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Investment analysis

Concerns over inflation, the prospect of the first US interest rate rise for nearly five years as well as a further rise in oil prices resulted in a sharp fall for world equity markets last week. By Friday&#39s close the FTSE World index was trading 1.9 per cent lower, having fallen by 2.8 per cent since the start of the year.

In the UK, economic data was mixed, with an encouraging set of employment numbers cancelled out by slightly disappointing manufacturing data. The Bank of England warned that domestic inflation would rise above the official 2 per cent target in 2006.

It was a turbulent start to the week for UK equity investors, with the FTSE 100 falling by 100 points on concerns that US interest rates are likely to rise faster than had previously been anticipated. However, blue-chip stocks once again outperformed, with the FTSE 100 falling by 1.3 per cent compared with a fall of 2.2 per cent for the FTSE 250 while the FTSE Small Cap index ended the week 2.8 per cent lower.

Although the US equity market performed better than elsewhere, prices still ended the week lower in spite of good news on employment and earnings. As elsewhere, the main worry for investors was the prospect of interest rates having to rise sooner than had previously been anticipated, with this scenario appearing more likely following the release of stronger than expected factory gate inflation figures on Thursday.

As well as interest rate and inflation worries, European equity investors had to digest a number of disappointing company results including Ahold, the world&#39s third-biggest food retailer whose shares fell 7.4 per cent after an 11.5 per cent fall in first-quarter sales. By the end of the week, the FTSE Eurotop 300 index had fallen by 2.5 per cent.

The worst performer of the world&#39s major markets last week was Japan, with the Nikkei 225 falling by 5.2 per cent on concerns over in oil prices as well as the prospect of higher global interest rates.

Korea&#39s Kopsi index fell by 8.4 per cent while Hong Kong&#39s Hang Seng fell by 5.2 per cent, taking its decline since the start of the year to over 10 per cent.

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