Market review
Economic news in South Africa continued to deteriorate over the quarter. The release of fourth quarter GDP numbers confirmed the sharp slowdown experienced in the second half of 2008. Demand remained under pressure in the first three months of 2009. Policy makers responded with two interest rate cuts of 100 basis points each during the quarter. South African bonds followed global yields higher after reaching record lows in December. While prospects of weak growth and falling inflation continue to provide a bond-friendly environment, the market remains sensitive to the impact of a rapid increase in government spending and concomitant future funding requirements. The All Bond Index lost 5.1% over the quarter. The listed property sector (-1.4%) fared somewhat better, but could not escape deteriorating sector fundamentals. Cash, as measured by the STeFI, returned 0.9% over the quarter.

South African equities weakened for the third consecutive quarter, with the All Share Index losing 4.2% year to date. Both financials (-7%) and industrials (-9.2%) ended the quarter in negative territory. Resource counters clawed back some of their losses sustained in the second half of 2008 to end up 1.6%. Gold mining (22.8%), platinum mining (9.6%) and pharmaceuticals (22.4%) were the only sectors to gain over the quarter. While general miners (-4.6%) performed broadly in line with the overall market, it was the domestic oriented sectors that fell most with banks (-9.8%), retailers (-7.6%) and the construction sector (-10.6%) all ending down.

The Namibian market saw a positive rebound towards the end of the quarter, with the NSX Overall Index returning 14.6% in March. However, the earlier losses weighed heavily on the quarterly performance numbers, resulting in the Overall Index returning a negative 12.7% over the quarter.

We have witnessed the South African Reserve Bank governor becoming increasingly dovish with regard to the prospects of further interest rate cuts. The governor of the Bank of Namibia followed suit, slashing the bank rate by 100 basis points in March. The market is now pricing in sharply lower interest rates - much to the relief of banks which gained 14.6% in March and general financials which rose 13.4% during the last month of the quarter.

The local index continued to gain after a positive performance in 2008, ending the quarter up 2.8%. Namibia Breweries returned 5.3% for the quarter, while First National Bank ended the quarter up 2.5%. Namibia Breweries' performance was underpinned by fantastic results in the first half of the year, which saw operating margins expand in a period characterised by high interest rates and high input costs. The IJG Bond Index gave up some of its fourth quarter gains to end nearly 4% weaker, while cash, as measured by IJG Money Market Index, returned a positive 2.4% over the quarter under review.

Portfolio review
We entered the year with a relatively full equity weighting on positive valuation grounds, positioned for the expected medium-term recovery. Although markets were already cheap it did not stop equities falling further as economic data at times came in worse than expected. This environment meant that returns for the quarter were negative. However, as a result of maintaining a relatively full equity position we benefited from the equity market rebound in March. Infrastructure related shares were again sold down as potential mining expansion projects were cancelled with the performance of Wilson Bayly, Aveng and Group Five in particular detracting from portfolio value. We did, however, continue to benefit from holding retail related shares with Mr Price and Truworths doing well.

The rand/Namibian dollar exhibited considerable volatility over the quarter, but managed to end the quarter little changed against the US dollar. We were not aggressively positioned for rand weakness. Your portfolio benefited from the Investec London team, which manages your offshore assets, having a very good quarter relative to their peers. The Four Factor equity selection process came back with a vengeance to deliver good stock selection.

Portfolio activity
There were two relatively significant moves during the quarter in terms of asset allocation. Firstly, we trimmed back equity exposure by approximately 5% just before quarter end after the strong run in March. We took profits on a shorter-term view that the coming poor earnings season may well provide an opportunity to buy back in at better levels and lock in some value add. Secondly, for the first time in a while bonds look better value in the face of lower-than-expected inflation and interest rates. From around the 8% yield level we believe that bonds offer a better prospective return than cash and consequently we increased bonds, reducing cash. Property exposure was marginally reduced, and for those funds that allow offshore exposure we kept the offshore weighting at approximately 10%.

