American Century Investments

(Investor Perspective is a quarterly publication of American Century Investments. This article appeared in the Spring 2003 issue.)

A look at proposed tax relief
and the role of dividends in your portfolio

By Rod Perlmutter, Financial Writer

Investor Perspective: Spring 2003 Issue

In January, President Bush introduced a proposal to eliminate the so-called “double taxation” on corporate dividends, a move his administration believes could save investors more than $360 billion over a 10-year period.

The proposal itself isn’t new, but it is the first time such a plan has headlined a multi-billion-dollar presidential tax-reform effort. As a result, publicity surrounding this highly debated proposal is generating questions about the nature of dividends and the role they play in investing.

Current law, proposed changes

Dividends are cash payouts that companies make to shareholders, generally on a quarterly basis, as a way of sharing profits. As such, dividends are instant returns on investments.

Under current law, a corporation pays tax on its profits at rates as high as 35%. For example, a corporation with $100 million of taxable income could pay as much as $35 million in corporate income tax. Then, if the corporation pays dividends to its shareholders out of the remaining after-tax income of $65 million, shareholders then pay tax on the dividends at their own individual tax rates, the highest being 38.6%. Later, if shareholders sell their stock at a profit, those capital gains are at a maximum rate of 20%, Added up the grand total rate in corporate income tax could be as high as 60%, far in excess of tax rates imposed on other types of income.

The Bush proposal eliminates the tax on dividends. Annually, corporations would be required to calculate the Excludable Dividend Amount (EDA), reflecting income that has already been taxed. In the above example, the EDA would be $65 million. Corporations would report the EDA to shareholders in the same manner that dividends are currently reported — on IRS Form 1099.

Proponents of the proposal estimate that about 35 million households currently receiving taxable dividends will see more profits. Corporate spending will change, too, they say. Currently, because loan interest is tax-deductible and dividends are not, corporations are motivated to borrow money instead of issuing stock. That can lead to greater corporate debt, which could pressure management to become less rigid in its accounting standards. Proponents say that the proposal will encourage companies to issue stock as opposed to borrowing, giving investors greater influence over the companies’ management – based on the notion that when a company with aggressive expansion plans goes to the stock market to raise money, it is subject to more public scrutiny that if it had quietly pursued bank financing.

The case for dividends

Many investors see dividends as a barometer of corporate health, viewing it as a “bird in the hand” – real tangible profits – as opposed to a projected “two in the bush,” or hoped-for earnings after the stock price rises. Dividends also impose “investment discipline” because they represent a corporation’s top priority – its quarterly obligations to pay out cash to shareholders. That’s because doing so reduces the level of capital left for the company to invest in new projects, forcing managers to be more vigilant and fund only those projects or expansions with the highest levels of expected returns. A company that doesn’t pay dividends, according to this argument, would have more money to throw around, perhaps on more speculative projects.

The discipline to issue a dividend means that investors receive a profit, albeit a small one, regardless of the performance of the company’s stock price. That stability is appealing to investors worried about bear markets.

And even if dividends for some stocks amount to only a few pennies per share, they add up. According to one study, from 1926 through 2001, dividends contributed more than one-third of the S&P 500’s total returns.

Ibbotson Associates, a Chicago-based investment research firm, says that could mean a lot in a typical portfolio: $10,000 invested in S&P 500 stocks in 1982 would, 20 years later, be worth bout $60,000. Include dividends that would have been collected and reinvested on those 500 stocks, and the total jumps to more than $100,000.

Another advantage of dividend-paying stocks, according to research by both Ibbotson and Morgan Stanley, is that they tend to be half as volatile as non-dividend payers. This is valuable because high volatility can undermine long-term compounding, since it takes a long time to recover from bear market years. At the same time, the best stocks among more volatile issues are the ones that pay dividends, according to research by Babson College professor Michael Goldstein and University of Georgia finance professor Kathleen Fuller. During the 30 years ending in 1999, among the most volatile stocks, dividend-paying shares delivered returns of 1.4% a month, double the monthly returns of share that offered no dividend.

