The second quarter experienced a sharp drop in offshore markets and the All Share Index fell 9% in sympathy. There were 3 main reasons for this fall: fiscal tightening in Europe; monetary tightening in China; and increased fears of deflation in developed countries. These factors have raised the risk of a double dip recession.

Despite these concerns the primary medium driver of our market is short-term interest rates. Inflationary conditions are benign due to a firm rand and declining maize prices and there remains scope for domestic cyclical shares to outperform as the economic recovery gains momentum. Nevertheless I am reducing an overweight exposure to domestic cyclical shares in favour of rand hedge stocks as I see little additional scope for the rand to strengthen further. The current volatile environment is conducive to Centaur's focussed stock picking style to continue outperforming its benchmarks.

The second quarter experienced a sharp drop in offshore markets and the All Share Index fell 9% in sympathy. There were 3 main reasons for this fall: fiscal tightening in Europe; monetary tightening in China; and increased fears of deflation in developed countries. These factors have raised the risk of a double dip recession.

Despite these concerns the primary medium driver of our market is short term interest rates. Inflationary conditions are benign due to a firm rand and declining maize prices and there remains scope for domestic cyclical shares to outperform as the economic recovery gains momentum. Nevertheless I am reducing an overweight exposure to domestic cyclical shares in favour of rand hedge stocks as I see little additional scope for the rand to strengthen further. The current volatile environment is conducive to Centaur's focussed stock picking style to continue outperforming its benchmarks.

The key short term drivers of the stock market being interest rates and commodity prices remain positive underpinning the positive momentum in our market. The key factor affecting both these variables is China's voracious demand for commodities which have resulted in exceptional conditions for commodity producing countries. If China catches a cold South Africa will catch pneumonia and I am closely monitoring Chinese economic numbers for negative signs. W ith the proviso that China's strong economic growth continues the South African stock market outlook remains favourable. A recovering economy, low interest rates, strong commodity prices and positive sentiment are positive factors for continued share price out performance over cash. The forward PE on domestic stocks is around 11X which is not overvalued and leaves continued room for share price appreciation. The fund will remain highly exposed to equities and property over the second quarter.

The inflation outlook remains benign notwithstanding Eskom prices hikes and there is scope for further interest rate cuts. Low short term interest rates and strong commodity prices are particularly positive factors for the JSE. The key risks for shares are: declines in offshore stock markets; declines in resource and precious metal prices; and weak economic growth in SA.

After a 32% return in the All Share Index in 2009 much of the economic recovery has already been discounted into the prices of stocks, and stock picking is particularly important in this environment. Nevertheless equities should still outperform cash by a reasonable margin and it remains a favorable time to be invested in the stock market.