Over the quarter we reduced the infrastructure exposure by selling Murray & Roberts and Barlows. We trimmed your retail share exposure, but retained the positioning to lower interest rates by buying bonds. With the green shoots of a global economic recovery in evidence we increased exposure to global cyclical shares, buying more Anglos and BHP Billiton, but sold Impala Platinum after the 30% run in March. Gold exposure was cut back by selling some AngloGold in line with the recovery of the risk trade. We remain underweight global defensive shares, with a view that they are too expensive and the next move is a global economic recovery. Lastly, we purchased Old Mutual as we think that the share is cheap enough to allow for significant margin for error and that the company has enough capital and liquidity to continue as a going concern.

Portfolio positioning
Investors are still very wary; the consensus view is that the recent improvement in equities is merely a bear market rally. As a result many investors are still underweight equity waiting for the pull back to enter the market, which may well mean that the market has further to run. Monetary and fiscal stimulus packages are also expected to bear fruit towards year end. Already the economic data is no longer universally worse than expected, but rather more mixed. Consequently, we are likely to keep a dominant portion of your money in shares, tactically trading at the margin to add additional value.

The bond position is expected to do well as we get further confirmation of the weak economy operating well below capacity and lower inflation. It is likely that we will continue to trim back your property holding over time. We do not anticipate holding a large gold position as the "end-of-the-world-trade" is drawing to a close and we do not fear a resurgence of global inflation.

Your portfolio is still predominantly positioned to benefit from lower interest rates, but will also gain from an improvement in global equity markets. The portfolio still has some exposure to the fixed infrastructure cycle, albeit less than previously. We remain infrastructure "believers", especially at these low share prices and with Eskom's spend set to continue with the recent approval of a third new coal-fired power station to be built. One of the next moves is to buy more global cyclical and resource shares once we are satisfied that the full downward earnings revisions are fully priced in.

After quarter end the rand/Namibian dollar strengthened relative to the US dollar and we took the opportunity to increase the offshore exposure of applicable funds from 10% to 15%. We are still not overly bearish on the rand, but for longer-term diversification purposes we are comfortable with this move.

Market review
South African bond yields continued their downward move as both the weak growth and lower inflation outlook favoured the potential for significantly lower interest rates. The All Bond Index gained 11.3% in the fourth quarter to end the year up 17%. Cash, as measured by the STeFI, rose 2.9% over the quarter and 11.7% for the year. The SA listed property sector increased by 8.5% over the fourth quarter, but returned -4.5% over 2008. The global financial crises and the ensuing slowdown in economic activity left their mark on the South African equity market. The All Share Index lost 23.2% over the year, all of the losses sustained in the second half of 2008.

The market ended 9.2% weaker over the last quarter of the year, with falling commodity prices driving down platinum (-25.8%) and general miners (-15.2%). The construction sector slumped 36.1% in the fourth quarter as companies saw their order books curtailed by weaker demand and foreign investors seemed to lose faith in the sector. Life assurers (-15.9%) continued their underperformance of the general market. Exposure to falling interest rates and defensive earnings streams dominated the outperformers over the quarter, with banks (-6.1%), healthcare equipment and services (5.6%), food producers (6.6%) and food retailers (16.2%) high up on the performance table. However, it was the gold miners (22%) that took the top spot over the quarter as the dollar gold price held its own and rand weakness and positive production news boosted returns to the sector.

In Namibia, the NSX Overall Index return was -16.1%, whereas the NSX Local Index return was 7.5% over the fourth quarter. For the full year the NSX Overall Index return was -37.9%, but the NSX Local Index return was 25.2%. Clearly, the overall equity index was negatively impacted by the very heavy weighting of Anglo American, which fell by 23% in the last quarter and by 48% over the whole year. We have maintained for some time now that in terms of the number of companies listed, the Namibian stock market is dominated by companies that are sensitive to changes in interest rates. Many of the listed banks and retail shares benefited from the expected fall in inflation and interest rates.