When looking at yields, look out

One way to evaluate stocks is to look at their dividend yield, which is calculated by dividing a stock’s most recent 12 months’ of dividend payment by its current price. A comparison of two imaginary stocks that both sell at $10 a share serves as an example. Say Company A paid 50 cents in dividends over the last 12 months, giving it a 5% yield. Company B paid $1 during the same period, producing a 10% yield. By looking at both the dividend and the dividend yield, one could assume that Company B was a better investment.

If Company A’s yield jumped to 20%, would that make it a better stock? It depends on why the yield rose. It’s one thing if the yield rose because the dividend rose. But it’s quite another if the yield increased only because the dividend stayed the same and the stock price dropped from $10 to $5. That slumping price could indicate other problems. Obviously, a dividend yield only tells part of the story, and investors should evaluate a wide variety of factors when choosing investments.

That goes for dividends as well. It may be tempting to assume that any stock that produces a dividend is, by definition, a superior investment. A dividend does not carry that guarantee. Enron Corp. paid $523 million in dividends in 2000, a year before it admitted that it overstated earnings by more than $500 million. Shortly after issuing dividends, WorldCom, Xerox and Waste Management all had to restate earnings that had been improperly inflated.

Dividends in a balanced portfolio

While economists debate the long-term impact of the elimination of the dividend tax, many market analysts expect several short-term effects. Some investors are likely to shift, at least temporarily, toward dividend- payers. Some companies that don’t offer dividends will consider changing their policies. And regardless of whether the tax is eliminated, dividends are likely to return to the forefront of the many factors considered in investment decisions.

While some research suggest that dividend-producing stocks are less volatile than non-dividend shares, it is important to remember that they are still equities, and, as such, carry risks. It’s also important to remember that dividends are only part of the investment picture. As the market moves, investors should see greater returns coming from share price appreciation.

Dividend-producing, stocks, then, should be considered just one facet of the equity portion of a diversified portfolio. That balance allows you to spread the risk by potentially lessening the impact of any single investment or discipline. To manage both risk and market volatility, investors should consider a mixture of both equities and fixed income products, based on your individual risk threshold.

– – – –

(Chart information)

A hypothetical $10,000 investment made in the Standard & Poor’s 500 Index on December 31, 1982 grew to $109,438 by December 31, 2002. Dividends represented 43% ($43,868) of the total return, while price appreciation represented 57% ($62,571) of the total return.

This information is for educational purposes only. It is not intended as investment advice.

# # #

Advertisements

A look at proposed tax relief and the role of dividends in your portfolio (2003)

(Investor Perspective is a quarterly publication of American Century Investments. This article appeared in the Spring 2003 issue.)

A look at proposed tax relief
and the role of dividends in your portfolio

By Rod Perlmutter, Financial Writer

Investor Perspective: Spring 2003 Issue

In January, President Bush introduced a proposal to eliminate the so-called “double taxation” on corporate dividends, a move his administration believes could save investors more than $360 billion over a 10-year period.

The proposal itself isn’t new, but it is the first time such a plan has headlined a multi-billion-dollar presidential tax-reform effort. As a result, publicity surrounding this highly debated proposal is generating questions about the nature of dividends and the role they play in investing.

Current law, proposed changes

Dividends are cash payouts that companies make to shareholders, generally on a quarterly basis, as a way of sharing profits. As such, dividends are instant returns on investments.

Under current law, a corporation pays tax on its profits at rates as high as 35%. For example, a corporation with $100 million of taxable income could pay as much as $35 million in corporate income tax. Then, if the corporation pays dividends to its shareholders out of the remaining after-tax income of $65 million, shareholders then pay tax on the dividends at their own individual tax rates, the highest being 38.6%. Later, if shareholders sell their stock at a profit, those capital gains are at a maximum rate of 20%, Added up the grand total rate in corporate income tax could be as high as 60%, far in excess of tax rates imposed on other types of income.

