Quarter Ended 31 March 2010

Markets showed positive returns for the first Quarter of 2010 as monetary easing remained in place and corporate earnings continue to beat expectations.  However, sovereign default risk poses concerns for equity market investors.

EU Macro
The Eurozone, and more particularly Greece, came to the forefront of investors concerns.  Greece's fiscal concerns received little sympathy from its European partners based on previous manipulation of economic data.  It seems a combination of Eurozone members and the IMF will provide a bailout of the Greek economy.  However, for the satisfaction of the bond markets a credible deficit reducing plan must be proposed and enacted.  The problems encountered by Greece could easily be replicated in other periphery Eurozone economies such as Portugal and Spain.

US Macro
Chairman Bernanke and the Federal Reserve have indicated that interest rates will continue to remain at exceptionally low levels for an extended period.  Corporate profits have continued to beat expectations based on significant cost cutting and relatively benign retail sales figures.  However, a concern for both the Fed and the Obama administration continues to be structurally high levels of unemployment.  The credit ratings agencies have given due warning to the US economy with regard to its AAA status.  The significant amount of stimuli both monetary and fiscal coupled with future liabilities, such as the retiring baby boomers, has assured that the medium-term target of reducing the fiscal deficit will need spending cuts or tax increases.  Whilst the fear that future assets bubbles or inflation may be created by the excessive stimuli there is enough spare capacity in the US economy to ensure that this is a medium-to-long term concern. 

UK Economy
International investors have been focussed on the upcoming General Election in the UK economy and more specifically the necessary steps that need to be taken to enact a significant reduction in the fiscal deficit position.  As with the US economy tax rises and spending cuts will be the likely instruments for a rebalancing.  Neither policy is considered favourable for votes.  The short-term fear is that the hung parliament as experienced in the mid 1970's which culminated with an IMF bailout could be repeated. 

Irish Macro
The austere budget enacted at the end of 2009 ensured that the Irish Government gained significant credibility from the bond markets.  This is reflected in the spread of the Irish 10 year bond against the German equivalent which has tightened significantly in comparison to other peripheral Eurozone economies that have suffered from excessive consumption.  Post the introduction of NAMA there is a suggestion that there may be GDP growth recovery at the end of 2010.  Statistically this may be the case as exports become a more important component of GDP figures, however, the sense of recovery may not be felt by the Irish consumer.

China
There is concern amongst investors that there is a Chinese property bubble and that inflation may be a risk for the domestic economy.  There is little doubt that China in future years will be a significant economic power, however, the process of industrialisation will entail considerable volatility.  A significant amount of GDP growth in 2009 and Q1 2010 was based on investment and government expenditure.  A rebalancing of the Chinese economy with greater emphasis on consumption could ensure more sustainable growth trends.

Wells Fargo
Over the quarter we opened positions in Wells Fargo, which we regard as a relatively defensive US retail bank.  The valuation was not stretched and the stock provided a defensive way to participate in the financials rally without exposing ourselves to the risks inherent in investment banks or banks involved with exotic products.  We were attracted by Wells Fargo's strong traditional banking franchise which was strengthened by the acquisition of Wachovia just over a year ago (the group has 70m customers and holds 10.8% of US deposits).  The deal gives the group the opportunity to generate cost savings and cross sell products to the enlarged customer base.

Synthes
Another stock purchased in Q1 was Synthes, the Swiss healthcare and medical devices group.  We were attracted by the stock's valuation (a 6% free cash flow yield) and its defensive growth characteristics.  Relatively stable end markets and a debt free balance sheet provide the defensive components, while demographics (ageing baby boomers) and new geographic markets (especially in Japan and emerging markets) represent the growth opportunities.  Overall, we see the attractions more than outweighing the potential threats from pressure on health budgets and product development issues.

CRH
Building materials group CRH remains a preferred holding.  A price to book valuation of 1x is attractive and it is supported by a 3.4% dividend yield.  The benefits from cost cutting and the full impact from stimulus spending will allow a meaningful improvement in earnings in 2010.  Meanwhile the group's strong balance sheet and free cash flow enable CRH to lead further consolidation in the sector, whereas competitors are relatively hampered by high debt levels.  This will allow CRH continue to add value through acquisition development, and it is one of few companies to have consistently done so over time.

Conclusion
Appian retains an overweight position in equities and cash based on relative value versus other asset classes and whilst we remain concerned with regard to the sovereign risk and the default of Government obligations, we believe in the short term that continued monetary stimuli will provide a favourable backdrop for the equity markets.

