Stock Market Review 2006

2006 Market Review

This month we are going to be reviewing the various markets covered by the various UK trading platforms. We will be comparing the performance of the various indices over the past year and looking at the top performing stocks from each market.

 

2006: Year of the Takeover

2006 was a record year for M&A activity - global mergers and acquisitions hit an all-time high of $3,760 billion in 2006, up from $2,744 billion in 2005 (source: Thomson Financial).

·          In the largest takeover action of the year, US telecoms giant AT&T agreed to purchase fellow telecoms group Bellsouth for a total consideration of $67 billion

·          Europe's largest story involved German energy company E.on making a €37 billion bid for Spanish electricity company Endesa, pitting it against a £20 billion offer from Spain's Gas Natural. The European Union has forced the Spanish government to drop its protectionist measures, paving the way for a resolution of the battle in 2007

Of course it wasn't all one-way traffic - in total, foreign firms spent £95bn buying up UK companies in 2006, whilst UK companies paid £50bn for overseas assets (source: Thompson Financial).

 

There are a number of factors behind this explosion of activity:

·         Rise of the 'BRIC' economies. The fast-developing 'BRIC nations' (Brazil, Russia, India and China) have added impetus to the M&A frenzy - sometimes taking part and at other times creating pressure to build firms of sufficient size to compete on the world stage. Tata Steel of India and CSN of Brazil are currently fighting over the UK's Corus. Whilst Russian gas giant Gazprom has sent shivers down a number of spines with talk of a UK takeover.

·         Growth of private equity. Private equity funds, and the groups that control them, are becoming increasingly visible on the M&A landscape. Their funding and confidence have increased - as have the size of their targets. For example, Texas Pacific Group is among the bidders for Australia's Qantas airline, whilst Permira bought Birds Eye from Unilever in Aug 2006. Even high street retailer Debenhams was floated in May 2006 after 3 years ownership by a consortium of private equity groups.

·         The changing role of the investment banks. 10 years ago the investment banks were solely concerned with providing advice to their clients - more recently this has changed such that these same banks are setting up their own private equity funds and competing directly in the M&A arena. Associated British Ports went to Goldman Sachs in 2006, Australia's Macquarie Bank is the new owner of Thames Water and Anglian Water was acquired by Osprey, a group led by the Commonwealth Bank of Australia.

 

The UK Markets

The FTSE 100 finished well ahead for the fourth consecutive year - although its 11% rise was significantly below the 17% return in 2005. Soaring worldwide demand for metals, especially from the booming Chinese and Indian economies, meant that the mining sector had a particularly strong 2006.

UK Index	%Change
FTSE MID 250	27.10%
FTSE 100	10.71%
FTSE TECHMARK	5.63%
FTSE AIM INDEX	0.81%

 

Outside the elite blue-chip index, the news was more mixed. The Techmark gained 6%, down from the 20% of 2005. And AIM was virtually static, gaining just 1% in 2006, down from 4% in 2005 and 20% in 2004.

Only the FTSE Midcap 250 managed to improve on last year's performance, putting in a 27.1% gain on top of the 26.8% from 2005.

 

The individual top performers from 2006

The FTSE 100: It should come as no surprise that general mining company Xstrata was last year's top riser from the blue chip index, finishing the year 110% ahead. Surging metal prices contributed to record profits, whilst the share price also benefited from news that the Group had finally won the battle to control the Canadian copper and nickel company Falconbridge.

Lonmin was another strong performer, gaining 87% in 2006. The platinum mining group's price surged towards the end of the year on the news that it was to acquire fellow platinum and gold miner AfriOre for $441 million (news release: 22/12/2006). Other winners from 2006 include Corus, Man Group, and British Land. Steel producer Corus has seen its share price rocket by 80% over the year, after being the subject of a bidding war between Tata Steel of India and Brazil's Companhia Siderurgica Nacional (CSN).

Shares in property investment company British Land rose by 61% in 2006. The Group announced strong results for the six months to 30 September, but the share price also benefited from the news that they were planning to convert to Real Estate Investment Trust (REIT) status - which is expected to offer a number of benefits to investors.

