Market Review Of Quarter 3, 2010

21.10.10

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UK (returns are in ?) The FTSE All Share Index enjoyed a very strong quarter, climbing significantly on increased merger and acquisition activity and more positive macroeconomi

UK (returns are in ?)

The FTSE All Share Index enjoyed a very strong quarter, climbing significantly on increased merger and acquisition activity and more positive macroeconomic news from the US. Index returns were helped by a strong rally in September as risk appetite increased.

Leading performers over the period included oil & gas and basic materials stocks, as more cyclical sectors outperformed with risk appetite improving. Mining stocks (notably base metal miners) also rallied sharply, as the demand outlook improved on strong factory output data from China. Pharmaceuticals, food and beverages and other defensives underperformed relative to more cyclical sectors during the quarter.

Europe (returns are in ?)

The MSCI Europe Index rose moderately during the quarter, despite ongoing sovereign debt downgrades and fears of a double dip recession. The quarter saw the release of several important economic updates including the release of encouraging bank stress test results. GDP growth figures released in July were mixed; the German economy grew slightly over the second quarter, but growth in peripheral states was less positive. The European Commission lifted the 2010 Eurozone growth forecast and Ireland's closely monitored government bond auction led a series of successful debt sales by peripheral Eurozone members towards the end of the quarter.

At the sector level, the cyclical consumer discretionary and energy sectors performed well. The more defensive health care and consumer staples sectors lagged the wider market.

US (returns are in US$)

US equity markets advanced during the third quarter of 2010, with the Russell 1000 Index returning moderately high. This largely offset the second quarter?s negative returns.

There was more to the third quarter than the results would lead one to understand as the market oscillated between risk-averse, safe haven-type investments and a higher risk, global growth recovery focus. This was particularly true in August and September. Investors in August become increasingly concerned of a double dip scenario due to a slip in consumer confidence at the end of July, negative economic data as well as increased global risks and sovereign debt concerns. Weaker-than-estimated data on home sales, factory orders and consumer spending all cast doubt on the economic recovery. Stocks declined further after weaker-than-expected growth in company payrolls suggested the rebound in corporate profits may stall, while an unexpected increase in jobless claims fuelled investor concerns. September was a reversal as concerns subsided and investors placed a greater probability on an economic growth recovery. This was due in part to the continued strength in emerging markets as well as the Fed?s indication that a second round of quantitative easing was highly probable.

Japan (returns are in Y)

The Topix Index modestly declined during the third quarter of the year, easing slightly. Despite the market rising in July and September, heavy declines in August weighed on the quarter?s overall performance. Japan?s anaemic GDP figure pushed stocks lower as Japan fell into third place on the world?s largest economies list, behind the US and China. In addition, news from the world?s first and second-largest economies fuelled concerns that global growth may stall, clouding the outlook for the export-reliant economy. However, stocks did recover somewhat after a jump in US industrial production in August, and the Japanese government?s announcement of its three-pronged strategy to stimulate the economy during September.

Asia-Pacific (returns are in US$)

The MSCI Asia Pacific ex Japan Index rose signifcantly during the penultimate quarter of the year led by cyclical and financial sectors. Resource-related sectors outperformed on hopes that China?s insatiable demand for commodities would remain strong, while financials gained on the back of a strong earnings season. The Chinese economy remained buoyant after reporting that factories increased production in August, and money growth also sped up. All of the regional markets finished in positive territory with the South East Asian economies leading the gains.

Emerging Markets (returns are in US$)

Emerging market stocks hit a 27-month high, and rallied sharply over the third quarter, notably in July and September, when the MSCI Emerging Markets Index (the Index) enjoyed its best monthly gain since July 2009. The Index gained signficantly over the period, well in excess of developed counterparts, helped by the secular growth stories that prevailed in certain markets.

Among the major markets, Chinese stocks gained moderately over the quarter, driven mostly by a strong rally in September, on speculation that government measures to curb loan growth would prevent an asset bubble and signs that the nation?s economic slowdown was stabilising. Meanwhile, Indian stocks gained signifcantly entirely driven by a strong rebound last month as the nation?s economic growth and earnings outlook attracted foreign investors.

Latin American stocks enjoyed their best quarter in a year, as the improved news from the US (the region?s major trading partner) saw major markets including Brazil and Mexico bounce back in September after a weak run in August. In contrast, smaller markets including Chile, Colombia and Peru sustained their gains throughout the quarter.

Your portfolio

Your equity portfolio would normally include shares or funds covering different regions, with the quantities dependant on your risk tolerance, objectives and personal circumstances. Talk to an experienced financial adviser like Blevins Franks Financial Management Ltd to establish the allocation most suitable for you.

Russell Investments Limited is the source of all data; any opinions expressed are those of Russell Investments Limited and do not constitute investment advice. Investors should be aware that past performance is not a guide to future returns. The value of investments and the income from them can fall as well as rise and investors may get back less than the amount invested.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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