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.
Equity markets fall in the third quarter
Equity markets tumbled in the third quarter as investors retreated to assets such as government bonds. Precious metal prices initially strengthened, with gold reaching a record high, but have since fallen back. Equity investors were particularly concerned by the rapid slowdown in developed economies alongside the worsening debt crisis in the eurozone and the implications of a Greek default for the European banking sector. These concerns were made worse by the lack of decisive political action to tackle the eurozone debt crisis. European equity markets saw some of the sharpest falls.
At the start of the quarter, markets had been cheered by news that the Greek government had passed additional austerity measures, so securing the next tranche of the initial bailout package. However, Greece needed further funding and on 21 July a second rescue package was agreed, totalling €159bn. Powers were also granted to the European Financial Stability Facility (EFSF) to buy the debt of financially stressed nations, in the hope of limiting the degree of contagion to Italy and Spain. Italy has the largest total debt in the eurozone and ratings agency Standard & Poor’s downgraded the country’s credit rating from A+ to A. Within the eurozone austerity measures and high unemployment have dampened consumer spending and overall economic activity, making it harder for these countries to meet the interest payments on government debt.
High debt burdens are a feature of developed economies including the UK, which has retained its AAA credit rating on the back of the government’s five-year deficit reduction plan. In the US, lengthy political wrangling finally led to an agreement to raise the government's $14.3trn debt limit and avoid a default. However, Standard & Poor’s were unimpressed by the lack of firm action to tackle the rising debt burden and stripped the US of its AAA rating. US economic growth in Q2 proved worse than expected at 1.3%. Consumer spending, the key driver of the US economy, has essentially ground to a halt.
In September, President Obama announced a $447bn package of tax cuts and government spending to boost the economy and create jobs – US unemployment stands at 9.1%.
The risk-averse mood and weak US economic data fuelled a strong rally in the major government bond markets. Sentiment was further uplifted by the Federal Reserve’s announcement that US interest rates would remain at their record low through to mid-2013. Despite the rating downgrade, US treasury bonds performed very well with yields falling to historic lows. The gilt market was also very strong. Elsewhere, investment grade corporate bonds posted positive returns but emerging market and high yield bonds were hurt by the sharp decline in risk appetite.
This table shows how different indices, representing different geographical regions, have performed over various time periods to 30 September 2011.
| |
1 yr |
2 yrs |
3 yrs |
4 yrs |
5 yrs |
10 yrs |
UK
FTSE All Share |
-4.36% |
7.58% |
19.19% |
-7.33% |
3.97% |
59.24% |
US
FTSE USA |
2.13% |
14.14% |
18.86% |
6.91% |
14.38% |
27.17% |
Asia
FTSE World Asia Pacific |
-4.09% |
5.07% |
30.58% |
2.81% |
17.55% |
88.41% |
Europe
FTSE World Europe ex. UK |
-13.61% |
-12.20% |
2.27% |
-17.89% |
-1.36% |
67.80% |
We’ve sourced these index figures, in sterling terms, from Financial Express to 30 September 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.
October 2011
