Market review
The second quarter started on a negative note, with Spain struggling to place its bonds as concerns over its relatively high primary government budget balance of 4% to gross domestic product (GDP) resurfaced. Politically, there continues to be a swing to the left, with new governments in France and the Netherlands further advancing the cause of growth over austerity in Europe. The developed world economic growth rate appears to have stalled after two years, with credit growth dipping and unemployment remaining stubbornly high. The anxiety regarding a possible Greek exit in June and the potential spillover effects into Spain and Portugal pushed US borrowing costs to March 1946 levels of about 1.6% and to all-time lows for Germany and the UK. Data from China continues to weaken, forcing the authorities to continue slashing the reserve requirement for banks. Policy makers are anxious to maintain trend economic growth of 7.5% to 8% a year. China retail sales weakened from a run rate of over 20% a year to 15%. Not even the $100bn Facebook IPO helped lift market sentiment. Brent oil fell back 26% putting it officially in bear market territory. In SA, the mining sector is recovering, while manufacturing remains under pressure. Our fate is linked to the fate of the global economy, especially Europe, which is still a major trading partner. Contrast this to Australia, where terms of trade are at 150 year highs and mining capital expenditure has been booming; providing a boost to the Australian dollar. SA retail sales momentum on a quarter-on-quarter basis weakened in the first quarter of the year, with the terms of trade deteriorating as commodity prices have pulled back. The one statistic bucking the trend remains new vehicle sales, which are growing at close to 16% a year, driven by strong rental car fleet replacement demand, strong installment credit sales of 14% a year and possible pre-emptive buying by consumers ahead of car price increases induced by the weaker rand. We still forecast economic growth for the full year of between 2.5% to 3%. A bit of calm was restored to global markets when Greece elected a new pro-Europe government and Spain finally received a €100bn bailout for its bank rescue fund, which is equivalent to 10% of GDP. At the end of June, the European Union (EU) summit led to an agreement to support Spanish and Italian banks further. But bankers remained out of favor, with JP Morgan recording large credit derivatives losses and Barclays being fined for manipulating the Libor rate.

Performance
The JSE Equally Weighted Top 40 Index delivered a total return of 0.90% during the second quarter - slightly above the Top 40 Index return of 0.6%. Contributors to this performance were Anglo, Assore and Truworths, while Vodacom and African Rainbow detracted value. Year to date the fund is outperforming the market. During the June Index rebalance Imperial Holdings replaced Lonmin. Simultaneously the portfolio constituents were reweighted back to 2.5%.

Valuations
The JSE ALSI Index is trading on a forward price-to-earnings(PE) ratio of close to 11x, in line with its long-term average level. We expect earnings growth of 16%, driven by resilient Findi earnings growth, this year. On a sectorial basis, resources are on a forward PE of 8x. From a long-term perspective, we believe the stock market is now trading slightly below fair intrinsic value. The performance of indices on the JSE has diverged considerably between Findi and Resources stocks. With the indices diverging again during the quarter, we see considerable value in blue chip resource stocks like Anglo American, which is trading at a forward PE of under 7x. Contrast this to Massmart, which is trading on an historic PE of 26x and a one-year forward PE of 20x!

Market Review
The quarter started with S&P downgrading nine European sovereigns. However, January saw a rally inspired by the anticipation that central banks would have to inject more liquidity into financial markets. Global equities had their best January since 1994 and the US market its best start since 1987. With riskon sentiment prevailing again, foreign investors flocked back to the JSE. The Chinese economy is clearly slowing and we expect a soft landing this year. In SA, it is evident that the consumer has been on a spending spree, with retail sales over the Christmas period jumping from 7.2% to 8.7% a year in real terms (but double digits in nominal terms). However, what is evident is that consumer inflation will start eroding the real income growth enjoyed by consumers over the past few years. In addition, we remain concerned that the rapid pace of unsecured lending has found its way into consumption.