The Bush proposal eliminates the tax on dividends. Annually, corporations would be required to calculate the Excludable Dividend Amount (EDA), reflecting income that has already been taxed. In the above example, the EDA would be $65 million. Corporations would report the EDA to shareholders in the same manner that dividends are currently reported — on IRS Form 1099.

Proponents of the proposal estimate that about 35 million households currently receiving taxable dividends will see more profits. Corporate spending will change, too, they say. Currently, because loan interest is tax-deductible and dividends are not, corporations are motivated to borrow money instead of issuing stock. That can lead to greater corporate debt, which could pressure management to become less rigid in its accounting standards. Proponents say that the proposal will encourage companies to issue stock as opposed to borrowing, giving investors greater influence over the companies’ management – based on the notion that when a company with aggressive expansion plans goes to the stock market to raise money, it is subject to more public scrutiny that if it had quietly pursued bank financing.

 The case for dividends

Many investors see dividends as a barometer of corporate health, viewing it as a “bird in the hand” – real tangible profits – as opposed to a projected “two in the bush,” or hoped-for earnings after the stock price rises. Dividends also impose “investment discipline” because they represent a corporation’s top priority – its quarterly obligations to pay out cash to shareholders. That’s because doing so reduces the level of capital left for the company to invest in new projects, forcing managers to be more vigilant and fund only those projects or expansions with the highest levels of expected returns. A company that doesn’t pay dividends, according to this argument, would have more money to throw around, perhaps on more speculative projects.

The discipline to issue a dividend means that investors receive a profit, albeit a small one, regardless of the performance of the company’s stock price. That stability is appealing to investors worried about bear markets.

And even if dividends for some stocks amount to only a few pennies per share, they add up. According to one study, from 1926 through 2001, dividends contributed more than one-third of the S&P 500’s total returns.

Ibbotson Associates, a Chicago-based investment research firm, says that could mean a lot in a typical portfolio: $10,000 invested in S&P 500 stocks in 1982 would, 20 years later, be worth bout $60,000. Include dividends that would have been collected and reinvested on those 500 stocks, and the total jumps to more than $100,000.

Another advantage of dividend-paying stocks, according to research by both Ibbotson and Morgan Stanley, is that they tend to be half as volatile as non-dividend payers. This is valuable because high volatility can undermine long-term compounding, since it takes a long time to recover from bear market years. At the same time, the best stocks among more volatile issues are the ones that pay dividends, according to research by Babson College professor Michael Goldstein and University of Georgia finance professor Kathleen Fuller. During the 30 years ending in 1999, among the most volatile stocks, dividend-paying shares delivered returns of 1.4% a month, double the monthly returns of share that offered no dividend.

When looking at yields, look out

One way to evaluate stocks is to look at their dividend yield, which is calculated by dividing a stock’s most recent 12 months’ of dividend payment by its current price. A comparison of two imaginary stocks that both sell at $10 a share serves as an example. Say Company A paid 50 cents in dividends over the last 12 months, giving it a 5% yield. Company B paid $1 during the same period, producing a 10% yield. By looking at both the dividend and the dividend yield, one could assume that Company B was a better investment.

If Company A’s yield jumped to 20%, would that make it a better stock? It depends on why the yield rose. It’s one thing if the yield rose because the dividend rose. But it’s quite another if the yield increased only because the dividend stayed the same and the stock price dropped from $10 to $5. That slumping price could indicate other problems. Obviously, a dividend yield only tells part of the story, and investors should evaluate a wide variety of factors when choosing investments.

That goes for dividends as well. It may be tempting to assume that any stock that produces a dividend is, by definition, a superior investment. A dividend does not carry that guarantee. Enron Corp. paid $523 million in dividends in 2000, a year before it admitted that it overstated earnings by more than $500 million. Shortly after issuing dividends, WorldCom, Xerox and Waste Management all had to restate earnings that had been improperly inflated.

Dividends in a balanced portfolio

While economists debate the long-term impact of the elimination of the dividend tax, many market analysts expect several short-term effects. Some investors are likely to shift, at least temporarily, toward dividend- payers. Some companies that don’t offer dividends will consider changing their policies. And regardless of whether the tax is eliminated, dividends are likely to return to the forefront of the many factors considered in investment decisions.

