September was another good month for global equity markets despite some profit taking at the end of the 3rd quarter. Global equities gained 4.6% in Dollar terms with all major and most minor markets posting positive returns. Government bond markets were also strong with the JP Morgan Global Government Bond Index gaining 2.3% over September. Whilst over the last twelve months bonds have still outperformed equities, this position is likely to end shortly in Dollar terms and is already the case year to date where equities (+29.3%) have comfortably outperformed Government bonds (+3.9%). Whilst corporate bonds have performed well during this period, we believe that this trend is decelerating and with yields much lower today than at the depths of the credit crisis have sold some conventional bonds and reinvested into a number of higher yielding property shares. The value and income orientation of the Fund has helped to keep the gross yield at just below 5% and whilst we feel that equities will remain range bound in the lead up to the 3rd quarter reporting season, we expect investors to rotate into value and income orientated shares as growth momentum falters.

Equity Market Review
Some of the momentum from earlier in the quarter was lost over the month of June. Opinions are very divided over the reason behind this modest correction in a number of markets. In some quarters it is felt it is too early to assume an immanent economic recovery is assured. The recent rally, largely driven by China stockpiling and indeed recording some early success with its stimulus packages may be inadequate to fully offset the deep seated problems in the west. The rebalancing of portfolios also appears to be largely complete for this stage of the economic and market cycle. Further evidence of the recovery is required before further tactical asset allocation can take place and therefore both economic and corporate data will be closely scrutinised over the summer months.
Unfortunately the World index has been held back by the modest 3% return form the US equity market and this does mean global investors will pay increasing attention to US economic data in order to gain a better understanding on how the economy is progressing and the role it will play as far as the rest of the world is concerned. Although there is a risk that markets may move sideways for a period, one should not underestimate the number of opportunities that are available.

Bond Market Review
Having reached the half way point for 2009 it is interesting reviewing the recent past. Few would have anticipated that the economic backdrop could be so changed. Interestingly recent economic data has confirmed the economic downturn in the UK started in April 2008 and not July as previously believed. Even the Bank of England with its sophisticated data collection program failed to pick up on the fact that the economy was rapidly loosing momentum.

Looking ahead, the potential pressures consumers and business alike now face should not be underestimated. With annual GDP for the year to June 2009 falling 4.9% we now have confirmation that the UK economy has experienced its worst slowdown since the Great Depression. Revised Q1 data also confirmed a 2.4% contraction which was significantly worse than the 1.9% estimate. Although there are signs of recovery in certain areas, this has to be expected given the severity of the slowdown and the extent of the inventory drawdown which now appears to have almost run its course. Although signs of a UK recovery remain elusive we can gain comfort from the growing evidence that shows the economy is at least stabilising.

Central Bankers rightly remain deeply concerned over the downside risks facing their economies given the monetary and fiscal stimulus which is currently lending support can not go on indefinitely. Investors in the developed bond markets therefore continue to wrestle with the dilemma over what increasingly appears a lengthy period of low interest rates being offset by the same governments having the ability to finance a very expensive bailout where recovery is by no means assured. As a result government bond markets have generally been well supported over the month having retreated earlier in the quarter although we do anticipate sentiment to swing widely as emotions change. The US bond market has been the main exception as concerns over the Dollar persist.

Equity Market Review
Over the month of April a flood of money hit global equities and the returns especially relative to cash rates and inflation have been very strong. Against this backdrop although the main economies continue to shrink, the rate of decline has eased and combined with a significant number of companies reporting better than expected profits, there are now the ingredients of a new bull market in the making. Indeed taking the definition of a bull market being a 20% rally from the lows, there is perhaps a strong argument that the tide has now officially turned and it is only a matter of time before economic data confirms an economic recovery is underway.

With such a backdrop one would have expected commodity markets to have also performed well however there are a number of very mixed signals and clear examples of the market (and some of the stocks exposed to the asset class) ignoring the fundamentals. The price of crude has held up well but global inventories are running at multi-year highs and there appears to be a real physical lack of global storage. Surprisingly, this has not held back the price of crude possibly as investors look through this near term issue. Indeed some specialists believe it will take up to 18 months to clear the overhang although bull market conditions could quickly return once this occurs. Conversely, the price of pork bellies (and companies operating in this field) have plummeted on the news of the swine flu outbreak despite humans not being able to catch the virus from eating pork and the equity markets dismissing the situation as a none event. Such examples highlight the indiscriminate nature of the recent dash to invest cash without too much consideration of the supporting fundamentals and should act as warning to investors.

Whilst in general terms there are grounds to be positive there is no denying that it is China and America that are setting the pace whilst the outlook in many parts of world and in particular Europe remains unclear. A global synchronised recovery is therefore far from being assured. In addition the high levels of consumer and public debt in certain countries will also act as a barrier for a sharp economic rebound and there is every risk that just as a recovery gets underway, tax hikes or indeed higher savings rates will start to choke confidence. Overall we feel is it right to continue to drip feed funds into the equity markets, however it is important not to get carried away with recent dizzy returns. The developing world looks best placed for a sustainable recovery and those companies with global operations are best placed to benefit, however everything must have a price and if the move into this areas comes at the expensive of a major sell-off in domestic utilities for example, then investing against the trend and seeking value will likely result in a better overall performance. It will also cause considerably less anxiety when a period of profit taking occurs or when the markets decide to reappraise the time scale of the economic recovery.

