Market review
It was a volatile quarter for equity markets, but a strong recovery in September ensured positive dollar returns overall. The MSCI World Index returned 2.5% in US dollars, 0.9% in sterling and -2.7% in euros. The MSCI Emerging Markets Free Index returned 14.5% in US dollars. In local currencies, the S&P 500 Index returned 2.0%, the MSCI Europe ex-UK Index lost 2.7%, the Topix Index (Japan) fell 8.4% and the UK's FTSE All-Share Index dropped 1.8%. The MSCI Far East ex-Japan Index returned 17.7%. Smaller companies underperformed sharply and the HSBC Index produced a return of -2.8%.

The dollar fell 1.5% against sterling, 5.3% against the euro and 7.4% against the yen. Yields on 10-year government bonds fell sharply in the wake of the credit squeeze to 4.58% in the US, to 4.35% in Germany, to 5.04% in the UK and to 1.68% in Japan. The return on the Citigroup Global Bond Index was 7.2% in US dollars.

US rates were reduced by 0.5% to 4.75% in September. This followed an intense credit squeeze, which saw spreads on low quality debt widen, liquidity in the trading of loans dry up and market interest rates rise sharply. The forward market is now discounting further cuts of 0.75% by the middle of 2008. The credit squeeze is expected to result in slower US growth and reduced inflation pressures. A slowdown in growth and inflation in the UK, Europe and Japan is also expected but growth in Asia and emerging economies should remain strong. It is no longer likely that the European Central Bank and the Bank of England will raise rates again, and cuts can be expected in early 2008. This would only counteract the recent increase in Libor rates, now significantly higher than central bank rates. The danger of central banks overreacting by cutting rates too far, too fast is diminishing. The fall in bond yields indicates market confidence that such a policy error will be avoided.

Oil prices (Brent) rose to US$79 per barrel, while the gold price rose to US$743.5 an ounce.

Fund performance
The Investec Global Balanced Feeder Fund returned 1% in rand terms over the quarter, while the benchmark gained 1.4%. The fund was in the top quartile, outperforming the average fund in the sector. The overweight position in equities and underweight position in bonds detracted from performance. The currency position and the satellite equity positions were mildly negative. The equity position was overweight relative to the benchmark at quarter-end, having increased exposure into weakness in August, while bond exposure was below benchmark.

Market outlook
The market setback significantly improved the value of equities in absolute terms while the fall in bond yields also improved it relative to bonds. The fall in bond yields is sufficient to break the up-trend of recent years, and it is clear that a cyclical peak in interest rates has been reached. Earnings estimates are likely to be reduced, with consensus levels of global earnings growth currently 11% for this year and next, but should be closer to 10% than 5%. It is unusual for a credit squeeze to accompany such robust earnings growth, but the corporate sector has not relaxed financial discipline in recent years. The consequences of a slowdown on corporate profits growth is more than discounted in valuations.

Markets have since recovered, but still represent good longer-term value. The final quarter is almost always a positive one for equity markets, and there are plenty of buyers on weakness. Unseasonally dull markets would only pave the way for a stronger start to 2008. The bad news for credit markets continues to be very good news for equity markets and has already been positive for high-quality bonds.

Market review
A minor wobble in June, caused by rising yields in the bond market, did not upset strong quarterly performance from equities with the MSCI World Index returning 6.7% in US dollars. In local currencies, the S&P 500 Index returned 6.3% over the quarter, the MSCI Europe ex-UK Index 7.8%; and the UK's All Share Index 4.5%. The MSCI Emerging Markets Free Index returned 12.6% and the Japanese Topix Index 3.6%. Smaller companies underperformed, with the HSBC Index returning 4.3%, but saw exceptional performance in Asia. Despite the assumption that large caps would return to favour this year, smaller companies are slightly ahead over the year to date.