While some research suggest that dividend-producing stocks are less volatile than non-dividend shares, it is important to remember that they are still equities, and, as such, carry risks. It’s also important to remember that dividends are only part of the investment picture. As the market moves, investors should see greater returns coming from share price appreciation.

Dividend-producing, stocks, then, should be considered just one facet of the equity portion of a diversified portfolio. That balance allows you to spread the risk by potentially lessening the impact of any single investment or discipline. To manage both risk and market volatility, investors should consider a mixture of both equities and fixed income products, based on your individual risk threshold.

– – – –

(Chart information)

A hypothetical $10,000 investment made in the Standard & Poor’s 500 Index on December 31, 1982 grew to $109,438 by December 31, 2002. Dividends represented 43% ($43,868) of the total return, while price appreciation represented 57% ($62,571) of the total return.

This information is for educational purposes only. It is not intended as investment advice.

# # #

American Century: World Market Wraps, 2003

(These are examples of the morning wrap-ups I wrote for American Century Investments in 2003 and 2004.  American Century employees read these brief summaries to keep current on market results and trends.)

World Markets Wrap: April 30, 2003

At the close….

April was as tepid as a spring drizzle for many Asian investors, but Europeans watched their markets bloom, buoyed by hopes that the swift end of the Iraq war signaled an improved earnings and consumer spending environment.

During April, the Dow Jones Stoxx 50, representing 50 of Europe’s biggest stocks, gained 10.3%, its biggest monthly rise since October 2002. The rally was felt throughout the broader-based Stoxx 600: all but one of the index’s 12 industry groups rose during the month. (Energy, the one detracting group, was slowed by tumbling crude oil prices.) The leading segment was insurers, which jumped 27%, as the rising stock market relieved fears about the portfolios of financial institutions.  Germany’s Munich Re, the world’s largest re-insurer, rose 69 percent during the month. That triggered a 21.4 percent increase by the Dax during April, its best monthly performance since 1959.

On Wednesday, European drug makers led the way, as Britain’s GlaxoSmithKline and France’s Aventis reported higher first-quarter profits after cutting costs. London’s FTSE slipped slightly during the session, but it climbed 8.7 percent in April, the biggest monthly gain since September 1997. The Footsie was led by banks such as Barclays, which gained 21 percent during the month. Paris’s CAC 40 nudged upward to end April up 12.8 percent, its best month since October.

Wednesday was the first day that Japanese markets, closed on Tuesday, could react to the big jump in U.S. consumer confidence. The broad-based Topix index responded with its best one-day percentage jump since Oct. 15, boosted by electronics exporters Sony and Matsushita Electric, and automaker Honda, all rising more than 6%. But the Nikkei 225 fell 1.6% in April, its fourth decline in five months. The SARS scare made April another disappointment for the Hang Seng, as the Hong Kong index fell for the fifth consecutive month. With North Korean aggression temporarily out of the headlines during much of April, the South Korean Kospi gained 12%, its biggest monthly gain since November 2001.

News & Views:

Are consumers ready to cast aside wartime pessimism and spend? Two surveys this week in Europe and America suggest that they are moving in that direction.

On Wednesday, a European Commission survey showed that European consumer confidence rose in April for the first time in seven months as the war in Iraq ended. However, the index, which is based on a survey of 25,000 people, is still in negative numbers: it rose from minus 21 to 19. And business confidence is still falling, slumping from minus 12 to minus 13. That was its lowest level since February 2002. Executives said export orders haven’t been as dismal since January last year, the surveys showed. Trade may be dampened further in severe acute respiratory syndrome (SARS) is not contained, analysts said.

On Tuesday, the New York-based Conference Board said that consumer confidence in the U.S. economy in April jumped the most in 12 years. The confidence index increased to 81 from a revised 61.4 in March. The almost 20-point jump was the biggest since March 1991, the month marking the end of the previous war with Iraq. More people said they’re expecting improved conditions six months from now, setting the stage for a pick-up in spending.