Bond Market Review
Government bond markets started to show the first signs of stress over the course of April as the majority of indices retreated. Evidence confirming a global economic recovery may be on the horizon is growing and more attractive returns can be found in other asset classes with such a backdrop. Corporate bonds did however make good progress having massively underperformed their government equivalents over the past year. The Sterling IBOXX Index returned 3% on a total return basis whilst the Euro and Dollar equivalent index returned a more modest, but still very reasonable 2.3% and 2.4% respectively. Investors appetite for risk is clearly returning and with no shortage of overweight cash and government stock positions, there is plenty of liquidity to fuel the corporate bond rally and indeed the equity markets. The outlook for government stocks, particularly in the UK and the US is far from clear as the funding of the credit crunch and subsequent economic downturn proves to be a major drain on public finances.

In the UK the recent Budget highlighted the dire state of the public finances which clearly shocked many investors. With £700billion required between now and 2013 (some £500billion more than previous Government estimates) and little hope of the economy growing by the Chancellors forecast rates of 1-1.5% in 2010 and 3.25% for 2011 and beyond, there will without doubt, be a surge in gilt issuance. It is also becoming increasingly difficult to see how the country will be able to maintain its 'AAA' status given the dubious GDP forecast and such a backdrop will only make the funding requirement more expensive. It is therefore surprising the market only declined 1.25%, however the Bank of England's quantitative easing program is now fully operational and this has acted as a major support. It success is now the subject of open debate given the market declined at a time when such a major buying program was being implemented. Indeed, with the first phase almost complete, the markets will shortly be seeking guidance on whether the full scheme will be implemented or indeed if some other measures will be announced. The Bank of Canada for example recently provided a commitment to keep rates at 0.5% for an extended period. This has helped to flatten the yield curve and bring rates lower. Although it should be noted Canada's banks have more conservative leading policies and have not been impacted by the credit crunch to the same degree as their neighbours. The gilt market does therefore face a very testing period and further weakness can be expected especially once the quantitative easing program comes to an end. The issue facing holders is if it will be a gradual decline or a major fall. The later would likely be accompanied by currency weakness.

In the US the Federal Reserve has also kept the Treasury market under control with ongoing repurchases. Here there is also a need to keep long term mortgage funding costs from rising now there is about to be a surge in new supply and business is in the process of refinancing. However, as in the UK, global investors may be looking through this near term support and selling. Foreign exchange movements increasingly imply international investors are repositioning elsewhere and early indications point towards funding problems in both the UK and the US unless the respective Governments can maintain confidence and restore economic growth quickly

Equity Market Review
Markets ended the year on a relatively good note after an appalling 2008. In dollar terms, global equities lost 20.9% of their value in 2008 despite double digit rallies in several markets in December. Once again, local currency returns were distorted by some momentous currency movements. In Europe, for example, markets gained a modest 0.75% in December but the swing of the euro against the dollar meant that such a movement translated into a gain of 10.6% in dollar terms.

The December rally was triggered by the realisation that interest rates would continue to be cut in all major markets in response to the growing threat of deflation. Ironically, deflation is generally considered to be negative for equity markets but there was a growing sense that the sell-off in October and November in particular had been overdone. Inter-bank rates are beginning to ease and low savings rates will eventually encourage savers to seek yield elsewhere. With the S&P 500, for example, yielding over 3% compared with a US discount rate of 0.5%, there is ample encouragement for investors to look to equities to provide income over bonds.

Elsewhere in the world, Asia and emerging markets generally enjoyed something of a rebound from the carnage of the previous few weeks and months, gaining 1.8% and 4.4% respectively in local currency terms. We do not, however, believe that such movements represent anything other than a relief rally at this point. It will take some time for the impact of lower interest rates to filter into the real economy and our inclination remains that of selling critically weakened companies (e.g. banks) into pockets of strength whilst building up positions in more robust businesses with strong cash flow, low debt and a progressive dividend policy on those darker days in the market.

From a currency perspective, we believe that sterling is probably in oversold territory and expect some of the recent movements to be reversed, particularly against the dollar, as 2009 progresses. Longer term, we remain nervous of the growing public sector borrowing requirements in most major markets (perhaps with the exception of Japan) but feel that President-elect Obama's spending plans will have a particularly detrimental impact on the US dollar over the medium term once the currency market's present obsession with a flight to safety has run its course.

Bond Market Review
Government bond markets finished 2008 with a flourish, returning 7.1% in dollar terms in December to bring the total return for the year to 12%. Dollar returns were magnified in December thanks to currency weakness which saw the dollar decline by 10.1% against the euro and by 5.4% against the yen. Against sterling, the dollar continued to make remarkable progress, propelling the gain against the pound to 36% for the whole of 2008.

Elsewhere, all major bond markets enjoyed positive returns in December in local currency terms with just the UK market slipping into negative territory when translated into US dollars. Driven by the fear of deflation (negative consumer price inflation), policy makers have been taking aggressive action to avoid such an outcome by cutting interest rates. Official rates in Europe and the UK are likely to follow the lead of the US and Japan effectively down to zero in an attempt to increase the amount of money in the banking system and economy.

Whilst in the short-term this has been very good news for government bond holders, such action comes at considerable expense in the form of deteriorating public finances and, eventually, higher taxes. The relatively quick response to the threat of deflation by policy makers will hopefully avoid the experience of Japan which is still recovering from policy failures in the early 1990s. Deflation, therefore, should generally be treated as bad news. Near-term price movements may be good news for bond holders but this is of less significance than the damaging consequences to the wider economy which such a problem would create.

Corporate bonds have begun to see pockets of interest from income-conscious investors. As some normality returns to capital markets, we believe that corporate bond markets will benefit, particularly given the low nominal redemption yields on offer from the government market. This should provide much needed breathing space to those companies needing to roll over debt in 2009, although the higher yields on offer from such activity may subdue the underlying equity of those companies in question who will see profits margins fall as borrowing costs rise.