Global equity markets yet again proved to be a minefield for investors over the past quarter, taking its toll on a lot of local stock exchange counters.

The leaked Mining Charter severely dented the confidence of international investors, vaporising a market capitalisation on the JSE of some R70bn within days. Congratulations to the author of the leaked draft. Undoubtedly this will become the most expensive document in South African history!

What appeared to be some light at the end of the tunnel last quarter, turned out to be the headlights of an oncoming steam train. It was only domestic small and mid cap stocks that held up in the face of the global equity meltdown, due mainly to a lack of international shareholding.

As we look ahead, there will be a lot of interesting opportunities in the local market for the patient investor. Numerous counters that were trading at attractive valuations previously have now become even more attractive, with more than a few dividend yields increasing. The visibility and predictability of earnings, cash flows and ROE's have been maintained or even improved upon.

The investment case for the South African market remains intact. Relative to their international peers, the bulk of South African counters continue to trade at attractive ratings. The frantic feedback from international investors with regard to the new Mining Charter can be described as an over-reaction. As widely anticipated by the market, commodity prices did not fall from a cliff, and the consolidation in the mining industry continues. Domestic industrials with opportunities to export will benefit from their regained competitiveness due to the weaker currency. In addition, the increased global scepticism towards financial assets in general should benefit some of South Africa's commodity producers.

Global equity markets presented a very challenging environment in the last few months, where accounting scandals in the US continued to erode investor confidence, which overshadowed the first signs of a global economic recovery. It has not been an environment for prospering equity markets as great amounts of shareholder value has literally been destroyed overnight (eg World Com, Xerox).
Over the quarter, domestic small and mid cap stocks managed to escape the negative sentiment towards global equities. However, domestic large caps and most of the dual-listed stocks were less resilient to the global downturn. Gold offered some safe haven qualities, but its volatile performance was not for the faint hearted.
As we move forward, we can expect little leadership from the Nasdaq or the S&P 500 where valuation levels remain stretched, and a sustainable recovery of corporate profits is in question. Nor can we expect European markets to take the lead due to the high correlation to the US. However, where value across most sectors can be found is the local market, where larger and globally operating companies can be purchased at attractive ratings relative to their global peers. These are counters that will benefit from an improvement in global economic conditions, regardless of the magnitude of the recovery. The consolidation in the mining industry continues. Domestic industrials with opportunities to export will benefit from their regained competitiveness due to the weaker currency. In addition, the increased global skepticism towards financial assets in general could be beneficiary towards some of SA's traditional asset class, commodity producers.
Overall, the outlook for the domestic market, and a vast number of its representative counters, looks promising and could be translated into returns above expectations of cash, bonds and international equity markets.

During the quarter, the fund manager adjusted asset allocation as determined by the volatile global and domestic macro-economic environment. As a result, the ideal combination for the period was defensive exposure to bonds, with an increased exposure to both cash and overall equities.
Within the equity allocation, which ranged between 70% and 75%, the fund was underweight in both financials and domestic industrial stocks. The weighting in resources was modestly overweight, the main rationale being to harvest the benefits of ongoing consolidation in that sector and an evident turnaround of mainly the US economy. Due to still stretched valuation levels for international equities, and taking into account an expected modest recovery of the Rand from its peak levels of late 2001/early 2002, the fund took a rather defensive approach to its exposure to international equity stocks.
The fund performed well, outperforming its composite benchmark by 2.96%. The return of 5.65% against the mean of the domestic asset allocation prudential fund category of 1.51%, places the fund 3rd out of 48.
Going forward, the fund manager foresees continued evidence of an improvement in the macro economic environment. This being said, however, valuations for global equities remain stretched. The magnitude of recovery of earnings in a number of stocks remains uncertain. Concerns about global accounting practices, predominantly in the US, and the quality of the Japanese financial system along with the conflict in the Middle East, are expected to continue to overshadow sentiment. Domestically, inflation fears persist and the immediate growth outlook for the South African economy appears rather subdued.
The second quarter of 2002 will, therefore, see the fund's equity exposure and asset allocation reflect these factors.

Markus Bachmann, fund manager of the Coronation Balanced Plus fund said because the fund use to have no international exposure it under-performed its three year benchmark, but it has now beaten its one year benchmark.
Bachmann is slowly adjusting the fund, which is overweight in equities by taking profits on the equity exposure and increasing the cash exposure.

The Coronation Balanced Fund has changed its name to the Coronation Balanced Plus Fund with effect from the 18 January 2002. This move follows the approval of unitholders who were balloted in September 2002. Unitholders also approved the deregulation of the fund's fees which will take place on the same date.