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Investment
Quarterly - Q3 07:
Third Quarter 07 market overview |
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| The
second quarter showed strong returns which were dominated
by global equity markets, sustained earnings growth and private
equity group takeover news, says Heather Lamont |
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Global
equity markets, supported by sustained earnings growth and
heightened levels of takeover news, posted strong returns
in the second quarter. Japan was the exception, declining
modestly against a background of unconvincing corporate and
economic news to be outshone by other markets in the Far East
which, excluding Japan, was the strongest region during the
period.
Although the majority of equity indices made good ground,
there were signs that further, and potentially more challenging,
obstacles could lie ahead. Concerns about the global interest
rate environment remained a factor, particularly for UK and
European investors, where economic strength and stubbornly
high inflation continued to present tough questions for central
bankers.
The oil price also made a return to prominence, raising further
concerns about inflationary pressures in the world’s
largest economies. After sustained declines early in the year,
where the price of crude dipped towards $50 per barrel, the
price regained its momentum amid heavy demand from China and
the US, at a time when stockpiles were receding and supply
remained tight.
Mergers and acquisitions continued to be a key factor for
UK equity investors, with the volume of deals staying high
and increasingly being targeted at the UK’s largest
listed companies.
Alliance Boots, Reuters, Hanson and ICI, all FTSE 100 constituents,
received takeover approaches as both private equity and other
international listed groups recognised the value available
in the UK market. UK groups were also active in pursuing other
companies, including both Barclays and Royal Bank of Scotland
bidding for Dutch banking group ABN Amro and AstraZeneca offering
over $15 billion for US group MedImmune. This environment
saw a number of companies take their turn in the takeover
spotlight, with rumours and speculation of bids an ever-present
feature.
In Europe, underlying economic strength supported investor
sentiment, despite the expectation that the European Central
Bank would continue to tighten monetary policy, which it did
in June, taking European interest rates from 3.75% to 4%.
Solid profit growth and the potential for corporate activity
added to the positive trend and helped European indices to
be among the best performers in the second quarter.
US equity markets were dominated by the performance of the
Dow Jones Industrial Average, which emphatically broke through
the 13,000 level for the first time in its history. This was
soon followed by a series of new record closing highs for
the broader S&P 500 Index, as US stocks benefited from
earnings upgrades and also from expectations for continued
merger and acquisition activity.
US interest rates were widely regarded as staying on hold
during the period, and this allowed investors to concentrate
on the corporate outlook, which was underpinned by the likes
of IBM and their announcement of a $15bn share buy back. The
likes of Apple, MasterCard and Verizon Wireless also beat
forecasts and helped to keep US markets at, or around, their
peak levels.
Private equity groups were at the forefront of the takeover
news, with TPG and Goldman Sachs bidding $27.5bn for telecom
group Alltel and among the other high profile bids was the
$27bn offer by Alcoa for Alcan.
Far Eastern markets, as alluded to earlier, enjoyed the strongest
gains, as investors continued to be attracted by the potential
offered by economies and stock markets in the region. Perhaps
not surprisingly, China was the stand-out feature, with stocks
shrugging off short-term periods of weakness and volatility
to establish further record highs.
The volatility experienced was linked largely to concerns
about government intervention to cool the pace of the economy
as a whole, and more specifically to slow the pace of growth
within the stock market. While measures were imposed, such
as the tripling of stamp duty on stock transactions, they
were not generally considered sufficient to dampen the prospects
offered by investment in China.
Looking forward, we consider that volatility is likely to
be a factor in the short-term as market sentiment fluctuates
between strong earnings and reasonable valuations and issues
such as interest rates and the sub-prime mortgage problems
in the US. On a medium-term view, equities remain our preferred
asset class, followed by cash, as we consider that the current
interest rate environment is likely to weigh upon bond prices.
Heather Lamont is head of charity business at HSBC
Investments
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