The FTSE All-Share Index returned 5.5% over the three months to the end of December. Over the quarter, the FTSE World ex-UK Index (+8.4%) rose by more than the FTSE All-Share Index in local currency terms, however Sterling strengthened markedly over the period and this reduced the FTSE World ex-UK Index return for Sterling based investors to +5.2% for the quarter. In local currency terms, the Japanese equity market produced the strongest return (Nikkei 225 Index, 3-month total return: +12.7%), whilst the US stock market also performed strongly (S&P 500 Index, 3-month total return: +10.5%). Bringing up the rear were Emerging Market and Asia ex-Japan stock markets (MSCI Emerging Markets, 3-month total return: +3.0%; MSCI Asia ex-Japan, 3-month total return: +3.4%).
Equity markets rallied in October as the Federal Reserve chose not to start to withdraw quantitative easing (QE) early in the period. This was contrary to market expectations. However, this move upwards then led to a period of drift as investors started to speculate, once again, as to when and by how much QE would be withdrawn. The announcement in December that QE tapering would occur over an extended period was taken well by the market and there was a strong equity rally into the year-end.
For the year as a whole, equity markets have been strong in Sterling terms. The FTSE All-Share Index returned 20.8%, whilst the FTSE World ex-UK Index returned 22.7%. Performance differentials were striking, however. The US and Japanese markets returned 29.9% (S&P 500 Index) and 26.5% (Nikkei 225 Index), whilst Emerging Markets and ex-Japan equities were poor, returning -4.4% (MSCI Emerging markets) and +1.2% (MSCI Asia ex-Japan) respectively.
Safe haven government bond prices rose during the early part of the quarter, as the expected US QE taper failed to materialise. However bond prices have since resumed their sell-off as the QE taper was subsequently announced. This means that the biggest buyer of US Government debt (the Federal Reserve) will reduce its rate of purchase steadily during the first half of 2014. The FTSE Gilts All Stocks Index returned -1.4% over the final quarter of 2013. Higher yielding debt outperformed gilts, whilst the best quality corporate debt underperformed as spreads had tightened sharply earlier in the year.
The Brent crude oil price rose 2.2% during the period. It is interesting to note that the spread between the Brent oil price and the West Texas Intermediate (WTI) oil price has widened once again. If sustained, this means that the US economy will benefit from lower energy prices relative to the UK economy, and on this measure will be more competitive. The gold price finished the 3-month period down 9.3%, in US Dollar terms. Inflation
data continued to be benign and the US QE taper was announced, which signalled the first very modest move to row back on the prevailing exceptionally loose monetary policy in the United States.