Emerging and developed markets wobbled in September (JSE down 3% in rand and MSCI World -2.5%) while most currencies weakened considerably against the US dollar, the currencies of structurally weak economies falling the most (Brazilian real -9.7%, the rand -6% and the euro and most other currencies -4%).

Bearing all of that in mind SA financials held up fairly well, the Nedgroup Investments Financials Fund being almost flat (but note that that equates to a -6% return in US dollar because of the weakness of the rand).

South African financials (in line with most global financials) saw some very big moves: but generally held up well. The largest decliners were Barclays Africa (-8%, I think simply on profit-taking after it has had a very good year), while Standard Bank, Nedbank and the life insurers declined 4%-5%. Standard Bank did report exposure to a Chinese warehouse fraud, but its fall was in line with Nedbank and less than Absa, indicating that the price decline was due to investors reacting to the deterioration in the rand and general economic environment.

Interestingly FirstRand/RMH declined only 1% and Capitec gained 15% after reporting very good results. This helped PSG to gain 2.5% and Sasfin also gained 3.8%.

After the recent declines, South African banks are starting to look like good value again (first time in a few years). But a lot will depend on how badly the consumer will get affected by the inflation squeeze and possibly higher unemployment.

The 18% investment in the Sanlam Global Financial Fund declined 3.7% in US dollar terms (in line with global financials) but generated a positive performance in rand (2.3%). We remain of the opinion that global banks represent better value in terms of the combination of growth and value than do South African banks at the moment.

We made miniscule changes to the Fund during the month but would like to start adding to Standard Bank if it declines further.

The Nedgroup Investments Financials Fund maintained its excellent performance of the past 10 years (compound return of 21.9%) over the past 6 months. The main contributor over the past 6 months was Investec (+30%) which was top performer in the financial sector as well as the funds' largest investment. Also making good contributions were Barclays Africa (21%), Coronation (+17%), Sanlam (16%), Discovery (13%) and Standard Bank (12%).The big value destroyer was African Bank (-48%).

During the 6-month period we (fortunately) brought down the Fund's investment in African Bank from 5% to below 1.5% and effectively used the cash generated to build up a 6% position in Barclays Africa.

African Bank has consistently disappointed the market failing to read the deterioration in their target market correctly and being underprovided for the rising bad debts. At this stage their client base remains under pressure and their funders will demand a further rights issue. Absa (Barclays Africa) on the other hand stayed well clear of the subprime market and is now benefitting from that. At the same time, it seems that recent initiatives are bearing fruit and the valuation at the beginning of the year did not reflect this as a possibility.

Investec's strong price gains reduced its attractiveness and hence we reduced the funds exposure from 14% in January to the current 11% which remains a sizable investment.

The Fund's investment in the Sanlam Global Financial Fund also did well (10%) and should continue to generate good returns in the second half of 2014 as global banks should continue reporting good results and remain undervalued.

Looking forward, the economic environment within which the South African banks are operating is deteriorating and the JSE has become very expensive judged on historical terms, hence investors should not expect strong performance in the second half of the year. More than ever market beating returns over the next 12 months will be generated by being invested in the correct stocks. We continue to be invested in smaller financial companies that can take market share or companies with presence outside South Africa.

The stampeding herd returned to emerging markets in January causing emerging market currencies and financial shares to rocket 5%+ whilst the JSE was only up 1% and the rand strengthened by 2% against the US dollar. This same picture applies to most emerging markets globally.

Best performers in the Nedgroup Investments Financials Fund both gained about 12%; ABSA (where we have only a small holding) and Standard Bank (which is one of the Fund’s largest investments) and then obviously Coronation which gained 13%. The laggards were Old Mutual (+0.7%) and the Fund’s investment in the Sanlam Global Financial Fund which has about 48% invested in developed markets which lagged in March (but still gaining 2.4% in rand).

Results reported were generally all good but reflected the current operating environment: slower loan growth and pressure via cost of credit. But year-on-year one can see how the effect of cost containment initiatives, and lower bad debts charges and focus on more efficient use of capital has resulted in higher returns on capital in every bank that has reported so far.

Investec’s results reflected the improvement offshore and in asset management. This has been a wonderful investment since we made it our largest holding early 2013. Similarly Capitec’s result highlighted the tough conditions in the low-end of the market, but was still a good result.

During February we reduced the investment in the Sanlam Global Financial Fund marginally and pushed the cash into African Bank (below R10) and Capitec and Standard Bank. This has already worked out after the past month.

South Africa remains a low growth country for a while, but the flows into emerging markets do reduce pressure for further interest rate hikes. The problem is that the policies our government is following might attract “hot money” but not the needed long-term direct investments, hence we maintain a preference for companies with growth nodes outside South Africa (obviously depending on valuations).

The Nedgroup Investments Financials Fund had a good quarter despite a poor macro environment in terms of economic and political deterioration and a 5% fall in the rand vs the $.

The shares that contributed to this good performance were Coronation (+20%), Investec (+13%), Sasfin, Sanlam (+11%) and Standard Bank and Old Mutual (9%).

Despite the Sanlam Global Financial Fund in which the Fund is invested being 50% invested in emerging markets, it gained almost 10% in rands (the 5% fall in the rand did help) and contributed to the strong performance.

The two poor performers amongst South African financials were Absa (-9%) and African Bank (due to the rights issue).

Absa's poor performance was predictable and we had sold our small Absa holding in September and used the cash generated to increase the Fund's holdings in Sasfin and the global financial fund.

The price movements noted above shows the influence of the weak rand (Investec, Old Mutual, Standard Bank and even Sanlam due to its Indian and African investments). The rand will again play an important role in 2014. Our opinion is that it could remain weak as long as South Africa's current account and budget deficits persist which should be the case in the first few months as the forthcoming election will not help to attract international flows against a backdrop of rising USA interest rates.

Hence for the moment the Fund maintains a large investment in shares that provide a hedge against further rand weakness (as long as they represent good value) but this will be re-considered should the rand weaken further.

The Nedgroup Investments Financials Fund recorded a good quarter (+7.5%) and has delivered 14.4% year-to-date. This despite the poor performance (-1%) of the investment in the Sanlam Global Financial Fund pulling it down.

The banking sector generally had a good quarter. Firstrand gained 16% with Barclays Group Africa (Absa) performing poorly (-1%) and Investec (+3%) being second worst.

Investec's price move was due to it releasing disappointing results; bear in mind, however, that year-to-date it is one of the top performers amongst the banks, gaining 12% versus Absa's -10%.

Year-to-date factors such as currency moves have played a large role in share price moves. Over time, however, the operational and net asset value per share growth, along with valuations, will determine which shares will outperform. In this regard we continue to feel that SA bank shares are expensive relative to global financial shares and should underperform them.

The negative performance of the Sanlam Global Financial Fund has been due to the sharp falls recorded by emerging market currencies and markets, causing a double negative. However, both have fallen to such an extent that the valuations now discount a considerable further currency decline, and in fact now represent good value.

The only change worth mentioning made during the quarter was to sell the small Absa holding the fund had. This was invested in Sasfin, a company that has consistently delivered excellent results over many years and is again mispriced in our opinion after it delivered very good results. The remainder is held in a small cash balance.