September market review

news: September market review

By BILL BLEVINS

United Kingdom

The market strength was fuelled by strong corporate news flow and profit growth, takeover activity and the continued robust global economic climate.

There was little to chose between the size indices, with the mid cap and small cap both returning +8.7 per cent. Year to date the size indices have produced similar returns.

Cyclical stocks outperformed defensives. This was driven by the continued strength of resource stocks, which have benefited from rising commodity prices.

Within the cyclical area, those stocks exposed to the consumer struggled due to the much quoted slowdown in consumer expenditure.

High yield stocks showed weakness, while stocks exhibiting high earnings growth saw improved performance.

Continental Europe

European stocks rose sharply in September, ending at 40 month highs despite the uncertainty caused by the inconclusive elections in Germany. The year to date FTSE World Europe ex-UK Index has risen over 21 per cent.

European inflation accelerated in September to 2.5 per cent, the fastest pace in more than a year after oil prices surged to a record as Hurricane Katrina and Hurricane Rita threatened oil rigs.

It was Merger & Acquisition (M&A) activity, both real and anticipated, which helped stimulate the European markets throughout the month. Materials stocks were the best performing, due to sustained demand from China and India.

Technology stocks recovered from lows as positive news flow, particularly in semi-conductors, boosted sentiment.

Value stocks moderately outperformed growth stocks. Size trends were more pronounced, with small cap stocks outperforming larger cap stocks. Over the year to date, growth stocks remain moderately ahead of value stocks, while small cap stocks remain strongly ahead of large caps. Energy has been the best sector over the year as oil prices remained high.

United States

US equities ended the month ahead with the Russell 1000 gaining 0.9 per cent. A rash of M&A activity boosted markets mid-month. However, this was followed by a steep decline as airline bankruptcies and preparation for the onset of Hurricane Rita cowed markets. Economic news was mostly negative with the effects of the hurricanes and the oil price leading to a plunge in consumer confidence. Nevertheless, the Federal Reserve continued its interest rate tightening cycle and raised rates by 0.25 per cent for the 11th consecutive time. Once again, energy related stocks were favoured, which helped large caps outperform smaller stocks, and value outperformed growth.

Japan

Japanese stocks rose sharply in September, continuing the strong gains made in the year to date. The Topix reached four-year highs, ending 11.5 per cent higher in total return terms.Largely positive economic news was boosted by Prime Minister Junichiro Koizumi’s convincing mid-month election win. Economic news was mostly positive with an upward revision of second-quarter GDP, good retail sales figures for August and growing business confidence.

Pacific Basin

Easing oil prices helped stocks in the Asia Pacific region bounce back from their August declines, with the MSCI AC Pacific Free ex-Japan Index rising by 5.9 per cent. A ratings upgrade of 25 Asian banks by Standard & Poor also boosted market sentiment.

South Korea was by far the strongest performing market in the region as a revival in consumer spending and corporate activity helped the Kospi Index reach all-time highs. All of the region’s countries posted gains in what was a very positive month, with Australia, Thailand and Hong Kong performing particularly well. Ex-benchmark India also rose strongly.

Emerging Markets

(all returns are in US$ unless otherwise stated)

Emerging markets had another strong month, with the MSCI Emerging Markets Index rising 9.3 per cent. This represented a significant out performance of their developed market counterparts, with the MSCI World Index up only 2.5 per cent. In a strong month for all regions, Latin America was the strongest performer, as Brazil continued to post strong gains. Brazil’s economy is enjoying strong growth, supported by solid corporate profits and expectations of monetary easing by the country’s central bank. Russia (+16.9 per cent) was strong again as the high oil price boosted returns of energy stocks, which make up around two-thirds of the Russian index.

Global Bonds

Bond yields increased in most markets this month. The US was the worst performing major market. US interest rates were raised again to 3.75 per cent, with the Federal Reserve citing inflation concerns. Two to three further rate rises are expected as the effects of hurricanes Katrina and Rita and high oil prices take their toll.

In the UK, the Bank of England kept interest rates at 4.5 per cent. UK economic news relating to the consumer was generally weak.

The Organisation for Economic Co-Operation and Development cut its growth forecast for the UK to 1.9 per cent from 2.4 per cent. Chancellor Gordon Brown was forced to follow suit, although his attempt to blame the oil effect was given short shrift by economists.

Interest rates in the UK remain the highest of the G7 countries, although investors have not ruled out the possibility of another cut before the year’s end, especially given that second quarter was revised down to 1.5 per cent (on a year on year basis), the slowest pace in more than 12 years. This has reinforced expectations that the Chancellor of the Exchequer will be forced to scale back plans to increase spending.

Yields across the rest of the yield curve increased, as positive economic news emanating from the US, Japan and Europe reduce investors demand for government debt. The UK outperformed all three of these markets. Non-gilts continued to outperform, with corporate and mortgage backed securities the strongest performers, as these sectors generally have lower credit quality ratings.

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