N.B. UK Equities are based on FTSE 100 Total Return, UK Gilts are based on All Stocks Indices, Property is based on Norwich Union Property Trust, Hedge Funds are based on CSFB Global Macro Hedge Fund Index

N.B. UK Equities are based on FTSE 100 Total Return, UK Gilts are based on All Stocks Indices, Property is based on Norwich Union Property Trust, Hedge Funds are based on CSFB Global Macro Hedge Fund Index

US Equities

• Whilst US equities have been a great investment over the twentieth century, the path has not been smooth.

• Previous peak levels have taken over 20 years to be revisited after adjusting for inflation.

• In each long-term bear market following a major peak real prices fell by over 50%, and by over 75% after 1929.

• If it assumed that 2000 was a significant market top, and history is any guide, then the risk remains that the S&P 500 will not make a new real high until after 2020.

• It is possible that 2003 will be the absolute low after the 2000 high although in previous cases it has taken in excess of 12 years after the peak to make the ultimate bottom.

• Japan witnessed a period of extreme stock market appreciation between 1984-89.

• Created a major market top.

• Ensuing bear market saw index lose 80% of its value.

• Even at recent levels though, the index remains 50% below its high.

• Appears likely that the low in early 2003 is the bottom for this cycle based on duration from the peak and with no new low having been made for over 3½ years.

• Possibility that new secular bull market has begun for Japanese equities.

• Decline in Japanese Yen has eroded some of the recent performance from a UK-based investor’s perspective.

• Many Asian markets tracked the Japanese market higher during the 1980’s before suffering sharp reversals in the beginning of 1990.

• Major event in recent times has been the ‘Asian Crisis’ in mid-to-late 1990’s.

• Declines exacerbated for foreign investors by collapse in many Asian currencies.

• Recent years have seen much improved performance with price levels from previous decade finally being eclipsed.

• Not all Asian markets have made new highs; Taiwan still trades more than 30% below its peak made in 1990.

• Rapid economic growth makes investment attractive although emerging markets may suffer from high volatility periods, particularly if liquidity is rapidly withdrawn.

• European equities have to a large extent followed a similar path to the US market with an extended bull market from the early 1980s through to 2000 before a sharp decline and subsequent recovery over the past 3¾ years.

• If the US experience is any guide, it could be many years before European markets regain their 2000 levels after adjusting for inflation.

• Correlations between major European markets are currently high and hence few diversification benefits can be gained.

• Smaller European markets have benefited in recent years from extremely accommodative monetary policy.

• Gilts have been in an extended bull market, along with global interest rates generally.

• Yields of close to 4%, seen in 2006, may prove to be the lowest levels of this cycle.

• Even if new highs in price/lows in yield are made, the risks seem heavily weighted towards this being the latter end of any positive trend.

• With quoted inflation running at 3-4%, and actual inflation probably another percentage point higher, current long-term yields at 4.8% look unattractive.

• Gilts may become attractive in the near-term if economic activity declines sharply or geo-political tensions rise sufficiently such that a ‘flight to quality’ ensues.

• Speculative grade bonds are priced relatively expensively compared to investment grade currently.