We’ve written this commentary assuming you have some experience of investing in shares. This means that although we have tried to write as much as possible in plain language, we may have used certain words or phrases that might not be familiar to anyone new to investing. If there’s something you don’t understand, please contact your adviser. It is not an offer to buy or sell any investments or shares.
Positive returns from most markets in Q4
Global equities rallied in the final quarter of 2011. Markets in the UK and Europe saw significant gains while in the US, equities returned around 12% (S&P Composite Index) in local currency terms. Emerging market equities also achieved a good performance although the Japanese market posted a negative return. The Japanese economy is heavily reliant on exports and has particularly suffered from the slowdown in the global economy. In contrast, the US economy has proved more resilient, with Q3 GDP (Gross Domestic Product) rising by 1.8% on an annualised basis, against 1.3% in Q2, helped by a pick-up in consumer and business spending.
Despite the improvement in risk appetite during Q4, government bond markets again registered positive returns with UK gilts proving particular strong. Gilts benefited from the exodus of money from the peripheral eurozone bond markets in the wake of the sovereign debt crisis. Additionally, gilts responded well to the Bank of England’s October announcement that it was restarting its policy of quantitative easing with a new programme of gilt purchases totalling £75bn. Elsewhere, the returns from both investment grade and high yield corporate bonds ended Q4 in positive territory, with the latter producing the stronger performance as investors took on more risk in return for a better yield.
While the eurozone debt crisis continued to dominate sentiment, investors took heart from more concerted efforts by European politicians to find a solution. October’s news of a deal to tackle the Greek debt crisis and stave off the immediate threat of default was initially greeted favourably. However, markets slipped back when the Greek prime minister announced a referendum on the EU proposals. He swiftly retracted his decision and stood down in November. However, contagion spread to Italy, which has the largest total debt in the eurozone, and during Q4 yields on Italian government bonds spiked to new post-euro highs. November saw the resignation of the Italian prime minister and Italy came under intense pressure to deliver credible fiscal reforms. Elsewhere, the Spanish general election delivered a resounding defeat to the government.
As November drew to a close, equity markets rallied strongly as leading central banks unveiled a coordinated plan to boost liquidity and stimulate lending by commercial banks. This helped to allay fears that another global credit crunch was looming. Within the eurozone, there were also hopes of firmer measures to secure additional funding for the EFSF (European Financial Stability Facility), and greater fiscal integration. However, the imposition of austerity measures is dampening economic activity.
Interest rates in the US, UK and Japan remained at historic lows to support economic activity. However, European rates were cut by a quarter-point on two occasions, bringing them back to the 1% level seen at the start of the year. Interest rates were also cut in several emerging markets following an easing of food price inflation and to help offset the impact of slower growth in the developed world. Investors were particularly cheered by some loosening of Chinese monetary policy.
This table shows how different indices, representing different geographical regions, have performed over various time periods to 31 December 2011.
| |
1 yr |
2 yrs |
3 yrs |
4 yrs |
5 yrs |
10 yrs |
UK
FTSE All Share |
-3.46% |
10.55% |
43.85% |
0.80% |
6.15% |
59.49% |
US
FTSE USA |
2.48% |
21.70% |
37.78% |
20.59% |
25.64% |
27.32% |
Asia
FTSE World Asia Pacific |
-13.01% |
6.02% |
26.79% |
5.93% |
15.38% |
83.18% |
Europe
FTSE World Europe ex. UK |
-14.71% |
-9.81% |
8.31% |
-17.67% |
-4.73% |
53.00% |
We’ve sourced these index figures, in sterling terms, from Financial Express to 31 December 2011. The indices mentioned above are measures of the markets they represent. For example, the FTSE All-Share Index represents 98-99% of the UK market. It is the aggregation of the FTSE 100, FTSE 250 and FTSE Small Cap Indices.
You shouldn’t take past performance as a guide to future performance or as the main or sole reason for deciding to invest. It may have been achieved in a more favourable economic period that may not happen again, and tax conditions are unlikely to be the same. We don’t guarantee the value of your investment and any income you take from it, both of which can go down as well as up.
A long-term commitment
We believe it’s important, where possible, to take a long-term view when investing. Looking back over the years, volatility has always been a feature of world stock markets, with each setback followed by a recovery – some taking longer than others. The usual way to deal with volatility is to invest for the medium to long term – a period of at least five to ten years.
It’s important to find the right product and invest in the right funds, and this depends on your investment objectives and attitude to risk. If either has changed, your adviser will help you review your investment to make sure it continues to meet your needs. Although we don’t give investment advice, we do offer a wide range of funds suitable for almost all investment objectives and attitudes to risk.
We strongly recommend you speak to your adviser before making any changes to your plan.
January 2012
