Quarter Ended 30 September 2009

Equity Market
Equity markets outperformed in Quarter 3 as Government and Monetary authorities continue to indicate that significant stimuli and liquidity would be provided.  Monetary authorities assured investors that whilst the global economy was improving, interest rates would continue to remain at very low levels.  Improving macro economic indicators and better than expected Q2 results gave investors significant comfort.

US Economy
The US property market as represented by the Case/Schiller Index improved over the quarter.  This is an important element for any eventual recovery in US consumer confidence and spending.  Whilst Q2 results were better than expected the main driver of this outperformance was significant cost cutting which allows US corporates to be operationally geared for the reappearance of the US consumer.  Unfortunately US unemployment figures have not improved significantly over the quarter.  Employment tends to be a lagging indicator with regard to any possible economic recovery however, some analysts and commentators have suggested that this recovery may be jobless in nature and hence sub-par.  Several Federal Reserve Governors indicated that should inflation become a concern then interest rates could be increased by .50/.75% per announcement as opposed to the recent historical piecemeal movements of .25%.

Eurozone Economy
The ECB continue to leave interest rates at historically low levels aided by M3, their favourite predictive instrument of future inflation, which remains well below their target.  GDP growth in the Eurozone was better than expected in Q2.  However, for a continued recovery in the economy based on the export orientation of the German economy, a global recovery is required.  The ECB has highlighted the recent Euro strength against the US Dollar and Sterling and the detrimental effect it will have on the competitiveness of European exporters.

UK Economy
The Bank of England continues with its policy of quantitative easing and as inflation begins to fall they remain comfortable with interest rate levels of 0.5%.  A more pressing concern for the Bank of England is the fiscal deficits being run by the present Labour government, a medium term factor for the weakness of Sterling.  The Bank of England remains concerned with regard to the lack of credit being provided by UK banks to the consumer.

Irish Economy
Irish growth will remain subdued until post 2010 after which exports may be the primary driver of any improvement.  From the perspective of the consumer within Ireland, it will feel a very subdued recovery particularly with regard to the fiscal corrections needed which may entail public spending cuts and income tax hikes.  From an overseas perspective Ireland faces three significant tests before the year end:

(1) The passing of the Lisbon Treaty.
(2) The successful introduction of NAMA.
(3) The year end budget.

These three factors will dictate to a significant degree the ability and the costs associated with the Irish government’s funding requirements from overseas investors.

The Future
Monetary and governmental authorities have made it abundantly clear they will do everything within their powers to ensure that there is a significant recovery in the global economy.  Investors over the quarter have come to the realisation that whilst a recession may be experienced a depression will be avoided.  It is Appian’s view that the surge in equity markets has discounted too readily the following risks:

(a) Fiscal imbalances
(b) A lack of significant recovery in job numbers or wage growth and
(c) The lack of action to rectify the continuing global imbalances.

A final risk from Appian’s perspective that has not been appreciated by investors is the changed environment of the global economy.  Investors seem to be of the belief that banks and the access to cheap funding will return.  We believe based on greater regulation, tightening credit standards and appropriate risk evaluation by financial institutions that this availability of credit is significantly over estimated.

As always Appian remains wary of the risks mentioned but is an acquirer of undervalued securities on a selective basis.

Pat Kilduff
September 2009