The All Share Index drifted sideways during the month of September, gaining 0.25%. For the quarter as a whole, the ALSI gained 13.9%, and, on the back of rising commodity prices, the rand gained 2.6% to the US dollar. This brought the rand/dollar rate to R7.51, about 30% stronger than the March 2009 low. The best performing industry group for the quarter was Industrials (+21.7%), followed by Consumer Services (+20.9%) and Consumer Goods (+19.9%). Telecoms (+3.8%) and Oil & Gas (+4.6%) showed the worst performance. The Nedgroup Investments Rainmaker Fund unit price rose by 1.9%for the month of September, and 13.5% for the quarter. We are satisfied with the fund's performance considering the fund’s defensive positioning. The holdings in Investec Plc (+32.8%), Reunert (+28.4%) and Naspers (+27.5%) did well during the quarter, but on the other hand; Reinet (+0.5%), MTN (+3.2%), Sasol (+4.6%), Newgold (+5.3%) and British American Tobacco (+8.8%) were relatively disappointing.
Global equity markets, which bottomed in March 2009, have beensupported by accommodative monetary and fiscal policies. Recently, the IMF revised higher its estimates for global growth; forecasting that world economic output would rise by 3.1% in 2010, primarily driven by emerging economies. In addition, the IMF estimated the ultimate losses in the financial system would total$3,400 billion between 2007 and 2010, an improvement from the $4,000 billion estimate it published in April.

The improved global sentiment spilled into the domestic equity market, with South Africa’s September PMI surging to 48 from 39, the highest level in 16 months. It appears that the rand is likely to remain strong while global growth prospects remain stable and risk aversion remains low.CPI inflation moderated to 6.4% year-on-year in August from 6.7% in July, aided by declining food inflation which measured 6.1% in August (considerably lower than the double digit inflation earlier this year). The most significant company specific news was the recent termination of the long awaited MTN/Bharti deal given regulatory and deal challenges.

A sustained recovery in the world economy seems to be dependent on the provision of ongoing stimulus packages, but the western world’s ability to do this is hampered by growing fiscal deficits. In the US, for example, we note that in 1982 (the last time unemployment reached the 9.5% level) the Fed fund’s rate was at 14.3% and debt levels were negligible. By comparison, the Fed fund’s rate is now at 0.25% and outstanding public debt now stands at almost $12 trillion (approximately $39,000 per citizen) having added an average of nearly $4 billion per day since October 2007. The picture in the UK and Europe is somewhat similar. China remains a beacon of hope but its economy has in a large part been designed to supply an over indebted western consumer.Risks remain elevated and we have yet to see anything that warrants a change in our conservative positioning; exposure to defensive industries and companies with high earnings visibility, stable cash flows and robust balance sheets.

After returning 10.3% in May, the South African equity market shed 3.1% in June. Global equity markets showed strong performance over the second quarter of 2009, and the All Share Index posted a total return of 8.6%. By comparison, the Nedgroup Investments Rainmaker Fund had a positive quarter. For the month of June, the performance of Sasol (-10.4%), Billiton (-9.2%) and Investec Plc (-7%) offset our top performers; Altron Prefs (+8.4%), Reunert (+8.1%), and Naspers (+6.6%). For the quarter, performance was enhanced by our exposure to Old Mutual (+44.7%), Naspers (+26.9%), and Murray & Roberts (+26%). However, the fund has been conservatively positioned with a high proportion of its investments in defensive counters; with British American Tobacco (-2.8%) performing particularly poorly over the quarter.

The quarter was characterised by the market's improved appetite for risk. This optimism was supported by the Organisation forEconomic Co-operation and Development (OECD) recently revising its world economic outlook upwards for the first time in two years, and concluding that the global economic slide is nearing a bottom. In addition, the Purchasing Managers Indices (PMIs)for June in Europe, the US and Japan have closed in on the 50 mark; with both the China's PMIs remaining above 50. A reading of 50 or higher indicates that industry is expanding and is a very important sentiment indicator.

Locally, the South Africa Reserve Bank kept its benchmark repo rate unchanged in June at 7.5%. This brings cumulative rate easing since December 2008 to 450 basis points. News flow during the quarter remained negative; the decline in the April real retail sales growth of -6.7% year-on-year points to its worst decline since 2003 and growth in private sector credit extension eased to its slowest pace in five years, illustrating the financial pressure being exerted on consumers and companies. More notablewas the unemployment and GDP data; Stats SA showed unemployment rose to 23.5% in Q1 2009 from 21.9% in Q4 2008 and the quarterly real GDP figure dropped from -1.8% (Q4 2008) to -6.4% in Q1 2009. Despite this, the rand was the best-performing currency globally versus the US dollar year-to-date (+22.9%). Perhaps the recent announcement of the R60 billion expected shortfall in revenue collections versus a budget of R659 billion for fiscal 2010 will herald a change in the rand's fortunes.

