Market Review
The third quarter was reminiscent of the 2008 global financial crisis, with the selloff in US financial markets giving way to global contagion. This time round the rout was triggered by the uncertainty surrounding raising the US debt ceiling and was exacerbated by an ignominious downgrade of its credit rating. The European sovereign domino effect also forced the EU to approve an enlarged bailout fund to address the problem. Such were the pressures during the first half of the quarter that the broadbased US S&P 500 Index ended down 6.66% on August 8 - its 31 st worst daily decline on record and the fourth highest daily trading volume in history! Gold spiked to a record high at $1 900/oz, the Swiss Franc hit a record high against the US dollar and US Treasuries, despite the US downgrade, fell to 1.9%, below their 2010 lows. It is thus no surprise that this quarter was one of the worst in history, with the S&P 500 declining 14% and European equities down 17%. The German Dax slumped25% - its worst quarterly performance in nine years - and Hong Kong market was down 21%, its worst quarterly performance in a decade.

The global growth scare saw emerging market equities underperform developed market equities so far this year. Emerging market policy makers have had to reverse course, with Brazil, Russia, Turkey all loosening monetary policy to provide a cushion against the global growth slowdown. The release of a bleak economic report from the IMF in September that warned the global economy was about to enter a "dangerous new phase' pushed world markets into a tail spin at the end of the quarter.

The South African economy also hit the skids in the third quarter, with risks skewed to the downside as global economic growth slowed. As a result, the All Share Index was down 3.6% over this period, with the worst of the selloff in September. Local equities underperformed bonds, which initially experienced a strong rally as 10-year yields peaked at close to 7.5% before weakening towards the end of the quarter. Three years ago, the financial crisis forced governments in the Anglo-Saxon world to intervene to save the private sector, especially financial firms. This year, the problem is that governments are the ones who need saving! Portfolio analysis The only meaningful change to the benchmark over the quarter was the substitution of Reinet with Truworths. The portfolio performed in line with its benchmark.

Outlook
As we mentioned last quarter, risk appetite is being driven by tail risks that are, by their very nature, difficult to predict. Global economic data releases have fallen short of expectations and there is a risk that the mid-cycle soft patch may indeed be the beginning of another recession.

From a long-term, fair value perspective, we believe the stock market is now trading slightly below its fair intrinsic value. On an absolute basis, the market is trading on a forward PE of 11x, which is in line with its long term average, assuming 20% earnings growth over the forthcoming year. Given the 14% annualised return we require when assessing the market's intrinsic value, investors can expect positive annualised returns intrinsic value, investors can expect positive annualised returns off current levels.

In addition, relative to bonds, SA equities have become even more attractive. The 10 year SA bonds are now trading around 8%, which would imply a long run real expected return of approximately 3% and cash yields are at extremely low levels. Therefore, we believe that the risk-return equation has once again shifted in favour of equities.

Market Review
The quarter kicked off with Portugal becoming the third Eurozone country to require financial assistance. After Greece was bailed out to the tune of ?110bn, Ireland ?68bn, Portugal had to borrow about ?80m to repay debt in April. Shortly thereafter, global equity marketswere rocked by a warning from Standard & Poors (S&P) that the US could lose its AAA credit rating. The political deadlock over the ballooning debt situation in the US saw the US dollar hit 16 month lows. This added to the appeal of gold which leapt to a new record high above $1500 an ounce as investors sought shelter from mounting sovereign risk in the US, EU and Japan. In May, commodity markets were rocked by concerns about the strength of the global recovery with weak growth and weak US jobs data. In fact we have been witnessing the weakest US recovery since 1921(that is over 17 cycles!). It is also noteworthy that the commodity sell off came ahead of the listing of the world's biggest commodities trader Glencore.

Equity markets finished on a solid note at the end of the quarter after Greece voted in a €28bn austerity package.This boosted markets and the JSE rallied by 4% enabling it to finish the quarter flat. SA equities moved sideways during the period, underperforming bonds and cash. They also underperformed global equities, in line with the broader emerging market underperformance during the three month period. Within the emerging market universe, South Africa lost 2% in dollars, underperforming other emerging markets (-1%), with Asia leading the pack. In the second quarter, industrials were the best performers (up 3.9%), followed by Financials (up 1.3%) and with the Resources sector lagging, down 5.7%. Overall, the Equally Weighted Top 40 Index ended off 1.1%.

Portfolio analysis
The main corporate action that took place during the quarter was the Massmart/ Wall-Mart transaction and Pick 'n Pay was substituted with Assore in the index. During the quarter, we experienced very strong inflows, with the Fund growing from a mere R17 m to its current market value of more than R100m.

Outlook
In our view, the market is now fully valued. The ALSI is trading at an historic PE of 13x but we expect a rapid decline in this ratio, with earnings expected to grow 21% over the next year. This translates into a forward PE ratio of 11x, which is in line with longterm averages. We still believe that the market may be too optimistic with regards to earnings growth in the resource sector with expectations for 32%growth. The local economic outlook is improving, with economic growth expected to be 3.75% this year. Inflation remains a threat lurking on the horizon, although our house view is for consumer inflation to remain within the target range over the next two years. SA corporate earnings are expected to continue recovering, with consensus earnings growth of over 30% expected in 2011. As we have consistently stated over the past few quarters, there is less value in the market after its strong run over the past two years. From a long-term, fair value perspective, we believe the stock market is still trading close to its fair intrinsic value. Given the 14% annualised return we require when assessing the market's intrinsic value, investors can expect upper single-digit annualised returns from current levels.

