MARKET & ECONOMIC COMMENT
Japanese equities continued to tumble during the period. By the end of October, the Topix Index had fallen for five consecutive months, declining by 23% from 31 May 2002, in SG dollar terms. Both the Topix and Nikkei indices approached 20-year lows as the export-led recovery in the first half of 2002 began to wane. Weak domestic data was exacerbated by external factors such as slowing global demand, ongoing revelations of US corporate malfeasance and the potential effect on oil prices of US conflict with Iraq.

In early August, the weakness of Japan's economy prompted the International Monetary Fund and credit rating agency Standard & Poor's to publicly censure the government over its lack of reform. Investor sentiment worsened in September following the downward revision of firstquarter (to end-June) GDP figures, a failed government bond auction and the Bank of Japan's (BoJ) announcement that it would support banks' stockholdings. The latter move was regarded by many as another example of ministerial measures to prop up banks' balance sheets ahead of earnings season.

In October, equities were sold lower by investors following the appointment of pro-reformist Heizo Takenaka as financial services minister. Concerns that Takenaka's hard-line approach would lead to large-scale bankruptcies fed into investors' ambivalence despite the BoJ's subsequent easing of monetary policy (on the same day as the reforms were scheduled to be announced). The proposals were delayed by conservative ministers, who intervened to effectively veto Takenaka's original plans, and a diluted reform package was eventually announced at the end of October, following several delays.

PORTFOLIO COMMENT**
In difficult global and domestic economic conditions, the Underlying Fund's performance benefited from an underweight position in economically sensitive sectors such as IT and Financials. The relatively resilient performance of defensive sectors such as Energy and Industrials also improved returns. Ian Burden has run the fund since September 2001. In that time he has improved the fund's quartile performance by moving away from the 'pure growth' focus of his predecessor.

While we are slightly underweight the Consumer Discretionary sector (which includes auto manufacturers and transportation), we strongly favour selected stocks within these industries due to their good earnings visibility and attractive valuations. In the auto sector, corporate restructuring and buoyant US sales have boosted the returns of Japan's three largest carmakers. Nissan announced record interim profits for the first half of fiscal year 2002 (FY02), while Honda forecast a rise in net profits of 13% for FY02 despite disappointing first-half results. Toyota also announced record first-half profits, with overseas sales rising 25% during the period. Japan's big three continue to gain market share in the US auto market (+3.4% in October) without resorting to discount incentives, while their operating margins are around five times greater than the average 2% of leading US rivals.

We increased our exposure to transportation stocks by augmenting our positions in East Japan Railway and Mitsui OSK Lines, while adding West Japan Railway. These well-managed businesses are reasonably valued, high-quality domestic holdings that add a defensive element to the portfolio. We also increased our exposure to the oversold Telecoms sector by adding mobile operators NTT DoCoMo and KDDI. Telecom stocks rallied significantly in October, while investors reacted positively to DoCoMo's growth in subscriber additions despite very poor first half FY02 earnings. In contrast, KDDI reported a three-fold increase in first-half earnings following substantial costcutting.

OUTLOOK**
The weak global economic outlook has unsettled investors in Japan, where business cycles have tended to be led by exports. Domestic uncertainty regarding the reduction of non-performing loans in the banking sector has further depressed Japan's stockmarkets. However, these difficult business conditions should help presage significant reforms both at the political and corporate levels. We will continue to favour companies with a stable outlook and restructuring programmes supportive of profits growth.

All data is as at 31/10/02, sourced from INVESCO unless otherwise stated. Any data in the text is source: Bloomberg, Thomson Financial Datastream or Lipper Hindsight. The text refers to the period 31/07/02 to 31/10/02, unless otherwise stated.
* Benchmark is the MSCI Japan Index.
**The above information refers to the underlying Ireland-domiciled INVESCO GT Japan Fund ("the Underlying Fund") into which the Singapore INVESCO GT Funds – INVESCO GT Japan Fund invests substantially all of its assets. The Underlying Fund is not directly marketed in Singapore. Covers the period 31 July to 31 October 2002.