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Investment
Quarterly - Q2 07:
Second Quarter 07 market overview |
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| The
last quarter saw equities resuming their upward trend following
a slow start at the beginning of the year. This has largely
been driven by mergers and acquisitions, as well as corporate
earnings news, says Heather Lamont |
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After
their uncertain end to the first quarter, global equities
quickly resumed their upward trend. Volatility remained a
factor, but the generally supportive background of steady
economic growth, further mergers and acquisitions and largely
positive earnings pushed many global equity markets to record
highs.
In the UK, mergers and acquisitions played a prominent role
in equity market strength. A number of stocks benefited, whether
it was in the form of a tangible offer, or simply speculation
of a bid. Many trustees will already know that Alliance Boots
agreed an £11.1bn offer from Kohlberg Kravis Roberts
after a prolonged bid battle for the company and Reuters and
Hanson agreed offers from Thomson and HeidelbergCement, valuing
the groups at £8.7bn and £8bn respectively.
Utility, mining and financial stocks were also regularly rumoured
to be potential targets and speculation surrounding Rio Tinto,
Vodafone and a potential merger between BP and Royal Dutch
Shell evidenced the increasing participation of the UK’s
largest listed companies.
Corporate earnings news was also a further trigger for UK
stocks to push higher. Companies demonstrated the ability
to maintain or increase profitability despite the tightening
of monetary policy by the Bank of England, which saw interest
rates increased by 0.25% to 5.5% in May. This followed UK
inflation staying significantly above its 2% target and the
Bank’s Quarterly Inflation Report also suggested that
further tightening of monetary policy could still be required
to contain inflationary pressures in the UK economy.
In the US, the Dow Jones Industrial Average continued to set
new record highs and the broader S&P 500 index also achieved
fresh closing peaks. Like their international peers, US stocks
were supported by positive earnings, takeover activity and
improved economic news as data suggested moderating inflation
and modest growth, a scenario consistent with US interest
rates remaining on hold in the short-term. Amazon, Ford, Apple
and 3M were among the companies to release earnings above
market expectations, which helped to support equity sentiment
that was already strong following sustained takeover news.
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Bid activity included a $27.5bn offer for telecom group Alltel
from private equity group TPG Capital and Goldman Sachs, Alcoa’s
$27bn bid for Alcan and Microsoft’s $6bn offer for Aquantive.
Of course, for those charities with significant US investments,
the shine has been taken off this positive story by the recent
weakness of the US dollar against sterling.
Merger and acquisition news also saw stocks in Europe maintain
their positive momentum. ABN Amro was among the highest profile
stories as Barclays and a consortium led by Royal Bank of
Scotland engaged in a bidding war for the company. Tobacco
group Altadis was another bid target, rejecting offers from
the UK’s Imperial Tobacco, which sparked interest from
other potential suitors, including private equity groups.
The economic background in Europe remained strong, with first
quarter growth of 0.6% coming in above forecasts for a rise
of 0.5%.
Many equity markets in Asia achieved fresh record highs, with
the rise of Chinese stocks the stand-out feature. Chinese
equities were supported by consistently large inflows of funds,
which saw the Shanghai Composite Index achieve a succession
of record closing highs. Government measures to slow the rapid
pace of growth saw periods of sharp short-term losses but
their quick recoveries suggested that investors considered
such declines to be buying opportunities.
Following the decision by Chinese authorities to triple the
rate of stamp duty on share transactions, stocks in China
fell heavily and volatility continued to be a feature as investors
considered the potential for further measures to be imposed.
However, with China widely forecast to continue to exhibit
high levels of economic growth, equities continued to attract
a great deal of investor interest.
In terms of asset classes, we continue to favour equities.
They have support from strong earnings and reasonable valuations,
factors that are further strengthened by the seemingly ever-present
merger and acquisition speculation. Takeover deals are being
supported by abundant levels of liquidity and against this
background we consider that equities continue to look attractive
on a 6-12 month horizon.
With the global interest rate environment biased towards further
monetary tightening we believe bonds prices are full and that
they offer little value relative to cash. Asia ex-Japan is
among our preferred equity markets and we also consider that
European equities offer good value at current levels.
Heather Lamont is head of charity business at HSBC
Investments
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To return to the June 07 features list click here
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