Overview
June proved to be a tough month in local equity markets. A higher degree of volatility was evident although the market did well to contain its losses. Were it not for the ongoing demand for resource related stocks, particularly from global investors, the market would have ended significantly lower than the -0.95% posted by the All Share index.

Currency
The rand remained fairly steady against most currencies, helped by a weaker dollar. The outlook for the currency remains grim as the current account deficit looks unlikely to narrow in the near term.

Fixed Interest
Strong growth, sustained worries over the large current account deficit and upside surprises to inflation, dominated economic news locally over the part three months. Most concerning has been the unexpected breach by inflation of the 6% upper limit of the inflation target range. The SA Reserve Bank was left with no option but to raise interest rates in June after leaving rates unchanged at the preceding two meetings. Risks to interest rates remain firmly to the upside. The negative inflation data exposed the overvalued levels of longer dated bonds relative to cash during the past two months. The sharp sell off was justified and the market has now priced in a further interest rate hike of 50bps in August. We maintain that long-term cash yields offer better value in the shorter term.

Equity
Despite the solid rand, resource stocks were buoyed by strong investor demand and steady commodity prices. The pressure on interest rate sensitive stocks continued from May as inflation data clearly pointed to further interest rate tightening. The financial sector was hardest hit, ending the month 4.1% lower after a 4.3% correction in May. The mid and small cap indices posted declines of 4.0% and 1.3% respectively. Their respective annual returns of 54.0% and 71.3% remain spectacular. Although fundamentals for equities are less attractive than six months ago, we do not believe that it is significant enough to detract considerably from the relative valuation advantage of equities versus other asset classes. It is however reasonable to expect more muted returns for the balance of the year.

Property
The pressure on property stocks continued for most of June. Although the fundamentals have deteriorated for this sector due to the tightening stance of the SA Reserve Bank, we still believe a structural holding in property is essential within an economy which is experiencing an investment boom and growing in excess of 4.5% annually. In the long term, property will generate attractive capital growth while paying out a steady earnings stream.

Local equity markets turned around strongly after the correction which started on 27 February. Despite the increased risk aversion, market volatility and uncertainty which prevailed in the global environment, the All Share index returned 6.4% during March. The Resource 20 index returned a very significant 11.1%. Although small versus the performance within the resource index, the 2.9% return from the Industrial 25 index and the 3.1% return form the Financial 15 index was still a very solid performance.
Local and global economic fundamentals continue to drive solid corporate earnings. This will remain a solid underpin for equity markets.
Short term corrections within a longer term up trend in the equity market should be expected. We maintain our view that equities are the asset class of choice based on its valuation versus other asset classes.

The Select Manager Prudential Active FoF returned 2.50% for the month of March. The Nedgroup Rainmaker fund and Investec Equity fund posted solid performances of 5.2% each.

Equity markets continued to rally in December. The All Share index returned 41.2% for the year. The Resource 20 index ended the year 44% higher, outperforming the Industrial 25 index which returned 40.8% and the Financial 15 index which returned 35.9%. Bonds delivered a disappointing return versus the equity market of 5.5% for the year.
In last month's note we mentioned our expectation of an equity market rally into the festive season. We therefore increased our holding in the pure equity fund managers from 10.5% to 14% at the expense of the Stanlib Income fund. Local equities are no longer cheap versus global equities, but versus other local asset classes, equities remain attractive. We are cognisant of the building global risks but believe that a continuation in the current market rally is likely.

The Select Manager Prudential Active FoF returned 2.41% for the month of December and 18.24% for the year. This represents a satisfactory return versus the fund's benchmark and its capital preservation goal.