Market Overview
The following review is for the period 1 January to 30 June 2007 and does not reflect changes in market conditions since this date.
Overview
After an unsteady start to the year, global equity markets made solid gains in the first half of 2007. The star performers were Europe and Asia Pacific (excluding Japan). The US economy continued to grow at a slower than expected pace, but this was balanced by strong growth elsewhere. This period also saw rising commodity prices and continued increases in UK and European interest rates.
UK
The UK economy and stock market, as represented by the FTSE All-Share Index, performed well over the first half of 2007.
The UK economy showed strength on all fronts with consumer spending, civil engineering, exports and business investment all growing. Wage growth appeared modest, but underplayed improvements in bonuses, job quality and increased numbers of older workers.
The strong economy prompted an increase in inflationary pressure, with the RPI exceeding the 1-3% band in March. This rise in inflation led to two interest rate increases over the period to 5.5%.
The FTSE All-Share Index rose strongly over the period, despite a two week sell-off that started in late February. Bids for several FTSE stocks, including Hanson and Reuters, supported the rise.
Europe
The European economy powered ahead in the first half of 2007.
This strong growth was driven by exceptional export demand from the Middle East, China, Eastern Europe and Russia which helped to tighten labour markets across Europe, particularly in Germany.
This boosted consumer income and confidence, prompting German consumers to increase spending sharply after 14 years of moderate growth.
European equities performed very well, maintained not only by the improving economic environment, but also by ongoing restructuring, productivity growth and increased takeover activity.
US
The US stock market, as represented by the FTSE World North American Index, rose solidly by the end of June.
This rise contrasted with poor general economic performance, with first quarter growth dragged down by a recession in the housing market. Equities, however, were supported during this period by activities such as company buy-back of shares and strong overseas demand for US corporates.
Japan
The Japanese market, as represented by the FTSE World Japan Index, rose in the first half of 2007, but underperformed the other major equity markets in sterling terms.
The economic environment was subdued, with low domestic demand reflecting poor wage growth. However, exports remained strong and capital expenditure was robust, particularly by export industries.
This lack of economic drive, combined with relatively poor corporate activity, were the main factors behind the modest market performance. A continued fall in the yen also reduced returns when measured in sterling terms.
Asia
The Asian market, as represented by the FTSE World Asia Pacific Ex Japan Index, rose solidly in the first half of the year.
The best performance came from China's Shanghai market, which rose strongly on the back of powerful retail and institutional buying. In Hong Kong the Hang Seng Index also performed well, sustained by the expectation of increased buying from mainland China. India was mixed, falling initially on inflation concerns, but rising again as the authorities allowed a sharp appreciation of the rupee.
Fixed Interest
The corporate bond market performance remained solid in the first half of 2007. The Bank of England's decision to raise interest rates twice in the period caused new bond yields to rise.
Overall, the sterling investment grade corporate bond market remains in relatively good shape, but increasing levels of merger and acquisition activity means that stock specific risk is rising.
High Yield
The high yield bond market has performed strongly over the period with new issues coming to the market on the back of mergers and acquisitions, private equity-led leveraged buy-outs and strong economic fundamentals in both the US and Europe.
Property
The UK commercial property market continued to climb, sustained by City and West End yield compression, combined with persistent upward pressure on rents. However, as the six months progressed, some moderation of returns was seen in lower quality retail property outside London.
The views expressed above are those of Legal & General Investment Management, who may or may not have acted upon them. The above should not be taken as an invitation to deal in Legal & General investments or any of the stated stock markets. Remember, the value of investments and any income taken may fall as well as rise, is not guaranteed and you may not get back the full amount of your original investment. Past performance is not a guide to future performance. Exchange rate changes will cause the value of any overseas investments to rise or fall.
