Investment News

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UK equity share prices were fairly muted during the first half of the year. The FTSE 100 index vacillated between 4,300 and 4,600 for much of the time, struggling particularly in the summer.

Shares, however, have surged recently, with the FTSE breaching the 4,700 barrier in early October. According to a report in the Sunday Times, most experts are of the opinion that the rally will continue and that the FTSE is likely to hit 5,000 by the end of the year. If it does, it will be at its highest level since September 2001.

This index of leading British equities gained 8.2 per cent so far this year. This is more than most other equity markets, for example the US S&P 500-index rose 3.4 per cent and emerging markets rose 7.2 per cent (according to figures from broker Brewin Dolphin). European markets increased 8.69 per cent.

A Sunday Times poll at the start of 2004 showed that analysts expected the FTSE to end the year at between 4,500 and 5,000. The paper now reports that the current optimism is encouraging most of them to review and increase their forecasts. A manager at Credit Suisse Growth and Income says: “The FTSE 100 could reach 5,100 by the end of the year. Equities look good value relative to both cash and bonds, and we are at or near the peak of interest rates in the short-term.”

Three of the market’s biggest sectors have done particularly well recently. Banks have benefited from the Banco Santander bid for Abbey National, rising oil prices have boosted oil and gas stocks, and mining has been helped by rising commodity prices. These three sectors make up 40 per cent of the index.

Not all analysts are as bullish. One analyst from Merrill Lynch is worried that the index could fall to 4,300. His concerns are uncertainties in the market, and he points out that the markets have priced in a win for George W Bush in the US elections, so a win for his opponent could unsettle the markets.

High yield bonds:

still benefiting from

underlying fundamentals

At the start of 2004, some observers predicted a difficult year for sub-investment grade debt. High yield bonds had performed very well in 2003 (European bonds gained 30 per cent in local currency terms and 39 per cent in Sterling terms), so many believed a correction was inevitable.

However, although the yield so far this year is more modest, this is actually a return to normality and a sharp correction remains unlikely. High yield bonds have benefited from a number of supportive influences over the last two years, and continue to do so. The speculative-grade default rate continues to fall.According to Moody’s, it fell sharply in August to 2.3 per cent from 2.9 per cent in July. It predicts this rate will fall to 1.6 per cent by the end of the year. This compares well to the default rate of 8.3 per cent at the start of 2003 and 5.2 per cent early this year.

These significant drops in default are attributed to the improving economic climate and a greater focus on de-leveraging. The result is that investors are no longer attaching such a hefty risk premium to high yield debt.

Other factors proving beneficial for high yield bonds are the pick up in merger and acquisition activity – investment banks’ continuing willingness to provide liquidity, and the derivative.

Multi manager:

sector continues to grow

The latest Cerulli Report projects that global multi-manager products will continue expanding 14 per cent compounded annually through 2008 – matching the growth rate posted for the past four years, exceeding UShttp://www. trillion by 2006 and surpassing UShttp://www..3 trillion in 2008. Cerulli Associates says this projection accelerated significantly from last year, when it projected a 10.4 per cent compounded annual growth rate through 2007, but the change resulted from better asset returns from stockmarkets worldwide as well as dramatic growth in the sizeable US market segment.

The report points out that multi-manager products recorded more than US$66 billion of net new business during 2003, a record amount. According to the report, Russell remains the global market leader among manager-of-managers investment firms. It shows Russell holding a 22.4 per cent share of the growing global manager-of-managers market, including 18 per cent of US manager-of-managers assets. According to the report, “Russell maintains its position as the world’s largest multi-manager by any measure. During 2003, the firm continued its global expansion using its traditional modus operandi – securing a key distribution relationship in a target country, then using that as a platform for generating additional business.”

Russell President and CEO, Craig Ueland, puts the record demand for Russell’s multi-manager investment services down to an increased investor “need for disciplined advice and objective research”.

In recent years Russell has expanded its global array of multi-manager investment programmes by developing business alliances with leading financial services organisations in major markets around the world.

In addition to expanding globally, Russell has broadened its original focus on corporate pension plans to include service to endowments and foundations, investment advisers, banks, brokers and other service organisations.

UK property market:

Values could fall 40 per cent

One of London’s top fund managers has predicted a fall in UK house prices of up to 40 per cent over the next three to four years. According the The Times, Neil Woodford (who manages six billion pounds for Invesco Perpetual) is positioning his funds for a sharp decrease in property prices, and is choosing not to invest in companies linked to the property market. He told The Times that higher interest rates and the British consumer’s sensitivity to them would send prices significantly lower: “People have borrowed a hell of a lot more money than they have ever borrowed before.”

He described the predicted fall as a “healthy correction”, which would bring the average property price down from 153,000 pounds sterling to between 92,000 and 107,000 pounds sterling. This would only bring prices back to where they were 18 months ago. He worries that this may affect the UK economy, especially coupled with higher fuel prices, utility bills and council tax.

Woodford is also staying away from investing in companies linked to construction, retailing and banking. Instead, he is investing in traditionally defensive stocks like tobacco and utilities.

He is well-respected in the City, and was rated second over one year and five years in the Citywire rankings of top managers.

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