Performance
From a performance point of view, the JSE Equally Weighted Top 40 Index delivered a total return of 8.9% for the three months to March 2012, which was much better than the average market return of 6%. Shares that contributed to this outperformance were Exxaro, Aspen, Woollies and Mondi. The down weighting(from market cap weighting) of Richemont and SABMiller, which both experienced a strong quarter, detracted from some of this outperformance. During the March rebalancing, all the constituents of this Index were reweighted back to 2.5%

Valuations: Trading at Fair Value
The JSE ALSI Index is trading on a forward PE of close to 11x, in line with its long-term average level. We expect earnings growth of slightly below 20%, driven by resilient Findi earnings growth, this year. On a sectorial basis, resources are on a forward PE of 8x. From a long-term perspective, we believe the stock market is now trading close to its fair intrinsic value. The performance of the Findi and Resource indices on the JSE has diverged considerably. With the JSE All Share delivering a total return of 6% in the quarter, it is now much more difficult to see much value in local equities. With the indices on such different trajectories, we are now seeing some pockets of value emerging. But some sectors are becoming overheated. We see over 20% upside in blue chip resource stocks like Anglo American and BHP Billiton. In the case of Anglo American, the rump (i.e. Anglos excluding listed subsidiaries Angloplats and Kumba) trades at a low single-digit price-toearnings (PE) ratio. On the other hand, we see a number of local industrial stocks, such as Massmart, Shoprite and Tiger Brands, being increasingly owned by foreign investors and trading at very extended valuations, with PE multiples in the 15 times to 20 times range.

Risks and Opportunities
Investors seemed to have been spooked by the prospect of a dramatic slowdown in Chinese economic growth, while the economic prospects for Europe remain uncertain.

Market Review
2011 was a roller coaster year for equity investors with more than $6 trillion - 9% in US dollars - wiped off the value of stock markets globally. At the start of the year the world was in recovery mode but dark clouds appeared early on when the so-called Arab spring saw the toppling of the long-standing leaders of Tunisia, Egypt and Libya after major political upheaval. Similar events continue to unfold in countries like Syria.

To compound things, the US lost its AAA credit rating by rating agency Standard & Poor's. The Euro crisis, however, remained investors' main concern throughout the year. With European debt comprising close to 90% of GDP, the collapse of Greece led to fears of contagion to the Southern European periphery and the Euro finally cracked against other major currencies at the tail end of the year. This forced European leaders, minus David Cameron, to eventually declare a pact to work towards fiscal union and provide liquidity backstop for EU banks, which may have to shrink their balance sheets by $800bn.

From a performance point of view, the JSE Equally Weighted Top 40 Index delivered a lackluster total return of 4.73 % in 2011, which was slightly better than other market capitalisation indices. The JSE performed relatively well versus other markets, ending down more than 17% in dollars, with many of the BRICs (Brazil, Russia, India, China) faring much worse, slumping well over 20% in US dollars. A major change to the indices during December 2011 was the inclusion of British American Tobacco to all the relevant JSE indices.

One of the key themes that drove investment performance last year was company degearing. In a world in which mergers and acquisitions and size have been the dominant trend over the past few decades, many corporates are again focusing on the disposal of noncore assets. Many of our core investments have benefitted from this.

SIM Strategy
By the end of the fourth quarter, the JSE ALSI Index was trading on a forward PE of close to 11x, in line with its long-term average level. We expect earnings growth of slightly below 20%, driven by resilient Findi earnings growth, this year. From a long-term perspective, we believe the stock market is now trading close to its fair intrinsic value. Investing in SA equities has proven especially difficult during the past year given the extreme levels of volatility and negative sentiment, which caused the downdraft in the third quarter. After a year of poor returns, it is easy to get despondent about investing in equities. But bear in mind that at the bottom of a cycle, prospects invariably look particularly bleak and investors then tend to focus on the downside rather than upside risk. Risks and Opportunities 2012 heralds the US Presidential elections and hopefully European leaders will take further bold decisions to address the sovereign debt crisis. In SA, we should get further clues about whether there are to be any changes at the helm of the ruling party at the ANC national elective conference in Mangaung. party at the ANC national elective conference in Mangaung. Against this backdrop, there is a real possibility that volatility will remain elevated.