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Market
returns, in local currencies: |
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12
Months |
1.1.06
to 4.5.06 |
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•
UK (FTSE All Share) |
26% |
8% |
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•
USA (S&P 500) |
19% |
5% |
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•
Europe (FTSE Euro 300) |
28% |
8% |
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•
Japan (Nikkei) |
56% |
6% |
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•
BBC Global 30 |
13% |
-1% |
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The
markets have performed far stronger than we anticipated at
the time of our last report in October 2005 this was despite
correctly highlighting the three economic trends expected
to dominate and be of concern over the next few years. These
three trends 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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However,
the downward pressures from high oil and energy prices together
with rising interest rates has been shrugged off and the world
economy has managed to pick up. Much of the huge demand for
oil and raw materials is coming from Asia. Individuals in
Asia tend to be net savers so rising interest rates are not
an effective weapon to curb demand. A reduction in European
demand is unlikely to have much effect on oil and commodity
prices other than possibly slowing the increase. However European
business confidence has recently risen strongly and it is
now more likely that we will not move into a deep recession
which was a worry for some economists a year ago. |
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Closer
to home in the UK the Chancellor has reduced his forecast
for GDP growth to between 2% and 2.25%. Inflation has increased
to 2% but still lies within the Bank of England target range.
Unlike in America, UK interest rates have been held at 4.5%
for the ninth consecutive month but when the change finally
comes it is now far more likely to be an increase. Corporate
profitability has been good and we have also seen a large
number of foreign or private equity bidders for quoted UK
companies. Many companies are increasing their dividends or
buying back their own shares. This has all resulted in strong
capital gains. |
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Some
Investment managers are now expecting oil prices to continue
to rise through $75 to $100. Worldwide interest rates must
increase as the inflationary pressure rises. Some long term
bears have now turned bullish and private investors have been
returning to the market. This could all be the forerunner
of a commodity bubble which might be due to burst soon. On
the other hand it might not; there is a lot of cash in the
system all looking for a decent return which should support
the markets. In America the inflationary pressures and rising
interest rates have had the expected effect and the equity
markets have been relatively restrained. |
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Japan's
recovery continues and it remains in an excellent position
to take advantage of the economic growth in Asia. |
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Stockmarkets
feel confident at the moment but as ever there are uncertainties
and investments are risky. |
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Conclusion |
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Having
predicted no more than 10% annual returns on equities we have
seen staggering gains well above this level not just for the
last 12 months but for the previous 12 months as well. We
don't think it can carry on, but neither do we feel that it
is the time for a hurried retreat. There will be periods of
capital loss in the future but with equity's impressive long
term track record we are happy to maintain holdings. |
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So
steady as she goes then. No surprise there - if you look back
over the past 5 years of Reports (through the full spectrum
of market conditions!) we more or less say the same every
time. |
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We
have remained equity based people throughout and I'm sure
that will remain the same for years to come, but whether markets
are about to go up or down is not something we would be confident
predicting (it often seems that markets march upwards against
all the odds!). |
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Our
main message on which we have also been consistent is that
you need to recognise that the markets can go down as well
as up and that you must be comfortable with the risk in your
circumstances. |
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Please
let us know if you want a risk assessment. |
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