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.
An eventful start to 2011
The first quarter of 2011 witnessed a more unsettled backdrop for financial markets. The period saw growing political unrest in parts of North Africa and the Middle East, while the earthquake and tsunami in Japan caused widespread destruction in the north of the country and radiation leaks at the Fukushima nuclear power plant. There were also continuing concerns over the sovereign debt problems in the eurozone periphery. In the face of these developments, global markets proved surprisingly resilient.
From an economic perspective, the civil unrest in several North African and Middle Eastern countries was one of the most significant developments. The potential threat to oil supplies triggered a spike in the oil price, which has exacerbated inflationary pressures. At the end of March, the price of Brent crude for May delivery stood at $117 a barrel, a rise of almost 24% since the start of the year. The average for 2010 was $79 a barrel.
Most share markets made progress on the back of another strong corporate results season and attractive valuations. Additionally, shares remained an appealing asset class given the low level of official interest rates in the major economies. The Japanese equity market proved an exception and fell back in Quarter 1. It will inevitably take time for the economy to recover from the recent natural disasters, although the reconstruction programme should gradually prove supportive.
The continuing recovery in the US economy generally aided sentiment. The latest revision to Quarter 4 2010 GDP data revealed that the economy grew by 3.1% against the previous estimate of 2.8%. Companies have been replenishing their inventories and increasing capital expenditure. Moreover, many US manufacturers are benefiting from the growing demand for western products from Asian businesses and consumers.
Within the UK, official growth forecasts for 2011 have been downgraded. Higher commodity prices and stubbornly high inflation, together with government austerity measures, are significant headwinds. At 5.5%, the annual rate of retail price inflation is now the highest for 20 years. The government’s preferred measure, the consumer price index, stands at 4.4%, which is more than double the Bank of England’s 2% target. However, on a positive note, the March budget was generally seen as pro-business, with measures such as a cut in corporation tax. It is also important to distinguish between the UK economy and the stock market. As a whole, companies in the FTSE 100 Index derive around 70% of their earnings from overseas.
Elsewhere, sentiment towards European shares was buoyed by the health of the German economy and other core members of the eurozone. Within these countries, businesses are benefiting from stimulative monetary conditions, the weak euro and robust demand from developing economies. However, the health of countries on the eurozone periphery, namely Portugal, Ireland, Greece and Spain, remains fragile.
Turning to bonds, it was a lacklustre quarter for government bond markets which have also been affected by inflation worries, as well as the likely effects of the impending end of quantitative easing in the US and questions over valuation levels. However, high yield corporate bonds performed well over the quarter.
This table shows how different indices, representing different geographical regions, have performed over various time periods to 31 March 2011.
|
|
1 yr |
2 yrs |
3 yrs |
4 yrs |
5 yrs |
10 yrs |
|
UK
FTSE All Share |
8.72% |
65.58% |
17.02% |
7.95% |
19.99% |
58.04% |
|
US
FTSE USA |
9.18% |
54.82% |
34.10% |
25.78% |
24.55% |
25.02% |
|
Asia
FTSE World Asia Pacific |
5.65% |
55.66% |
29.33% |
24.27% |
22.43% |
70.41% |
|
Europe
FTSE World Europe ex. UK |
7.48% |
59.89% |
10.24% |
13.37% |
27.44% |
72.21% |
We’ve sourced these index figures, in sterling terms, from Financial Express to 31 March 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.
April 2011