The dollar fell 2.3% against sterling and 1.5% against the euro, but rose 4.4% against the yen in the quarter. The yield on 10-year government bonds rose to 5.04% in the United States, after reaching 5.3% during June, and to 1.87% in Japan, 4.56% in Germany and 5.46% in the United Kingdom. The Citigroup Global Bond Index returned -1.5% in dollars over the quarter.
The Federal Reserve continued to leave rates unchanged at 5.25%, but markets no longer discount a reduction this year. The slowdown to 0.6% annualised growth in the first quarter is expected to be followed by the US economy bouncing back in the second, as much of the weakness was attributable to de-stocking. However, the weakness of the housing market and the unfolding credit problem are expected to result in slow growth in the second half. The UK economy is also likely to slow, and rising rates make it likely that the European economy will at least lose momentum. Inflation data caused some discomfort in the quarter, but more recent numbers have been surprisingly subdued. Rates were increased 25 basis points to 4% in Europe and to 5.5% in the UK. Increases to 4.5% and 6%, respectively, are expected, and Japanese rates are also likely to be raised from 0.5% this year

Fund performance
The Investec Global Balanced Feeder Fund returned 1.6% in rand terms over the quarter, outperforming the average fund in the sector. Equity exposure was slightly reduced in the quarter to 65.3%. Our overweight position in equities contributed to the performance. Bond exposure was increased to nearly 30% in June, but reduced to 26.2% at quarter-end.

Market outlook
The strength of equities, in the face of difficult bond market conditions, has taken many investors by surprise. It is explained in part by the undervaluation of equities, both in absolute terms and relative to bonds, and in part by robust earnings growth. Analysts' earnings estimates for 2007 had been reduced in the first quarter to excessively cautious levels, but were significantly raised in the second. Earnings growth in excess of 10% is now expected in both 2007 and 2008. First quarter earnings in the US exceeded forecasts by 6%, and estimates for future quarters are also likely to be comfortably beaten. This implies that estimates for the US, and by extension other markets, are still too low. The valuation of equity markets, at 15.8 times 2007 earnings and 14.2 times 2008, remains modest by historical standards.

The 10 year US Treasury yield has fallen back close to 5%, but it is too early to regard the shake-out as over. The yield could well return to the 5.3% level it reached earlier in the month, or go higher. Clearer evidence of a sustained US slowdown is necessary before the bond outlook there will turn positive. UK and European yields are not significantly below the highs reached earlier in the month and so present better value.

With the outlook for bond markets uncertain, equity markets, having performed better than expected in the last quarter, should consolidate in the short term. Thereafter, an improved bond market outlook, better than expected earnings growth and reasonable valuations should ensure further gains in the remainder of the year, though it would be prudent to assume that the possibility of a re-rating has been deferred. We expect to keep our current overweight position in equities for the time being, but may increase it as opportunities arise.

Market review
Goldilocks economics held sway among investors in the opening days of the new year. Under the consensus macroeconomic scenario US growth was going to be just soft enough to persuade the US Federal Reserve not to raise rates any further and just strong enough to enable the other economies of the world to take up the slack created by a slowdown in the world's largest economy. Two months is all it took to shatter the confidence of investors in the perfect environment for risk assets. By the end of February it seemed quite plausible that the US housing market might go into crisis mode. All the major data releases disappointed the markets. Almost overnight, everyone heard about the appalling abuses of the sub-prime lending market. Global equity markets did not take kindly to the deterioration in the macroeconomic backdrop. By mid March most markets were 5% to 10% down from their earlier highs with investors expecting a further decline as the collateral damage from the sub-prime lending fiasco seemed to loom ever larger. However, the second sell-off never happened and by month end, equity markets were on their way back up to their earlier highs. The MSCI World Index gained 1.9% (in US dollar terms) over the month and 2.6% over the quarter. The US dollar fell 0.2% against sterling and 0.9% against the euro and the yen over the quarter. The Citigroup Global Bond Index returned 1.2% in US dollars over this period. The Federal Reserve continued to leave rates unchanged at 5.25%. Markets discount nearly 50 basis points of cuts this year. A slowdown in the US economy is clearly underway, but the extent of the slowdown remains unclear. Inflation surprise indicators have picked up, suggesting excessive complacency about the trend. Rates were increased 25 basis points in Europe, the UK and Japan to 3.75%, 5.25% and 0.5%, respectively. Economic growth outside the US remains solid. Oil prices fell below US$60 per barrel, but ended the quarter at US$66. The gold price rose to US$664 per ounce, and other metals recovered strongly at the quarter end from earlier weakness.