Only one 'footsie' constituent recorded a double-digit fall in 2006. Cruise line operator Carnival fell a steep 22% after suffering a ruinous first half of 2006, with high fuel prices and reduced demand for its cruises hitting passenger numbers and revenues hard.

The FTSE 250: Aquarius Platinum was the top riser from the mid-cap FTSE 250 - posting some impressive results in the wake of the soaring metal and mineral prices. Aquarius Platinum was also the subject of some heavy takeover speculation - which boosted its share price by a remarkable 144% over 2006.

Aquarius Platinum was not alone. Several other mid-cap firms also saw extraordinary price gains in 2006. Motor insurance company Admiral, self storage company Big Yellow Group, defence group Chemring and the London Stock Exchange all saw their share prices rise by over 100% in 2006 - the LSE's surge obviously being inspired by the protracted takeover bid by the US technology exchange Nasdaq.

Of course, not all the FTSE 250 companies performed so impressively - the price of PartyGaming shares dropped a precipitous 76% after the US Congress passed new legislation against online gambling.

 

The US Markets

The US markets had a good year in 2006, recovering from a weak 2005 in which concerns over Iraq, floods in New Orleans, rising interest rates and stalling consumer spending held all the major US indices below 5%. This past year has seen some strong economic figures and company results restore confidence in the markets - helping them out-perform the equivalent UK indices.

The Dow Jones Industrial Average - the benchmark indicator for the US stock markets, gained a very healthy 16% in 2006 after dropping 1% in 2005.

US Index	%Change
Russell 2000	17.00%
DJ INDU AVERAGE	16.29%
Russell 3000	13.66%
S&P 500	13.62%
Nasdaq 100	6.79%

 

The top performers included car manufacturer General Motors (+57%), communications giant AT&T (+46%) and computer outfit Hewlett Packard (+44%). Semiconductor maker Intel stood out as the DJI's poorest performer, its share price sliding 19%.

The S&P 500 also had a solid 2006, gaining 14% over the year. The more diverse nature of the S&P 500 index, which represents some 70% of the US market, was expressed in the larger gains - and losses! - of its constituents. Specialty metals producer Allegheny Technologies gained 151%, while SanDisk - which makes memory sticks for computers - lost 31%.

The Nasdaq 100 index of technology companies made smaller gains - although its 7% increase was still an improvement on the 1% recorded in 2005. Internet firm Akamai jumped 167%, mobile telephony company Millicom International Cellular surged 130% and RIM, developers of the Blackberry, posted a 94% share price gain.

 

The European Markets

The major European markets also performed well in 2006. The German DAX 30 gained 22% (compared to 27% in 2005), the French CAC 40 rose 18%, (against 23% last year) and the Italian MIB 30 also recorded an 18% gain.

Euro Index	%Change
XETRA DAX 30	21.98%
CAC 40 INDEX	17.53%
MIB 30 INDEX	17.53%

 

Europe's top performing shares included Paris-listed steelmaker Arcelor, which jumped 106% during the protracted takeover by Amsterdam-listed Mittal Steel. Frankfurt-listed steelmaker ThyssenKrupp also gained 103% on the back of M&A talk, whilst Milan-listed Tenaris (a manufacturer of steel pipes and tubes) gained 97% after getting caught up in the speculation frenzy.

 

Other Markets

The Asian markets varied in their performance from stellar to mediocre. A booming Chinese economy, inflows of capital and promises of continued regulatory and tax reform pushed the Shanghai Composite up by an extraordinary 130% in 2006.

The Jakarta Composite gained 55%, whilst a rapidly growing economy buoyed the Indian BSE 30 by 47%, up from 42% in 2005.

Intl Index	%Change
Shanghai Composite (China)	130.43%
Jakarta Composite (Indonesia)	55.29%
BSE 30 (India)	46.70%
HANG SENG (China)	34.20%
NIKKEI 225 (Japan)	6.92%
Seoul Composite (S Korea)	3.99%

 

This overview of the global markets has highlighted some of the strong performances from 2006. Let’s wait and see if the M&A frenzy continues into 2007.