Global economy set for record growth in 2004

The long-term average rate is about 4%, But it is slightly more downbeat on 2005, with its forecast trimmed by 0.1% to 4.3%. The aggregate figures mask substantial regional disparities. In particular, it has become less optimistic about the US and has revised downwards its forecasts for both 2004 and 2005 by 0.3%. US growth is now expected to be 4.3% this year and 3.5% next year.

In contrast, the IMF is markedly more upbeat on Japan’s economic prospects. The projection for 2004 was revised up by 1.1% to 4.4%, while the 2005 estimate was increased by 0.5% to 2.3%. UK growth estimates were revised downwards by 0.1% for both 2004 and 2005, and growth this year is now expected to be 3.4% and 2.5% next year. Further oil price rises and an economic hard landing were identified as key risks to the forecast; although there is an economic revival in Europe, it is heavily dependent on external demand.

The IMF also argues that inflationary pressures could be stronger than expected, which might be a particular problem in countries where housing markets are “richly valued”, such as the UK. Global economic imbalances, particularly the US current account deficit and corresponding surpluses elsewhere, remain a key risk. Although the US will have to adjust at some point, it is still not clear how.

On the positive side, the IMF says that the emergence of China and the IT revolution provide the opportunity for sustained increases in global productivity growth. Much of the last year has been characterised by a lack of consensus as to the future outlook of equity markets. During this time, there seem to have been no clear trends, with equity-based funds outperforming periodically, but with pockets of outperformance occurring from other asset classes.

Though funds should be considered a long-term investment, investors may be showing concern over the current environment and its effects on fund performance. Latest IMA figures show that net sales are lower than the same period last year, when equity markets were in a recovery phase – to the extent that Isa redemptions have more than doubled since August 2003.

In spite of these worrying figures, there have certainly been areas of investment that have outperformed for at least part of the time, and investors need to consider the underlying fundamentals of the markets they are investing in, as well as the stockpicking ability of individual fund managers.

Overall, average sector returns for UK-registered investment funds have been satisfactory, with no excessive levels of performance, and any losses reasonably modest. However, if we break the year’s returns down into quarterly periods, we can see that the market – while not showing seismic shifts in returns across asset classes – has seen some distinct movements and even changes in direction.

One of the strongest-performing equity-based sectors during the year is Latin America, which gained an average of around 29%. Other emerging markets sectors have also performed well, particularly over the last quarter. These returns – many in excess of 10% – contrasted with the losses sustained by many emerging markets categories the quarter earlier.

Smaller companies sectors have also typically performed well during the year, though higher gains were achieved in the first half of the period, irrespective of the region of investment. Japanese smaller companies funds saw the greatest volatility in quarterly performance, varying between achieving gains of almost 25% in the first quarter of 2004, to recording losses of more than 10% during the latest quarter.

Funds investing in Japanese large-caps have been less volatile, but the only three-month period in the last year recording positive returns was the first quarter of 2004, when the sector gained an average of 14.3%. Funds that were invested in cyclicals saw better returns during the first quarter of 2004, while a defensive bias was credited with outperformance during the second three-month period. North America also continues to be a difficult market due to domestic and international worries, and funds focusing on this region have generally underperformed.

Most European regions achieved broadly comparable returns over the last year, ranging between 11% and 15%. The bulk of these gains were achieved during the latter part of 2003; since then, as equity markets have lacked direction, higher returns have been harder to achieve in Europe. The UK has followed a similar path, though returns have been more consistent than with European funds, with lower gains but also less significant losses, on average. Funds investing for income outperformed the Equity United Kingdom sector by over 1.6% during the last year, as market conditions tended to favour higher-yielding stocks.

Equity-based funds investing in areas such as healthcare, biotechnology and TMT have underperformed the overall market, with TMT Global, one of the worst-performing sectors, posting losses of -6.9% during the year.

In the continuing tug of war between equity and fixed income fund returns, the past year has favoured equities, with the GBP-Corporate sector seeing gains of around 3.9% during the year, compared with Equity UK returns of over 12%. High-yield funds have performed well in this scenario, particularly during the quarter to September 27, 2004 and the last three months of 2003. The three-month period to the end of June 2004 was not conducive to fixed income funds, with almost every bond sector seeing losses. Currency has also played a part in returns, with low gains, or even losses in sterling terms in sectors that are not GBP-denominated.

Perhaps the underlying message is that though equity markets are not momentum-driven, there have nevertheless been areas of interest to the good stockpicker. 1yr Equity sectors% Chg
Latin America29.14
Europe Emerging Mkts24.9
Sector – Energy Global22.51
Smlr Cos Europe ex UK21.76
India19.63
Smlr Cos Japan19.48
Smlr Cos Europe18
Smlr Cos UK16.54
China15.12
Europe ex UK14.3
Fixed income sectors
GBP-Zero Div Pref18.48
GBP High Yield11.36
Europe High Yield10.1
GBP-Index Linked7.07
Global High Yld6.16
GBP4.53
GBP-Corporate3.88
GBP-Government3.13
Global Emg Mkts2.82
EUR2.64
Bid to bid, sterling, gross income reinvested, to September 27, 2004. Only sectors containing at least five funds are included in this analysis. Source: Standard & Poor’s LOUISE COLLINS
Standard & Poor’s UK media manager