The global outlook has strengthened, backed by aggressive stimulus measures in some countries. This improved financial market conditions, capital flows surged and industrial production rose due to inventory restocking. However, risk to a sustainable recovery remains. Most countries' exports are falling at double-digit rates, although the contraction has eased somewhat thanks to inventory restocking. Consumption remains weak due to negative wealth effects amid worsening labour conditions. The current market is characterised by low inflation, low interest rates, a strong rand, high gold price and a substantial recovery in equity markets. The portfolio is conservatively structured to cater for a possible pull back in the equity markets.

Global markets
Global markets are looking much better than in recent months! But, we are still in a recession. Globally, markets have stabilised. The free fall in the levels of economic indicators has diminished, but we are not quite out of the woods yet. The S&P 500 delivered an impressive 15.9% over the quarter. Returns on metals and oil also rebounded, with the latter up 50% for the three months to end June. Bond markets in general weakened due to the reversal of risk sentiment. Global economic free fall subsided and Asian regions, especially China, delivered positive returns driven by aggressive monetary and fiscal stimulus. Developed regions still delivered negative growth, but despite this, the decline in leading indicators has bottomed out - indicating a halt to the free fall. The US, Europe, Japan and the UK will deliver negative growth for the year but should demonstrate some positive growth in 2010.

Local market
Local consumers are struggling based on the recent statistics for retail sales and new car sales. The cuts in the repo rate by the SARB will take time to work through the system and industry-wide retrenchments are placing a damper on bank lending as demonstrated by the placid credit growth numbers. The South African PMI has turned from its lows, pointing to some deceleration in the negative growth trend. The absolute index level is still way below the magical 50 indicator level.

Portfolio positioning
Potential equity return growth is being held back my market uncertainty. Equity (SWIX 40) is expected to deliver 18% over the next 12 months with above average risk. Short-term interest rates are expected to maintain low levels over the next 12 months with a moderate probability of another 50 basis points reduction in the repo rate. The government borrowing requirement will keep the pressure on medium- to long-term (seven years and longer) interest rates making them unattractive relative to short-term assets. The equity portion of the portfolio is fully protected at current levels for the 2009 calendar year, having a moderate exposure. We are accumulating high quality credit in short end of the yield curve (one to four years).

Market performance
The local equity market delivered 8.6% (SWIX40 Index) while bonds had a fairly flat quarter. The one to three-year bucket of the BESA yield curve had a 1.4% return but the longer bucket's returns were negligible. Cash returned 2.2% for the quarter.

In order to achieve the objective the investments to be acquired for the portfolio will cover the full spectrum of securities, and include equities, participatory interests in collective investment schemes in property, loan stock listed on exchanges, non-equity securities, preference shares, bonds, money market instruments and assets in liquid form.

We may make active use of derivatives to reduce the risk that a general decline in the value of equity markets may have on the value of the portfolio. The portfolio may also invest in local or offshore collective investment schemes operated in territories with a regulatory environment which is to the satisfaction of the manager and trustee.

The use of derivative strategies may be pursued actively and will only be limited by the statutory limitations placed on the inclusion of financial instruments in portfolios.

The Metropolitan Property Absolute Income Fund changed its name to the Metropolitan Cautious Portfolio on the 01/04/2009.

The Metropolitan Cautious Portfolio changed its sector from the Domestic Asset Allocation Targeted Absolute and Real Return sector to the Domestic Asset Allocation Prudential Low Equity sector on the 01/04/2009. The fund loses its history. The same day that the name was changed.

Financial markets remain quite strained and credit conditions tight but lately spreads have narrowed marginally. Global growth is projected to slow substantially but, assuming the crisis response to the unprecedented range of policy measures being thrown at it, a modest recovery may begin in late 2009.

Disinflation, if not deflation, will become the key economic theme in 2009. SA economic growth has held up reasonably well in the face of the global slowdown, however the decline in commodity prices and the household sector remains stressed by relatively high debt levels together with significant rise in interest rates that took place over the last two years.

Inflation pressures have diminished appreciably in light of the declines in prices for energy and other commodities and the weaker prospects for economic activity. The Reserve Bank cut interest rates by 50 bps, for the first time since April 2005, signalling a turn in the interest rate cycle.

The SA Listed Property sector continued its good performance in the 4th quarter and was up 8.5%. In the 6 months to December the sector was up 33.5% , and recovered most of the negative performance to finish the year down -4.5%. The sector benefited from expectations of lower interest rates and the inclusion of Growthpoint in the ALSI 40 index. The outlook for SA listed property remains positive. The return for Cash was 3.0% and for the All Bond 11.3%.