# # #

World Markets Wrap: May 1, 2003

At the close… 

Most markets in Europe and Asia, except for London and Tokyo, were closed Thursday for the May Day holiday.

London’s FTSE 100 finished lower in light trading, with banks and insurers pacing the declines. Barclays fell 3.41%, while Aviva, the largest United Kingdom insurer, and Prudential, the second-largest, each slipped 3.2%. Elsewhere, Shire Pharmaceuticals, Britain’s third-biggest drug maker, gained 9% after reporting strong first-quarter earnings and forecasting solid growth for the remainder of the year. France’s CAC 40 and Germany’s DAX 30 will reopen Friday.

In Tokyo, the Nikkei 225 reversed earlier losses to close higher for the second consecutive day, an advance fueled by hopes that the government will soon unveil its emergency economic proposals designed to shore up the slumping market. A move by the Bank of Japan to ease monetary policy also helped, and banking shares rose sharply. Mizuho Financial Group, the world’s largest bank by assets, gained 7.9%, while UFJ Holdings jumped 7.3%.

Markets in South Korea, China, Hong Kong, Taiwan, Singapore, Malaysia, the Philippines, and Thailand all were closed for the day and will resume trading tomorrow.

News & Views:  

SARS and violence are taking a toll on holiday observances in Asia and Europe. The deadly SARS virus is dampening May Day, also known as Labor Day, celebrations in China. The week-long holiday was shortened to an extended weekend, and the government issued strong travel advisories encouraging people to stay put.

Last year, more than 87 million people traveled during the holiday, which generated $4 billion in revenues, according to the state media. Since late last year, severe acute respiratory syndrome (SARS) has killed 170 people in China and infected more than 3,600. Beijing had been hard hit by the epidemic, with 100 or more new cases every day and 11,000 people under quarantine.

In Europe, rallies by labor union members and anti-war demonstrators were mostly peaceful, though violence marred events in Germany, where riot police and rock-throwing protesters came to blows. At least 65 events were planned in Berlin for a holiday that has seen violence for more than a decade.

# # #

World Markets Wrap: May 17, 2003

At the close…

European exporters, buoyed by optimistic reports about higher U.S. home sales and growing consumer confidence, helped push European bourses upward Tuesday. But benchmarks in Tokyo and Hong Kong faltered for the first time in four sessions.

Benchmark indices rose in 10 of the 17 Western European markets. The FTSE 100 rose when GUS jumped 6% after Britain’s No. 2 home-improvement chain agreed to sell its home-shopping units in the U.K., Ireland and Sweden in an attempt to reduce debt. While defense contractor BAE Systems faltered on its inability to resolve an aircraft carrier contract with the British government, French rival European Aeronautic Defense and Space jumped 3.9% after Airbus signed a US$24 billion to supply 180 A400M military transport planes to seven countries. That boosted the Paris CAC 40, STMicroelectronics, Europe’s largest semiconductor maker, gained after repeating its April forecast for second-quarter sales and gross margin. Its German rival, Infineon Technologies, helped lead the DAX into positive territory.

The Nikkei 225 stumbled after the nation’s top seven lenders reported a second year of losses the reduced their capital closer to regulatory limits. Mizuho Financial fell 5.2% after reporting the biggest-ever loss by a Japanese company. Of the seven largest lenders, only UFJ holdings rose, after reporting that it plans to pay dividends for the first time in three years on expectations that it will return to profit this year. The Hang Seng fell after oil producer CNOOC and other mainland companies slipped on concern Beijing may not allow citizens to invest in Hong Kong stocks anytime soon.

News & Views:  

The “mad cow” disease scare, a renewed SARS threat, and a strong Canadian dollar that is undermining the nation’s export business – should that make investors fear that the United State’s northern neighbor is going to pot?

Of course not, Canada’s Liberal Party leaders would say. It’s just a coincidence that they chose this week to try to decriminalize marijuana.

