Following the poor returns seen in the second quarter, the third quarter provided more disappointment for global equity investors. Markets fell to their lowest levels in over six years amid fears that economic recovery would falter and that the double-dip scenario would become a reality. The previous quarter's concerns over accounting irregularities gave way to renewed fears over the escalation of hostilities in the Middle East, with the threat of US led military action against Iraq looking increasingly likely as the period progressed.

Global markets overall fell by around 15% over the quarter, with the weakest performance coming from Europe ex UK, which fell 23%. The UK lost around 18%, with the US 14% lower and Japan, the best relative performer among the major markets, losing 12%. Consumer staples led the gainers while technology was the weakest area.

Central banks again left interest rates unchanged amid mixed economic data, although nervousness over possible tightening gave way to mounting expectations that the next move would be downwards. In the US, consumer confidence fell to a 10-month low because of falling stock markets, weak employment figures and growing concerns about a potential war with Iraq, while industrial production fell for the first time this year. In contrast, retail sales and consumer borrowing continued to rise.

In Europe the German IFO survey showed the outlook for business confidence at its lowest in eight months, while German unemployment rose to a three year high. France saw a decline in consumer spending and industrial production fell at its sharpest rate in nine months.

Meanwhile in Japan the economic situation showed little evidence of improving, with the earlier brief recovery faltering as orders slowed up. The Bank of Japan announced plans to buy equity holdings from banks, which should help to support the stock market in the short term, although the likely longer term impact remains less clear.

Equities have fallen to levels where they are undeniably good value, although sentiment remains severely depressed and new money is not being enticed in. Looking ahead, the fund managers expect equities to outperform bonds over the next 12 months, although they expect continued volatility in the near term. Corporate profit growth remains key and the fund managers believe that next year's forecasts are overly optimistic. The return of more realistic management credibility and better figures should herald an upturn in sentiment.

Global equity market performance was disappointing during the second quarter. All major markets lost ground to end sharply lower and in many cases fell to their lowest levels since the aftermath of the terrorist attacks on 11 September. Losses were led by the US, where concerns mounted that the pace of economic recovery is slowing. In common with central banks elsewhere around the globe, the benefits of monetary easing have now worn off in the USA and nervousness over possible tightening is increasing. The situation was compounded by a weaker than expected rebound in corporate profits, concern over the prospect of more terrorist activity and fears that more accounting irregularities will be uncovered, or what President George W. Bush has referred to as an "overhang of distrust", following the collapse of Enron and the implication of Arthur Andersen. Pharmaceutical shares came under pressure after the Wall Street Journal reported that Merck had boosted revenue with accounting methods not used by its rivals, while IBM was hit after a number of analysts warned that earnings would fall short of forecasts. These factors had a profound effect on the dollar, which fell to a two-year low against sterling and the euro. The gold price benefited as investors sought sanctuary from falling equity markets, and reached its highest price in almost five years. Meanwhile in Europe, news of falling consumer spending in France and waning business confidence in Italy towards the end of the period suggested that the European economy is struggling to expand during the second quarter. This follows limited growth in the first quarter and a contraction during the final quarter of last year. Fears now are that rising unemployment, strikes and a slowing US recovery may dampen consumer demand and lead companies to cut production. Elsewhere, although Japan could not escape the declines, its equity market held up better than its global peers, supported by steady buying by foreign investors in the belief that the market may now have passed its low point. Looking ahead, while the fund manager's expect global economic growth to recover faster than previously envisaged, they nonetheless expect it to remain below trend this year. Last year's interest rate and tax cuts should help the recovery process as we progress through the second half of this year and into next. The fund manager's expect global inflationary pressure to remain subdued, as there is still considerable excess capacity and the corporate sector has little pricing power. Overall the fund manager's remain positive on the outlook for global equities relative to bonds and cash. During the second half of the year the fund manager's expect equity investors to discount a strong rebound in profits and positive corporate newsflow.

