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Please refer to 'Important information' at the end of the bulletin. Please note this investment bulletin is not for use by UK clients.

Investment Commentary

UK - Some festive cheer for retailers
The FTSE All-Share Index posted a US dollar gain of 3.1% in December as M&A activity continued to feature strongly. Corporate news was also encouraging: among the notable winners were aerospace stocks BAE and Rolls-Royce, which rallied on the announcement of a multi-billion dollar Eurofighter order from Saudi Arabia.

Pharmaceutical stock AstraZeneca rose on news of its acquisition of cancer drug research company Kudos. The coldest December in ten years prompted a winter spending spree and retailers Marks & Spencer and John Lewis registered buoyant trading.

US - Flat end to year
The S&P 500 was unchanged US dollar terms in December. M&A was again positive for the market, although uncertainty over the Federal Reserve's future interest rate policy acted as a brake on performance. There were no negative surprises in terms of economic data. The Fed's raising of its base rate to 4.25% had already been discounted, while a non-farms payroll increase of 215,000 in November was as expected. The top-performing sectors during the month were healthcare and materials and the laggards were telecoms and consumer discretionary.

Europe - Investors shrug off interest rate rise
The FTSE World Europe ex UK Index ended 2005 strongly, rising by 3.8% in US dollar terms in December. At the beginning of the month the ECB raised interest rates by 25 basis points to 2.25%. The market took the news in its stride and continued to move up on the back of further bid activity. Takeover speculation was rife in the French media sector, while the leveraged buy-out deal for TDC, a Danish telecommunications company, by a group of private equity companies added further zest to index performance. The high level of IPOs coming to the market underscored investors' increasing demand for yield.

Japan and the Far East - Recovery evidence spurs strong month
Japanese stocks offered further proof that the domestic economy has turned the corner by posting a succession of five-year highs; the Topix Index gained 8.9% in US dollars in December. Industrial output rose for the fourth consecutive month and there were signs of increasing demand both internally and externally.

The MSCI Asia Pacific ex-Japan Index was also strong, rising 4.8% in dollar terms, although Hong Kong lagged notably. China made a further move towards a more flexible currency by approving 13 domestic and foreign banks to act as market-makers for renminbi trading.

Bonds - Yields fall as data softens
Government bond markets performed well in December, reflecting strong year-end cash flow, softer US economic growth data and high asset liability related demand in the UK and Europe; the JP Morgan Global Government Bond Index rose by 1.0% in dollars over the month. US and European yield curves flattened as short-term interest rates rose. The more stable outlook for sterling rates left the UK yield curve little changed. Within the corporate bond market, issuance was seasonally light and spreads ended a lacklustre 2005 roughly where they began the year.

The above has been provided by Threadneedle and should not be seen as a recommendation to invest. Anyone considering investing in these markets should seek independent professional guidance/advice.