Markets made further advances in September, ending a second successive strong quarter, which resulted in a bounce of 67% in the MSCI World Index from its March lows, and bore testimony to the potency of interest rate cuts, quantitative easing and fiscal stimuli implemented by policymakers globally. During the quarter, the index gained over 17%, as improving economic data provided a growing weight of evidence that the possibility of a financial Armageddon had passed, and that a stable recovery had become the more probable scenario.

Overall performance was led by Europe ex UK, with Asia-Pacific also outperforming. The UK and US markets were broadly in line, while the key laggard was Japan, as the most recent industrial activity data disappointed, the manufacturing sector remained under pressure, and unemployment reached a record high. The strongest sector performances came from financials, benefiting from the ongoing healing of the banking system, and materials, where underlying prices remained firm, helped by favourable supply and demand dynamics, and continuing demand from the industrialising economies of China and India.

With some economies now technically out of recession and others forecast to follow suit shortly, the improving global macro environment continues to be reflected in asset prices, although the recovery has been from very low levels, with further to go to regain previous highs. Equities remain attractively valued and the extent to which profits and valuations have fallen suggests potential for further medium term recovery, although there is the possibility of some shorter term profit-taking.

Global equities rebounded strongly during the quarter, registering close to double digit percentage gains (in US dollar total return terms) in April and May, before pausing for breath in June. Overall, the MSCI World Index returned 21% during the quarter, its best three-monthly return in its 21- year history. At a regional level gains were led by Asia Pacific ex Japan (+33%), the UK (+27%) and Europe ex UK (+26%), with a lesser outperformance coming from Japan. The US was the laggard with a return of 16%, a performance which might ordinarily have meant that North America was the strongest region rather than the weakest.

All sectors registered strong gains during the quarter and, with the return to profitability of a number of global financial institutions during the first quarter, the financial sector led the pack with a return of almost 40%. Materials also outperformed strongly as underlying commodity prices remained firm. Crude oil rose by close to 50% during the quarter (although it remains sharply lower than a year ago), while base metal prices rebounded strongly from previous lows, ending higher across the board. The industrial and consumer discretionary sectors also outperformed the MSCI World Index. In contrast, the more defensive sectors, such as utilities and healthcare, were among the underperformers, albeit still notching up double digit percentage gains, as investors sought out more cyclical areas amid mounting expectations of a turnaround in the fortunes of the global economy. A number of economic indicators released during the quarter suggested that major economies might now have bottomed out, with manufacturing output numbers for June showing a slow recovery in the UK, Japan and the US.

Given that markets typically do not advance (or decline) in straight lines, the pause for breath in June following three months of very strong gains was not surprising. However, equity valuations continue to appear attractive relative to other assets, and there is still a considerable weight of cash awaiting reinvestment, so it is likely that world markets can make further upward progress in the coming months. It is important to note that investors will still seek reassurance that equity market gains can be supported by improving economic fundamentals, if requirements for additional risk are to be validated.

Global equities fell during the first quarter of 2009, with the MSCI World Index declining by 11.8% in US dollar terms.

All major regions posted negative returns over the period except Asia Pacific ex Japan, which closed the quarter flat in dollar terms and was up 2.8% in local currency terms. The US (-10.5%) and the UK (-10.7%) outperformed the wider global markets, whilst Japan (-16.6%) and Europe ex UK (-16.1%) underperformed.

The overwhelming majority of global industry sectors posted losses. Positive performance was seen in certain sectors, including semiconductors & semiconductor equipment (+5.8%), retailing (+3.1%) and technology hardware & equipment (+1.6%). The worst performance was in financials, with the weakest returns seen in insurance (-25.9%), real estate (-21.9%) and banks (-21.6%).

The US, Europe and Japan are experiencing the first simultaneous recession since the Second World War. The banking sector remains under pressure and consumer spending continued to decline, with oil prices falling to below US$40 a barrel on concerns about production cuts. This in turn helped inflation to come down from last year's highs, with the European rate declining to the lowest level in more than two years, and deflation is now a concern.

Of the largest European economies, Germany was affected particularly badly as manufacturing continued to fall, faced with the biggest nominal reduction in demand since the Second World War.

The Bank of England reduced its benchmark interest rate to 0.5%, the ECB to 1.5% (and then to 1.25% on 2 April) and the US Fed Funds rate was taken down to the range between 0.25% and zero, exhausting their options for further monetary easing. Equity markets rallied from very oversold levels at the end of the quarter, spurred by a combination of quantitative measures, Geithner's plans for future financial regulation in the US, and some tentative improvements in a handful of economic indicators.

Global equities fell sharply in the last quarter of 2008, with the MSCI World Index declining by 21.7% in US dollar terms. All major regions posted double-digit losses except Japan (-9.0%), with the US performing in line (-22.2%) and the UK (-26.3%) and Asia Pacific ex Japan (-24.9%) underperforming the broader global market. All global sectors posted negative returns. More resilient areas included telecommunication services (-4.0%), pharmaceuticals, biotechnology & life sciences (-6.9%) and utilities (-9.4%), while underperformers were diversified financials (-40.3%), banks (-35.2%) and real estate (-29.9%). Inflation fell as European economies entered a recession, forcing the European Central Bank to cut interest rates three times down to 2.5%. This has continued to fuel the recovery of the US dollar after a long period of falls which, coupled with a significant contraction in US manufacturing, in turn forced the price of oil to below $40 a barrel. In the meantime across the Atlantic, the US Fed Funds rate was cut three times from 2.0% to 0.25%, opening a new era in American monetary policy. The Federal Reserve also pledged to buy unlimited quantities of securities, after previous policy measures seemed to have failed to halt a recession. Similarly to the US and despite interest rate cuts down to 0.1%, the focus of Japan's central bankers has shifted from conventional monetary easing to buying debt and pumping cash into financial markets. China, the largest market for Japanese exports and the biggest contributor to global growth, made its most substantial interest rate cut of the past 11 years in an attempt to halt an economic slowdown. The banking sector remains under pressure, with Citigroup having to be rescued by the US Treasury and many financials reducing dividends at the fastest rate in 50 years to preserve capital.