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A REVIEW OF 1996 FOR THE UNITED KINGDOM

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The equity market had an uneventful first half of the year, in which the FT-SE 100 index rarely managed to break ou...
The equity market had an uneventful first half of the year, in which the FT-SE 100 index rarely managed to break out of a narrow 3650-3800 trading range, and a much stronger second half in which the market topped the 4,000 mark, closing at an all time high of 4118.5 on 31 December.

Including dividend income UK equities returned almost 17% over the year as a whole.

The unimpressive equity market performance in the first half came against a background of slower economic growth, led by destocking in the manufacturing sector.

Corporate news reflected this lack-lustre performance, with a number of profit warnings. The market was also held back by fears of a US equity market correction caused by a monetary tightening to check economic growth and inflation.

The key market drivers in the second half were the strength of company balance sheets and cash flow, and a change in sentiment about the US economy as fears of tighter monetary policy there receded.

Anticipation of stronger domestic economic and corporate profit growth also helped lift investor sentiment.

Conventional gilts returned 7% in 1996, index-linked returned a little under 6%.

The 10 year benchmark bond yielded a low for the year of 7.25% in mid-January, a high for the year of 8.24% at the beginning of May, and closed on 31 December at 7.51%.

The improved performance in the second half of the year reflected both a slowing of economic activity in the US and increased political momentum towards European Monetary Union in Europe.

It also reflected the acknowledgement that economic policy would be little changed following the election, whichever political party came to power.

Overseas

In sterling terms global bond markets performed badly in 1996. The JP Morgan global bond index, excluding the UK, gave a return of -6% in sterling terms.

Poor performance was attributable to a sharp appreciation in the value of sterling which ended the year up 15%, its highest level since September 1992.

For the same reason overseas equity market performance was also disappointing last year and the FTA world index, excluding the UK, gave a return of only 1% in sterling terms.

However, within the total North America and the Pacific Rim both returned over 11% and Europe ex UK returned over 9%. The Japanese equity market, down almost 25% in sterling terms, had the most profound effect on performance.

The Japanese Topix began the year at a level of 1577, reached a high of 1722 in June, only to slide for the remainder of the year, to close on 31 December at 1470.

A deterioration of investor sentiment in the second half of the year reflected the fear that an austere 1997 budget would halt an economic recovery that was already showing signs of running out of steam.

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