This quarter was characterised by significant labour unrest within the local resources sector, which placed South Africa high on the international news agenda. The unprecedented tragedy that occurred at Lonmin's Marikana mine was the catalyst for further strikes, which have subsequently spread to other sectors of the local economy. Despite this, the South African equity market held up well over the quarter and reached an all-time high during September.

The bond market also had a good quarter, with the ALBI up 5.0%, coincident with South Africa's inclusion in the World Government Bond Index. However, during the period, Moody's downgraded South African bonds from A3 to Baa1 largely due to fiscal concerns stemming from the political situation and labour unrest.

Globally, most developed economies continue to grapple with slower economic activity and high unemployment. The US economic weakness has brought about yet further quantitative easing measures by the Fed. The economy has become a key focal point of the upcoming US presidential elections and the US faces automatic fiscal tightening in 2013, unless further action is taken to extend current fiscal stimulus measures.

Economic weakness persists in Europe, with the latest data indicating that this region went into contraction during the second quarter of this year. GDP growth in the world's second-largest economy, China, has begun to slow. Given that its major trading partners are facing tough economic conditions, the South African economy continues to be weak, with the situation exacerbated by recent labour unrest.

Global markets were generally up during the quarter, with the exception of Japan, which was down 1.5%. The US (S&P 500 Index) was up 5.8%, the UK (FTSE 100 Index) was up 3.1% and the MSCI Emerging Markets Index was up 7.9% (in US dollar terms).

The FTSE/JSE All Share Index gained 7.3% during the quarter, with the recent material sectoral diversion continuing - industrials were up 10.5%, financials were up 6.5% and resources were up 2.9%. Foreigners were net sellers of equities, particularly in the resources sector where they appeared to be unnerved by the labour challenges facing miners. However, this sell-off was offset by significant foreign inflows into our bond market. Foreign investors continued to favour local consumer-oriented industrial shares, causing these exceptionally expensive shares to accelerate upwards to new all-time highs.

Commodity prices strengthened this quarter, with most commodities relevant to South African miners gaining - platinum was up 16.8%, gold was up 11.1% and copper was up 6.8%. After a significant fall last quarter, the oil price (Brent Crude) increased by 16.1%.

The rand weakened by 1.8% against the US dollar and 3.2% against the euro. Inflation has dropped back into the upper region of the South African Reserve Bank's target band, where we expect it to remain in the medium term. The Reserve Bank dropped the repo rate by 50bps in July, and left it unchanged at their most recent Monetary Policy Committee meeting. Interest rates are currently at multi-decade lows.

The Kagiso Stable Fund continues to reliably deliver on its mandate of outperforming cash deposits, with a very low risk of capital loss. It slightly underperformed the average fund in the Domestic AA Prudential Low Equity sector for the quarter due to our equity positioning in resources shares in favour of industrials, our underweight bonds position and low effective equity weighting.

Going forward, we remain defensively positioned with high effective rand cash exposure and relatively low effective equity exposure - mostly achieved via hedging. We are underweight property, physical cash and bonds, with a large positioning in inflation-linked bonds. The fund continues to be appropriately positioned in our best ideas, based on our team's proven bottom-up stock picking, fixed income and asset allocation processes.

The South African equity market held up relatively well (up 1.0%) at aggregate level in rand terms over the quarter and touched its all-time high during the period. The bond market had a good quarter, with the ALBI up 5.2% and was the best performing asset class, due in part to a lowering in inflation expectations and additional foreign bond purchases due to South Africa's inclusion in a major global bond index.

The equity market's resilience masks a massive sectoral diversion, with financial shares (up 4.6%) and industrial shares (up 2.6%) performing strongly and resources shares continuing to head lower (down 3.6%). The weaker currency also supported the equity market, given the heavy weighting towards rand hedge shares in our market.

The rand lost 6.0% against the US dollar and 1.0% against the euro. The South African Reserve Bank kept interest rates unchanged at multi-decade lows. Money market expectations moved materially during the quarter - from expecting rate increases to a situation where an interest rate cut in 2012 is now priced in. Inflation looks to have peaked and to be securely heading into the target band. The South African economy continues to be weak, with a generally poor employment environment and economic weakness in our major trading partners.

The Kagiso Stable Fund continues to reliably deliver on its mandate of outperforming cash deposits, with very low risk of capital loss. It underperformed the average fund in its sector (the Domestic AA Prudential Low Equity sector) for the quarter, due to its defensive equity position and stock selections which detracted over the period.

Going forward, we remain defensively positioned with high effective rand cash exposure and relatively low equity exposure - mostly achieved via hedging. We have exposure to inflation-linked bonds and some foreign exposure to equities, commodity ETF's and foreign cash.

The first quarter of 2012 saw the South African equity market underperform most global markets, partly due to the weak performance of resources shares as news of growth slowing in China outweighed continued positive US economic data. Many South African companies, especially amongst the industrials, were pushed further above their all-time high share prices.

The rand gained 5.4% against the US dollar and was 2.4% stronger against the euro. The South African Reserve Bank kept interest rates unchanged at multi-decade lows due to ongoing global economic uncertainty, despite inflation remaining above the official target of 6% pa. Inflationary pressures are coming from the weaker currency and higher transportation, electricity and food prices.

The bond market had a reasonable quarter, with the ALBI up 2.4%, despite high inflation rate expectations, outperforming the meagre cash returns on offer.

The Kagiso Stable Fund continues to reliably deliver on its mandate of outperforming cash deposits, with very low risk of capital loss. It however slightly underperformed its peers in the Domestic AA Prudential Variable Equity sector for the quarter, due to substantially hedged equity exposure.

Looking ahead, we remain cautious over prospects for the developed economies, with high levels of government debt, high levels of unemployment, stimulus removal and austerity measures looming and demographic trends moving slowly against them.

Going forward, we remain very defensively positioned with high rand cash balances, some high conviction equity stock picks and negligible net equity exposure - mostly achieved via hedging. We have exposure to inflation-linked bonds and some foreign exposure

The fourth quarter of 2011 was a very strong period for global equities, bouncing off their third quarter low points, amidst high volatility. Positive US economic data emerged amidst the European gloom and co-ordinated central bank measures were announced to provide Europe with much needed banking sector liquidity. Many South African companies, especially among the industrials, ended 2011 at all-time high share prices.

The US market was particularly strong (the S&P 500 Index was up by 11.2%), as was the UK market (up 8.7%), outperforming most emerging markets (MSCI Emerging Markets Index was up 4.4% in USD) and the negative Japanese market (the Nikkei Index fell 2.8%). The Rand was little changed against the US Dollar (+0.1%) and 3.4% stronger against the Euro. The South African Reserve Bank kept interest rates unchanged at multi-decade lows, against a backdrop of rising inflation, which breached the official target in November - partly due to the weaker currency and higher transportation costs. Domestic economic growth prospects are looking softer, however.

The bond market had a relatively strong quarter, with the ALBI delivering 3.5%, despite inflation rate expectations rising on the back of the weaker rand. For 2011, bonds (ALBI: +8.8%) outperformed equities (FTSE/JSE ALSI: 2.6%).

The Kagiso Stable Fund slightly underperformed its peers in the Domestic AA Prudential Variable Equity sector for the quarter. This may be due to its very low equity and bond exposure.

Looking ahead, we remain cautious over prospects for the developed economies, with high levels of government debt, high levels of unemployment, stimulus removal and austerity measures looming and demographic trends moving slowly against them.

Going forward, we remain very defensively positioned with high rand cash balances, some high conviction equity stock picks and negligible net equity exposure. We have exposure to inflation-linked bonds and a tactically reduced foreign exposure.