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Global equities have continued to strengthen over the past six months, despite what might not have seemed to be the ideal market backdrop. Concerns about slowing global growth, the surging price of oil and interest rate rises in the US, were all not enough to dampen investor sentiment and all major equity markets posted strong gains over the period.

One of the major themes characterising markets during this time has been the positive influence of the corporate environment. Generally speaking, investors have drawn confidence from the high proportion of companies that have shown strong earnings and profits growth so far this year. This generation of excess cash has in turn allowed companies to share these profits with investors in the form of share buybacks and increased dividends. Similarly, it has also prompted increasing merger and acquisition activity between companies, and this has also been a positive for share prices.

Market performance across the board has been dominated by strong oil and mining stocks. Oil companies have benefited from rocketing oil prices, while mining companies have also proved exceptional performers, gaining on the back of robust demand for raw materials from China and India in particular.

UK equities generated solid returns for investors over the period, with performance led by the larger FTSE 100 companies. The strength of the oil price proved particularly beneficial to the UK market following Royal Dutch's full listing on the FTSE Index in July. Together with fellow oil giant BP, the two make up just under 20% of the FTSE 100 Index, and the strong performance from both companies helped boost the market's overall returns.

A slowdown in consumer spending combined with a more subdued housing market, meant investors eschewed areas such as house builders, retailers and leisure stocks, however, despite the underperformance of these areas, UK investors remained broadly positive over the period. Evidence of this resilience came as news broke on 7 July, of the London suicide bombings, initially sending the UK market sharply lower. However, within a day, the stock market had recovered the lost ground as investors came to the conclusion that while the bombings represented a terrible human tragedy, the impact on businesses would not be significant. Even the news of a failed repeat series of suicide bombings two weeks later did not keep the market from touching a three-year high.

The Bank of England provided further support for investors, when in August; interest rates were cut to 4.5%. This eased the pressure on the UK consumer and boosted the prospects for further economic growth.

Despite early concerns about slowing economic growth, the US market produced solid returns for investors. Not surprisingly, performance was led by the oil stocks, but market support also came from the fact that in general, companies across a range of sectors managed to deliver increased profits. This positive corporate environment, as well as a strengthening in the US dollar, helped to offset the negative impact of rising interest rates during the period.

The Federal Reserve has so far increased interest rates seven times this year (and 12 consecutively) to 4%, in an attempt to raise the cost of borrowing to more 'normal?levels. It seems they are still a while away from peaking.

Economic data in the US has shown improvement as the period has progressed, but more recently the devastating effects of hurricane Katrina have impacted sentiment. In particular, the destruction caused across the Gulf of Mexico ?where many oil refineries are located ?prompted a further spike in oil prices, which brought concerns about the longer-term impact of such high prices to the fore once again.

European equity markets gained strongly over the period, with investors drawing confidence from the benign interest rate environment and company results showing strong earnings growth. The weakening of the euro against the dollar also provided a welcome boost for the major exporters, and sparked a rally in technology and pharmaceuticals stocks in particular.

Oil stocks also performed strongly on the back of the high oil price, with Royal Dutch a notable performer before its re-listing on the UK stock exchange. Even the 'no?votes against the EU constitution in France and the Netherlands could not stifle the market for long. However, ongoing sluggishness across the Eurozone economy remains a cause for concern. There was even some speculation for a while that the European Central Bank (ECB) might be forced to follow Sweden's example and cut interest rates, but the reverse now seems more likely.

Despite this year's gains, equity valuations still look relatively attractive across Europe, while continued take-over activity is also providing investors with some encouragement. Less positive is the political backdrop in Germany. The confusion surrounding the German election result in September was disappointing for a country looking for strong economic and political leadership. In any event, it is likely that the necessary reforms are unlikely to happen, at least in the short-term.

Following early trepidation, Japanese equities rallied over the period, encouraged by the early signs of domestic economic recovery. Equity market sentiment was also boosted by continued buying from overseas investors, attracted by appealing valuations relative to many other regions. Also, the predicted softening of demand from China and the US has not really eventuated and thus, Japanese exporters remain well supported. Perhaps most importantly, the re-election of Prime Minister Koizumi in September is being viewed very positively, as he begins to implement a programme of aggressive economic reform.

In the Pacific Basin, despite some early concerns about the slowing pace of US and Chinese economic growth, local equity markets rallied sharply. Korea, Singapore and Taiwan in particular benefited from strong export demand, while improving domestic economies, particularly in some of the smaller nations, also boosted sentiment. The most significant event over the term was China's decision to revalue its currency, 'unpegging?the Renminbi from the US$ and instead managing it against a 'basket of currencies? The move proved positive for a number of Asia Pacific countries, who saw their exports become marginally more competitive.

Over the six month period, Emerging Markets and in particular, those of Latin America continued to post stellar returns. Rather than be negatively affected by rising interest rates in the US, Emerging Market investors drew confidence from the fact that US rates would apparently not need to rise as aggressively as earlier expected. Strong domestic growth in countries such as India and China saw these markets strengthen, while the high price of oil benefited a number of the oil rich Latin American countries in particular. Robust investor appetite for risk remained an ongoing theme across Emerging Markets, with the prospect of higher returns from these more volatile regions, drawing significant investor support.

In the short-to-medium term, we expect the backdrop to become more challenging for equity markets as growth begins to slow and earnings momentum begins to wane. Commodity and hedged investments are our favoured asset classes for lump sums at present, while regular savers can use any volatility to dollar-cost average their positions.

An underweight position in bonds relative to equities remains our advice. Bonds look too complacent about the possibility of higher inflation and higher interest rates.

We expect the concerns currently weighing on the markets to persist until interest rates are perceived to be at or near their peak for the cycle. There is now increasing concern that the cycle may peak higher and later than previously expected, reflecting a view that the Fed is determined to see asset prices lower to squeeze out the inflationary pressures which bubbles can create.

US budget imbalances continue to grow, exacerbated by the huge sums Bush has pledged to spend to repair hurricane damage. There is now a growing acceptance that growth will slow in 06. The US markets have already peaked. Other markets will follow.

Global imbalances have reached epic proportions; with the US projected to run a USD700bn current account deficit this year (nearly 6% of GDP), while all other major countries/regions are running surpluses. In short, the US spends and the rest of the world saves. Although it is not in the interest of the US or its major trading partners and financiers to abandon this symbiotic relationship, it remains to be seen how long it can continue.

Higher interest rates will continue to support the USD for the time being, as interest rate differentials make the currency more attractive compared with its competitors. While weak consumer spending puts GBP and EUR rates under downward pressure, rising inflation is doing the opposite; so the differential may stabilise or even start to shrink in 06.

We do not expect any significant long-term weakness in the oil price. The supply and demand equation will continue to deteriorate as economic growth - particularly in India and China - increases overall demand, while production and refining capacity fail to keep pace. In the short-term, the market is vulnerable to more price spikes if the northern hemisphere winter proves severe.

We expect Gold to remain in a gentle uptrend overall; but for as long as foreign inflows into the USD remain strong, we do not expect a dramatic breakout on the upside. A number of commentators have forecast USD500/oz by the end of 05. Some are forecasting USD800/oz by the end of 06. Gold continues to offer a worthwhile hedge against stock market volatility and currency weakness, particularly for USD-based investors.

Base metal prices in particular are likely to remain sensitive to concerns about falling economic growth, but any weakness in the USD will continue to be supportive.

With additional input from Friends Provident International, Insight and Foreign & Colonial

This commentary should not be seen as a recommendation or solicitation to invest. Anyone considering investing should first seek advice specific and appropriate for their own needs, objectives and risk appetite.