Although data has become "less bad", the pace of the recovery remains uncertain. South Africa has lagged the global slowdown and corporate earnings news flow remained disappointing in the quarter. The forces of de-leveraging, tight credit and job lossescan't be ignored. This supports our preference for defensive plays which are likely to withstand a more discerning consumer (ie Shoprite, British American Tobacco and Naspers).

Tim Allsop & Omri Thomas
The All Share Index improved significantly during March; posting a total return of 11.0%. The late quarter rally softened the decline for the quarter; with the All Share Index falling 4.2%. The Nedgroup Investments Rainmaker Fund's relative performance for the month of March was disappointing, but the performance for the quarter was satisfactory.

For the month of March, the performance of British American Tobacco (-10.7%) offset our top performers; Investec (+33.9%), Standard Bank (+24.6%), and MTN (+23.6%). For the quarter, our performance was enhanced by our exposure to gold (AngloGold Ashanti and Newgold), BHP Billiton, and Net 1. The building contractors (Murray & Roberts) continue to underperform which has detracted from our performance.

The fault lines in the global economy continued to widen during the first quarter of 2009, with global and domestic economic indicators deteriorating further. However, more recently the unity shown during the G-20 meeting has fuelled improved sentiment. The narrowing of the spread between US Treasury bond yields with that of similar-maturity, highest rated corporate paper during March reflected the market's improved appetite for risk. This optimism was further supported by China's key manufacturing index reversing back into positive territory for March - the first time in six months. The JPMorgan Global All-Industry Output Index, a measure of conditions in both the manufacturing and service sectors globally, also rose to a five-month high of 40.1 in March from 37.4 in February.

Recent events have been effective in restoring calm temporarily. Despite the monetary and fiscal interventions, the global outlook continues to deteriorate. Economic activity is expected to plummet in the OECD area in 2009 and unemployment rates in many countries will reach double-digits; the most rapid increase in OECD unemployment in the post-WW2 period. We are still deeply entrenched in the global financial crisis and the process of reshaping the economy will not happen overnight. The challenge facing policymakers is sowing the seeds of long-term, sustainable economic growth and mitigating the longer term inflationary hazards associated with the existing super stimulatory policies and interventions.

In South Africa, the first quarter in the equity market was characterised by high volatility and limited earnings visibility, which continued to undermine investor confidence. Prospects in the manufacturing sector deteriorated further in March, with the PMI falling to a record low of 36 points from the 39.2 level in February. The PMI is a very important sentiment indicator, not only for manufacturing, but also the economy as a whole. A reading of 50 or higher indicates that industry is expanding.

December 2008 saw equity markets recover from the depressed levels reached in November. The Nedgroup Investments Rainmaker Fund ended 2008 by appreciating by 3.5% in December. Performance for the quarter was, however, negative. For the year as a whole, the fund's unit price declined by some 19.4% which was considerably better than the 23.2% decline of the JSE All Share Index.

This brings a close to a turbulent fourth quarter and challenging 2008. The very real impact of the excesses in the financial sector is visible in the global economy today. Global levels of production, productivity and investment are slowing and unemployment is increasing. Global capital flows and international trade are declining; most notably, the sharp decline in Intra-Asia trade, which plunged in November.

Similar themes have emerged locally; tighter credit conditions, production cutbacks, and mounting job losses. Fortunately, South Africa has faired better than the developed world, with the problems cyclical in nature as opposed to structural.

Given this backdrop, fiscal policy across the globe has been stepped up. US policymakers are very concerned about the possibility of a prolonged economic slump. Therefore, the Fed has enacted a wide and unprecedented range of measures to mitigate the credit crisis and stimulate the economy. It has already cut its target range for the Fed funds rate down to 0.25%. In South Africa, the SARB cut the repo rate by 0.50% to 11.50% in December on easing inflation pressures.

Despite the significant sell-off in the latter half of 2008, it will still be a long time before investors have clarity on the earnings outlook. The first half of 2009 will likely continue to witness churning market conditions, thus our investment themes will focus on defensive plays (British American Tobacco, Reinet, Tiger Brands, and Adcock Ingram): companies with high earnings visibility, stable cash flows and robust balance sheets. The fund continues to have large holdings in the defensive food retailers (Shoprite and Spar) and we are well positioned for any recovery in building contractors, which have underperformed.