Bonds around the world had a good year, and Namibia was no exception, as the IJG Bond Index returned 9% for the year and 3.8% for the quarter. Cash returns for the year were 10.8% and 2.7% for the quarter, as measured by the IJG Money Market Index. With the Namibian dollar tied to the South African rand, the weakness of the rand meant that the Namibian dollar weakened by 28% versus the US dollar over the year and by 13% in the last quarter.

Portfolio review
The last three months of 2008 capped a disappointing year for the portfolio. Even though the high yield and mortgage debt markets started to unravel in late 2007, we underestimated the severity of the ensuing global liquidity and credit crisis. It subsequently turned out to be the most severe economic shock since the 1930s. Global trade ground to a halt in the wake of Lehman Brothers' failure. Cyclical shares including construction stocks were sold off very heavily with a premium performance attached to shares with defensive characteristics. The speed and savagery of this adjustment resulted in a negative performance for the portfolio over the year. Notwithstanding the difficult market conditions in 2008, the portfolio's returns over the past three and five years are still in excess of inflation.

In the face of considerable global economic uncertainty, the rand weakened by nearly 14% over the quarter relative to the US dollar. Consequently, the portfolio benefited from our decision last quarter to up the offshore weighting prior to this weakness. The US dollar returns were held back slightly by a possibly premature move into investment grade corporate debt, although it is very likely that we will get back these returns as the valuation on offer is outstanding.

Portfolio activity
We used the rapidly falling equity market as an opportunity to selectively buy certain counters where we saw excellent value and in so doing maintained the overall equity weighting at relatively full levels. Within equity we lowered the exposure to resource shares, selling down ArcelorMittal, Anglos and BHP Billiton with a view that it is still too early to discount a global economic upturn. We also lightened holdings in Naspers, SABMiller and Steinhoff, while topping up in the construction area that was unrealistically hard hit in the flight from cyclical companies. Aveng, Murray & Roberts and Group Five were the principal infrastructure shares purchased.

We maintained our view that interest rates will fall rapidly in South Africa in 2009. Consequently, we added to the domestic interest rate sensitive cluster by buying more retail and bank shares as well increasing the listed property share exposure. The South African inflation rate is set to fall rapidly in January and February 2009 and interest rate sensitive shares are likely to rerate further. We did, however, sell down your holdings in domestic bonds as the bond market has fully discounted the good inflation outlook.

During the quarter the rand weakened excessively relative to fundamentals. We brought some of your offshore assets back, selling US dollars and buying rands/Namibian dollars. We will be vigilant to timeously increase your offshore assets again.

Portfolio positioning
We believe that markets have already done an efficient job of discounting the very poor economic outlook. The major risk now is being too conservatively positioned. Given the massive financial stimulus injected to date and juicy valuations on offer, it is a dangerous game to think that one can time the recovery with precision. There is every possibility that markets will bounce back in the first half of 2009. With equity markets in a bottom formation phase, we have a relatively full equity position at present and look to add value by trading the ranges until the resumption of the bull market.

We think that South African interest rates will fall substantially in 2009, by up to 4% as inflation declines rapidly. Consequently, we like the outlook for the consumer, banking and property sector. The South African bond market has largely priced in this highly beneficial scenario and therefore we have little of your money in local bonds.

The sell-of in South African infrastructure shares has been overdone. We believe that public sector infrastructure projects will sustain these companies' earnings until the return of private and mining sector capital expenditure. Shares with exposure to tobacco, alcohol, pharmaceuticals and food have done exceptionally well in the last six months. We think that it is too late to have significant defensive exposure as this has become a very consensus position to adopt. These shares are now richly priced.

We would not be looking to take more money offshore as we consider the rand to be oversold and expect the current account deficit to improve in 2009. There is some political risk in 2009, but when risk assets recover we expect the rand to strengthen.