The UK stock market had a good start to 2006 with merger and acquisition (M&A) activity and stronger...
The UK stock market had a good start to 2006 with merger and acquisition (M&A) activity and stronger earnings results from companies continuing to provide support to equities during the first quarter. The FTSE All-Share index rose 7.1% during the first three months of the year, while in March the FTSE 100 index reached its highest level in five years. From a sector perspective, industrial metals was among the best-performing industries, amid strong commodity pricing trends, while leisure goods underperformed the broader market.
Strong profit announcements from major corporations including BG Group, the integrated gas company and consumer-goods manufacturer Unilever boosted investor sentiment. Shares in mortgage bank Alliance & Leicester also rose robustly amid investor speculation of a takeover.
In February, UK inflation accelerated for the first time in five months, rising to 2% after gaining 1.9% in January. This was largely due to increasing energy prices. The figure was on a par with the Bank of England's target and in line with economists' expectations.
In March, the Monetary Policy Committee of the Bank of England voted eight to one to hold interest rates at 4.5% for the seventh month in a row, amid signs of a revival in the housing market and a stronger forecast for consumer spending. They are also expected to hold rates in the April meeting.
In housing, a survey produced by the property website Rightmove revealed the average asking price of a home in England and Wales had broken through the £200,000 barrier and the Nationwide Monthly House Price index revealed that after a brief pause in February house prices were back on a strong upward trend, increasing by 1.1% in March. On a cautionary note however, they did suggest deteriorating affordability of first-time buyers, as well as rising utility and council tax bills, will act as a brake on prices.
Towards the end of the quarter, property stocks also advanced after the Chancellor of Exchequer lowered the bar for property companies to become Real Estate Investment Trusts (Reits) in his annual budget speech.
Economic growth remained firm but retail sales volumes fell more than expected in March, as cold weather kept consumers away from the shops. In its Distributive Trades Survey, the Confederation of British Industry (CBI) said retailers were disappointed in March, as sales remained well down on a year ago for the third month running. The furniture and carpets sector showed the biggest improvement with a slightly more active housing market beginning to drive up sales of larger household items after a very difficult 2005. Industrial production was also down 2.3% year-on-year at the end of 2005. However, according to the CBI, manufacturers expect factory output to increase in the spring as order books continue to fill.
With interest rates possibly near peak levels and M&A activity gathering pace, the outlook for UK equities remains positive. Economic activity has picked up slightly and growth looks set to continue (in his last budget, the Chancellor predicted the economy will grow by 2%-2.5% this year). There are still a number of optimistic messages coming out of the UK market and, in particular, it continues to offer fruitful opportunities for stock picking.
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