The May headline CPI was sticky as expected, printing a disappointing 8.0% year-on-year (y/y), slightly up on consensus expectations of 7.9%. From a previous 8.4% y/y, food, transport and base effects were the main drivers. Breaching of the upper limit of the 3%-6% target appears considerably less likely as administered prices and labour costs continue to exert upward pressure.

The equity market continues to find short-term, albeit shallow support within what has been a classic oscillating market. Given the potential forecast error of the path of future inflation, a potential abundant supply of government bonds (the infrastructural economic stimulus plan and shrinking tax receipts) and a diminishing need for bonds as a secure store of value, the prospects for long-duration bonds is not positive.

The return of the fund over the second quarter of 2009 was in line with expectations for offshore credit performance. Currency hedges and the fund's focus on short-term investment horizons also contributed.

The May headline CPI was sticky as expected, printing a disappointing 8.0% year-on-year (y/y), slightly up on consensus expectations of 7.9%. From a previous 8.4% y/y, food, transport and base effects were the main drivers. Breaching of the upper limit of the 3%-6% target appears considerably less likely as administered prices and labour costs continue to exert upward pressure. The equity market continues to find short-term, albeit shallow support within what has been a classic oscillating market. Given the potential forecast error of the path of future inflation, a potential abundant supply of government bonds (the infrastructural economic stimulus plan and shrinking tax receipts) and a diminishing need for bonds as a secure store of value, the prospects for long-duration bonds is not positive. The return of the fund over the second quarter of 2009 was in line with expectations for offshore credit performance. Currency hedges and the fund's focus on short-term investment horizons also contributed.

In February, headline CPI printed a disappointing 8.6% y/y, up from 8.1% in January. Economists were surprised by the strong 1.2% m/m increase in the consumer inflation number from January to February.

Nonetheless, we do not believe that this is a trend reversal and it is expected that inflation will continue to ease in the coming months. Consistent with this expectation, the market is pricing in another 2.0% in interest rate cuts by the South African Reserve Bank. Consequently, it is expected that the returns of the fund benchmark (the STEFI Composite Index) will lower commensurately.

Returns on the fund however, are expected to be less affected due to it's broad investment universe which allows it to diversify away from the benchmark and provide higher absolute returns.

December marked the end of a tough year on a positive note. The All Share Index was up 1.52%, driven by Industrials which returned 5%, while Resources and Financials lost 0.2% and 1.2% respectively. Over the year the All Share Index lost 23.2%, driven by all three sectors. Resources lost 28.3%, Industrials 26.2% and Financials 26.2%.

The Bond market continued to rally with the All Bond Index up 7% during the month and 17% for the year. Cash returned 1% during the month and 12.4% for the year whilst listed Property was up 4.9% during the month and lost 4.5% over the year.

The Monetary Policy Committee noted improvements in the Inflation outlook in South Africa and decided to reduce the Repo by 50 basis points to 11.5%.