Market review
Record prices for food and energy have already translated into increased expectations of inflation across the developed and developing world. Higher inflation was reported in China, India, Europe and the US during the second quarter. Central bankers in the west now have to grapple with the threat of inflation in an environment of slowing economic growth. Interest rates are now widely expected to rise in coming months in Europe and the US.

American economic data releases offered little comfort to investors as unemployment rose at the fastest rate in 22 years in May and consumer confidence continued to decline. There was also little to cheer about in the housing market, with data in the US, UK and Spain all demonstrating continued pain in the sector.

With concerns over rising inflation and the state of the global economy at the fore, the equity market rally over the first part of the quarter could not be sustained. Global equities gave back all of their early gains to end the quarter down -1.4%, in US dollar terms.

There was however, considerable divergence of returns between different sectors of the world economy. Financials and the banking and insurance sectors were again the worst performers as write-downs on asset-backed securities continued and many of the world's largest banks sought to raise new capital from investors. The consumer sector also performed poorly.

Whilst many sectors suffered rising costs because of higher commodity prices, many industrial companies benefited from this situation with mining and oil & gas unsurprisingly amongst the strongest sub-sectors.

Fund performance
The Investec Global Equity Fund of Funds returned -5.9% over the second quarter, against the MSCI World Index return of -5% (in rand terms). Over the 12 months to the end of June, the fund returned -0.1%, against the MSCI World Index return of -0.3% (in rand terms).

Over the second quarter performance was delivered through good stock selection, particularly in the financial and industrial sectors. In financials we were underweight banks, which have consistently underperformed on fears over further asset write-offs and loan losses. Within industrials we were overweight steels, oil & gas and mining, three of the best performing sub-sectors in the market. The portfolio's worst performing sub-sector in the quarter was carriers, where our stock selection modestly detracted from performance. We have taken corrective action.

Our most significant overweight positions are in speciality finance, where we have exposure to the brokerage companies rather than to the investment banks, and steel where we have a geographically diverse exposure. We are most underweight banks, which are still suffering earnings downgrades, and diverse industrials - several companies have warned of negative outlooks.

Market outlook
Equity investors are currently focused on economic growth, resulting in a bearish tone to markets. The recent easing of price caps on gasoline in several Asian countries led to a sharp sell-off in the markets. There are concerns that increases in interest rates, to ward off inflation pressures, will negatively impact economic growth. Investors are also focused on financial stocks, which remain weak. Provisions against non performing loans are rising, impacting banks' balance sheets. While it will take time for these concerns to work through the market there are many factors to be positive about.

Share valuations are reflecting a lot of bad news and some quite sharp falls in earnings (profits). The extent of further earnings downgrades are unknown but there is currently a disconnect between analysts' expectations and returns implied by market valuations. Companies' balance sheets, with some exceptions, are in good shape. Quality companies are still being rewarded by investors.

Our view remains that equity prices can still make progress over the medium term, despite the macroeconomic headwinds. We will continue to focus on high-quality stocks that offer good value and are likely to benefit from improving conditions.

Market review
Equity markets were exceptionally weak in what has historically been a seasonally strong quarter, with only a minor recovery at the end of March. Although the MSCI World index returned 8.3% in rand terms, it fell by 8.9% in US dollar terms. In local currency terms, the S&P 500 Index returned -9.4%, the MSCI Europe ex-UK Index lost 15.5%, Japan's Topix Index shed 17% and the UK's All-Share Index declined by 9.9%. The MSCI Emerging Markets Free Index returned -10.9% and the MSCI Far East ex-Japan Index -12.6% in US dollar terms. Smaller companies performed broadly in line, with the HSBC Index producing a return of -8.6 % in US dollar terms. Information technology and financial shares were very weak over the quarter declining by 14.5% and 11.5% respectively in US dollars.

Fund performance
The Investec Global Equity Fund of Funds appreciated by 6.9% in rand terms, lagging behind its benchmark index over the quarter. This translated into marginal underperformance of the average fund in its peer group. The fund's lower-beta global equity holdings such as Morgan Stanley Global Brands Fund, Taube Hodson Stonex International Growth and Investec Global Select performed well. However, this was offset by weaker returns from the other fuller beta global equity positions, which all underperformed. With the exception of gold (Investec Global Gold Fund), the fund's thematic allocations marginally detracted value over the quarter. Over the year to the end of March the fund returned 10.8% in rand terms, against the MSCI World Index, which gained 9% (in rand terms).

Portfolio activity
Fund portfolio activity during the quarter was relatively modest. Emerging market equity exposure was cut back after that area's strong relative and absolute performance. The Legg Mason US Growth Fund was switched into the Legg Mason Value Fund, given the latter's greater emphasis on US recovery plays.

Market outlook
The recovery in equity markets, which started in late March at the time of the Bear Stearns crisis has continued in April. We believe that the low point has been passed, although the upward path from here is unlikely to be smooth. Earnings growth is expected to weaken further, but this is more than discounted in exceptionally attractive valuations, both in absolute terms and relative to bonds. It would take extreme weakness in earnings in the second half to halt or reverse the market recovery. Further support to equity markets is provided by the cautious and risk-averse attitude of most investors. This leaves plenty of room for positive surprises, despite the gloomy economic outlook.

Market review
Against a backdrop of substantial volatility and heightened uncertainty, global equity markets fared poorly over the final quarter of 2007. The ripples from the collapse in values of structured financial instruments backed by subprime US mortgage debt continued to affect sentiment. All major indices closed down sharply led by the US S&P 500 Index (-3.3% in US dollars) and the Japanese Topix Index (-5.9% in US dollars). MSCI Europe outperformed other developed markets, declining by 0.4% in US dollars. The Global MSCI composite lost 2.3% over the fourth quarter (in US dollars). Emerging markets held up admirably on the back of domestic currency strength and somewhat different local growth dynamics. The MSCI Emerging Markets Index gained 3.7% over the quarter (in US dollars).

The dollar rose 2.3% against sterling, but fell 2.8% against the euro, 3% against the yen and 0.9% against the rand. Exchange rates were responding to interest rate cuts by the Federal Reserve in the United States and the Bank of England. Central banks cut interest rates to inject more liquidity into a banking system that had virtually ceased to function as banks reserved cash on their balance sheets rather than place money into the market and risk a major institutional failure. This followed write-downs in valuations of off-balance sheet structured investment vehicles (SIVs). By the end of the quarter, markets had a good understanding of the extent of each major banks exposure to the problem debt with write-downs totalling around US$44 billion. Several major financial institutions such as Citigroup, Merrill Lynch, Morgan Stanley and Bear Sterns have shored up their balance sheets with capital injections totalling US$18.5 billion from sovereign funds in Dubai, Singapore and China.

The rising cost of credit, as a consequence of the banks charging more to borrow money, along with rising commodity, energy costs and inflation increased the probability of slower economic growth. This caused investors to sell the more cyclically exposed sectors and buy the perceived defensive sectors. The best performing sectors in global markets in the quarter were utilities, consumer staples and energy. The poorest performers on a sector basis were financials, consumer discretionary and industrials.

Fund performance
The Investec Global Equity Fund of Funds returned -2.7% over the quarter in rand terms, ahead of the MSCI World Index, which returned -3.2% (in rands). Over the year to December the fund returned 10.5% in rand terms, well ahead of the MSCI World Index, which gained 6.2% (in rands).

Market outlook
The environment for equity markets remains challenging as uncertainty over the direction of earnings increases. However, markets remain good value and it would take a substantial move down in profitability expectations to take multiples back to historical norms.