John Mattimoe
March 2010

Quarter Ended 31 December 2009

Macro Economic Environment
Unconventional monetary and fiscal policies have saved the global economy from a deflationary spiral and depression in 2009.  The recovery should continue into Quarter 1 2010 but growth will slow down again in the second half of the year.  The ailing financial system and the pressure on consumers to increase savings, remain a powerful headwind in 2010.  We expect leading indicators to continue their dramatic recovery in 2010, however, a slowdown in the second half of 2010 is unavoidable.   De-leveraging at government and consumer level remain a secular challenge.  Although the bubble in real estate prices only occurred in a handful of regions, the credit risks were exported throughout the world due to the emergence of securitisation and the globalisation of the financial system.  Banks must therefore downsize their balance sheets. 

The fact is that growth drivers capable of reducing the debt to GDP ratio will differ from those of the past decade and until we return to balanced global trade, this will act as a brake on the global macro economic environment. 

Finally, we believe there is no end in sight to the low interest rate policy.  We believe any rise in interest rates will be tempered with high unemployment and weak economic demand.  However, the market will be preoccupied with these potential rises in rates due to the level of indebtedness throughout the world.

Currencies
The dominant theme of the first half of 2010 will be the direction of the US Dollar.  With Europe’s interest rates predicted to rise the US Dollar has also been boosted by doubts surrounding the creditworthiness of Dubai and more particularly Greece and its implications for the European Monetary Union.  The Greenback has gained ground even against the Japanese Yen and the Australian Dollar. 

Equities
We are in the middle of a cyclical upturn, which should lead to further positive corporate earning surprises.  The mere fact that all other asset classes remain weak leads us to suppose that money flows into equity instruments will pick up over the year.  However, since the economic outlook remains opaque at best, there is a risk of a significant setback over the year.  In short, volatility will reign. 

Cash holdings in many balanced institutional funds are disproportionally high and the rate that they are receiving on the funds is low.  Despite improving yields from long term government bonds, they still do not look particularly attractive at current levels and therefore equities will be the asset class of choice for the next few years. 

When one considers the dividend yields from large blue chip companies, one can see that given the security of these dividends our clients will be attracted to a sensible and growing yield from blue chip equities. 

Corporate takeovers are another growth driver.  Many companies have high cash holdings and will look to invest these sensibly over time.  Valuations are still attractive and with interest rates low, the conditions for merger and acquisition activity remain ideal.  Acquisitions by firms, reduce their costs further whilst boosting their earnings.  Often this happens despite the lack of sales growth.  Takeover speculation we believe will lead to higher valuation within certain sectors. 

While the consensus earning growth of 25% in 2010 is realistic, we are concerned that the consensus earnings growth for 2011 of 20% is overly optimistic.  While it is perfectly feasible for earnings to recover quickly after a recession, particularly a recession as deep as the one we have just had, earnings growth can soar to high levels quickly, but not for a sustainable period.

The only factor that gives us call for concern is that the broad consensus on stock market is so centralised and that most investors expect a good start to the year.  We believe that over the course of this year there will be extreme volatility but that opportunity will continue to persist. 

Equities for 2010
We will continue to identify those companies with the following criteria in order to reduce risk and give excellent long term return:

• Large capitalised companies with low gearing and attractive returns both in terms of cash flow and dividends.
• Companies who have attractive valuation ratios and realistic sustainable earnings growth.
• Companies whose products are sustainable despite downturns.

Companies
The restocking process which started in early ’09 has brought some improvement in company profits but is likely to tail off over the duration of 2010 due to weak consumer demand.  We continue to favour companies in the energy, industrial, healthcare and consumer staples.  We remain underweight financials.  We continue to like the following stocks:

Microsoft
We continue to like Microsoft as we believe it has a strong balance sheet and successful rollout of Windows 7 in 2010 will continue to do well.  There is also the potential of other ancillary deals with the likes of Yahoo, Nokia and other providers in this space.  The valuation looks undemanding and as capital expenditure increases Microsoft will be a beneficiary of this.

Roche
Roche is the largest oncology or cancer producer of drugs in the world and will continue to benefit from the new ways of treating cancer.  Roche will also benefit from the substantial synergy stemming from the purchase of US firm Genentech.  Roche is also looking to develop its cardiovascular and diabetes drugs.  Its valuation is at a significant discount to the premium that it has held over the last 10 years and has excellent cash flow returns. 

Pfizer
Many patents are due to expire around 2012 for the pharmaceutical industry.  Pfizer has completed its acquisition of Wyeth which should produce significant cost savings.  The company has virtually no gearing and is on a strong financial footing to be able to adjust to the new healthcare plan promised by Barack Obama. 

These are just some of the ideas that we have going into 2010 and we would be happy to meet with you to discuss your portfolio over the coming weeks and months ahead. 

Patrick J Lawless
December  2009