The South African economy is anticipated to deliver superior economic growth during 2011 but does face a challenging environment. The potential negative impacts around the North African & Middle East (5% of SA exports) uprisings and the Japanese (9% of SA exports) crisis could impact our growth expectations, especially our export and consumer related sectors. Rising inflation is a major issue in emerging markets and is starting to come through in South Africa. While the strong Rand has provided a buffer for inflation, the strong rise in food, oil and electricity prices will feed into inflation over the next few months. This together with the high consumer debt levels will constrain household consumption expenditure in the year ahead. While the mining sector is anticipated to provide a meaningful contribution to economic growth, it is largely reliant on robust economic growth being sustained in the likes of China and India. The manufacturing sector has improved with utilisation levels slowly rising but the strong Rand remains a thorn in the side impacting their global competitiveness. With a million job losses during the recession and unemployment at relatively high levels, sustained job creation is required from both the private and public sectors to reduce unemployment meaningfully. This requires a significant increase in labour productivity and incentives to encourage the private sector to start investing and spending on capex in the coming years.

The last two years have witnessed one of the strongest rallies in emerging markets as earnings bounced back from a relatively low base and investors regained their confidence in the sustainability of the economic recovery. This rally was further fuelled by the second round of quantitative easing (QE2) and record low interest rates in developed markets, which incentivized the flow of money into riskier assets. The JSE All share index (ALSI) has benefitted from the large flow of funds into emerging markets as well. While South African equities still offer some relative value compared to bonds and cash, valuations have now started to look stretched. Developed markets seem to be offering much higher relative value compared to emerging markets. We have taken this opportunity to continue increasing our exposure to global equities within developed markets which have been trading well below their historic valuations. The strong outperformance of emerging markets versus developed markets and the continued Rand strength has however impacted the relative performance of our portfolios in the short term.

It is concerning to note that global earnings revision over the last three months depict a rather challenging picture for emerging markets including South Africa. The pace of earnings downgrades in emerging markets has continued to increase while developed market equities continue to receive significant upgrades. While the growth story for emerging markets is compelling, record inflows over the last couple of years have fuelled relatively high valuations and expectations. This gives credence to our conviction in maintaining a higher than average exposure to developed market equities which are offering more relative value. Current consensus numbers for the ALSI suggest that earnings for 2011 are going to be significantly in excess of trend line estimates. While reversion to mean is not an instantaneous process as we witnessed between 2005 and 2008, we feel it does indicate downside risk. This becomes especially true if we put it in context with the volatile global political situation.

Our portfolios are positioned defensively to make sure they have the required downside protection. Alongside our higher than average asset allocation to global equities, we remain tilted towards high quality companies which have dominant market shares, robust cash flows, strong balance sheets and a higher level of sustainable ROE. With inflationary pressures lurking around the corner, our South African equity exposure is highly tilted towards companies which have the ability to pass on cost increases and maintain a higher level of profitability through the economic cycle. Furthermore, we also have a high exposure to non-commodity Rand hedges which should provide a kicker to portfolio performance if the Rand were to depreciate.

Our global equity exposure is also highly tilted towards high quality large cap market leaders who have strong balance sheets, sustainable cash flows and high dividend yields. Their strong balance sheets give them the ability to fund future growth with relative ease compared to their smaller leveraged peers, while effective utilization of their cash holdings for share buybacks or M&A provides significant earnings and ROE enhancement. More importantly, the high level of real dividend yields provides substantial downside protection. We believe that the underlying value in our balanced portfolios will come through over the medium to long term as the valuation gap between poor and higher quality companies and developed and emerging markets normalizes.

The South African economy is on track to deliver positive economic growth for 2010 despite industrial action having impacted negatively during the second and third quarters. Robust mining production due to demand from major emerging markets and rising commodity prices has resulted in mining starting to come through. Rising disposable income, low interest rates and increases in credit extension has contributed to a cyclical uptick in household consumption expenditure. However, the high consumer debt levels will limit its ability to support strong economic growth over the medium to long term. Consumers also face a potential risk in rising inflation, which could happen fairly rapidly should the Rand depreciate against the major currencies. The manufacturing sector is difficult with the continued strengthening of the Rand constraining its growth potential. Despite this, there appears to be some pick up with automotive production starting to normalize and the PMI moving back above the 50 level in November. Government expenditure is anticipated to remain supportive of economic growth in the future with the stable fiscal and monetary position of government allowing for this flexibility. Despite the increased borrowing for infrastructure related projects (public enterprises included), government debt to GDP is forecasted to peak at 43% in 2013, well below levels of its developed market peers. Unemployment however remains a key concern with the difficult economic environment not being very conducive to job creation. The public sector has contributed to some formal job creation in recent months while, the private sector has lagged and is unlikely to make a meaningful impact in the short term. While the economic environment will remain challenging in the year ahead, economic growth should be better than expected due to base effect of industrial action during 2010.

