Quarterly Investment Report - Qtr ending September 2005

Foreword
Certainly there is never a time where there aren’t positive and negative factors affecting either the global economy, the UK or individual securities for that matter. The art is balancing these “for and against” factors and deciding which is likely to dominate and thus cause downwards or upwards movements in stocks.

Whether our view on future events proves to be well founded or not, it is probably fair to say that the industry consensus would be that over the next couple of years we are looking at single digit returns from all/any asset class.

Commentary
As anticipated, the MPC reduced the cost of borrowing from 4.75% to 4.50%.

Global demand for oil remains high, but there appears to be a plentiful supply. However, this is only true of heavy crude (such as the Saudis produce). The problem is that there are insufficient refining facilities for this grade of oil (due to chronic underinvestment in refining facilities in recent years) and thus we expect the price of oil to continue to rise.

Recent terrorist attacks in London have seemingly had little impact upon the markets, but there is always the threat of further outrages and against this background, gold always tends to “shine” as an investment medium.

We see a declining dollar as the only viable means by which to address the yawning US budget deficit and yet the combination of rising US and declining UK interest rates has seen the opposite occur in practice as far as the dollar/pound exchange rate is concerned.

The UK stock market still appears able to defy the gravitational pull of appalling consumer spending figures. We’ve seen this kind of stunt pulled in the not too distant past with the boom in technology stocks. Short-term we may be shown to be wrong in our prognosis of falling share prices, but the crunch is coming and the warning signs are clear for all to see. For example, the number of people in England and Wales unable to pay their debts hit the highest level in at least 45 years in the second quarter, official figures showed on Friday (5th August). The number of individual insolvencies rose to a seasonally-adjusted 15,394 in the April-June period, the highest since comparable records began in 1960, the Department of Trade and Industry said. That was up 36.8 percent compared to a year ago and 11.7 percent on the quarter. The insolvencies were made up of 11,195 bankruptcies, also the highest on record. There were 4,199 individual voluntary arrangements.

Outlook
As we see it, the following are the major positives and negatives affecting individual asset classes/Sterling:

Sterling
Negative: Falling UK interest rates.
Positive: US$ will have to fall to correct US trade deficit. Weak German economy.
Our view: That the £ will remain broadly static against the other major currencies.

Variable interest
Negative: Falling UK interest rates.
Positive: Safe haven relative to other asset classes. Base rate still comfortably above inflation.
Our view: Hold existing deposits. Add to cash through asset disposals.

Fixed interest
Negative: Rising UK government borrowing. Rising US interest rates. Falling US Treasury prices.
Positive: Falling UK interest rates. Loss of 10% reclaimable tax credit to PEPs and ISAs on dividends. Static US inflation.
Our view: Hold quality stock (BBB credit ratings and above) and junk bonds (CCC ratings. Buy 2nd line fixed interest securities such as Preference shares. Buy bonds rated B to BB, but be very selective.

Equities
Negative: High levels of consumer debt. Loss of 10% reclaimable tax credit to PEPs and ISAs on dividends. Significant downturn in consumer spending. Rising bankruptcies and repossessions.
Positive: Expected UK GDP growth in 2005 in the region of 2.5%.
Our view: Sell cyclical stock. Hold defensive stocks.

Index-linked
Negative: Negative: Relatively low UK inflation rates. Possible peak in UK inflation.
Positive: Feed through of inflation from previous consumer credit boom.
Our view: Sell index-linked gilts. Hold 2nd line index-linked securities.

Commodities
Negative: Negative: Significant rises have already occurred in commodity prices. China’s consumption of oil and raw materials may reduce. Threat of a world economic downturn.
Positive: Increasing demand of late for raw materials especially in growing economies such as China. Limited refining capacity for oil..
Our view: Hold commodities.

Gold and Silver
Gold
Negative: Denominated in US dollars.
Positive: World economic uncertainty.
Our view: Hold Gold.
Silver
Negative:
Positive: Increasing demand given increasing applications for the metal. Just off an all time low relative to Gold.
Our view: Hold Silver

Property
Residential
Negative: Negative: Falling prices in many UK areas. Historically high UK property values to earnings ratio. Weakening demand in many parts of the UK. Penal UK Stamp Duties. High levels of consumer debt. Rising repossessions. Fall in the number of mortgage approvals.
Positive: Anticipated influx of EU workers into the UK. Falling UK interest rates. More buoyant private rental sector with First Time Buyers being either unable to get onto property ladder or awaiting a fall in prices at bottom end of market. Boost to housing market expected with advent of new pensions legislation in April 2006.
Our view: Sell residential property, possibly go back into the market in early 2006.
Commercial
Negative: Penal UK Stamp Duties. Rising Gilt yields. Weakening tenant demand in certain areas/sectors (retail and manufacturing). Analysts predict little capital growth in the immediate turn. Many investors now committing funds to this asset class. Worsening economic background.
Positive: Falling UK interest rates. Expected UK GDP growth in 2005 in the region of 2.5%. Stronger tenant demand in certain areas/sectors (offices)..
Our view: Sell commercial property.