The All Share index has risen by 23.6% for the 9 months ending September 2006. The index (excluding dividends) is up 203% since it bottomed in April 2003. The Price to Earnings multiple has almost doubled from 8.5 times to 16.5 times over this period. A big feature of the quarter was the depreciation of the ZAR. Notwithstanding the ZAR weakness, the resources index underperformed the All Share Index by 5% over the quarter.

This has been driven mainly by the emergence of macro data suggesting a global slowdown may be commencing. The interest rate cycle in the US is already impacting the world's largest economy and the slowdown in the US housing market is likely to lead to a slowdown in the overall growth outlook. The effect of slowing demand coupled with rising supply should drive commodity prices lower. It is our view that the commodity cycle has peaked with the next major move being down, therefore our strong underweight the sector.

In general the more defensive rand hedge counters outperformed as the currency weakened 8.4% against the USD to 7.75 from 7.15. Sentiment towards the ZAR took a beating with the surprisingly large current account deficit and the exoneration of Zuma on corruption charges. Construction counters came through with surprisingly strong earnings growth and with the added underpin of the infrastructure story have put in a solid performance. We have overweight positions in Aveng, M&R and WHBO. While we are of the view that these counters are now overvalued there might be some momentum here yet. Other counters with a fairly reasonable growth outlook like MTN and Netcare also featured strongly.

Following the surprise interest rate increase in June a further 50bp was added in August, which was expected. We're expecting at least a 50 bps increase in October and probably another in December. However, both inflation and credit extension have remained stubbornly high. PPI is accelerating and might be signaling some of the second round effects of higher fuel prices and a weakening currency. The Reserve Bank Governor has expressed concern over consumer buoyancy, which has weighed on interest rate sensitive stocks, retail in particular. Consequently these counters look very attractive from a relative rating and dividend yield perspective and this did result in some price recovery towards the end of the quarter. On a fundamental basis however we consider most of the consumer-credit retailers to be fully valued. Furthermore, the intended imposition of import quotas on apparel from China has created significant uncertainty for clothing retailers - the delaying of the imposition thereof to January 2007 seems to have relaxed the market somewhat but the challenges remain.

Our view is unchanged from the last quarter. We believe that the market is now trading closer to its fair intrinsic value. Notwithstanding a sound economic outlook for South Africa, investors should expect a more moderate return outlook in future.

With the market getting off to such a fantastic start in Q1, it was always likely that the second could be somewhat of a roller coaster ride. And indeed, the volatility has been extreme with the market declining by 17% from its peak on the 11th May to the 13th June only to recover most of the losses by the end of the quarter. The All Share Index ended the second quarter slightly higher than where it started (up 4.4%). It is fascinating how conditions can change within a six week period. Firstly, international markets were caught off guard by higher than expected trade deficit figures. Secondly, while the markets had believed US rates to have peaked, comments by the Fed Governor, Ben Bernanke, indicated that the rate tightening might not be over. To add to this from a SA perspective, we saw the South African Reserve Bank reacting to a very weak trade deficit, strong growth in money supply and fears that inflation may creep back into the system. Against this background, one can understand why they reacted with a 50 basis point interest rate hike. We don't believe it is over yet as it is likely we will get another 50 bps interest rate hike in August and possibly another in October.

The sell off in the Rand was mainly on the back of the weak trade deficit. It is, however, our view that the Rand/$ will stabilize between ZAR/$ 7 and ZAR/$ 7,50. It is also our view that inflation is likely to peak at approximately 6% over the next few months, but then to decline to again be comfortably within the 3 - 6% inflation target range. With this in mind, we're likely to see some moderation in consumer spending. Nonetheless, we remain positive on the general outlook for growth in South Africa. On the other hand, with the expected moderation in the global growth outlook, commodity prices have started to show signs of moderating. This is evidenced by the 15% drop in the Economist Metals Index from its peak reached in the middle of May.

With the ALSI historic PE ratio at 16.8 times (one year forward at 13 times), it is by no means the "dripping roast" that it was when the market bottomed in April 2003 (when we were able to buy assets on 8 times PE ratios). We believe, however, that the market is now trading closer to its fair intrinsic value. It is fair to say that while we have a more moderate view on the expected return outlook for the equity market, equities remains our preferred asset class.

Who would've thought that the year would get off to such a strong start? The All Share Index rose 13,3% in the first three months of 2006. As we indicated in our last quarterly, we're positive on equities for 2006, but we certainly did not think that the quarter would be so robust.

Also mentioned before was that we favoured financials and industrials relative to resources as we believed that resource companies were overvalued. We continue to believe that this is the case. This is premised on a view that commodity prices are trading well above their sustainable and normalized levels. The current oil price of $65 plus is well above its long term average and the political and supply side risks are more than adequately priced in. The commodity price strength has by no means been unfounded given the general strength in global economics and in particular China and India. We do, however, believe that commodity prices (and resource shares generally) are pricing in this exceptional growth.

The best performing sector on the exchange has been the construction sector. This has been on the back of another theme that we believe will play it out over the next few years. Barloworld has been identified by us as a mayor beneficiary related to this theme.

Although government's target of growing GDP at 6% may be on the high side, we still believe that the domestic economic fundamentals remain robust and supportive of further sustainable above trend growth for the medium term.

Although the current All share price earnings ratio trades at around 16,5 times our expected plus 25% earnings growth takes this ratio back to a more reasonable 13 times. It's our view that equities will still be one of the best asset classes for the remainder of 2006.

The FTSE/JSE All share recorded a positive total return of 20.3% for the third quarter of 2005, outperforming the mid cap (+18.6%) and performing in line with the small caps (+20.0%). For the year to date the All share returned a very healthy 36.7%.

The sectors that contributed the most to this performance, were Oil and Gas i.e. Sasol that was a beneficiary of the current high oil prices, Pharmaceuticals i.e. Aspen that's riding the crest of the wave and Construction, where the market is now for the first time starting to recognize Governments intentions to spend billions over the next number of years on infrastructure improvements.

The biggest positive contributors to our portfolio were our overweight BDEO, Murray & Roberts and Imperial whilst our omission of shares like Altech and Discovery further enhanced our returns. Negative contributors were our zero weight in Sasol, which on a per share basis was the single biggest contributor (negative) to performance. Despite this the fund experienced a relative good quarter.

For the fourth quarter we continue to expect SA earnings growth to provide positive surprises which should be a key driver of SA equity market outperformance. Market consensus for SA earnings growth are to moderate to 17% over the next year, compared with our forecast growth of plus 20%. We believe investors are discounting too much bad news in terms of loss of momentum in domestic earnings growth.

Based on relative value we continue to favour financials and industrials over resources. The market as a whole has however delivered a capital return of 130% over the last two and a half years and we believe the risk of a correction has increased. We would however view a correction as a good buying opportunity.