On Tuesday, the party, which holds majorities in both houses of Parliament, introduced a bill that would eliminate a criminal record of possession of small amounts while stiffening prison sentences against growers and traffickers. Getting caught with 15 grams – about half an ounce – or less of marijuana would bring a citation akin to a traffic ticket, with a fine of C$150 (US$109). Proponents said possession would remain illegal but the bill would prevent young people from getting saddled with a lifelong criminal record.

Parliamentary debate about getting stoned may distract investors from seven days of rocky developments for the Canadian economy. Though investigators have destroyed more than 370 cattle and have isolated more than a dozen farms since the first case of bovine spongiform encephalopathy was discovered last Tuesday in Alberta, only one case has actually been verified. Last week’s discovery led 21 nations to ban imports of Canadian beef, a potentially crippling blow to the multi-billion-dollar industry.

On Wednesday, the Canadian dollar reached a six-year high of 74.5 cents relative to the U.S. greenback. Though the dollar has retreated slightly sine then, it has still increased about 14% year-to-date, and that makes Canadian goods less competitive in the U.S. market.

And on Monday, to the embarrassment of local health officials who lobbied hard in April to get Toronto taken off of the World Health Organization’s travel advisory list, the international organization put Canada’s largest city back on a list of areas affected by severe acute respiratory syndrome (SARS). The disease has killed 27 in Canada, three in recent days, and about 1,400 people who may have been exposed are in quarantine, according to Ontario health officials.

# # #

World Markets Wrap: June 30, 2003

At the close…

A less-than-expected increase in a U.S. manufacturing index in May and concerns that a proposed sedition law in Hong Kong will lead to political and business disruptions caused many markets to slip Monday. Despite the one-day decline, June 30 market the end of the best quarter for many global equity markets since 1999, as investors gained confidence in the post-war and post-SARS economy.

On Monday, benchmark index dropped in all 17 Western European markets except in Ireland and Luxembourg. The CAC 40 fell when Alstom dropped 4.5% after the world’s second biggest train maker said its U.S. rail unit underestimated losses and is being investigated for its accounting. The disappointing U.S. manufacturing report tripped exporters that depend on American sales, such as Germany’s reinsurer Munich Re and Britain’s data service Reed Elsevier, driving both the DAX 30 and FTSE 100 downward. The Hang Seng retreated as well. The Tokyo 225 rose after a semiconductor trade association said May chip sales rose faster in Japan than any  other region, and that led NEC to jump 7.5% to a nine-month high.

Despite a tepid June, in which the FTSE and CAC rose less than 1%, the London index climbed 12% for the three months ended June 30, and both the Paris and Frankfurt indices had their best quarters since 1999, leaping 18% and 32%, respectively.

The quarterly gains were more prevalent in Asia, where every major index gained except for benchmarks in China’s Shanghai and Shenzhen bourses. The MSCI Asia Pacific index, tracking companies in 14 countries across the region, rose 14%. The rise was the first advance in a year and the biggest increase since 1999’s fourth quarter.

For the quarter, the Hang Seng rose 8.1%, its best since 2001, and the Nikkeir 225 increased 14%, its best since 1999.

Year to date, the DAX is the leader of the biggest European benchmarks, with an 11.3% gain. The Footsie gained 2.3% while the Paris CAC nudged up 0.7%.

In Asia, the Nikkei advanced 5.9% and the Hang Sent rose 2.7%.

News & Views:  

Are global markets recovering? Year to date, the world’s best known indices are in the black. All but one of the 61 “primary equity indices” tracked by the Bloomberg News Service – major benchmarks for the world’s largest markets – increased during the six months ended June 30.

Many Latin American bourses, which were the biggest losers of 2002, have been the leaders of 2003. Argentina’s Merval Index, which fell 47% in 2002, rose more than 65% for the six month period, making it the top performer of the 61 indices. Close behind was Brazil’s Bovespa and Peru Lima General indices, which had gains of more than 32%.

Eruope’s leading indices were Prague’s PX 50, which rose 27%, and Russia’s RTS, which rose 40%.