Fund performance
The Investec Global Balanced Feeder Fund returned 5.2% in rand terms over the quarter, while the average fund in the sector returned 5.3%, in line with the benchmark index. Asset allocation and equity stock selection contributed positively to returns while bonds detracted from performance. Equity exposure was reduced early in the quarter, but raised again in March, ending the quarter at 66.5%, compared with a benchmark weighting of 60%. Bond exposure was increased slightly to 27.9%

Market outlook
The speedy recovery from the market correction has taken investors by surprise. Analysts' earnings estimates for 2007 have been reduced to around 8.5% globally even though 2006 results were better than expected. However, preliminary forecasts for 2008 show a pick up in growth to 11%. Investors remain more cautious than analysts, even though there are signs that these growth estimates are too low. The valuation of equity markets has risen only in line with earnings, producing a historic price earnings ratio of 16.6 and a prospective one of 15.2. The 10-year US Treasury yield should remain in a trading range with a yield below 5%. UK and European yields have returned to the highs of the last 12 months, but we do not expect significant further upside. As we stated last quarter, the probability of a US recession is lower than the probability of a re-acceleration in growth and bonds should return around their coupon. With bond yields picking up and commodity prices strong, equity markets have probably gone far enough in the short term. The combination of better than expected earnings growth, a possible market re-rating and vigilant central banks should ensure further gains in the remainder of the year. However, volatility is likely to be higher than in recent years. We expect to keep an overweight position in equities for most of the year, but may reduce exposure tactically from time to time.

Market Review & Portfolio Activity
Equity markets continued to rise in the forth quarter with the MSCI World Index returning 8.5% in US dollar terms. In local currencies, the S&P 500 returned 6.7% for the quarter, the MSCI Europe ex-UK 7.8%; and the FTSE All-Share index 6.2%. The MSCI Emerging Markets Free Index returned 14.7% and the Japanese Topix index 4.4%. Smaller companies outperformed significantly with the HSBC Index returning 11.9%, but underperformed in Japan.

The US dollar fell 4.8% against sterling and 4.1% against the euro in the quarter but gained 0.9% versus the Japanese yen. The yield on 10-year government bonds rose to 4.71% in the US, to 3.96% in Germany and to 4.74% in the UK, but was flat at 1.69% in Japan. The Citigroup Global Bond index returned 1.8% in US dollars for the same period.

The US Federal Reserve continued to leave interest rates unchanged at 5.25% and markets are now discounting a 25 basis points cut in the first half of 2007. The US economic slowdown has led to some estimates of growth for 2007 below 2%, but the consensus forecast is still around 2.5%. Other data shows inflation pressures remain subdued. Rates were increased 50 basis points to 3.75% in Europe, were kept at 0.25% in Japan and were increased 25 basis points to 5% in the UK. Economic data continues to be firm outside the US, resulting in HSBC revising upwards its global growth estimate to 4%.

Oil prices traded around $60 per barrel and the gold price rose to $635 per ounce, with US dollar weakness accounting for less than half of the increase. We expect some short-term downside to the oil price, which may also put some downward pressure on gold down.
Performance Review
The benchmark index returned 5.8% for the quarter while the Fund returned 8.6%, and the average fund in the sector returned 5.5%. The Global Equity Fund returned 11.49% while the Global Bond Fund returned 1.26%. These accounted for 1.2% and -0.2% respectively of outperformance where asset allocation added 2.8%. This came partly from the overweight position in equities and partly from exposure to external, mainly closed-end funds, which accounted for 17.6% of the portfolio at the quarter end. The unwinding of month-end pricing anomalies which held performance back in the previous quarter means that the 2% contribution from asset allocation over six months is more representative. Equity exposure was increased 1.3% to 67.6% early in the quarter, compared with a benchmark weighting of 60%, while bond exposure was reduced by 2.7% to 27.3%.