The upward momentum in the UK equity market continued into August, as reflected by the 7.1% rise in the FTSE All-Share index. Similar to previous months, the stockmarket was driven by strength in cyclical sectors, while defensive areas of the market underperformed. In terms of equity market performance on a market-capitalisation basis, small- and mid-sized companies outperformed, as reflected by the 13.1% and 10.2% rise in the FTSE Small Cap and the FTSE 250 indices, respectively.
By contrast, large-capitalisation stocks lagged, as reflected by the 7.2% return of the FTSE 100 index. At the sector level, banks and insurers led the way, while tobacco and pharmaceuticals were weak. The Bank of England’s Monetary Policy Committee (MPC) kept interest rates on hold at 0.5% at the 6th August meeting. However, the market was surprised by the MPC’s decision to extend the Quantitative Easing Asset-Purchase programme by a further £50bn to £175bn.
European equities continued their positive momentum during August as favourable data, both economic and corporate, propelled markets to nine-month highs. France, Germany, Portugal and Greece all posted positive second-quarter GDP figures as they were the first developed economies to emerge from recession.
Meanwhile second-quarter earnings results from many European companies were broadly supportive to equity markets. Financials once again drove markets higher while utilities and industrials were also strong. Eurozone GDP overall still fell by 0.1% during the second quarter, though this was a vast improvement on Q1 which saw a 2.5% fall. Despite some economies coming out of recession, the likes of Italy and the Netherlands were still contracting by 0.5% and 0.9% respectively.
US stockmarkets recovered from a mid-month fall caused in large part by reaction to the release of poor retail sales and disappointing initial jobless figures. Strong revisions to second-quarter data and a swathe of better economic news helped to ensure that the S&P 500 index finished up by 3.4%. The Dow Jones Industrial Average, the technology-orientated Nasdaq Composite and the smaller companies Russell 2000 rose by 3.5%, 1.5% and 2.8%, respectively. From its low on 9 March to 31 August, the Dow Jones index has climbed 45%.
Data released during August showed that Japan’s economy returned to growth in the second quarter, expanding at an annualised rate of 3.7%. This ended a run of four consecutive quarters of negative growth and was built on stabilisation in conditions globally, together with the positive impact of extensive government stimulus measures. Despite the stronger performance of the economy, the Bank of Japan highlighted that downside risks to growth remain and they stated their willingness to extend emergency credit facilities into 2010 should it be necessary.
Asia Pacific Equities
Economic data in China that fell short of expectations raised doubts about the strength of recovery in Asia’s dominant economy and left equities in the region mixed. Chinese stocks experienced the largest declines as disappointing foreign direct investment, export and industrial production data hit sentiment. Comments from Premier Wen Jiabao underlined that challenges remain given the weakness in external demand, which remains a key component in achieving sustainable economic growth. In order to support the recovery, the government reiterated its commitment to maintaining low interest rates and high levels of domestic spending.
Following several months of strong performance, global emerging equities paused for breath during August with the MSCI Emerging Markets (US$) index falling by a modest 0.5%. From a regional perspective, Asia was the weakest performer, with stocks in China declining the most in value due to worries over policy tightening. The local China A-share market was the hardest hit, falling by 21.8%. By comparison, equities in Latin America and EMEA registered gains, most notably in Hungary, Argentina, Poland and Turkey.
Although emerging markets underperformed in the month, they have still returned superior gains versus developed markets on a year-to-date basis.The outperformance of emerging European equities was aided by a rally in Western European share prices, falling interest rates and receding recessionary fears.
Investment views in this document are taken from various sources and are intended purely for information purposes. They do not in any way constitute investment advice. You are not certain to make a profit, you may lose money/make a loss if you invest in any of the above.