UK
The FT All Share continued the advance from the fourth quarter of 2004, with a total return in January of 1.3 per cent. The FTSE 100 index rose 0.9 per cent, under performing the FTSE Mid Cap and FTSE Small Cap indices.
The UK market appears reasonably valued, with earnings growth in the region of 10 per cent. The valuation premium of Large Caps is now much less pronounced, with PE valuations for the FTSE 100, FTSE Mid Cap and FTSE Small Cap broadly in line. Historically, this has been a signal that Large Caps are relatively attractive.
January saw a continuation of the trends seen last year in style performance. Cyclical stocks found favour. Out performance was achieved by the electrical and electronic, steel, construction, transport and aerospace sectors. The worst performers were beverages, food and drug retailing, food processors, telecommunications and healthcare, generally seen as defensive sectors. Smaller companies continued to out perform. The FTSE Mid Cap Index finished the month at an all time high.
Value stocks continued to out perform, although marginally. The Small and Mid Cap indices have a higher exposure to more cyclical sectors which has been a factor in their out performance.
Continental Europe
The equity market rose over January due to a combination of factors. Commodity-related companies were able to raise prices further due to sustained demand from China, optimism about profit growth in Europe was boosted by earnings beating estimates for some high profile stocks and US economic data remained positive. The FTSE World Europe ex-UK Index finished the month up 1.6 per cent.
The European Central Bank again left interest rates unchanged at two per cent.
Style themes have primarily continued the trends seen in 2004. Value stocks moderately out performed growth stocks in January, continuing the out performance witnessed over the last five years. Similarly, Small Caps had a continued strong performance, out performing Large Caps over January and consistently out performing over the last three years.
Strong demand from China helped economic sensitive stocks, such as steel makers, leading cyclicals to out perform defensive stocks over the month.
The best sectors over the month were industrials and basic industries.
US
After dramatic returns during the fourth quarter of 2004, in January, the market declined by -2.7 per cent as measured by the Russell 3000 Index. The first three weeks of the month were largely negative, in response to rising oil prices, a weaker-than-anticipated December jobs report and a release from the Commerce Department showing the US trade deficit had risen to an all time high.
The market began a recovery during the last full week of the month as real GDP numbers were released, reflecting the US economy’s strongest growth since 1999. Energy and oil stocks led on the upside, largely in reaction to a double digit rise in crude oil prices over the month. Producer durables, technology and transportation names were the laggards.
The market started the year on a very defensive note and was dominated by the energy and consumer staples sectors, whereas the cyclical technology, producer durables, and autos and transportations sectors under performed. In contrast to last year, Large Cap stocks out performed Small Cap stocks.
Japan
After a strong finish to 2004, the Japanese equity market was down slightly in January, with the Topix index declining by -0.3 per cent in local terms.
Exports growth numbers slowed reflecting the continued weakness of the US dollar and falling demand from China. The price of crude oil rose over the month, which had an adverse impact on the global outlook.
The Bank of Japan cut the domestic growth forecast and consumer confidence was down for the first time in three months. On the positive side, government reports showed increased machinery orders in November, triggering optimism that capital expenditure by firms will sustain the economic recovery.
There was a significant size effect in January with Small Cap stocks posting significant gains while the larger firms lagged. The value style marginally out performed growth.
Pacific Basin
The Pacific Basin markets rose slightly over January, with the MSCI Pacific Basin ex Japan index posting a gain of +0.8 per cent in US dollar terms.
The markets were jittery at the start of the month as oil prices climbed, after they were thought to have stabilised, and the US dollar weakness continued. They then picked up as Samsung and Intel announced solid earnings, suggesting that the technology sector of the region may be on the verge of an upturn.
The month ended strongly, after unexpectedly strong US consumer confidence data implied that the region’s exporters could see an increase in sales.
Emerging markets
(all returns are in US dollars unless otherwise stated)
Thanks to a strong final day of the month, emerging markets eked out a small gain in January, with the MSCI Emerging Markets Index returning 0.32 per cent in US dollar terms.
While small, this return extended emerging markets’ run of consecutive positive months to six and creates a favourable companion with the developed markets.
Of the regions, Asia reversed its recent trend and handily out performed the index, while both EMEA and Latin America under performed.
Of the larger markets in Asia, Korea provided the high spot with a return of 7.44 per cent, while Taiwan was the laggard with -3.05 per cent.
In EMEA, the Eastern European markets generally did well, despite weakness in their currencies relative to the dollar. Of note was Russia which returned 3.01 per cent following S&P’s move to raise the country’s credit rating to investment grade.
Brazil and Chile held Latin America back, although the rest of the region was equally moribund and none of its seven markets managed to out perform the index.