The ware may have been bad for Saddam Hussein, but it’s been great for investors in neighboring Middle Eastern markets, which rebounded from first-quarter losses with a strong second quarter. Of the 61 primary indices, the Tel Aviv 25 Index was the third fastest climber during the six months, climbing 43%. Arab markets advanced as well, as the Morocco IGB Masi, the Egypt Hermes, and the Jordan General PRI indices all rose more than 17%, During the second quarter, all four benchmarks advanced more than 24%.

Among the slowest risers during the six-month period were Asian indices, still smarting from the business slowdown triggered by fear of severe acute respiratory syndrome disease. The Hang Sang gained only 2.6% while the Nikkei 225 rose 4.9% and the South Korean Kospi rose 6.1%.

And what was the one loser of the 61 primary indices tracked year-to-date by Bloomberg? It was the Budapest Stock Exchange, which dropped 3% on concerns that Hungarian monetary policy to control inflation may slow the market and hamper the nation’s bid to enter the European Union.

# # # #

World Markets Wrap: August 28, 2003.

At the close…

The Commerce Department said that the U.S. economy grew at a 3.1% annual rate in the second quarter, its fastest pace since the third quarter of 2002. That encouraged European exporters, who grew more confident in the rebound of the American economy. Asian markets were mixed.

Benchmark indexes rose in 11 of the 17 Western European markets. The Frankfurt Dax nudged upward even though Munich Re reported a fifth straight quarterly loss and its share price slumped 4.8%. Analysts said the world’s largest reinsurance company would have finished in the black if it wasn’t for an unexpected 1.12 billion euros set aside for taxes because of a proposed change to German law. The Paris CAC 40 rose when Carrefour, Europe’s biggest retailer, gained 5.9% after raising its full-year forecast.

But the London FTSE 100 slipped after hotelier Hilton Group reported a first-half profit decline of 50%, as geopolitical tensions and the SARS scare contributed to make the worst travel climate since the 1930s.

The Nikkei 225, which reached a 13-month high last Thursday, slumped for the fourth time in five sessions. DoCoMo, the nation’s largest company by market capitalization, had increased 9% in August, but slipped 2.6% Thursday, after an analyst downgraded it.

The Hang Seng rose on the strength of surging oil stocks. CNOOC, China’s largest offshore oil producer, gained 3.8%, after rival PetroChina reported first-half earnings doubled from a year ago.

Thailand’s key stock index rose to a four-year high, after the government said Wednesday that the economy may have expanded 5.6% in the second-quarter, beating its 3.5% forecast.

News & Views:

Brazil made a promise last September to the International Monetary Fund: Give us a $30 billion loan, and we’ll cut inflation and reduce our budget deficit.

Brazil received the loan, and, between October and February, the central bank attempted to slow inflation by raising its benchmark interest rate 8.5 percentage points to 26.5%.

It has worked – so much so that, the government said Thursday, the economy is officially in recession.

On Thursday, the government-run statistics institute IBGE said Brazil’s gross domestic product fell 1.6% in the second quarter from the first quarter. According to one news service, economists expected a decline of 0.62%. The economy contracted in the first quarter as well, but on Thursday the size of that fall was revised upward, increasing from 0.1% to 0.6%. Two consecutive quarters of shrinking GDP is a common definition of recession.

The central bank’s aggressive rate raising paid off in reducing the monthly inflation rate fell from 2.25% in January to 0.2% in July. Then the bank changed direction. Since June, when the key interest rate was 26.5%, the bank has reduced it three times, including a 2.5% cut last week, its biggest decrease in four years. The interest rate is now 22%.

Brazil’s major stock index, the Bovespa, has reflected the topsy-turvy nature of the economy. In 2002, as investors fretted about both inflation and whether the IMF would help, the Bovespa had one of the worst performances of all the world’s major bourse benchmarks, plummeting 46%. With inflation under control in 2003, the Bovespa has leaped to near the top of the pack.     Year to date, the index has increased 60%, trailing only the Pakistan Karachi stock index, which has gained 68%.

# # #