Quarter Ended 31 December 2007

Equity markets continued to decline from the fallout of the credit crisis.  Initial estimates as to the ultimate cost of sub-prime write-downs range from between US$200bn to US$600bn.  Banks remained reluctant to lend to each other with the subsequent continuing spike in short-term rates as the year end approached.  Banks hoarded cash and tightened up their lending standards

Some of the concerns with financial company write-downs had started to be addressed in Q4.  To ensure financial strength and healthy levels in their Tier 1 ratio, Citigroup, UBS, Morgan Stanley and Merrill Lynch have sought and received financial assistance from Sovereign Wealth Funds (SWFs).  These SWFs are typically oil producing or Asian countries which reflect their massive amounts of surplus capital.  This enables these countries to buy what they perceive to be undervalued assets in addition to managing their currency relationship with the USD.

The issue for monetary authorities is whether the fallout from sub-standard lending will affect consumer confidence and spending.  Will sub-prime lending and defaults become issues for prime lending in areas such as credit cards, consumer debt and commercial property?  As it stands, the US property market on a national basis is down 6% year on year as of the end of October.  Against that, US property values have appreciated 50% over the last five years and typically, the value of a home for a US consumer represents only 19% of their net worth, with a more significant percentage represented in their equity portfolios.

Earnings

Earnings growth for US corporates in Q4 is expected to be -9% year on year.  Excluding the financial sector and their associated write-downs, earnings growth would have been +12%.  This expected double digit earnings increase is a continuing reflection of resilience of the US consumer, the beneficial translational effects of a weaker US Dollar for US corporates and continuing growth in emerging markets.

For the equity markets, of increasing importance over the first six months of 2008 is the direction of the US unemployment rate and the levels of income growth experienced by the US employer.  As it stands, US corporate balance sheets are extremely strong and for those US companies exposed to export markets they are likely to strengthen further as a result of the weaker US Dollar.

Analysts believe that there will be further rate cuts from the US FED and that their concerns with regard to inflation will be less important than those of growth.  Inflation has become an issue as oil has reached $100, based on increased demand, reduced supply, speculation on the part of oil traders and geo-political concerns.  Agricultural commodities and food prices have also continued to soar, based on improving diets in emerging countries, increased demand for bio-fuels and severe droughts being experienced in parts of Australia.  Increasing food and energy prices is not a significant issue in itself, however, as the head of the ECB – Trichet - pointed out, it is the second line effects of these increases that may prove problematic.  These second line effects primarily are increased wage demands.  Initial indications from German Unions is that they will be seeking wage rises of 8% for 2008 and whilst this is a typical negotiating ploy, repeated on an annual basis by the German Unions, it is an issue that both the ECB and Appian will be closely monitoring.  Historically, unions have settled for 50% of their initial demand but 2008 is a year of where political issues may need to be considered.

The Irish economy for 2008 is likely to record GDP figures of 2% with housing completions centering around 40,000.  These sort of growth figures were last recorded in the early to mid-90’s and reflect a slowdown in the property market, the appreciation of the Euro against Sterling and the Dollar and the doubling of ECB interest rates.  As it stands presently, the Irish equity market is beginning to fully discount the slowdown in growth, but sentiment may remain negative as the Irish growth story dissipates.

Holdings

Our holding in Gold has proven beneficial as it reaches new recent highs.  The dwindling supply of gold from South Africa, concerns with regard to inflation, a hedge against the weakening US Dollar and an increased demand from emerging countries for gold have all played a part in its price appreciation.

In the first half of 2008, markets may be relatively subdued.  However, given our generally high cash content and our holdings of gold, we are well placed to seek value as it emerges.

PAT KILDUFF
December 2007