Nedgroup Investments Equity Fund has closed and merged into Nedgroup Investments Rainmaker Fund.

The JSE All Share Index (ALSI) ended a miserable quarter in lackluster fashion, posting its worst monthly performance for 2011, declining 3.6%. Concerns about global growth and the lack of an effective policy response to the sovereign crisis in Europe, have undermined market confidence. All sectors, with the exception of Healthcare (+4.1%), were in negative territory for the month. The biggest declines occurred in the Telecommunication (-5.7%) and Basic Material (-5.3%) sectors. The rotation towards defensive stocks accelerated, which underpinned the performance of British American Tobacco (+9.8%) and Mediclinic (+4.9%), ultimately aiding our performance. Our positions in Kumba (-11.9%) and Investec (-11.6%) offset this to a degree.

For the quarter, the ALSI recorded a 5.8% decline. The rand's depreciation against the US dollar has exacerbated the US dollar return - in US dollar terms the ALSI was down 22.5%. Concerns about global growth and the worsening debt crisis in Europe are top of mind. Numerous global growth indicators point to further downside in global economic activity, which will be hard to arrest without major policy stimulus. This prompted the Federal Reserve's "Operation Twist", a bold attempt to drive down long-term interest rates and stimulate the faltering US economy. Equities were also rattled by the Fed's bleak comments; "Growth remains slow. Recent indicators point to continuing weakness in overall labour market conditions and the unemployment rate remains elevated." This assessment is consistent with the latest report from the International Monetary Fund (IMF). The IMF reduced its forecast for economic growth in the US this year to 1.5%, down from their June estimate (2.5%). The outlook in the eurozone is no better, with limited visibility surrounding the sovereign debt woes, and confusion regarding the mechanism to solve the crisis and contain the damage.

In the developing world, the IMF expects economic growth to remain robust, albeit with increased risks. China, the world's second-largest economy, is forecast to grow 9.5% this year (according to the IMF). China's economic resilience is critical for the world! A nightmare scenario is a "hard-landing" in China, which would almost certainly lead to a global recession and a sharp decline in asset prices.

Emerging markets and their currencies were particularly badly hit in September as risk appetite faltered. The rand was weaker against the US dollar, depreciating approximately 15% for the month. The deterioration in the global economy means further downside risk to local growth. Weak external demand, coupled with indebted consumers, rising energy prices, infrastructure constraints and concerns over policy have all weighed on domestic growth. Despite this, the Reserve Bank's Monetary Policy Committee opted to leave the repo rate unchanged at their September meeting given the upward climb in inflation (both the CPI and PPI readings for August were above expectations). There is little room for complacency for investors. There is a growing realisation that developed economies are in the midst of a prolonged period of sluggish growth. At best, we expect a faltering but gradual recovery in economic growth supported by low interest rates, liquidity injections and currency adjustment where these are possible. Markets are also likely to be characterised by elevated volatility. Given this, we continue to favour high quality companies with growing cash generative businesses that are trading at reasonable valuations.

The portfolio currently trades on a forward rolling Price/Earnings (P/E) ratio of 8.2x and a dividend yield of 3.5%, with an anticipated 12-month forward earnings per share growth of 16.3%.

June was a volatile month. Waning confidence in developed markets, specifically Greece, resulted in the FTSE/JSE All Share Index (ALSI) collapsing intra-month (-6.8%). We used this opportunity to increase our weighting in quality counters that had lagged, such as SABMiller and Anglo American. Easing concerns of a Greek default resulted in the market recovering into the month end, with the ALSI declining 2.0% for the month. Health Care (+0.8%) was the only industry group to record a positive return. The worst performance came from Basic Materials (-3.0%), Consumer Goods (-2.1%) and Financials (-2.0%). Imperial (+4.1%) and Reunert (+1.8%) aided the portfolio's performance for the month, with AngloGold (-9.1%) detracting.

