There are tentative signs of global and local economies bottoming out, but the timing, speed and magnitude for recovery remain uncertain and in all likelihood be slow and protracted when it commences. The SA Reserve Bank shifted emphasis from inflation to growth risks early in the current easing cycle and cut interest rates aggressively by 4.5% since December, but decided to keep rates on hold at the last meeting on the 25th of June. It now seems as if they are shifting back to an inflation focus, which may cause the repo rate to remain at current levels for a few months. News on the domestic economy will continue to be on the negative side over the next few months, but various cost-push and exogenous factors may cause inflation to remain sticky over the same period. For this reason, uncertainty regarding further monetary easing has increases. We, however, still believe that a further 100 basis easing will be possible by September.

From a philosophy perspective, we remain a fundamentally conservative fund manager and will continue to actively avoid extremely risky investments and invest only in vanilla instruments with A1/F1 or better credit-rated counterparties. We shall however, manage the fund's duration close to the maximum allowed for the time being. We expect the yield curve to remain steep, benefitting the fund's relatively long and well-positioned maturity profile. Liquidity-wise, the fund is furthermore well-positioned to buy into value-opportunities, which usually arise as liquidity starts to squeeze in easing cycles. We are confident that the good long-term performance history of the Gryphon Money Market Fund will remain intact and our short term relative performance has already returned to top quartile. Performance volatility of the fund remains low, the best in the industry.

The global economic outlook for 2009 remains relatively bleak. The local economy will also be tested by the global financial turmoil and a world recession. Production levels in the mining and manufacturing industries will remain under pressure as export sales decline in response to falling global demand and weak commodity prices. Exports will remain under pressure as the global slowdown persists. The depth and duration of the global economic slowdown remains uncertain and this poses a downward risk to exports both in volume and value terms. Weak domestic demand and subdued international commodity prices should also keep imports under pressure. All this is likely to push up unemployment and negate rising real incomes. The continued moderation in local growth in particular, adds to the compelling arguments in favour of aggressive monetary easing.

The Reserve Bank's explicit acknowledgement of the adverse growth consequences of tighter credit conditions strengthens the case for deeper rate cuts than would otherwise be the case. This is also supported by the Bank's view that the upside risks to inflation emanate primarily from cost-push pressures. Against this backdrop we foresee the MPC will continue to cut rates aggressively. This will add to the relief that consumers should start experiencing from lower energy and food prices. Despite a much improved inflation outlook, a weak and volatile rand exchange rate remains the most significant risk to this view.

We however, remain (from a philosophy perspective) a fundamentally conservative fund manager and will continue to actively avoid extremely risky investments and invest only in vanilla instruments, with A1/F1 or better credit-rated counterparties. We shall however, manage the fund's duration close to the maximum allowed for the time being, since we foresee aggressive frontloaded easing by the MPC. We expect the yield curve to normalise further, benefitting the fund's relatively long and well positioned maturity profile. Liquidity wise the fund is furthermore well positioned to buy into value opportunities, which usually arise as liquidity starts to squeeze in easing cycles. We are confident that the good long-term performance history of the Gryphon Money Market Fund will remain intact and our short term relative performance will improve drastically from here on again. Performance volatility of the fund remains low; the best in the industry.

Although a global economic recovery is expected to begin towards the end of 2009, growth will remain lackluster, adding further to slack and raising deflation as a concern if growth stays subpar in 2010. Global inflation is plunging in response to the deep economic downturn and the associated collapse in commodity prices. All of this is negatively affecting the local economy, with consumer spending slowing down rapidly, but inflation fortunately too. We believe that the local economy will continue to lose momentum over the first half of the year and the economy will remain weaker than consensus expectations. Against this backdrop we foresee the MPC to cut interest rates at each of their meetings this year, adding to the relief that consumers should start experiencing lower energy and food prices. Although we remain cautious of a financial blow-out in the global banking system, which can easily contaminate our financial market and banking system, we shall increase the risk in the fund as the interest rate down cycle is progressing. We, however, remain from a philosophy perspective a fundamentally conservative fund manager and will continue to actively avoid extremely risky investments, and invest only in vanilla instruments with A1/F1 or better credit-rated counterparties. We expect the yield curve to start normalising and fund managers will have to more actively hunt for yield. From a relative performance perspective we are entering more suitable times for the more conservatively managed funds. We are confident that the good long-term performance history of the Gryphon Money Market Fund will remain intact, as performance volatility remains low.