Comments from the US Federal Reserve hinting at a possible deceleration of stimulus, concerns around a Chinese slowdown and the weak South African economy were key themes during the quarter. It is still early, but there are signs that a market environment, for which we have been positioned for over a year, is finally coming to pass, with valuations driving this view. ` US economic activity appears to be improving, but remains significantly below potential. The Eurozone faces significant challenges as it grapples with debt in its periphery and an increasingly negative demographic burden as its population ages. China's growth prospects remain high, but are decelerating as the new leadership undertakes necessary structural reforms and reins in excessive credit extension. The South African economy remains weak and vulnerable. Lacklustre manufacturing, slowing household spending and a struggling mining sector, all contributed to a weak 0.9% GDP growth rate in the first quarter. In addition, the large 'twin deficits', high and rising inflation, falling commodity prices and a credit-driven consumption boom, which is now showing signs of unwinding, are all contributing to a fragile economic outlook. With the exception of Japan, global markets performed poorly in June as news of the Fed's stimulus tapering saw a re-pricing across risky asset classes and bond markets. Yet, despite the sharp sell-off in June, most developed equity markets performed well over the quarter. The US market (S&P 500 Index) ended the quarter up 2.4%, the Japanese market was a strong performer, with the Nikkei 225 Index gaining 10.3%, however the UK market (FTSE 100 Index) fell 3.1% as did the MSCI Emerging Markets Index, which was down 9.1% (in US dollar terms). The local equity market hit a new high in May, but then fell sharply during June to end the quarter down 0.2%. In line with the previous quarter's trend, Industrials (up 6.9%) outperformed the broader market, driven by rand-hedge stocks which were boosted by the depreciating currency. The positive trend in domestic industrials has again been fuelled by foreign buying, with equity inflows totalling R19.7 billion over the quarter, up from R3 billion in the previous quarter. Financials (down 1.6%) and Resources (down 11.8%) once again lagged. Resources continue to underperform as the prospect of lower stimulus and concerns around Chinese demand contributed to pressure on commodity prices. Most commodities relevant to South African miners fell in US dollar terms. Iron ore was down 15%, copper lost 11.1%, platinum fell 14.9% and gold was down 22.8%. The oil price (Brent Crude) ended the quarter 7.4% lower. The rand had another difficult quarter, weakening 6.5% against the US dollar and 7.9% against the Euro. Inflation eased to 5.6% at its most recent reading for May. However, inflation is expected to breach the 3% - 6% target band in the second half of this year due to fuel price increases and the lagged impact of the weaker rand. The fund delivered a return marginally below its benchmark, the FTSE/JSE Top 40 Index, over the quarter driven by costs incurred from flows, significant index changes that necessitated trading and its futures position which underperformed the spot index. The fund continues to closely track its benchmark, the FTSE/JSE Top 40 Index, which closed the quarter down 0.2%.

Developed equity markets rebounded strongly during the quarter. Positively interpreted comments from the US Federal Reserve officials contributed to US equities gaining 10%, propelling the S&P 500 index to a new high. The Japanese equity market was a strong performer, with the Nikkei 225 index gaining 19.3%. European equities gained 5% during the period, underperforming the global market as debt related concerns in Cyprus seemed to dampen investor sentiment. The MSCI Emerging Markets index was down 9.7% (in US dollar terms).

Most commodities relevant to South African miners lost ground in US dollar terms. Gold was down 4.6% and copper lost 7.1%. Platinum, however, was up 3.5%. The oil price (Brent Crude) rose above US$120/barrel for the first time in almost a year, but fell back as the US showed strong inventory figures, ending the quarter 2.2% lower.

Locally, weak export demand, buoyant but slowing consumer spending, slow infrastructure development and chronic labour unrest in the mining, transport and agricultural sectors all contributed to a sluggish economy. This, along with a high current account deficit, negatively affected the rand, which was the worst performing emerging market currency over the quarter. During this period, the rand lost 8.1% and 5.3% respectively against the US dollar and the euro.

Despite deteriorating macroeconomic fundamentals, the South African equity market continued to set new records, with the FTSE/JSE All Share index reaching an all-time high of 40984 in March. The FTSE/JSE All Share index gained 2.5% over the quarter, with industrials up 6.3%, and financials up 5.9%. Resources (down 6.0%) continued to be weighed down by weakening commodity prices in part from weaker Chinese demand, as their economic growth moderates. However, the weaker rand should provide some support to resources earnings in the short term.

The fund delivered a return marginally below its benchmark, the FTSE/JSE Top 40 Index, over the quarter driven in part by costs incurred from significant index changes that necessitated trading. The fund continues to closely track its benchmark, the FTSE/JSE Top 40 Index, and closed the quarter up 2.0%.

Global markets were generally up during the quarter, with the exception of the US (S&P 500 Index), which was down 1.0% as uncertainty around the looming fiscal cliff deadline affected investor sentiment. The UK (FTSE 100 Index) was up 2.7%, Japan (Nikkei 225) was up 17.2% and the MSCI Emerging Markets Index was up 5.2% (in US dollar terms).

Commodity prices weakened this quarter, with most commodities relevant to South African miners losing ground - platinum was down 5.2% (in US dollar terms), gold was down 5.5% and copper was down 2.7%. During the quarter, renewed optimism on Chinese growth led to an improvement in base metals. Consequently, iron ore prices recovered strongly as buying was boosted by stronger activity and falling inventory levels. The oil price (Brent Crude) remained fairly static, down a mere 0.4% during the quarter.

The rand weakened by 1.9% against the US dollar and 4.4% against the euro. The rand depreciated notably in October at a time of severe labour unrest and the downgrading of South Africa's sovereign rating. However, it performed strongly in December, gaining 5.1% against the dollar as concerns about Europe's slowdown eased and the appointment of Cyril Ramaphosa as ANC Deputy President was well received by global markets.

The FTSE/JSE All Share Index gained 10.3% during the quarter, ending the year near a record high. In terms of sector performance, industrials (12.4%) were the largest contributors, followed by financials (9.9%). Resources (7.3%) recovered a little as Chinese data improved and the iron ore price rallied. For the year, the FTSE/JSE All Share Index returned 26.7%. Industrials (40.7%) and financials (38.1%) performed well, with resources (+3.1%) lagging.

The fund continues to closely track its benchmark, the FTSE/JSE Top 40 index, which closed the quarter up 10.9%. All index changes that occurred during the quarter were timeously acted upon so as to minimise the relative risk in the fund.

Portfolio manager
Aslam Dalvi