For the quarter, the ALSI recorded a 0.6% decline (+1.1% for the first quarter). Health Care (+6.9%) and Telecommunications (+5.4%) were the best performing sectors. Over the second quarter, the Oil & Gas (-8.5%) and Basic Materials (-4.8%) sectors posted negative returns.

The recovery continues to be bumpy. Global growth has clearly slowed, especially in the US. Investors remain worried about the ongoing dilemma in Europe and fears of a slowing China given additional policy tightening have been top of mind.

Acknowledging that the US economy has run into a soft patch, the US Federal Reserve kept monetary policy frozen after its June meeting. Consumer inflation in China rose to its highest monthly reading in nearly three years in May, +5.5%. The market has been increasingly worried about a hard landing in China given ongoing tightening. The People's Bank of China announced a further 25 basis point interest rate hike in July, the fifth increase in eight months. Fortunately, the latest data show that the economy is still strong despite the tightening - industrial production rose 13.3% in May. Concerns about a hard landing in China appear overblown and the market is hoping that the world's second biggest economy can navigate between the challenges of combating inflation, yet maintaining reasonable growth.
Turning to Europe; the Greek government managed to pass the austerity package required to release the next round of IMF funding. However, the environment is still full of risk, with the rating agency Moody's, recently cutting Portugal's main credit rating to Ba2 (junk territory). While the concerns in Europe show little sign of ending and clearly require careful attention, a disorderly Greek default is unlikely.

On balance, economic indicators in South Africa continue to provide mixed signals. Positive newsflow included a stronger than expected GDP reading (+4.8% for the first quarter of 2011), and a modestly milder inflation profile given the recent drop in oil prices. However, several other indicators have tapered off - PMI data eased (to 53.9 in June from 55.1 in May), vehicle sales growth moderated (new vehicle sales increased 6.1% in May compared to +7.9% in April), and credit demand in the private sector is showing sluggish growth (sliding to +5.2% in May from +6.2% in April).
The picture is by no means clear, which will keep markets volatile. Concerns regarding global growth and the European debt crisis are unlikely to fade quickly. Yet countering this, monetary conditions remain highly accommodative globally, which is supportive of risk assets. Our investment strategy remains consistent with our previous commentary; we favour high quality companies with growing cash generative businesses that are trading at reasonable valuations. Our active management style lends itself to a volatile environment, which is likely to prevail for years. The portfolio currently trades on a forward rolling Price/Earnings (P/E) ratio of 9.7x and a dividend yield of 2.7%, with an anticipated 12-month forward earnings per share growth of 13.6%.

We start the new quarter with a significant exposure to oil and basic material counters (ie the sectors that performed particularly badly over the past quarter). This gives us some cause for optimism.

The JSE All Share Index (ALSI) gained 0.52% in March 2011. This brings a turbulent month to an end that was characterised by uprisings in the MENA region (Middle East & North Africa) and an earthquake in Japan. After an initial negative reaction to these events, our market recovered strongly in the second half.

Telecommunications (+12.5%) was the best performing industry group, followed by Oil & Gas (+2.8%).
Basic Materials (-2.3%) and Industrials (-1.8%) were the poorest performers for the month. The portfolio's MTN (+13.9%) exposure aided our monthly performance. The MTN financial result wasahead of expectations, underpinned by an exceptionally strong operational performance and higher dividend payout.In addition to MTN, holdings in Exxaro (+8.5%), Foschini (+7.8%) and Mondi (+4.7%) enhanced our performance for the month; whereas Naspers (-9.0%) and Anglo American (-6.7%) detracted. Over the quarter, the ALSI achieved a total return of 1.1%. The oil and gas sector posted the best gains for the quarter (+13.1%) buoyed by a surging oil price.

