Fund manager Gail Daniel says that in spite of poor job growth, consumers are a favourite sector, especially JD Group and Ellerines. She has reduced her exposure to gold, as SA gold shares are becoming pricey, but she sees value in IT shares such as Mustek and Comparex. She is getting more bullish on SABMiller, as any kind of traction in the US is not reflected in the price. The fund is still a top sector pick.

(Financial Mail - 07 November 2003)

Two macro economic events dominated the local investment markets in September. Firstly, the South African Reserve Bank called an emergency meeting, which resulted in a 1% cut in the repo rate. Secondly, in the last weekend of the month, the G7 held a meeting in Dubai that led to a change in policy with regards to intervention in the foreign exchange markets. The outcome of which is likely to be a continuation of the US dollar (USD) bear market.

Despite a 1% cut in interest rates, the rand strengthened from R7.46=1USD at the start of the month to close below R6.94. Whilst we believe that the rand has now reached levels that are hurting the local economy, we do not believe that the USD bear market is over. It is thus difficult for us to see too much rand weakness against the USD. It is interesting to note how that weak USD effect dominated over local rate cuts.

For the month, the JSE All Share Index declined 2.9%, driven by a 5% sell off in resources. Gold shares were, however, reasonably resilient falling 2.6%. Financials were 2.8% lower. The upside came from telecommunications stocks led by a 9.6% gain in MTN. We benefited from our 7% weighting here. MTN announced a positive earnings surprise and we believe the share is worth in excess of R27. Other counters we hold that performed well during the month were Naspers, Netcare and Impala. Woolworths and Anglogold disappointed. Within the equity portfolio we remain very underweight in local manufacturers, and although the outlook for the consumer sector is not as strong as it used to be, it is still far more robust than sectors exposed more directly to the stronger currency.

Investec launched a new B class (retail) on this fund on 1 October 2003.

June was another difficult month for the equity market; with the JSE All Share Index falling 2.2%. The fund, however, managed to return 3.5%. Within the equity portfolio, our sector and stock selection once again helped. We are overweight banks and general retailers, which returned 2.9% and 6.8% respectively. We are underweight resource shares, which returned -6.3%. The resource counter saw two profit warnings for the month from Sasol and Sappi. We were fortunate to have a very small position in Sasol and no Sappi's. We are expecting poor results from this sector in the upcoming reporting period, and given the higher ratings that these counters trade on relative to banks and local consumer counters, we see no need to alter our position unless the resource shares sell off into weak results. Healthcare has also proved to be an attractive area of investment so far this year, returning 5.9% for the month and 13% since the start of the year.

The portfolio is vulnerable to a strong US dollar as well as a strong rebound in global economic activity. Clearly this is not our view, as we believe that the over-indebted US consumer will start saving and the leverage is therefore limited.

The local equity market had a torrid month on the back of a stronger rand, continued geopolitical uncertainty and concerning economic data released from the US. The impact of a stronger rand is to reduce the earnings outlook locally. In order to shelter from this, we have a heavy overweight in domestically orientated counters. Our retail holdings continue to perform well and with local inflation subsiding, we are convinced that the second half of this year will see substantial interest rate cuts from which local financial shares should benefit. Our favoured banking counters are Standard Bank and FirstRand, and we are underweight insurance shares.

We have a 9% weighting in telecommunication and technology shares, although within this sector we are positioned in companies where we have a high degree of certainty in their ability to deliver on earnings growth. Telkom and MTN are our favourites.

We are overweight SA retail shares. We are underweight resource counters and the fund will be vulnerable in the event of a sustained sell off in the rand or an improvement in the outlook for world economic growth. On the latter, we feel that world economic growth is currently surprising on the downside and this is not yet fully reflected in global markets as optimism reigns that the world will be fine once the Iraqi war is resolved in the US's favour.

In our view, it appears unlikely that there will be such a simple solution to a complicated problem, and that global growth will disappoint on the back of an over-indebted US consumer. Indeed, the possibility of a global recession is not being sufficiently debated.

A weakening of the rand, an oil price below US$25 and a sell off in the S&P to below 800 will make us more positive on globally sensitive stocks. In the meantime, we look forward to substantial cuts in local interest rates in the second half of this year, which should continue to allow the SA consumer to remain resilient.

The local equity market failed to produce positive returns both in absolute and relative terms to cash and bonds. The 2002 market return of -8% was disappointing, given the fact that the rand gained 40% against the US dollar. Only foreigners made money over the past year, and the net transaction figures suggest that not only was no new money invested in local equities, but in fact, foreigners pulled out some R5bn!

Against this backdrop, the performance of the Investec Equity Fund can be termed satisfactory. The fund produced a small positive return of some 2.2%, for an active gain of some 10%. More importantly though, are the cumulative 2 year compound returns of 17% p.a. which are superior to the best SA bond fund (+14% p.a.) and the best money market fund (10.8% p.a.). The peculiarity of the world is such that real assets (equity) have failed to attract real money over the past two years.

Every year contains its fair share of new risks and opportunities and 2002 was no different. The 3 most important decisions of the year were: to buy gold and mid-caps, and to sell the other large cap shares. The fund ended the year with no direct gold shares (2% see through via Anglos) after having some 8% at one stage, but continued its weighting to mid and small-caps. The rising gold price should underpin both the currency and the domestic consumer, and we would expect continued strong performance from AVI, Truworths and Aspen. The fund further increased its exposure to the retail sector with purchases in Truworths and Foschini. We expect the consumer to remain buoyant on the back of further tax cuts, pending interest rate relief and a continued strong domestic economy.

More recently, the rhetoric surrounding geo-political conflict is rising with Middle East fears on one hand, and North Korean nuclear armourment gaining momentum. The gold price embodies much of these concerns, and the SA shares are pricing in $375/oz. We don't believe that an investment case for local gold shares exists.

Falling revenue lines (due to a stronger rand than firmer gold price) and rising costs (inflation around 12%) spell declining earnings momentum, at a time when the valuations are quite stretched.

Looking forward, we would expect near term war uncertainty to dominate the investment landscape, but anticipate the declining trend in SA short-term interest rates, stimulative fiscal policy and the second order impact of stronger commodity prices to sustain domestic economic momentum. Following 3 years of negative returns, global equities appear to have discontinued their declining trend.

Although too soon to expect the start of another bull market, we would be surprised to see equities underperforming bonds in 2003, given that equities are priced for 7-8% total returns in hard currency. Adding further impetus would be the abolition of the double taxation of dividends, which could see the dividend yield on the S&P500 rising to over 3% (which compares favourable to 1.25% on cash).