investment analysts have been upgrading their corporate
earnings figures for 2005. The UK also has a bigger proportion
of resource companies (e.g. oil companies) and financial companies
than in the world as a whole. So, the initial impact from
higher oil prices has actually been positive. UK companies
are currently coping well in a difficult environment. |
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The
Euro Zone has worse growth prospects than the UK but the large
companies still appear to be doing fine. Costs are being cut
by outsourcing and export markets are being developed. Germany
has now overtaken America and is now the largest exporter
in the world. The Euro Zone countries are unable to control
their own interest rates and this may cause problems for some
of the countries in the future. |
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As
the year has progressed the Japanese recovery has been seen
as secure and is reinforcing external demand for both Europe
and the UK. Japan is also in a good geographic position to
take advantage of the boom in India and China. In America
on the other hand inflationary pressures now have a higher
priority for government control with the longer upward march
in interest rates now expected putting a restraint on the
equity market. |
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Shares
worldwide have now pulled back most of the losses of 2000 to
2003. So where next? |
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If
you review our previous 10 six monthly Market Reports (on
our Website) you’ll conclude that we don’t know!
Many of our predictions have been right but translating this
into accurate market outcomes (especially short term ones)
is not possible. We are not alone – we don’t know
any commentator that predicted the extent of the recent boom
in market values. |
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We
will always point to the uncertainties and warn that stockmarkets
are risky (there are plenty of down periods to come). However,
as always, we remain ‘equity’ people with its
impressive long term track record. Look at our Unit Trust
selection (available on request). We have 3 UK managed funds
(Invesco Perpetual Income, Fidelity Special Situations and
Newton Higher Income) the average return on these funds over
the last 10 years is an almost quadrupling of the original
investment! Not many residential properties in the UK can
boast such an appreciation, which, if you read the press may
come as a surprise. The crashes are news worthy, but you don’t
hear about relentless small daily gains. |
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The
past is not necessarily a guide to the future but these Unit
Trusts go part of the way to explaining why we haven’t
lost the faith! |
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Pensions
Simplification (‘A’ Day) |
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We
are issuing our second paper on ‘A’ Day (6 April
2006) very shortly. Please use this as a good excuse to review
where you are going on pensions. |
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If
you are confused by pensions please read our Website pages:
Pensions - Why Have One?, Pensions - Do Something
and Pensions: 2006 (A Day) (our first ‘A’
Day paper). All found on: our
news page on this site. |
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