Interest rates globally moved a little higher during the third quarter of 2006, but the major surprise came from the Bank of England when it announced a 25 basis point rise in UK rates at the beginning of August. We envisage that there may be another 25 basis point rise in UK rates before the end of 2006 but that 5% may mark the peak of the current cycle. Against this background, we continue to foresee some weakness in sterling arising later in the year and into 2007. On a purchasing power parity basis, sterling continues to look expensive against both the yen and the dollar.

We noted in the previous Outlook that we did not expect any major rise in the oil price from the level seen in the summer. In fact, this analysis was over-cautious in that a major feature of commodity markets during the summer was the sharp fall in global oil prices of over 16% from the level seen at the end of June. It is our expectation that there could be further downward pressure on the oil price, although demand may build a little during the winter in the Northern Hemisphere. However, supplies of oil and gas are plentiful at the current time and there appear to be few catalysts for stimulating a rise in the oil price, barring any further political uncertainty in the Middle East or a particularly cold winter. Nevertheless, we continue to believe that commodity prices in general are still in a “super cycle” and that a pull back of the scale seen recently and an ebbing of speculative interest is entirely consistent with rises over the longer term.

Bond markets were again relatively subdued over the summer and yields on shorter dated UK gilts reached 5% briefly during the period. We have consistently argued for the past two years that gilts offer little fundamental value to our clients but were yields again to rise over 5% we may consider selectively adding to holdings at the shorter end of the curve.

Turning to global markets, we were encouraged by the further progress seen in the Japanese economy during the summer and although the Stock Market remains a little lacklustre we noticed a pick-up in activity towards the end of the period. We expect further progress for the rest of the year and Japan remains for UK investors a particularly interesting area at the moment. We continue to look to add to holdings here and envisage some sound investment returns from this region over the medium term. It is also worth noting that we expect that Japan and the Pacific Rim economies will pick up during 2007 to counter-balance the slowdown in the United States.

The US equity market was one of the better performing markets over the summer with the, albeit unrepresentative, Dow Jones Index reaching all time highs. Some commentators had forecast that 2007 would be a particularly difficult year for the US economy given falling house prices, but now it appears that the consumer may be rather more resilient than had been foreseen, particularly given the sharp fall in oil prices over the third quarter of 2006. This is obviously a particularly sensitive area for the American consumer and any fall in petrol prices naturally provides a key reinforcement to consumer confidence. We continue to prefer to tread somewhat cautiously in the US equity market, feeling that values are currently a little stretched.

In Europe, as we have commented in past investment reviews, we continue to envisage some stronger growth coming from Germany during 2007. The German equity market remains a key focus for us at the current time and we continue to add to our exposure in this area. We also expect further news of the strains being placed on the euro as we move into 2007 by the varying economic performances of a number of the constituent countries in Euroland. In particular, Italy and Greece are undoubtedly struggling under the current currency regime and it is not impossible that further cracks in the euro edifice will manifest themselves over the short to medium term. We would expect to see interest rates in Euroland continue to rise and thus we envisage some gentle appreciation of the euro against sterling over the course of the next six months.

There have been no major changes to our investment themes over the quarter. The Chinese economy, despite caution being expressed by a number of commentators, continues to grow strongly and we expect to see further appreciation of the Chinese currency against the basket of Western Bloc currencies into 2007. We retain our enthusiasm for companies involved in the manufacture, sourcing and sale of luxury goods on a global basis and have also been pleased by the good progress shown by real estate companies in the UK following the announcement in the Budget in the spring of a favourable change to their tax status. We continue to see further progress from these companies in the short to medium term. In the West End and City markets, in particular, demand for rental space remains at a high level, fuelled particularly by overseas interests.

After a dismal performance by equity markets in the second quarter of 2006, it has been pleasing to note that most markets regained their poise during the summer. We feel that equity markets in general may end the year a little higher than at current levels although, as we have cautioned before, the international political arena is still thwarted with uncertainty and, in particular, the threat of nuclear development by both Iran and North Korea has the potential to unsettle sentiment towards markets at any time. Nevertheless, it does appear that there remains appetite for merger and acquisition activity within equity markets, which will underpin market sentiment, and also we continue to observe substantial buy-back programmes by major companies of their own stock. Our preference remains for equities as the asset class of choice over fixed interest for the future and, given the recent fall in global oil prices, we feel a little more enthusiastic towards markets than of late.



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