The first year of the new millennium was a tumultuous period for UK investors. Following the impact ...
The first year of the new millennium was a tumultuous period for UK investors. Following the impact of the launch of the single European currency, world markets started the year on tenterhooks over the possible fallout from the Y2K computer date changeover. Central banks, eager to ensure there would be no financial crisis, pumped liquidity into markets.
When the new year delivered nothing more serious than a big party hangover, cash-rich investors poured into the stock market to inflate a bubble that had been swelling for some weeks in highly fashionable technology stocks. The technology boom grew faster and went further than anyone had expected. The UK market may have been led higher by the US market, particularly the technology-laden Nasdaq index, but it followed willingly. In the first quarter of 2000, untried technology, media and telecom companies could fund their expensive marketing habits at will, with as much capital as they could consume.
Meanwhile, old economy stocks such as those in the construction, distribution and engineering sectors were dumped and derided.
Many had long and steady track records of real profits and dividends and felt sorely rejected by investors' TMT mania.
Year-end bonuses, combined with rapid gains among newly-listed TMT stocks quickly fed into the housing market, wage claims and consumer spending.
In February, the Bank of England's Monetary Policy Committee, following the US Federal Reserve, raised interest rates, and the inevitable correction was sharp and ugly. A big drop on the Nasdaq Index on March 10 was followed by similar plunges elsewhere.
While TMT stocks collapsed, they took many other sectors down with them and bearish sentiment prevailed for much of April and May.
Volatility in all markets shot up, but with investors repeatedly buying on the dips, unwilling to concede that the bull run was over.
In May, US monetary authorities were obliged to send a much stronger signal, by raising the Federal Funds rate by 50 basis points instead of the customary 25 basis points, the sharpest hike since 1994. Suddenly, fears of a hard landing for the US, the world's leading economy, became the market focus.
Since the UK feels the effect of changes in US markets so keenly and quickly, the UK market also suffered. The TMT sector continued to unravel with the share prices of some dot.coms plunging 90% from their highs.
Flotations were delayed or pulled, and some of the new stars of the FTSE index disappeared from it as fast as they had entered.
The UK technology sector managed a brief rally in the summer but this melted away with the first results from the US corporate results season.
Going into the third quarter, the outlook continued from page 66
for the UK economy was, in fact, fairly benign, with moderate growth and low inflation. The strength of the pound, caused mainly by the weakness of the euro, gave the manufacturing and exporting sectors some pain, but house price and wage inflation had eased over the previous two quarters.
The UK stock market, which early in the year had effectively split into TMT stocks and the rest, had broadened out as valuations among technology stocks dropped and undervalued stocks rose. Telecoms were further hit by the realisation of the cost of bidding for third generation licences in a series of auctions across Europe. Doubts about the strength of company balance sheets quickly resulted in higher yields on the corporate debt.
Just as the stock market began to recover some equilibrium, and talk of another year-end rally became commonplace, markets were surprised by the continued strength of the oil price.
From $10 per barrel just two years ago, benchmark crude oil shot first through the $25 per barrel ceiling, and then through $30. As the higher prices emerged at high street pumps, the public in both the UK and Continental Europe rebelled.
Far from a producer-led supply squeeze, they considered the shortages symptomatic of governments imposing stealth taxes on fuel under the guise of environmental protection. In the UK, protests outside oil depots brought the country to a standstill, until the demonstrators, who had significant public support, were persuaded to disperse.
The temporary crisis depressed investor sentiment further. The oil price spike fed through into short term inflation figures but, within a month, the indicator was back within the Government's stated target range, while a planned second round of demonstrations against the oil price was successfully headed off.
No surprise Budget
The Government's interim Budget offered no surprises, but those looking for something to worry about turned to the delayed result from the US presidential election and a more serious situation in emerging markets, triggered this time by the collapse of the domestic bond market in Turkey and a threatened debt crisis in Argentina.
Despite the likelihood of a soft landing for both the US and the UK economies, investors are extremely cautious going into a new year.
One of the sectors most affected is telecoms, especially the infrastructure side of the business.
In the technology sector, institutional investors started to dump the more exotic dot.coms like boo.com and clickmango.com during last summer. But the share prices of mainstream, quality companies in the sector, such as Bookham Technology and Marconi, also began to be affected.
At the end of a rollercoaster year, the market outside TMT stocks again began to move ahead as valuations outside the technology sector remained attractive.
Demand returned for financials in general, but insurers in particular, as part of a quest for corporate earnings visibility in a low growth environment. A spate of floods in the UK raised concerns short term about higher claims for general insurers, but longer term it soon became clear that premiums would go up.
The division of the stock
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Initial FOC of 0.6%
Former PFS president
Last commission convened in 2002