Global equity markets ended the month lower as market participants were in "risk-off" mode and reduced their emerging market exposure. The emerging markets index (-6.4%) experienced a sharp decline relative to the developed markets index (-2.4%). The JSE tracked emerging market bourses lower, dragged down by resource shares (-13.6%) which retraced May's gains. Financial shares (-2.4%) and industrial companies (-2.8%) fared relatively better.

Developed market bond yields spiked after the US Federal Reserve signalled unexpectedly early curtailment of its stimulus programme due to continuing signs of US economic recovery. Emerging market debt was also sold down with SA 10-year yields rising sharply resulting in a decline in the ALBI of 1.5%. SA Inflation surprisingly slowed to 5.6% year-on-year in May from 5.9% in April on the back of lower wheat prices and transport costs as petrol and diesel prices eased. At the factory gates, producer price growth moderated to 4.9% y/y from 5.4% y/y in April, below expectations for a 5.2% rise.

Commodity prices continued to trend lower (CRB commodity index -2.2%) as tight Chinese credit markets affected growth expectations for the world's largest commodity consuming economy. Gold prices slumped (-12.3%) for the month on broad-based US dollar strength and waning inflation expectations.

The Rand retraced some of May's losses, gaining 2.1% against the US dollar to close at R9.87/$. However, the currency was volatile intra-month, having slumped to R10.30/$ following Bernanke's comments on the moderation of US monetary stimulus.

The Nedgroup Investments Stable Fund remains relatively fully invested in equities. Downside is still protected through put options, which will prevent a significant decline in the value of the fund should the domestic market fall heavily. The Fund has retained a full allocation to foreign assets, and continues to avoid bonds despite the recent rise in yields. Returns have been above expectations for some time, and some consolidation in markets should be expected over the next 3 to 6 months

Global equity markets extended their gains in December with emerging market bourses (+4.8%) leading their developed market peers (+1.9%) in spite of looming concerns around the US fiscal cliff, as economic data out of the US and China continued to improve. The JSE (+3.2%) gained to close near its all-time highs, posting an annual return of 26.7%. with financial shares (+5.4%) leading the bourse on increased risk appetite, while industrials (+2.4%) also rose and resource stocks (+3.0) gained despite rand strength.

The ANC elective conference in Mangaung held few surprises with Jacob Zuma re-elected as ANC president, but markets were cheered by the appointment of Cyril Ramaphosa as deputy president of the ANC. SA inflation was unchanged from October at 5.6% year-on-year in November, but food inflation continues to place upward pressure on the inflation basket with food increasing by 1.3% month-on-month and non-alcoholic beverages by 0.8%.
Industrial commodity prices were largely unchanged for the month, with the exception of iron ore (used in the production of steel), where spot prices rose by 20.4%, while precious metals prices generally declined as near-term US inflation fears abated. The rand recovered some lost ground in December, finishing the year at R8.47 to the US dollar. On-going foreign interest in our bond market resulted in the rand showing only modest depreciation of 4.1% for the year despite high intra-year volatility.

The Fund’s allocation to equities has been increased, both on the domestic market as well as in the international component of the Fund. The improvement in the data out of China, further improvements in the US housing market and the ongoing support by reserve banks globally to support economic activity, should be positive for sentiment and company earnings going forward.

Developed markets were buoyed by positive economic data that lifted US markets (+3.6%) to all-time highs and continued monetary easing by the Bank of Japan pushed Japanese equities (+5.0%) higher. In Europe, persistently weak macro-economic data compounded by a precedent-setting bailout of Cyprus put pressure on European equity markets (Euro Stoxx 50 Index -0.3%) and the euro (-1.8%). The JSE (+1.2%) gained with financials (+3.1%) advancing the most after the banks generally reported solid earnings. Industrial shares (+2.8%) benefited from good gains in non-resource rand-hedge stocks as the rand depreciated, but resource stocks (-2.6%) declined as metals prices and demand expectations fell.

Bond yields surged in Italy after a ratings downgrade and Cypriot bank failures and €10 billion bailout, but fell in Germany, France, the UK and Japan (on continued quantitative easing). SA yields climbed at the margin as global brokers highlighted the risk to the bond market of deteriorating fundamentals. SA consumer price inflation unexpectedly accelerated to 5.9% in February (from 5.4% in January), prompting hawkish comments from the South African Reserve Bank’s Monetary Policy Committee, despite annual producer inflation slowing to 5.4% from 5.8% the previous month.

Industrial commodity prices (-4.4%) declined, led by iron ore (-9.5%) on an anticipated slowing of Chinese steel production due to tepid downstream demand, which could be exacerbated by expected iron ore supply increases in the second half of 2013. The rand depreciated further (-2.2%) against the US dollar on deteriorating fundamentals, slumping 9.0% against the dollar so far this year and touching four-year lows, prompting SARB Governor Gill Marcus to comment that the currency decline had overshot the Bank’s estimate of fair value and that it should retrace from these levels.

The asset allocation has changed very little over the last month. The allocation to equities remains close to the 40% mandated maximum. The foreign asset exposure has been retained at close to 25%, with an increased allocation to equity markets the prevailing theme since October 2012.

Nedgroup Investments Positive Return Fund have closed and amalgamated into Nedgroup Investments Stable Fund.