Equity markets rose strongly, less so those with appreciating currencies, on confidence that a "double-dip" recession would be avoided owing to continued stimulatory monetary policies and strong emerging economy growth. Government bond yields declined sharply as interest rates remained at nominal levels, governments were creating money partly to buy in their longer dated bonds, and the prospect of inflation re-emergence remaining remote. The dollar weakened on the prospect of further monetary policy easing which would not be followed by Europe. Industrial commodity prices rose sharply on supply side pressures and continued Chinese demand, while agricultural commodities' prices benefited from adverse climatic conditions in Russia.

Improved global sentiment caused JSE listed shares to appreciate sharply, in line with global markets, with earnings momentum still positive and market valuations appearing reasonable to cheap. Emerging markets are recipients of re-allocated capital, with JSE listed companies benefiting from this trend. South African government bond yields declined sharply, driven by a sharper-than-forecasted decline in domestic inflation, a reduction in the repo rate and foreign demand for high yielding SA debt. Domestic short-term interest rates were further reduced to 6.0% as domestic demand remains low, unemployment levels high and inflation falling to 3.5%, while the rand remains strong relative to the currencies of most of SA's trading partners.

Equities remain the asset class of choice as company balance sheets are robust and earnings are growing rapidly though largely due to efficiencies rather than more sustainable sales growth, given the unattractive yields on bonds and cash, and the elevated prices of most commodities. Developed world economies will exhibit subdued growth next year despite unprecedentedly easy monetary policies, as consumers reduce their over indebtedness and European governments seek to reduce their budget deficits to maintain their credit ratings and hence funding abilities. As a consequence, interest rates are likely to remain at current low levels for some time to come in an effort to stimulate flagging economies as further fiscal measures are not possible. The currency outlook remains murky, there being no relative yield attractions, with the dollar and yen globally probably having the least adverse fundamentals of the major currencies, but offset by impending US further "quantitative easing" ie money creation. The local currency -while structurally weak due to higher inflation in the SA economy without offsetting increases in output -will remain strong or even strengthen further should demand for emerging market assets remain strong.

A battle is developing between those believing that the world needs to spend its way of out troubles versus those believing that this is the very issue that got them into trouble. This has many implications: from how quickly economies recover, to market rating to whether the world will experience deflation or inflation Unfortunately we can't predict the future but we can inflation. Unfortunately, future, structure our client's portfolios to be robust should either scenario unfold.

June 2010 was a volatile month. The markets were up 4% by the 20th, only to end the month down 3%. Much of the market stress can be attributed to the perceived change in attitude of the G20 members, led by Europe. Consensus previously held that the developed economies would continue to stimulate their way out the crisis. This, combined with near zero short-term rates could have been a very good environment for equity market ratings.

It now seems clear that the G20 is attempting to rein in their unrestrained spending that took place under the guise of stimulus program. Wealthy countries are required to cut their budget deficit by 50% over the next three years and try to stabilise their level of debt relative to the size of their economies by 2016. This seems like an attempt to take their foot off the stimulation accelerator, but not necessarily a decision to stand on the brake. It is still unclear how much of the pain has been deferred till a later date. Time will tell whether governments are really committed to implementation of a more austere fiscal policy or whether it was just a case of managing bond vigilante expectations.

China is another key market that is trying to take preventative measures after seeing the damage caused by an overly loose world year long- policy in other parts of the world. It is attempting to rein in the stimulus-induced consumer credit growth of last year. Our longterm outlook for China remains positive as the command economy shifts its focus to stimulating its overly cautious consumers.

Although austerity looks to dominate in Europe, the US remains committed to providing an accommodative environment to fight deflation as well as stimulate aggregate demand. Employment growth in the last quarter has been disappointing, at a time when a significant portion of unemployment benefits are lapsing. What is important in the shorter term is that the stuttering US job market is able to gain traction. While hours worked in the US have ticked upwards, we have yet to see a major upturn in sustainable job growth.

As noted previously, we believe that even though data points will probably continue to provide mixed signals over a longer time horizon, we remain cautiously optimistic that the world economy can claw its way upwards, albeit at a slower than rate what we have become accustomed to. The equity component of the portfolio remains invested in conservatively managed companies, leaders in their industries and sectors, with the ability to protect earnings through pricing power. The outlook for earnings is less certain than three months ago, and greater caution in warranted. However, we have high conviction on equity outperforming cash and government bonds in the current environment. This is not the time to 'bet' on one possible outcome, given all the uncertainties around.

Globally, economies are showing signs of stabilising with leading indicators around the world turning strongly upwards. We will continue to scour for signs that the stimulus spending is creating an environment for a sustainable recovery. Some key indicators we are watching are US job creation US housing prices US housing inventory industrial resources prices and creation, prices, inventory, inventories to name a few.

Should job creation gain traction, the US GDP recovery will enable the US government to finance its growing deficit. After a hiatus, a resurgent western world's demand for resources should resume, driven initially by re-stocking at the same time as China maintains its resource consumption levels. This could potentially create a bottleneck in some resources where supply will only be able to respond to the increased demand a few years out. As a result, we have continued to selectively up-weight resources, with gearing to a global recovery.

The SA economy is expected to accelerate off a low base in late 2010, although strong vehicle sales suggest that we might experience the recovery earlier than expected. The rand remains vulnerable to negative shocks, but emerging market flows should keep it strong in the short term. We, therefore, see potential for positive earnings surprise in interest-rate sensitive stocks, driven by increased consumption as a result of lower interest service cost and subdued food inflation. SA banks remain well capitalised with plenty of headroom to lend should the environment stabilise.

On balance, we remain positioned for a global economic recovery. However, should it not play out as expected, problem unprecedented global deficits at unprecedented levels will be a major problem. In line with our investment philosophy of managing risk, we have therefore not "bet the farm" that the above positive scenario will play out, but have weighted our portfolio to take advantage should our base case eventuate.

As a result, the asset allocation of the Nedgroup Investments Stable Fund is fully invested in quality, well-financed and robust companies, where management is adding value to grow shareholder wealth. Equity market returns are likely to be front loaded, and in the positive scenario painted above, PE's can expand rapidly as investors rush to get exposure to the market. We continue to favour a full waiting to foreign assets as the rand does appear vulnerable should flows into emerging markets dry up, at a time where imports accelerate due to growing consumer spend. Government bonds locally and globally, are at money risk to increasing supply and competition for investor's money.

After a dismal start to the year, the SA equity market rose significantly for a third quarter running, gaining 11% and 32% for the year -as continued demand for emerging market assets and improved sentiment lifted equity prices globally, but especially in emerging economies. Equity markets have begun to price in positive traction in global growth driven by government support and continued low global short-term interest rates. This could provide an impetus for equity markets through the first half of 2010.

The rand may remain strong short term as support for commodities and emerging market assets grow, and World Cup fever builds, leading to capital inflow into the country. This is not sustainable and the currency is expected to weaken in the longerterm based on a poorer macro outlook for SA's competitiveness in the global economy.

Weak government finances and projected budget deficit (estimated between 9-10% of GDP) will put pressure on government infrastructure spend going forward. Having said that, we feel the left slanting government will continue to find the money to support their lower LSM constituents.
The allocation to growth assets has been increased during the last two quarters, allowing unitholders to participate in the current upswing in prices. The equity exposure, however, remains invested in quality, well-managed and conservatively-funded companies.