Markets and currencies – a review of 2005.jpg

Markets and currencies – a review of 2005


For the first time in the last five years, shares outperformed house prices by a substantial margin. According to an article in the Daily Mail, UK house prices rose just three per cent during 2005, well down on the 12.7 per cent in 2004, while the FTSE 100 UK stockmarket index rose 16 per cent over the same period.

Nationwide is predicting that house prices will only rise between zero per cent and three per cent during 2006.

As usual, experts’ predictions for shares are mixed, but most are agreed that there will be a positive outcome, with some suggesting a break through of the 6,000 mark. Of course, even this does not include the reinvestment of dividends, which can have a significant impact on overall investment returns. One positive for the market is the expectation that the Bank of England will cut interest rates.

Although the monetary policy committee voted eight to one in favour of holding rates at 4.5 per cent in its December meeting, there are indications that a 0.25 per cent cut in the base rate could come as early as the first quarter. There is lingering concern about the outlook for inflation and also on the effect of high oil prices, and one member of the committee felt that there was sufficient evidence to cut rates immediately.


European shares also hit multi-year highs, led by gains in Germany, France and Switzerland. The FTSE Eurofirst 300 index rose to a new 52 month high in December, an increase of 23 per cent for the year – its best performance since 1999. Include dividends, and the total return rises to 27.2 per cent.

The upswing was very broad, with only the telecoms sector recording a decline. Smaller companies outperformed their larger peers with the MSCI Eurozone small cap index rising 32.7 per cent, compared with a rise of 23.4 per cent on the main index.

According to Wolfgang Munchau in The Times, the German economy is in a strong position to achieve the long-awaited cyclical upturn. He says that corporate profits are strong, wage pressures are modest, the export boom continues and there are already signs of investment picking up. It is expected that consumer spending will surge towards the end of the year ahead of the planned three per cent rise in VAT in 2007. Fifteen German companies saw their share prices more than double in 2005.

The equity markets rally has lasted almost three years now and, since the trough in March 2003, the Eurofirst 300 has risen 86.8 per cent. Eurozone equities are now trading on a prospective price earnings ratio of 13.3, still below the long-term average.


Despite the Dow Jones Industrial Average Index starting 2005 at around 10,800, rising to 11,027, then falling to 9,961, before ending the year almost unchanged, non-US investors were not disappointed with their returns due to the strong performance of the dollar.

As of December 30, the currency stood at 1.1790 dollars against the euro, a rise of more than 12 per cent over the year and the largest annual rise since the euro was launched in 1999. Against sterling, it stood at 1.7208 dollars, a rise of 10 per cent and the biggest annual rise since 1992 when the pound abruptly left the European Exchange Rate Mechanism. The best performance was against the yen, with a 15 per cent rise on the year as the Bank of Japan kept short-term interest rates pinned at virtually zero.

The Federal Reserve has increased interest rates 13 times since June 2004, going from one per cent to 4.25 per cent, although there are now indications that this series of rises may be coming to an end, which will be good news for equities. There may also be further strengthening of the dollar to come.

The Telegraph reported Steve Pearson, HBOS’s star strategist, as saying, “the US has a strong economy, it has high yields and that is good for the dollar”. He predicts that the US currency will hit 108 dollars against the euro this year. The US was the star among developed economies last year, growing by around 3.5 per cent.


Shares in Japan also made strong gains in 2005, with the Nikkei 225 index rising 40.2 per cent, the best performance since the boom year of 1986. The broader Topix index rose even further with a 12 month return of 43.5 per cent, the biggest advance since 1999 when Japan was benefiting from the dotcom boom. Both indices are now just below five year highs.

Property stocks and retailers faired best as signs began to show that Japan’s consumer and asset prices had finally stabilised and that consumer confidence was building. However, the rally was led primarily by overseas investors, although towards the end of the year domestic individual investors were seen to be net buyers.

The Nikkei reached a 20 year low of 7,600 in mid-2003, but has now climbed back to over 16,000. This is, of course, still less than half the peak of almost 40,000 hit at the end of 1989 before the bubble burst.

Asia (ex-Japan)

A highly significant event occurred in 2005, this being the leap of the Chinese economy into fourth place in the table of world economies, ahead of the UK! This was perhaps not a surprising event, as the meteoric rise of China has been well documented, but it certainly marks a shift in the global economy.

Despite diplomatic problems between China and Japan, the former is now the latter’s biggest trading partner and should also benefit from Japan’s continuing recovery.

South Korea led the way among Asian markets, with the Kospi index rising 54 per cent over the year to become the best performing major Asian share benchmark. By the end of last year, South Korean industrial production had grown to its strongest level for six years.


After taking 18 years to move above 500 dollars a troy ounce, the question is whether gold has staying power. Historically, the price of gold has risen when the dollar was falling, but lately it has traded independently of the dollar, reaching long-term highs against the yen, euro and sterling and may now have entered a new era.


The Times reported Morgan Stanley’s strategy team as saying that a positive equity market environment should run through the first half of this year with liquidity still strong, some “valuation headroom” remaining and strong to stable growth almost everywhere in the world.  

Richard Skelt, head of portfolio strategies at Fidelity International recently said that, “while the impact of commodity prices on economic growth and inflation remains uncertain, global leading indicators have been improving for the past six months. This is an encouraging sign for equity markets”. As far as bonds are concerned, Fidelity International fixed income portfolio manager Ian Spreadbury feels that, “while some concerns have been raised with regards to valuations within the corporate market, we consider many opportunities still exist and 2006 should see some mid-to-high single digit returns”.

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