Despite a couple of ‘blips’ in April/May and October, this has been a year of reasonable gains on the UK stockmarket. The FTSE 100 is showing a rise of about 13.5% for the year to date. In fact, recovery has proceeded at much this rate since the low of March 2003. In early November, the FTSE 100 briefly recorded a 4-year high of 5,500. To set this in context, however, this is still nearly 1,500 points less than its all-time high in late 1999.

The later, and more significant, ‘blip’ in October was caused by worries over the price of oil – exacerbated by the hurricanes in the USA. These still persist as a concern for the future, because fuel costs could have a significant influence on inflation. In the UK in particular, any potential rise in inflation this year has been largely offset by the slowing of the housing market but there are indications that house prices are now increasing once again.

With one major exception, the rest of the world’s major stockmarkets have followed much the same pattern. This has lead to considerable discussion among analysts and commentators as to whether the Japanese economy is at last breaking free of more than a decade of deflation or whether we are seeing yet another false dawn. The major exception has been the United States of America where markets have moved sideways. The Dow Jones is at much the same level at which it started the year, although it has oscillated within a range of about 5%.

The bald statistics do conceal one major change in the investment climate. In the UK, and to a large extent in Europe, the early stage of recovery in 2003/4 was led by small and mid-cap companies. This year, they have been overtaken by large-cap, FT 100, organisations. From an investment viewpoint this suggests that the smaller companies and ‘opportunities’ funds that led the field for the last two years or so could now disappoint. Large-cap funds, in particular, equity income funds, could be the way forward.

As is usually the case, good news for equities tends to be bad news for fixed-interest investments. A year that has been moderately good for equity investors has been only moderate for Corporate Bond and similar funds. It is now widely expected that the Bank of England will reduce interest rates again in the near future to stave off any faltering of the economy. This, in turn, will make it more difficult to extract a reasonable yield from a fixed interest portfolio.

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