The third quarter of 2009 was again very strong for equity investors globally. The MSCI World Index rose by 17.6%, adding to the impressive 22.5% achieved in the second quarter. Emerging markets continued their outperformance of developed markets. Our markets performed in line with the global average, with the FTSE/JSE All Share Index (ALSI) showing a return of 17% in US dollars, and 13.9% in rands. The local currency continued its strength against major currencies, due to high interest rate differentials and a strong rebound in commodity prices, as well as mergers & acquisitions (mainly the MTN/Bharti merger talks).

Industrials led our market higher with a return of 16.3%, followed by financials (up 15.1%) and then resources (up 11.1%). Other than coal mining, which showed a decline of 25.1%, all the 29 other subsectors showed strong returns, ranging from a low of 3.1% for mobile telecommunications to a high of 31.9% for personal goods. MTN, in the mobile telecommunications sector, significantly underperformed the overall market. This is in part due to uncertainty around the MTN/Bharti merger talks, concerns around the price and structure proposed, as well as the weak Nigerian currency, the naira, as that is the country where MTN generate most of its profits. On personal goods, Richemont has rebounded strongly from its recent lows despite poor luxury goods sales being reported. Investors seem to be looking past short term financial results.

During the quarter, we took advantage of strong equity markets by taking profits from Mvela Resources, Old Mutual, Aveng and ArcelorMittal. This was after strong performance from these shares. We also switched out of Nedbank into FirstRand. We also introduced new shares in the portfolio, namely Tongaat-Hulett, Woolworths, Hulamin and Adcock Ingram.

The second quarter of the 2009 turned out better than the first as global equity markets rebounded strongly from a horrible first quarter. The MSCI World Index rose an impressive 22.5% in US dollars, erasing all the losses suffered in the first quarter. Although these gains were broad based, it was the emerging markets that impressed with an excellent return of 35% against the developed market's return of 21%.

Our markets performed in line with their emerging markets counterparts, with the FTSE/JSE All Share Index (ASLI) delivering an outstanding 34% in US dollars. In rand terms the returns were much more muted at 8.6%, as most of the gains in US dollars came from a very strong rand. The strength of the rand is partly attributed to rising commodity prices during the quarter, combined with increasing risk appetite globally, as well as high domestic interest rates relative to the rest of the world.

Of the 30 sectors in our market, only five showed negative returns for the quarter. The worst-performing sector was gold mining (the best-performing sector in the first quarter), which fell 16.2% against an increase of 22.8% previously. Rising risk appetite and a strong rand were negative for the sector. The best performing sector was household goods (up 32.8%), erasing all the losses suffered in the first quarter.

During the quarter, we switched out of Murray & Roberts and WBHO into Aveng within the construction sector on valuation, while we took profits from our top performers, namely Astral Foods and Naspers. Additionally we took advantage of low valuations by further adding to Anglo American, Exxaro and Sentula Mining. We also added to our long term core holdings (e.g. City Lodge, Altech and Cashbuild).

Although most investors hoped for a better start to 2009 after a horrible 2008, this was not to be as global equity markets continued to slide. The MSCI World Index declined 11.8% in the first quarter of 2009. The global economy has continued to deteriorate despite unprecedented actions from policymakers, such as the Japanese-style zero-interest rate policy. Falling profits and rising unemployment have never been good for equity markets.
Domestically, the FTSE/JSE All Share Index fell 4.2% during the quarter. The decline was broad-based as only four out of 30 sectors managed a positive return. Gold mining was the best performing sector with an excellent return of 22.8%, followed by pharmaceuticals & biotechnology (up 22.4%) and then platinum mining (up 9.6%). Precious metals have risen sharply as investors question the impact of current policy actions on future inflation. Gold shares also benefited from their improving fundamentals (e.g. rising production, improving balance sheets and cash flows), while platinum shares rebounded from their extremely low valuation. The strong increase in the pharmaceutical sector was due to rumours that Aspen would be taken over by UK giant GlaxoSmithKline. Aspen rose more than 35% during the quarter.

During the quarter, we took advantage of extremely low valuations by buying Anglo American plc as well as Mvela Resources. We also added to our long term core holdings (e.g. SABMiller and City Lodge Holdings) that showed value after falling together with the overall market. We also took profits from some of our best performers (e.g. Lewis and Telkom) that are no longer showing value.

The last quarter of 2008 was as volatile as the third quarter, as global markets continued their slide amid the global financial and economic crisis. The only markets in the world to manage positive returns were government bond markets and gold. These were a result of a combination of risk aversion, falling interest rates and fear of the long term consequences of the policy response to the global economic crisis.

Our domestic equity markets were not spared, as the FTSE/JSE All Share Index fell 9.2% in the fourth quarter, leading to a decline of 23.2% for the year 2008. It was certainly one of the worst years on record for equity investors. To put this into perspective, out of 32 JSE sub-sectors, only two had positive returns in 2008, namely food producers (up 3.1%) and food & drug retailers (up 15.2%). The 30 other sub-sectors had returns ranging from -1.6% for gold mining (thanks in part to the resilient gold price) to as large as -46.9% for the life assurance sector. There was basically nowhere to hide for equity investors.

Given significant declines in 2008, there is some hope that 2009 would see a rebound in equity markets. However, there is still a lot of uncertainty as the global financial and economic crisis continues to wreak havoc around the world. We have therefore taken a more cautious and defensive stance in the portfolio, focusing only on those companies with strong balance sheets, strong market positions and strong management teams. We believe such companies are better placed to weather the global economic downturn.