Although 2004 witnessed the worst overall set of natural disasters for many decades this did not aff...
Although 2004 witnessed the worst overall set of natural disasters for many decades this did not affect the returns from the stock market in general, insurance companies excepted. The sterling total return from equities with dividends reinvested was 13%; when translated into US dollars the return was 22%, to rank the UK market close to the median in an international context.
All categories within the UK market produced positive numbers, not surprisingly, in view of the achieved above trend growth of some 3.5% in the UK economy as commonly forecast. In general, the results were of a more lacklustre, rather than stellar nature as in 2003, (with the sole exception of micro-cap) and mainly achieved in the second half, following the lead given by Wall Street.
Perhaps more surprising was the fact that the worst returns were achieved by the companies deemed to be in the growth category, whereas the best returns came from the dull and defensive stocks such as utilities, property, drinks, tobacco and food. This would appear to be a sure sign that investors have not yet regained their nerve following the bursting of the technology bubble in 2000.
The major themes troubling fund managers during the year were the rising price of energy and certain base metals, the weakness of the US dollar and the future strength of the Chinese economy.
The overall economic background for global stock markets in the coming 12 months appears stable and well set. Growth in the US will be at a slightly diminished rate by comparison with 2004, following a series of interest rate increases, but nevertheless is likely to be in the region of 4%. China and the rest of South East Asia will continue to grow rapidly; Japan, whose economy produced a brief spurt of growth, now appears to be fading once more led by the domestic side, due to its failure to shake off downward pricing pressures.
Continental Europe still remains mired in near recessionary conditions as the rate of unemployment in the major economies continues to climb above double digit levels, with little help from the monetary authorities in the form of an interest rate reduction yet visible on the horizon. Meanwhile, the UK looks 'set fair' in the run up to a general election, with a probable growth rate of some 2.8%.
Against such a favourable background, it is not difficult to be relatively optimistic for stock markets, even though the price of oil is currently attaining record levels in absolute terms. Most importantly for the London market, is the fact that Wall Street should continue to make progress as a result of the gradual decline of the dollar and the general improvement in the state of corporate finances, even if further interest rate increases take place. Accordingly, it currently would not appear unreasonable, in my opinion, to set a target for FTSE100 in the range 5400-5500 by the end of the calendar year. A combination of rapid increases in dividends, further corporate activity and plentiful institutional cash levels are all relevant and significant features.
The Monetary Policy Committee would appear to have achieved their aim of slowing the economy as a result of the series of five quarter-point rises in interest rates. The slowdown in the housing market, the poor level of retail sales at Christmas and the recent further profit downgrades of, for example Boots, together provide ample evidence. Although I consider that a further rate increase is unmerited I can envisage one occurring on account of the governors of the Bank of England eternal fear of the return of inflation, at a time of rising commodity prices and a tightening of the labour market while the number of jobs in the public sector rises inexorably.
As investor confidence slowly returns so it will become increasingly unlikely that 2005 will witness a repeat of the strong outperformance by the more defensive sectors. I am confident that greater attention will be directed during the coming months towards stocks with good growth prospects.
Joined as head of strategy, multi asset, in June
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