Market Review It has been a turbulent start to the year, with troubles in North Africa leading to fears that there was the risk of contagion spreading to the world's main oil-producing countries - possibly leading to serious disruptions in oil supply. Fears that the rising oil price would slow global growth saw gold rise to a record high in March of $1444/oz. As if that wasn't enough, in March Japan was hit by its biggest ever earthquake-tsunami and suffered severe human and economic losses. Global markets pulled back as fear gripped investors, with the Japanese equity markets plunging almost 20% shortly after the tragedy. These events will inevitably translate into lower global growth estimates for 2011, but the impact on the South African economy is likely to be minimal.

Oil remained centre stage during the quarter after rallying by more than 40% during the past 12 months and breaching the psychological $100/barrel mark - a level last seen in 2008 just before the global economy and equity markets crumbled. However, the underlying causes of the current oil price spike are different, with political tensions in oil producing regions leading to supply disruptions and Japan's nuclear disaster prompting a global anti-nuclear backlash. This has raised expectations that demand for oil as an energy source may increase.

The good news, at least, is that the South African economy continues on its recovery path. Manufacturing production continued to rebound as measured by the Purchasing Managers Index, which rose to 57 in March - its highest reading since February 2010 - while new vehicle sales grew at more than 20% on a year ago. Retail sales slowed to 6% at the beginning of the year, driven by a slowdown in furniture and appliance sales. The Reserve Bank kept rates unchanged in March and delivered a more positive economic outlook, revising growth in Gross Domestic Product up to 3.7% in 2011. However, its inflation forecast deteriorated to 4.7% for 2011, but this remains within the target band.

The JSE Equally Weighted Top 40 delivered a total return of 2.43% during the first quarter , shrugging off the bad news. With the larger capitalisation shares outperforming the rest of the market, this has been one of the best performing indices over the last three months.

Outlook
It appears that a number of low probability tail events have the potential to derail the global economic recovery. In the developed world, deflationary fears are being replaced by inflationary fears, as oil and food prices hurtle back to record highs. The inflationary impact on disposable income and the still-fragile consumer could lead to a double-dip recession. In the emerging world, there are fears policymakers may react too aggressively to stem the impact of inflation, with the fate of the Chinese economy still set to be a key driver of global demand for natural resources.

In SA, the currency remains stubbornly strong. After depreciating from R6.60 to the dollar to R7.30 at the beginning of the year, the rand has appreciated back to the R6.70 level. This is obviously putting a lot of pressure on rand-sensitive sectors and may adversely impact job creation. This could well lead, once again, to calls for policymakers to try and weaken the currency - an exercise that has proved not only futile, but also costly in the past. Electricity generation is likely to remain a challenge in the short- to medium-term.

Finally, although we expect the economic recovery to continue on a positive trajectory, the market is now beginning to price in this recovery. For this reason, investors should expect more moderate returns from current levels.

Market review
The last two years of equity market performance are another keen reminder that investing at the point of maximum pessimism is a long-term winning strategy. There are few who would have thought the FTSE/JSE All Share Index would have generated a return of 32.1% in 2009 and another 19% in 2010 - all of this while the world was going through the toughest global crisis since the Great Depression! Since the market index hit its low point of 17 714 in the wake of the crisis on November, 20 2008, the market (ex dividends) has gained almost 80%. The equity market's performance last year was led by the industrial sector (up 24%), followed by financials (ahead 16.6%), with the resource sector lagging with 12.3%. Overall, the All Share Index gained 9.5% during the fourth quarter, while the Equally Weighted Top40 (the fund's benchmark) delivered a 6.8% return during the period. There was a reshuffling of sector performance during the final quarter, with resources putting in the best performance (up 16.5%), industrials (8.4%) and financials declining 0.1%.

SIM Outlook
The local economic outlook remains sound. We expect economic growth to average about 2.8% this year and 3.5% next year. SA corporate earnings are expected to continue recovering, with consensus earnings growth of 27% expected in 2011. There is less value in the market currently after the strong run of the past two years. From a long-term, fair value perspective, we believe the stock market as a whole is now trading approximately 5% above its intrinsic fair value. Given the 14% annualised return we require when assessing the market's intrinsic value, investors can expect upper single digit annualised returns from current levels. The risk/reward tradeoff is diminishing.

Risks and opportunities
In South Africa, we believe that the recovery is well entrenched and with that comes a number of opportunities to sustain general economic growth. However, risks include political statements around issues such as nationalisation of the mines; high levels of unemployment and a stubbornly strong rand - or should I say persistently weak developed economy currencies? Finally, although we expect the economic recovery to continue on a positive trajectory, the market is now beginning to price in this recovery. For this reason, investors should expect more moderate returns from current levels.