Adrian's Update

Volume 5 January 2006

Happy New Year! On top of a good year overall, once again we have been blessed with another year-end rally and after strong postings in all equity markets globally excluding the US where rising interest rates deterred investors, we have seen returns to levels not witnessed since the end of the nineties. Nonetheless, the Dow passed through the psychological 11,000 mark mid-month before dropping back by month-end. Global company earnings rose probably around 16% last year which helped deliver the gains yet whilst the trend continued into January, the unwary could well have been caught out as the arch villain volatility reared its head and many gains made over the first few weeks of 2006 were essentially nullified by month-end. The dollar had a stellar year in ’05 with its best gains against the majors for 8 years and of course the gold (18% gain and a 25-year high) and oil price gains are now well-known as are the reasons behind them. In keeping with tradition however, my first “Update” for 2006 would not be complete without the now popular table below to review ’05 and satisfy the curious mind. Remember, the picture shows a basket of major indices and is provided to represent a global investment perspective.

The table clearly shows that with this composition, one should have returned around 15% from equities for 2005 or around 10% excluding Japan, which had a phenomenal 2005. The growth was more consistent than 2004 and in general, better than analysts expected although still volatile through much of the year. In contrast to the world’s equity performances we are delighted to report that our low volatility non-aligned ADASTRA Realty Fund returned almost 14% in 2005 and as a result has become an attractive proposition for many investors seeking an equity complement and wary of hedge and traditional property funds and of falling returns in the UK and Europe.

Equities or Bonds? Although a few bright periods appeared during 2005, the bond sector once again was the laggard of the portfolio. Despite raw material and commodity prices soaring and solid global growth bond yields actually declined in many key markets. If you are wary of bonds and, of late hedge funds, property funds provide much needed stability as an alternative to this asset class to hold alongside equities which you recall I have advocated holding for the last couple of years now.

Interest rates impact At 4.5% US rates are definitely nearing their peak at present yet with Ben Bernanke officially assuming the Fed Chair on February 1st (he will chair the March 28th meeting of the FOMC) the upward moves may be continued this year and whilst there is now more uncertainty over the likely cap level the rate may still increase to 5% over the coming months although this is not as safe a bet as it would have been 3 months ago. Whilst the UK also currently sits at 4.5%, the Old Lady’s next move is likely to be a cut, although quite when is open to considerable debate. To this backdrop, the UK property market continues its slow decline, yet with demand still growing (albeit slower than this time last year) in the US, our US property-based ADASTRA Realty Fund provides a worthy alternative. Euroland is presently at 2.25% following last month’s rise, its first for 5 years.

The “Greenback” The dollar was doing “quite nicely” thanks was how I opened this section last year and I have to repeat that again as we move into the New Year. Much has now to be said about the US trade deficit however, (currently over $70 billion) and although we can expect a solid growth from the US economy for 2006, it is impossible to discount the impact of such a figure. My prediction was wrong for last year as I expected a decline and instead saw a 14% gain against the majors, this year I am going to move more for the status quo to be maintained and I see a sideways move overall for the dollar this year, forecasting a 1.20 against the Euro and 1.76 against the sterling for year-end..

Where to now? Continued M&A activity will drive global equity markets and additionally the BRIC (Brazil, Russia, India and China) countries look attractive for this year, of these Brazil and India are my two picks. In contrast to my prediction last year that oil prices would drop back to $30 per barrel, we are still beset with a price of around $60. This clearly will continue to play a major role in costs and headline inflation figures worldwide. Look for continued good growth in Japan but expect US equities to show good form for 2006 we may even see a retun of some healthy results in the technology sector. Gold likely stays strong and with interest rates at plateau levels don’t expect much from bonds. Remember, specialist stocks and funds are only for the VERY brave, rather continue with a blend of asset classes as advised in previous Updates. As always, should you have any questions on how best to benefit, feel free to check on our website http://www.adastraportfolio.com/ or contact us by e-mail on invest@adastraportfolio.com, we look forward to hearing from you!

Tailpiece Apparently, if you yelled for 8 years, 7 months and 6 days you would have produced enough sound energy to heat one cup of coffee. Now there’s an extremely alternative means of combating high oil prices! Finally, if the former is too drastic (or noisy) and you need to find additional means of boosting your budget to cover these ever rising costs, bear in mind that reportedly ₤11 million in small change is thrown away in the UK every month!!!

Food for thought Merely being alive allows us to make choices. Making wise choices allows us to live life fully.

Adrian's update is a monthly market roundup from the desk of Adrian P Sinden. It is supplied free of charge to ADASTRA Clients and Registered Users of our Website.