The domestic equity market tracked the volatile behaviour of its global counterparts in the third quarter. The JSE's All Share Index edged over 30 000 for the first time in the middle of July, slid more than 13% through to mid-August, and then recovered all of its losses in the last six weeks of the quarter to end the period 5.7% higher than its level at the end of June.

Although equities remain our preferred longer-term local asset class, and current market ratings are not particularly demanding, we do have some concern about the outlook for earnings growth as rates of global and domestic economic expansion ease. SA bonds, which were mired in weakness until mid-August, followed other emerging bond markets and rallied sharply as the Fed's rate cut galvanised interest in riskier assets.

Equities remain our preferred longer-term local asset class, based on supportive growth fundamentals. However, short-term valuations are stretched in certain sectors. The SA equity market has run hard, and some volatility in the near term can be expected. Short-term cyclical factors, particularly inflation, have resulted in temporary weakness in the local bond market. We remain underweight at present but recognise that in due course the market will start anticipating the peak in inflation, and we will likely use short-term weakness to raise exposure to longer-dated bonds. Longer-term fundamentals that favour SA remain intact. Property yields have derated along with longer-term interest rates. The expected growth in distributions means that we expect listed property to be more in line with cash returns over the next 12 months. International exposure remains a good hedge against possible rand volatility and as a means of diversification. At current levels some international markets are looking attractive.

While the US remains the largest economy in the world, the Eurozone and Japan are increasingly taking the lead on the growth front among developed economies. Meanwhile, China's economy continues unabated with hefty trade surpluses being sustained. Global equities yielded 2.1% in US$ terms over the quarter, significantly lower than the 8% reported in the forth quarter of 2006.

On a regional basis European developed equity markets produced reasonable returns, particularly the German DAX on 4.9% for the quarter. SA's GDP advanced by 5.6% annualised in the last quarter of 2006. Given strong investment spending and moderating, but still solid household consumption expenditure, GDP is expected to continue advancing at 4.5% this year. The equity market enjoyed another good quarter. The All Share Index added 9.4% to the annual return of 37.7% for 2006.

Although we remain positive on the fundamentals of the SA economy it is important to acknowledge that the earnings base of SA Inc. has now doubled over the last four years. In addition, the PE ratio has almost doubled to 15.5 times since April 2003. Equities remain the preferred longer-term asset class and within equities we remain overweight the industrial sector and underweight resources.

The outlook for bonds is improving as we approach the end of our interest rate tightening cycle. Property yields have re-rated along with the longer-term interest rates.

Financial markets, both here in South Africa and globally, experienced a very good 2006. Economic and market fundamentals remain strong and are driving asset prices. The SIM Managed Solution range of funds are well positioned to capture these opportunities, and the diversified exposure to different asset classes like equities, bonds, property and cash ensures long-term growth potential. The funds are also exposed to international markets that offer diversified return potential as well as hard-currency exposure.

The US economy remains strong but is coming off its previously high growth rates. The European economy as a whole continued to be the surprise package of 2006, with third-quarter growth expanding by 2.7%. In South Africa, third-quarter GDP rose by 4.7% annualised - very much in line with expectations. The positive growth cycle has now lasted for 32 quarters. We expect 2007 to be another healthy growth year with growth of 4.3%.

Equity markets continued to be robust during the fourth quarter of 2006 and regularly achieved multi-year highs. The Dow Jones Index reached successive new highs while the S&P Index moved to its best level in more than five years, returning 14.3% in USD over 2006. Bond markets have started anticipating the end to short-term interest rate hikes and possible cuts during 2007.

In South Africa, the equity market enjoyed another good quarter in the fourth quarter of 2006 and the All Share Index ended the year 37.7% higher. This is the fourth year in a row that the FTSE/JSE has yielded a positive return. Equities were the best-performing asset class for the year, outperforming properties, cash and bonds. Financials and industrials were the best-performing sectors in the fourth quarter. Bonds had a reasonable quarter and closed the cash return gap that existed. Property unit trusts were the second best performing asset class, yielding 7%.