AS WE bid farewell to 2004 and welcome in 2005, this article reviews last year’s market performance as well as looking to the future.
FTSE
The FTSE 100 did not quite live up to predictions that it would hit 5,000 by the end of 2004, but ended the year on a high note nonetheless. It closed at 4,814, which is a 7.5 per cent rise over the year. This increases to 11 per cent if you add income from dividends.
While this is a good performance, the rise has not been as much as the 13 per cent increase in 2003. However, the cumulative return over the last two-year period has been excellent, i.e. around 20 per cent or closer to 27, inclusive of dividends.
In the second half of the year, investor confidence was boosted by the outcome of the US presidential election, evidence of robust growth and strong fourth-quarter profits. In the final two weeks of the year, the index rose 117 points and closed near to its highest level for two-and-a-half years.
Looking ahead, most experts believe that the UK market will continue its slow but steady progress, possibly reaching 5,500 next year. Some predict it will rise 12 per cent as the recent ‘2004 year-end rally’ continues.
Most investors have entered the New Year with confidence. Firms have reduced their debts, cash flow has increased and company finances are at their strongest since the late 60s. Dividend payment should continue to rise. Other reasons for optimism include the belief that UK interest rates are close to their peak, the solid UK economy and the fact that experts say the UK stock market is still undervalued.
It is interesting to note, though, that various analysts have suggested that the biggest gains are to be made in the first quarter of the year. Bystanders may come to regret their hesitation.
United States
In the US, the first half of the year was disappointing, but the re-election of George W Bush helped to underpin a cautious recovery. The Dow Jones industrial average ended the year up 3.8 per cent, while the Nasdaq rose 8.6 per cent and the Standard & Poor 500 index 9.4 per cent.
One of the main concerns is how US interest rate rises may affect the markets and the Federal Reserve Bank has warned of further rate rises. The dollar hit lows against most major currencies in 2004, including an all-time low against the euro. This is not necessarily bad news, as US goods have become cheaper abroad, which will stimulate the US economy. In addition, for foreign currency investors the dollar is cheap and investment now could mean a profit from the markets over the next few years, as well as a profit from the currency if the dollar strengthens, as many expect.
Europe
The low dollar is not such good news for European businesses and could hamper growth. Having said that, European stock markets did not have a bad year, with the French CAC 40 and Germany’s DAX indices closing with gains of 7.39 per cent and 7.35 per cent respectively. The FTSE Eurofirst 300 index of pan European blue chips was up 8.8 per cent, thanks to strong corporate earnings and attractive valuations.
Over the coming year, European markets are expected to continue their slow and steady course.
Asia
The Japanese market faired less well in the second half of 2004 and lost many of the gains it had made in the first half. However, the Nikkei index gained 7.6 per cent and closed at 11,489 points. Some experts now predict that it will rise to 13,000.
Bonds
With income yields well in excess of cash deposit rates and double digit total returns over the last 12 months, these bonds continue to benefit from global supportive factors and are thus expected to perform well in 2005. Overall, though, equities are expected to perform better than bonds this year.
Property
In the UK, 2004 has been described as a year of ‘two halves’ for the property market. The market was buoyant in the early months, but began to slow in the second half, with falls by the end of the year.
Experts differ on what will happen next. Halifax predicts property values will fall by two per cent this year, while Nationwide expects them to rise by two per cent. Others think prices could fall by eight per cent. Since growth will be lacklustre at best, there is a good chance that many buy-to-let investors will sell, tipping up an already fragile market.
Most experts predict that equities will perform better than other assets, and this includes property. The stock market is expected to beat property in 2005, reversing the trend of the past five years.
From 2000 onwards, investors entered each New Year with some trepidation – but not this year. The markets have stabilised, growth forecasts are positive and the mood is upbeat.