The South African equity market had very strong performance in the fourth quarter on the back of solid recovery in the resource stocks, as well as the strong performance of the industrials sector. Financial stocks underperformed during the last quarter as the sector had to contend with challenging news flow on the European debt crisis sparked by Ireland, as well as the tensions in the Korean peninsula. For the FY2010, industrials stocks gained 27.4%, followed by Financials 15.5% and Resources stocks 12.2%. While the outperformance of the industrial sector was driven by the foreign inflow into South African equities, the underperformance of resource stocks relative to the market and other sectors was mainly due to the weaker commodity prices earlier this year as China, the largest consumer of metals in the world, started tightening its policy to prevent a property bubble. Despite the fact that fund managers preferred investment asset class is equities, there was a significant shift in the last three months from equity and cash into bonds. This shift was mainly due to the increases in bond yields after the recent inflation numbers were released and the outlook for inflation increasing over the medium term. As the Rand continued to strengthen against the USD, we continue to favour global equities which providing South African investors with an attractive investment opportunity over the medium to long term. M&A activities have seen significant increases during the past 12 months, with a total value of R 145.3bn in transactions being announced. Our exposure to high quality companies, who are either market leaders or niche operators in the small and mid-cap arena, could be benefit from increased activities in this area. Our portfolios are well diversified with significant exposure to domestic focused companies who stand to benefit from economic recovery in South Africa. We remain overweight consumer staple stocks which provide downside protection should the economic environment remain challenging. Our domestic portfolios trades at a significant discount to the South African market across various measures while providing a higher dividend yield. Importantly, our sustainably higher ROE relative to the market through the cycle, will provide out-performance for investors over the long term. Global stock markets continued their recovery in the fourth quarter, with the MSCI World gaining 9.0%, on the back of a strong recovery in the United States and other developed markers. Emerging markets lagged during fourth quarter as some of these countries started tightening their monetary policies in order to contain inflationary pressure and currency appreciation. For the FY20 1 0, emerging markets gained 16%, and outperformed developed markets by 4.0%. While the developed economies face challenging conditions, many developed market companies have increased exposures to higher growth markets providing for decent earnings growth at attractive valuations. In addition, the strong balances sheets and robust cash flows allow for many of these multinationals to make strategic acquisitions of companies into higher growth markets. Our global portfolios are well exposed to superior quality companies within the technology, industrial and basic materials sectors which provide exposure to emerging markets and are geared to the global economic recovery at attractive valuations. Our significant exposure to the communications and healthcare sectors provide downside support should economic growth remain muted for a sustained period of time. Our global portfolios trade at a significant discount to the global market across various measures with a higher sustainable ROE% through the cycle. With global bond and cash yields close to historical lows, the decent growth profile and attractive real dividend yields being offered by higher quality global equities does lay the foundation for outperformance of equities over the long term. The operating environment for SA Property companies is improving gradually and there were further indications over this quarter that vacancies and bad debts are reducing in the industrial and retail sectors but there are still a number of the major office nodes that are lagging and in this sector the demand for new space remains weak. Vacancies will reduce as the economy recovers but the rate of improvement is expected to be slow, especially in the office sector, and landlords and tenants continue to face the pressure from very high levels of inflation in electricity costs and municipal charges. However, revenue and distributions continue to be supported by healthy annual contractual rental escalations of 7-8% p.a. on current leases. The current listed property sector yields are below historic levels and government bond yields, which increases the risk of downside but this also creates an opportunity for Oasis to add value through our detailed in house research and stock selection skills. Despite bond yields in developed markets moving higher over this quarter due to further concerns around Euro sovereign debt and the longer term negative effects of the unprecedented level of quantitative easing, the real yields of South African government bonds remain attractive on a relative basis. However, during the past quarter the yield curve has shifted upwards and after very strong foreign flows into SA bonds we have seen foreigners becoming net sellers.