As a result, it is affected by global macroeconomic problems such as the US fiscal impasse and the eurozone sovereign debt crisis.  In addition, the outlook for growth for the UK economy remains sluggish as both consumers and the government try to reduce indebtedness.  In the portfolio of City of London Investment Trust, the biggest bets are in well diversified multinational consumer product companies.  Although stocks like British American Tobacco, Diageo (alcoholic beverages) and Unilever (food and household products) have performed well, they should continue to benefit from the favourable structural trend of the rising prosperity of consumers in emerging markets.

Of course, much of the poor macroeconomic news is already reflected in the valuation of the stock market.  The UK equity market (FTSE All-Share Index) is on a price earnings ratio of around 12x which is well below its long-term average. In 1999/2000, when the economic outlook appeared to be bright the price earnings ratio was over 20x.  UK equities also have an attractive dividend yield of 3.6% which compares with the 10 year gilt-yield of 1.7% and 30 year gilt-yield of 3%.  In addition, companies have been growing their dividends at an average rate significantly ahead of inflation.

There is no doubt that equities will continue to be volatile given the macro-economic problems.  For the long-term investor, we believe that equities are attractively valued and returns will pleasantly surprise.

One stock that was recently purchased for The City of London Investment Trust was Direct Line in its initial public offering.  In our view, it offered an attractive dividend yield and interesting recovery prospects for its leading UK personal lines insurance business.