Global equity market performance was disappointing during the second quarter. All major markets lost ground to end sharply lower and in many cases fell to their lowest levels since the aftermath of the terrorist attacks on 11 September. Losses were led by the US, where concerns mounted that the pace of economic recovery is slowing. In common with central banks elsewhere around the globe, the benefits of monetary easing have now worn off in the USA and nervousness over possible tightening is increasing.
The situation was compounded by a weaker than expected rebound in corporate profits, concern over the prospect of more terrorist activity and fears that more accounting irregularities will be uncovered, or what President George W. Bush has referred to as an "overhang of distrust", following the collapse of Enron and the implication of Arthur Andersen. Pharmaceutical shares came under pressure after the Wall Street Journal reported that Merck had boosted revenue with accounting methods not used by its rivals, while IBM was hit after a number of analysts warned that earnings would fall short of forecasts. These factors had a profound effect on the dollar, which fell to a two-year low against sterling and the euro. The gold price benefited as investors sought sanctuary from falling equity markets, and reached its highest price in almost five years.
Meanwhile in Europe, news of falling consumer spending in France and waning business confidence in Italy towards the end of the period suggested that the European economy is struggling to expand during the second quarter. This follows limited growth in the first quarter and a contraction during the final quarter of last year. Fears now are that rising unemployment, strikes and a slowing US recovery may dampen consumer demand and lead companies to cut production. Elsewhere, although Japan could not escape the declines, its equity market held up better than its global peers, supported by steady buying by foreign investors in the belief that the market may now have passed its low point.
Looking ahead, while the fund manager's expect global economic growth to recover faster than previously envisaged, they nonetheless expect it to remain below trend this year. Last year's interest rate and tax cuts should help the recovery process as we progress through the second half of this year and into next. The fund manager's expect global inflationary pressure to remain subdued, as there is still considerable excess capacity and the corporate sector has little pricing power. Overall they remain positive on the outlook for global equities relative to bonds and cash. During the second half of the year the fund manager's expect equity investors to discount a strong rebound in profits and positive corporate news flow.

The quarter started in buoyant mood, with global equity markets making strong gains early on, amid renewed hopes for a global economic recovery. This was followed by renewed weakness during the middle of the period as news of the accounting irregularities at Enron gave rise to concerns that such problems might be more widespread. Optimism over the fortunes of the global economy then led markets higher towards the end of the quarter. In aggregate, markets ended the quarter slightly ahead, with Japan the strongest performer as the government imposed short-selling regulations ahead of the end of the fiscal year. On the economic front, the fund manager expects global growth to have slowed to around 1.4% last year and to remain below trend this year. The interest rate cuts of last year and fiscal stimuli should bring about a mild recovery this year, most of which will occur in the latter half of the year. The fund manager expects inflationary pressure to remain subdued. Average European economic growth in 2002 is forecast to be higher than in the US, but the growth momentum might be in favour of the USA. The Japanese economy continues to give cause for concern. The Enron situation caused equity investors to turn their attention to corporate accounts, fearing that other apparently sound companies may suffer the same fate. This led to some risk aversion, although signs are now emerging that this has been overdone and that a sense of rationality is returning. Recent economic releases have pointed towards an improvement in global economic fortunes, which is increasing investors' confidence in a rebound in corporate profits during the second half of the year. Following a period of consolidation, the fund manager is now looking for a resumption of the upward trend. Markets are still offering value and the fund manager is expecting solid returns over the next 12 months. The biggest risk to our benign economic and market environment would come from a collapse in the Japanese banking system. This would be very bad news for bond markets, particularly US treasuries, where Japanese banks are significant holders. If a forced liquidation of US bond holdings were to occur this would have a knock-on effect on the US Dollar.

The Old Mutual Global Equity is expected to deliver only single digit growth, with it heavy US weighting. This fund has a solid diverse foreign exposure, with an asset manager with international skills.