The third quarter was a period of heightened price volatility for most asset classes, as markets continued to grapple with an increased recession risk in developed economies and the impact that sovereign debt defaults could have on the global banking system. There is also clear evidence that Chinese monetary tightening is starting to have the desired impact on Chinese property prices and artificial investment demand in various parts of the Chinese economy. How this plays out is uncertain though and basing investment decisions on any extreme outcome in this regard is to say the least, unwise.

Risky assets have been hammered over the last three months, losing all of their gains in the first half of the year. The MSCI World Index fell 16.5%, MSCI Emerging Markets Index fell 22.5% and the S&P 500 fell 14% all in US dollars. Locally the JSE All Share Index fell only 6% in rands, however in US dollars it faired just as bad as other emerging markets losing 21%. Gold typically appreciated during this time of volatility increasing 16% in US dollars and 39% in rands. The only other place to be was in government bonds where US bonds were up 6.5% and Japanese bonds were higher at 12.5%, both in US dollars.

On the currency side, during the quarter ended 30th September, the Brazilian real dropped 17% against the dollar, the rand fell 16%, the Aussie dollar lost 10%, the Korean won lost 9%, the euro lost 8% and the Swiss franc lost 7% (after intervention).

There is, however, a couple of positives - which are going unnoticed by investors - amongst the negatives. The German unemployment rate again fell to a new 20 year low of 6.7%; and the US weekly jobless claims dropped to 391 000 last week, down from the previous week and below market expectations. The only other possible positive is that markets are now looking cheap; however this is assuming that we are not heading for another global recession.

Some of the worries which have fuelled recent volatility in global markets include concerns over a double-dip in the US economy, looming global inflation, a faltering Japanese GDP post the tsunami, a hard landing in China and the Eurozone debt troubles.

This has been reflected in volatile equity, listed property and preference share markets. With a waning risk appetite, bonds and listed property have fared well recently, however, the looming series of interest rate hikes will likely create head winds for these asset classes going forward. Despite the moderate 2.5% yields on inflation-linked bonds, this margin is looking increasingly attractive as potential real returns from other asset classes seem less certain.

CPI accelerated to 4.6% year-on-year in May due to higher food and fuel prices. The annual increase in the two largest of the12sectors-housing and food and non-alcoholic beverages-rose by a significant 6.6%and 6.1%respectively.

The JSE All Share Index sold off sharply during the first three weeks of June, declining by 7%, before the end of month rally erased most of the losses but still ending down 2%, the market, however, has managed to end the first half of the year marginally positive.

Global markets performed similarly to our local market with both the MSCI World Index and the MSCI Emerging Markets Index down-1.5% in US dollars, while the S&P500 fared worse dropping 1.8% in US dollars.

On the currency front, sterling was one of the poorest performing, losing ground against most major global currencies during June: -2.5% vs. the USdollar,-3% vs. the euro and-3.1%vs. the rand.

Global equity markets pulled back sharply during March with the Japanese earthquake, tsunami and nuclear accident as well as the tensions in Libya weighing heavily on global risk appetite. From the end of February till the middle of March, the S&P 500 and MSCI World Index fell -5.3% and -6.8% respectively in USD. The All Share Index similarly fell -6.4% in ZAR. As quickly as these indices fell, they quickly recovered, with the S&P 500 and the All Share Index essentially ending flat for the month.

Although the unprecedented disaster and strife that is affecting parts of the world has had an impact on certain local markets, global markets have continued to move upwards. The key risk to financial markets going forward is the threat of higher global inflation. This inflation is evident amongst emerging market countries where the average (of the normal survey of 24 countries) is at 6%, up from 4.8% in early 2010. These increases have resulted in several emerging economies having already reacted by raising policy rates and bank reserve requirements; with further rate hikes expected.

Gold and Oil continued their massive run with both commodities moving higher during March. Gold hit a new high of USD 1444 during the month, but fell back slightly to end at USD 1435 per oz. Oil moved up to USD 117 per barrel - the highest price since early August 2008. The nuclear problem in Japan has led to increased expectations of increased demand for traditional sources of energy - gas, coal and oil - not only as emergency alternative fuels for Japan but also for the medium term as many countries re-examine their nuclear energy policies. While demand persists, the risks of crude oil supply disruption keeps the price elevated.

On a more positive note, the US economy added more jobs than expected in March: the jobless rate fell to 8.8%, a two-year low, from 8.9% in February. Euro zone unemployment declined for the fourth month in a row in February. The seasonally adjusted jobless rate in the 17 countries that use the single currency fell to 9.9%, down from 10% in January. German unemployment fell particularly sharply, pushing the jobless rate down to 7.1%. This is the country's lowest rate since figures were first published for unified Germany two decades ago. In Asia, China's manufacturing sector regained momentum in March, calming fears of a pointed slowdown, on strengthening demand for machinery and autos.

On the currency front, the rand strengthened against all major currencies during March to end at R6.75 to the US dollar, R10.84 to pound sterling and R9.58 to the euro.

2010 ended as a fair year for equities in developed markets with the MSCI World Index returning 12.3% in US dollars, with the Toronto 300 Index leading the pack with a 20.7% in US dollars. Developing markets were generally better with the MSCI Emerging Market Index returning 19.2% in US dollars. One of the stand-out emerging equity markets was the FTSE/JSE All Share Index which returned 33% in US dollars.

In the fixed interest space, global bonds in developed market had lacklustre returns for 2010, with the JP Morgan Global Government Bond Index returning just 4.8% in US dollars. Emerging market government bonds were the place to be - the JP Morgan Emerging Market Bond Index returned a very solid 11.6% in US dollars over the year.

Again one of the best performing bond markets was the South African All Bond Index which returned 29% in US dollars. The global search for yield resulted in the largest ever inflow into South Africa's bond market by foreign investors with R61bn coming in during the year. Japanese government bonds were the other hot spot in the fixed interest arena for 2010, returning 28% in USD.

The fund is currently positioned with an overweight position in global equities and an underweight position in global bonds.