The earthquake and tsunami in Japan dominated news headlines in March. Asian stocks fell sharply on the news, reflecting investor concerns around the potential economic impact of these events (the Nikkei suffered its worst two-day slump since the 1987 stock market crash). The devastation and loss of life in Japan is tragic as well as the short-term economic implications, however, the required re-building is a positive. The situation in the MENA region remains a risk to the price of oil, which has risen from $95 to $115 a barrel. This, together with rising food inflation, remains a risk to the inflation outlook. The ensuing policy response (higher interest rates) could put pressure on economic growth and equity markets.

In South Africa, news flow in March was mostly positive. The South African Reserve Bank's leading business cycle indicator increased to 134.2 points (January 2011) -an all-time high. The leading indicator provides a guideline for economic growth for the next six months. However, the housing market continues to weaken and inflationary pressure from rising food and fuel prices may negatively impact the consumer in the months ahead. The rand recovered some of the ground it lost in January and February against the US dollar, which is helping offset imported inflation to a degree.

The investment outlook clearly remains complex. There are good grounds to be concerned about the sustainability of the global economic recovery given rising inflation, high government debt burdens, a potential slowdown in China and spreading strife in the Middle East. Jitters over these issues have seen the price of gold jump to an all-time high of $1,461. In light of the current economic backdrop (which we consider lacking visibility) and elevated valuations, we feel it prudent to maintain our philosophy of favouring high quality companies with growing cash generative businesses that are trading at reasonable valuations. The portfolio currently trades on a rolling Price/Earnings (P/E) ratio of 9.9x and a dividend yield of 2.9%, with an anticipated 12-month forward earnings per share growth of 13.6%.

A strong end-of-year stock market rally saw the All Share Index gain 6.2% in December. All industry groups recorded a positive return, with Telecommunications (+11.2%) the best performing and Health Care (+1.1%) the worst performing. The performance of holdings in Steinhoff (+13.8%), MTN (+11.0%) and Anglos (+10.6%) was pleasing, whereas Adcock (-7.6%) and Old Mutual (-2.8%) detracted from our performance. For the year, the All Share Index advanced 19.0%. The Consumer Services sector (+42.8%) proved to be the best performer for the year, with Basic Materials (+11.7%) the worst despite a strong rally in the fourth quarter.

Looking ahead, the global economy in 2011 is likely to demonstrate continued divergences in growth. A large part of the advanced world continues to struggle with balance sheet repair and debt problems. The concerns in the euro area will mean sluggish growth. Fears of a sovereign default are evident in Europe with sovereign default insurance costs near an all time high. Several economies remain vulnerable, namely, Ireland, Portugal, Greece, Spain and Italy. And while the US appears to be climbing out of their soft-patch, an improved housing and job market are crucial to the sustainability of this.

For developing countries, the story is very different. Emerging market economies are experiencing a strong recovery, with rising asset values and appreciating currencies. However, policy could lean toward tightening in many emerging market economies. We saw the Chinese central bank raise interest rates for a second time in the fourth quarter of 2010, in an attempt to stem rising inflation and curb real estate speculation. In turn, China's manufacturing PMI fell to 53.9 in December from 55.2 in the previous month as the tightening began to affect the manufacturing sector. This is a concerning development given China's importance to global growth.

The South African economy is also experiencing divergences in performance. While it looks like the South African retailers have had a good Christmas season, other components of the SA economy remain muted (ie construction). In the year ahead, global spending on mining is forecast to surpass pre-crisis levels (led by China), which will be positive for the resources space. However, the strong rand does pose a headwind to these counters andwhile global liquidity remains plentiful, the currency is unlikely to weaken drastically.

Investor confidence has increased significantly as the recovery continues and the prospects of a double dip have subsided. Yet, it is difficult to predict how the trajectory will play out given the world's structural disparities. There are several developments that could scare investors -a sharp deterioration in the euro zone; currency tensions; the threat of protectionism; and rising inflation in China (thus continued tightening). These are all likely to contribute to heightened financial market tension and volatility. Given the lingering imbalances, our investment themes favour high quality, growing cash generative businesses especially those with exposure to emerging market economies.