The Fund remains defensively positioned for risk as reflected by our overweight cash position, high bond allocation as well as defensive local equity positioning. We continue to favour offshore equities to local equities based on earnings expectations plus currency hedging benefits. We are underweight offshore exposure in total.

Fixed Income: Fixed income benefited from a contraction in credit spreads, a recovery in the Rand and a generally favourable global fixed income backdrop. Local inflation continues its upward trajectory, largely reflecting drought related food price pressures but also some evidence of generalised inflation in the slight uptick in core inflation. Inflation readings for the first two months of the year have surprised considerably to the upside compared to expectations (0.5% month on month in both instances). If this tendency continues over the next three months (reflecting accelerated currency pass through or intensifying food inflation), the anticipated base effect dip in the inflation profile will not materialise as mentioned previously over the next quarter and a year-end peak of inflation above 8.0% can be anticipated. We believe this will be a cause for concern to the SARB and sufficiently so to motivate the continuation of the normalisation cycle in a front loaded format. The March CPI reading would thus be critical in this regard.

The local monetary policy response function has shifted with more emphasis been given to the long-run negative effects of elevated inflation as opposed to a short-run trade-off between growth and inflation. This is constructive for long bond yields despite sovereign downgrade risk and continued political uncertainty. We subscribe to the tightening cycle ending this calendar year and foresee a further 50 bps of cumulative tightening. Downside growth concerns are for now being underplayed by the SARB as structural of nature and policy (especially viewed against peer group economies) is touted as still being accommodative. We do believe this view will change once the policy cycle has reached its end and growth remains fragile and thus expect that there is room for mild rate cuts from H2 next year onwards when we expect the inflation trajectory to revert sharply back into the band.

We note the general positive EM and risk sentiment and largely ascribe this to global central bank accommodation and specifically a surprisingly dovish and hesitant US Fed. The global backdrop is forcing the carry trade back in vogue or at the very least leading to trimming of EM underweights which should be supportive of continued Rand recovery, contraction in credit risk premium and by consequence lower yields in short and longer tenors. This is also reflected in strong foreign inflows into local bonds (R20 billion YTD) despite the uncertain political backdrop, once again confirming that the global tide and sentiment outweighs local idiosyncratic risks.

Equities
The risk rally that started in the second half of February continued into March as US economic data appeared to have turned the corner, easing concerns over a potential recession later in the year. Initially policymakers appeared hesitant to add fuel to the fire as Mario Draghi delivered the expected cut in European interest rates, however, they suggested that further cuts were unlikely. Janet Yellen, however, was far less reticent as she appeared to turn very dovish in guiding for continued caution in raising rates, despite the recent uptick in US inflation and ongoing improvements in the labour market, choosing instead to focus on the global economic and financial risks to the recovery as well as the possibility that the improved inflation picture may prove to be transient. This of course provided further impetus to the risk-on tone, pushing markets to recover all of their mid-February losses. The S&P 500 ended with a 6.6% gain for the month, which was notable relative to most other developed markets which enjoyed more muted gains. This leaves US equities up 1% for Q1 despite being down 10% at one point, a result which is far superior to many other developed market peers, in particular those in Europe (Stoxx 600 down 8% for Q1) and Asia (Nikkei down 12% for Q1).

The Fed's dovishness and general risk-on stance put renewed pressure on an already consolidating US Dollar leading to broad-based weaknesses against most currency crosses. The Euro was 4.7% stronger for the month but gains were largest in EM where the Brazilian Real gained 11%, the Russian Ruble 10% and the South African Rand 7%. Dollar weakness and risk-on of course meant that emerging markets were the place to be in equities as the MSCI Emerging Markets Index rose 13%, its largest monthly gain in seven years. MSCI Brazil rose 17%, MSCI China 12% and MSCI South Africa 9%.

Commodities also extended their rally, at times in spectacular fashion, including a one-day 19% spike in the iron ore fix as traders and mills panicked into increasing stock holdings. By month end both iron ore and Brent crude had added a further 8% to last month..s moves. The JSE was extremely strong across the board, however, gains were largest in the non-rand hedge parts of the market, especially financials and retail. Banks rose 13%, Insurers 15% and General Retailers 12%. Resource sectors were also strong but lagged after their huge increases in the first two months of the year. For the first calendar quarter, however, it remained resource plays at the top of the table, led by gold, platinum and iron ore names in particular.

Despite the market gyrations not much has changed to alter our views. We are reluctant to chase the mining rally given the necessary adjustment which has not yet fully played out in our view. We have, however, continued to trade the resources space opportunistically where we see genuine improvement in fundamentals. Domestically we remain of the view that the SA economy is likely to remain under pressure, which raises the risk of earnings disappointment in SA Inc plays which remain vulnerable to a more meaningful derating than what we have seen to date.