Macro
Markets began the quarter in a buoyant mood as Euro-zone fears seemed largely dealt with given Mario Draghi's commitment to an unlimited bond repurchase programme in Q4 2012, which boosted confidence in the region. This sense of comfort was rocked by the outcome of the Italian elections in February, which turned out to be an unequivocal anti-establishment anti-austerity vote that threatened the stability of the region. With Italian politics fading from the news front, the Euro-zone just seemed to refuse to remain out of the headlines, with the Cypriot banking crisis taking centre stage in March, highlighting the persistent vulnerability of the region. Broadly, economic data remained soft across Europe and Asia, with some small signs of improvement in the US. In Europe and the UK, austerity measures continued to supress growth. Locally, Fitch downgraded SA's sovereign rating to BBB with a stable outlook, playing catch up to Moody's and Standard & Poor's ratings, which were put into effect last year. Labour unrest on farms in the Western Cape continued well into January, adding to the nervousness of foreign investors. The most important local news was probably the budget. Broadly, spending in absolute terms was left unchanged for the year ahead. While there was personal tax relief to the tune of R7bn, it was down on the previous year's R9.5bn. This, together with the implied crackdown on unsecured lending, implies less capacity for discretionary spend. SA's trade deficit narrowed to R9.5bn in February from R24.5bn in January, but remains large. Three quarters of SA exports are commodities, which are dependent on global demand and this has been soft. At R34bn, the cumulative trade deficit for the first two months of 2013 is well ahead of last year's R21bn.

Sector review
The JSE SWIX delivered 1.6% on a total return basis for the quarter, with industrials the top performer (+6.3%) followed by financials (+5.9%) and resources declining 6%. Within financials, life insurers were the clear outperformers (+12%), with other insurers (+3%), general financials (+4%) and banks (+2%) lagging some way behind. The Fund had a solid quarter, returning just over 6%; outperforming the Financial Index and performing well relative to the peer group. On a rolling 12-month basis, the Fund has underperformed relative to the Financial Index and has outperformed the broader market. Discovery (+27%), Old Mutual (+15%), Investec (+10%) and First Rand (+6%) were the main positive contributors to Fund performance during the period, while Absa (-3%) and JSE (-9%) detracted from performance. Old Mutual published a solid set of results for the 12 months to end-December 2012, which saw 9% earnings growth and a 23% increase in the ordinary dividend for the full year. Broadly it met financial and strategic targets set for the year, disposing of its Nordic and Finish businesses and a number of the US affiliates associated with US Asset Management. It repaid £1.5bn in debt. In short, it has significantly de-risked the business. Discovery released its interim results to December, which saw earnings and dividends up 20%. Its established SA businesses put in solid double-digit growth and its emerging businesses (UK put in solid double-digit growth and its emerging businesses (UK Health and UK Life, SA Invest) grew very strongly. While the losses from start-ups widened, the market seemed to look through this. Discovery was the top performing financial counter during the quarter. First Rand (+6%) was another significant contributor to the Fund during the period. It also published results during the quarter, in which its earnings for the six months to end-December rose 25%. Its return-on-equity (22%) is the highest in the sector and testament to its excellent execution in the retail space. Strong growth in interest income and non-interest income (backed by strong advances growth) and excellent cost control enabled the absorption of a 28% increase in impairments in producing this result. Investec (+10%), in its pre-close briefing for the results for the 12 months to March, indicated earnings growth of 14% to 17% in Sterling (30% to 34% in rand), probably much in line with market expectations. It also published details of an innovative ownership structure for its asset management business, which would result in senior staff owning up to 20% of the asset management business. Absa (-3%) published a disappointing 9% decline in earnings for the year to December 2012. Muted revenue growth and ballooning credit losses were the main culprits. Aside from results, shareholders voted in favour of the R18bn Barclays Africa deal, which will see Barclays increase its stake in Absa Group from 55.5% to 62.3% through the issuing of 129m shares to Barclays as payment for the deal. JSE (-9%) published a poor result for its year to December. Earnings were down 15% as expenses (mostly consulting fees and software licences) eroded profits. We remain significant holders of counters that are exposed to events unfolding in the Euro-zone region (Old Mutual and Investec). We added to Absa and Santam during the period, funding this from positions that have done well and show relatively less upside to our estimate of intrinsic value.

Outlook
SA PMI data slipped to 49.3 in March from 53.6 the previous month. The business conditions index also fell below 50, pointing to mounting pessimism in the manufacturing sector. The manufacturing sector accounts for 15% of GDP and weakening sentiment does not bode well for the SA outlook. Our outlook for 2013 remains quite subdued with our economists looking for global GDP growth of around 3%. We expect SA GDP growth of between 2.5% and 2.75% in 2013, with consumer price inflation averaging 5.9% and ending the year at 5.4%. We expect interest rates to remain on hold through 2013. We expect final consumption expenditure of SA households to grow at about 3.5% in real terms over the next 12 months, slightly ahead of compensation growth of around 3%. Private sector fixed investment spending is likely to remain subdued as the marginal rate of return points to moderate growth going forward, which would also suggest soft employment growth.