IMS MARKET OUTLOOK UPDATE - SEPTEMBER 2007

IMS Update On The Outlook For Markets - September 2007.

General
Sub-prime mortgage concerns have spilled over into other high yield credit markets in terms of sentiment. We have seen the high yield market back up significantly over the past couple of months. This, in turn, has upset the LBO market – leaving a lot of deals sitting on banks' books and making them reluctant to lend. This has certainly impacted global investment sentiment, as witnessed by the VIX rising sharply and a flight to quality in terms of sovereign debt.
While there are concerns of this moving into the real economy and spreading, it is difficult to believe, based on fundamentals and information about the problems to date, that this is more than another welcome adjustment to current excesses in some areas of global markets. Indeed, with the up to 10% correction seen during the past month, equities, while vulnerable short term, are looking good value on a longer term view.

Where IMS is placed ...

Equities – while we are underweight US equities, our emphasis is on large cap – with S&P 500 companies reporting for the second quarter earnings up around 10% (double the expectations of only a few months ago). With the market trading at around 15-16 times next year, the outlook is positive, although with some notable exceptions such as the housing sector and possibly some banks. Our growth bias holds us in good stead, as does our focus on some of the value managers that are emphasising energy, such as UBAM.
With estimated global growth of 5.5% this year expected to be dominated by Russia, India and China, we continue to maintain a full weighting to the emerging markets and Asia. We have been concerned about valuation although the recent correction, if it continues, will see us add to an overweight.
In terms of the rest of the developed world, our emphasis will continue to be in large cap for the time being. While the LBO market may well continue to dry up short term, private capital still has many billions to invest and, more importantly, as with the US, it seems logical to assume that the stronger companies will continue to buy back stock (especially now they are cheaper) and return cash in the form of dividends to investors.

Fixed Interest – while it is tempting to think that what we have recently witnessed in government debt markets is a prelude to recession in the developed world, we don’t believe this to be the case and if so then yields are too tight and yield curves should not be as flat or indeed even inverted. Unemployment and wage growth are low and steady respectively - when they turn for the worse then this will be the time to worry. We will therefore remain underweight for the time being.

Credit Markets – high yield markets have widened significantly in the US from the lows of 260/270 basis points over at the beginning of June. At some stage, real cash buyers will re-enter the market. From an IMS perspective, having been maximum underweight for some time, now we will look at moving back to a more neutral weighting but probably wait it out on the sidelines in the very short term.

Currency – as we have seen earlier in the year, any increase in risk aversion leads to a rally in the lower yielding currencies, such as the Yen and Swiss Franc. Recently this has been no different. We are neutrally weighted in Yen assets – Japan equities are cheap and offering good fundamentals, but we need to see more appetite from other investors before moving back to an overweight; however, the Yen rally has been welcome. As with the Yen, the dollar is cheap on a PPP basis – it, too, tends to rally in a risk aversion trade. We are neutral in respect of the Dollar for the time being. On the negative side, it is hard to see emerging market countries continue to invest in the US at a lower rate of return than that they pay to raise funds themselves.

Liquidity/Defensive –Most WAY portfolios have a 5%+ cash cushion that will be put to work in equities once markets have settled.

IMS Commentary Date: 31st August 2007. WISL Press Release Date: 6th September 2007. Reproduced with kind permission.

Note: Investment Manager Selection Limited (IMS) is the Investment Adviser to the Fund Manager. This commentary has been prepared for Financial Intermediary Clients and Professional Associates of WAY Investment Services Ltd and is not intended for and must not be distributed to Private Investors. This information is supplied to you in confidence and you may not pass it on to any other party without prior written consent. Past performance is not necessarily a guide to future returns and changes in rates of exchange between currencies may cause the value of investments to rise or fall. No representation or warranty is given (express or implied) as to the accuracy, completeness or correctness of the information nor the opinions, interpretations and conclusions contained in this commentary. The commentary does not constitute investment advice or a recommendation to purchase or sell any security. Neither the author nor WAY Investment Services Ltd accept any liability whatsoever for any loss or damage arising in any way from any use of or reliance placed on the commentary. WAY Investment Services Ltd is an Appointed Representative of WAY Fund Managers Ltd which is authorised and regulated by the Financial Services Authority.

Press Release Date: 6th September 2007.