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Investment analysis

The last three months have been particularly disappointing for equity investors, with all the world&#39s major stockmarkets falling sharply on fears of further accounting scandals, tension in the Middle East as well as concerns that the US economy may fall back into recession.

In the US, investors had only just recovered from the shock of the collapse of Enron before being dealt another blow following the news of the demise of US telecoms giant WorldCom, which was forced into receivership as a result of the company&#39s huge debt burden and allegations of accounting irregularities.

Against this backdrop, the reaction of equity markets was unsurprising, with Wall Street posting its worst quarterly performance since the 1987 market crash. Over the period, the S&P 500 fell by 17 per cent while the Dow Jones Industrials index fell for a sixth consecutive month, ending the quarter 17.5 per cent lower.

In spite of massive falls since March 2000, there was also no respite for beleaguered technology investors, with the Nasdaq falling a further 20 per cent.

Having traded in a narrow range for many months, the FTSE 100 followed the US market lower during the summer, with investors focusing their attention on the worrying developments in the Middle East and the sluggish rate of global economic growth. During the period under review, the FTSE 100 index fell by 19.3 per cent while the FTSE 250 and Hoare Govett Smaller Companies index fell by 21.2 per cent and 20 per cent respectively.

In spite of the fall in equity values, the UK economy appears to be in better shape than most if not all of its G7 counterparts, with reasonable growth expected over the next 12 months while inflation is forecast to stay around the 2 per cent level.

Meanwhile, consumer spending has remained strong, buoyed by a combination of rapidly rising house prices and mortgage rates at their lowest level for a generation.

European equity markets performed particularly poorly as massive falls in telecom and insurance stocks pushed markets sharply lower during June and July leaving the FTSE Eurotop 300 ex-UK index nursing a loss of 26.7 per cent.

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