Investor/An insider's guide to the market: With the long August evenings just beginning to shorten, it's a good time to look back at what has been an eventful summer in the investment markets.
"Sell in May and go away" is one of the oldest stock market sayings, but anyone following it would have missed out on a very strong equity market rally. This across-the-board rally has lifted most equity indices well into positive territory for the year to date.
Despite Europe's somewhat sclerotic economy, European equities have led the way in 2005. European-wide equity indices are now up by between 12 per cent and 14 per cent year to date, while the UK's FTSE 100 is not far behind with a rise of 11 per cent.
The ISEQ Overall index is up 8 per cent, but if the depressing effect of the Elan collapse is stripped out, the Irish index would be up by some 16 per cent.
Asian markets have also performed well in 2005 with both Japan and Hong Kong up by between 7 per cent and 8 per cent.
North America has lagged, with the S&P 500 index barely in positive territory and making a gain of just 2 per cent. However, the US dollar has been strong this year so that the return in euro is in fact over 11 per cent. Therefore, foreign investors in the US equity market will not be too disappointed with the return from their American shares so far in 2005.
The opposite is of course the case for American investors in their domestic market. The overall level of US share prices has been relatively flat for over a year and this does seem to be encouraging some US investors to diversify overseas.
Recent data released by the US Treasury shows that US investors bought $146 billion (€118 billion) of overseas bonds and equities over the past twelve months - more than at any time since 1994.
June is the latest month for which figures are available and they show that US accounts bought $9.6 billion worth of equities in June to bring the two-month total to $96 billion.
The traffic was not all one-way as the data also showed that total net inflows into the US came to a surprisingly high $71.2 billion, up from a figure of $55.8 billion in May. The bulk of these inflows were directed towards corporate bonds with only a tiny portion going to US equities.
Figures such as these serve to remind us that global financial markets are increasingly interdependent. Data released on the UK gilts market reveal that 24 per cent of outstanding UK government gilts are in the hands of overseas investors. Four years ago the comparable figure was 16 per cent. During the first quarter alone foreign investors raised their holdings of UK gilts by £10 billion (€14.67 billion). This still leaves UK gilts behind US Treasuries where overseas holdings now account for 46 per cent of outstanding issuance.
This trend towards greater integration across the world's financial systems will be strengthened by the Chinese decision to drop their dollar-peg policy. China now pegs its currency to a basket of currencies and this is expected to encourage central banks, especially Asian banks, to diversify their substantial reserves out of the dollar.
It was in fact a very busy summer for economic and financial developments. The rising oil price barely paused for breath and $70 per barrel is expected to be reached before long. The Federal Reserve in the US continued with its policy of measured interest rate rises and signalled that it would continue to raise rates in quarter point increments. The Bank of England cut its repo rate by 0.25 per cent to 4.5 per cent, which led to some short-term weakness in sterling. However, the Bank has made it clear that it has no plans for a follow-on cut and will assess economic data for a few months before making any further moves.
From the Irish perspective, the international financial news over the summer has been benign. High oil prices show no sign of derailing global growth and, if anything, the prospects for continued economic growth have improved.
Currency markets are under no major strains and the Chinese revaluation should lead to a gradual and welcome general appreciation of Asian currencies. The dollar rally of 2005 has brought the euro to a more competitive level and should give a boost to the European economy.
Anyone who did switch off in May will come back at the end of August to find a very steady set of economic and financial conditions, which is reflected in higher share prices than those prevailing in May. And for the remainder of 2005 the odds still favour a continuation of these bullish trends.
