FTSE 100 ends year down 24% at 3,940 in worst bear market since the War

A meagre rally on the world's leading stock markets yesterday came too late to camouflage the impact of another devastating year for investors.

Shares prices across the developed world plunged for the third year running in 2002, marking the worst bear market since the Second World War.

For UK investors it was the steepest fall since the main index of blue-chip shares was launched in 1984.

The threat of war, surging oil prices and the ongoing fallout from the excess of the unprecedented stock market boom triggered a sell-off in stocks as investors headed for the safety of gold and property.

The gloom was compounded by revelations of corporate malpractice that knocked confidence just as markets were recovering from the impact of the terrorist attacks of 11 September 2001.

According to the Morgan Stanley Capital International (MSCI) index of the 23 richest nations' markets, share prices plunged more than 21 per cent in dollar terms.

"During 2002, investors started to come to terms with the new realities of the post-bubble, post-9/11 era," said Steven Narker, director of private client research at Merrill Lynch.

"It's been a sobering experience, far-removed from the giddy atmosphere of the late-1990s. The business cycle has not been repealed, excesses need to be corrected and fundamentals so actually matter."

The worst casualty was Continental Europe, which provided eight out of the 10 worst-performing indices around the world.

The wooden spoon went to Germany's DAX index, which plunged 44 per cent as the parlous state of Europe's largest economy added to global concerns. The French, Finnish, Dutch, and Swedish indices languished in the bottom 10.

On Wall Street, the Nasdaq technology index plummeted almost 40 per cent while an 18 per cent fall for the Dow Jones was its worst for almost three decades.

The Tokyo stock market, which was closed yesterday, ended the year 19 per cent down taking the Nikkei 225 to its lowest level for 20 years.

In London the FTSE 100 closed up 40 points at 3,940.4, leaving it 1,277 points or 24.5 per cent down on the year – its worst ever performance.

The best-performing stock markets were a bizarre collection of war and crisis-ravaged states. Pakistan topped the table with a 112 per cent rise after closing on an all-time high.

Argentina's stock market gained 78 per cent despite enduring the worst economic crisis in its history. However in dollar terms the market plunged 52 per cent, the worst out-turn for any market, because of the massive currency devaluations.

Russia, Thailand, Mauritius, Czech Republic, Malaysia and Panama all scored double-digit gains, valued in their own currencies.

Despite – or maybe because of – the scale of the bloodletting on the worlds' markets over the past three years, investment strategists are reasonably optimistic about the coming year.

"After the longest period of declines for over 50 years, there are signs that the excesses of the bubble period are close to being purged," said Ken Forman, global investment strategist at Standard Life Investments.

Most investment banks forecast the FTSE 100 will rise by between 6 and 25 per cent in 2003 – even though they got their 2002 forecasts spectacularly wrong.

David Schwartz, a stock market historian who believes the FTSE 100 will end the year at 4,700, said the historical signals pointed to an end to the bear market.

According to his research the market has risen in each of the 13 years since 1952 that have preceded a US presidential election.

"The evidence is quite clear cut," he said. "The closer we are to a new bull market at the start of a pre-election year, the greater the likelihood of a big gain."

Other analysts were keen to inject caveats into their outlook. Leigh Harrison, senior portfolio manager for Credit Suisse Asset Management, said the scale of consumer and corporate debt would hang over 2003.

"Growth will be disappointingly slow and markets lacklustre as a result," he said. "The market can trade sideways for the time being but a sustainable recovery is not likely until the imbalances have been corrected."

The dollar's correction continued yesterday as the US currency briefly broke through the $1.05 mark against the euro, a three-year low and taking its losses for the year to 17 per cent.

Gold ended the year up 25 per cent despite a fall yesterday from the five-year peaks it hit last Friday. Oil, which hit a two-year high of $31 on Monday, dropped 4 per cent to $28.66 in London after Opec hinted it would act if prices stayed high.