Market review
The All Share Index (ALSI) closed 3.4% up over the second quarter, losing some of its earlier gains as inflation fears gripped global markets. Substantial dispersion in performance across the sectors was evident as resources gained 13.4% over the quarter, while the Financial and Industrial Index lost 6.4%. Banks and general retailers shed close to 15% over the quarter, while the defensive food retail and telecommunications sectors ended up 3.2% and 3.4%, respectively. The telecommunications sector was buoyed by corporate activity as MTN sought a potential merger with an Indian telecoms company.

The weakness in the bond market witnessed in the first quarter continued into the second quarter, with the bond market returning a negative 4.9%. This was sparked by comments from South African Reserve Bank governor, Tito Mboweni, signalling that more drastic action was needed to combat inflation which had become more generalised. The 1-3 year area of the curve outperformed, returning a negative 1.3%, still well behind cash, which gave a return of 2.7%. International energy prices surged, stoking inflation fears globally.

The Namibian Overall Index returned -2.6% over the second quarter.

Fund performance
The Investec Managed Fund Namibia returned -3.8% over the second quarter and gained 6.4% over the year to the end of June. The fund was ranked second in its sector over 12 months and first over two, three and five years to the end of June.

It has been another tough quarter for your fund. Just when it appeared as if financial markets were stabilising, global growth expectations were knocked downwards by the spiking oil price and the reappearance of subprime concerns in the US. In the current quarter the damage was done in June, with the oil price breaching $120 being the final straw for markets.

During the second quarter it looked at one stage as if the subprime related problems were subsiding, only to reappear as it became apparent that banks around the world would need further capital injections to stabilise their overly geared balance sheets. In particular, this had an impact on the Namibian listed banking and insurance shares, which were very weak. Higher inflation and interest rates accompanied by slowing growth, are a lethal cocktail for equity markets. It is exactly the opposite of what equity markets require to move ahead.

The structure of the Namibian market means that there is little scope to avoid the damage to financial and consumer shares as they make up a large percentage of the listed companies. We did, however, have a sizeable weighting in Anglo American to at least take some advantage of the resource company run. Anglos was up 15% for the quarter, whereas the bank and retail shares were sharply down.

Aside from the higher interest rates negatively impacting the interest rate sensitive shares, we were particularly disappointed by the performance of our holding in Barloworld. We underestimated the negative knock-on effect that a slowdown in motor vehicle sales would have on Avis car rental as well as the severity of the construction downturn in Spain.

Portfolio activity
During the quarter we took some protective action; we lowered the equity weighting by selling some African Bank and Freeworld shares.

As equity markets continued to fall, we took the opportunity to selectively buy some shares of good companies that we considered to offer excellent value such as Truworths, Shoprite, Standard Bank and FirstRand. These companies fall into the interest rate sensitive category. They are cheap for a good reason as the outlook over the next year or two looks particularly bleak for consumers in South Africa. Earnings for companies exposed to the consumer are likely to be flat to modestly down over the next two years. However, this poor outlook is already reflected in the price. Our view is that patience will be rewarded and that consumer shares will do particularly well once markets have more certainty as to when interest rates will peak. We think that time is within the next few months.

Market outlook
Global equity markets are being held hostage to the oil price. We expect global oil demand to fall over time as consumers around the world find the petrol price untenable. The US currently constitutes approximately 29% of global oil demand and China 10%. Therefore, increased Chinese oil demand is unlikely to be strong enough to offset the slowdown in oil demand from the rest of the world. We do not think that speculators are the reason for the high oil price. Should we be correct in our assessment that the oil price will subside in time, it is likely that global equity markets will rally hard from the current very depressed levels.

For a more sustained uptrend, markets need to be convinced that global economies have seen the worst and that inflation has reached its peak. This is likely to only be some time in 2009. In addition, the credit crisis impacting US banks needs to be further resolved before markets will settle. What does help from a contrarian perspective is the extreme bearishness at present towards equities and South Africa. It is too late to be selling equity.

In essence we continue the strategy from the previous quarter whereby we are in "wait" mode for that time in the cycle when equities re-rate positively. The shares in your portfolio are offering excellent value and we are comfortable holding a near maximum equity weighting. All that is required is patience and the ability to withstand short-term losses in order to accumulate capital over the longer term. We expect CPIX to peak in October 2008 and are thus buying more interest rate sensitive assets.

Although Barloworld has been very disappointing, we are not selling your Barloworld shares as we consider the market to have overreacted on the downside. We have looked very carefully at the earnings outlook again and do not think it prudent to sell the share on a forward price earnings ratio (PE) of 7.3 times. The outlook for the Southern African Caterpillar operations remains very good and will offset the weakness in Spain.

Recently equity market prices have reacted in a way to suggest that commodity prices are going to fall soon in response to the worsening global economic scenario. We do not think that commodity prices will fall precipitously and are thus holding on to your Anglos shares.

We always thought that returns were going to be delivered later in the year and we have not changed that view.