| |
| |
Investment
Quarterly - Q1 07:
First quarter 07 market overview |
|
|
| |
| The
start of 2007 saw a strong run in UK equities, though a higher
degree of volatility has crept into the equation. Equities
still appear more attractive than bonds, though diversification
remains key, says Heather Lamont |
| |
The
start of the New Year saw markets continue their strong run
from the end of 2006, however the end of February presented
a sharp reminder that prices go down as well as up.
In the UK, equities started 2007 trading around levels not
seen for about six years, although they did experience a degree
of volatility. This was due to the heavy exposure to mining
and oil companies which fluctuated in line with underlying
commodity prices. January’s surprise interest rate rise
from the Bank of England, taking UK rates to 5.25 per cent,
also weighed on sentiment. However, the meeting’s minutes
reassured equity investors that rates may be close to peaking,
which pushed equities higher.
Corporate newsflow continued to offer support, with the current
earnings season starting largely positively, albeit with some
notable disappointments. Merger and acquisition speculation
continues to exist while both listed and private equity groups
have access to capital on a significant scale.
US equities also started the year well, trading around their
strongest levels for a number of years, boosted by a stable
economic background, with the US Federal Reserve expected
to hold interest rates at 5.25 per cent in the near-term.
Corporate earnings supported prices and news from technology
groups was particularly strong, with Apple, Yahoo and Microsoft
benefiting from positive sentiment.
Federal Reserve chairman Ben Bernanke’s testimony to
Congress was a further catalyst, as he indicated that the
US economic outlook remained reasonable and that signs had
emerged that inflationary pressures had started to moderate.
The positive tone of Bernanke’s testimony helped to
offset the negative news surrounding the US housing market.
Sharp increases in mortgage debt defaults, largely focused
on the sub-prime market, raised concerns that housing market
issues could yet cause wider problems.
In Europe, equity markets also maintained their multi-year
highs amid supportive corporate news and a slightly softer
tone to monetary policy from the European Central Bank. Financial
markets interpreted the comments accompanying the January
policy meeting as implying a moderation in the pace of future
rises.
The start of the year saw many Asian markets trading at or
around record levels and emerging markets keeping up their
positive momentum, as investors continued to be attracted
by the growth opportunities available. Financial markets shrugged
off the Bank of Japan’s decision to raise interest rates
by a quarter point to 0.5 per cent. This was the highest in
more than a decade, pushing the weak yen to new record lows
against the Euro and leading Tokyo shares to their highest
levels in 15 years.
However, the end of February saw the return of volatility,
with a number of events combining to lead to a sharp correction
in global stock markets. Following the 130 per cent rise in
the Chinese Composite index during 2006, many would argue
that a correction was due, and arrive it did with a nine per
cent fall sparked by news that China may pass rules to limit
demand for stocks.
China has been one of the main emerging markets for many investors
as the country’s economy has grown strongly and the
government has sold stakes in some of its biggest and most
attractive companies. However, the government has been looking
at ways of slowing growth in order to stop the economy from
overheating, and many investors are worried that it may lead
to tougher regulations that will limit stock-market investment.
This came at the same time as former Federal Reserve chairman
Alan Greenspan stated that the US economy could fall into
recession by the end of the year, causing further selling
pressure and speculation about a windfall tax on basic resources
in South Africa. Coupled with a build up of tension between
the US and Iran, equity markets ended the period someway off
their recent highs.
We continue to favour equities and cash over the next six
to 12 months, at the expense of bonds. Valuations remain attractive
and, in particular, we expect large cap stocks to lead performance.
We also expect a gentle US slowdown, which reduces the risk
of further US rate rises. Our preferred equity markets remain
Asian and emerging markets due to their high growth rates
and cheap valuations. The correction at the end of February
reinforces the need for a well-diversified portfolio, both
by geographic region and also by asset class.
Heather Lamont is head of charity business at HSBC
Investments
Top
|
| |
| |
| |
|
|
