September held with tradition, as the worst-performing month of the year. The MSCI $ World Index fell 11.1% during September, delivering the worst monthly performance since November 1983. Sentiment over the period was dominated by fears of renewed terrorist activity on the September 11 th anniversary, disappointing economic data, weak earnings updated from the US, and the omnipresent threat of war with Iraq. However, despite this unsettled backdrop the ABSA International Fund again outperformed its benchmark over the month.

US markets began the month on a weak note after the Institute for Supply Management reported that factory activity remained flat versus expectations of a 4% rise. The fall marked the first contraction in new orders after eight consecutive months of growth. Economic data released later in the month was mixed with the University of Michigan's consumer sentiment index falling to 86.2, worse than economists' expectations of 87.7. However, retail sales rose by a larger-than-expected 0.8% in August from the previous month, better than the 0.6% consensus forecast. The earnings season got off to a poor start with profit warnings from McDonald's, JP Morgan Chase and Morgan Stanley. In the technology sector Oracle and Electronic Data Systems also disappointed the market. Towards month-end, losses in the equity markets accelerated after the Fed left short-term interest rates unchanged despite the heightened geo-political, economic and corporate concerns.

In Europe, the markets again followed equity movements in the US. On the economic front, both the ECB and the Bank of England kept interest rates in the UK and Europe unchanged. There was some cheer, however, as the closely watched German Ifo business climate index fell by less than expected. Japanese equities also tracked lower at the beginning of September, with the benchmark Nikkei 225 index hitting 19 year lows. However, stocks subsequently received a boost following the Bank of Japan's unprecedented decision to buy shares directly from struggling banks in an effort to reduce their shareholdings. The stimulus provided by the bank ensured that Japan was the best performing regional market with a fall of 4.7% in US $ terms over the month. In the long term, there are two main drivers of equity prices: profits and interest rates. Interest rates are close to 40 year lows in the US, providing valuation support. On the profit side however, investors have reason to be concerned after the recent accounting scandals. Whilst the risk of massive corporate fraud does now seem to be dissipating, we are still seeing companies struggling to deliver the type of growth that we would expect in an economic recovery. Hence we will continue to adopt a cautious approach in the ABSA International Fund whilst we look for clear signs that the direction in markets has changed for the better.

Equities failed to sustain the momentum of the last quarter of 2001, and started the new year on a subdued note with the MSCI World $ index falling 3.1% in January. Investor sentiment was steadily eroded over the month by the growing probability that the interest rate cutting cycle in the US and Europe had drawn to a close, and on the continuing emergence of corporate casualties of the TMT boom and bust. Against this unsettled backdrop, the ABSA International Fund fell 13.4% in January. The US was the second best performing major region (after the Pacific exc. Japan region) with a loss of 1.5% in US $ terms. Interest rates were left on hold at 1.75% over the month, the first time since December 2000 that the Federal Reserve had not cut interest rates in one of its scheduled meetings. However, much of the action during the month focused on stock specific issues, namely the collapse of energy of trading giant Enron. In Europe markets performed poorly with Continental European equities down 5.3% in US $ terms over the month. However, there were encouraging economic signs in the Euro zone. Both the Bank of England and the European Central Bank left their interest rates unchanged in January. Japan was once again the worst performing major region, both in US $ and Yen terms. Over the month, Japanese equities fell 7.8% in US $ terms. The spate of earnings warnings continued unabated with Toshiba and Fujitsu the latest technology stocks to guide their earnings down. In the currency markets, the Euro had a disappointing debut as a physical currency in the 12 nation Euro-zone, falling 3.4% to 6 month lows against the US$. Despite the improving macro outlook, the financial markets remain nervous and unsure. Partly, this is because markets already began to price recovery into stocks late last year. A more pressing concern is that after the Enron collapse there will be more "skeletons in the closet". While there are doubtless a number of companies where accounting interpretations have be stretched, the Enron situation was fundamentally fraud and is very unlikely to be representative of the American financial system. We believe that as 'Enron' worries abate, markets will re-focus on the likelihood of improved cyclical earnings in 2002/3 and the fact that bonds and cash are poor risk/reward candidates in an improving economy. Global equities should outperform bonds and cash this year as profit expectations rise and as the economy recovers in the second half of the year. The ABSA International Fund's portfolio is structured to benefit under this scenario.