This quarter was marked by yet another rate hike, while internationally there were major concerns resulting from problems in the sub-prime market. South African banks have not been exposed to this and there was consequently, little impact on the market.

Inflation remains under pressure in the short term with the international oil prices having again increased (over $80pb) and food prices, as a result of drought conditions, rising. This is against the backdrop of a marginally stronger local currency, but inflation is still expected to be outside the target range until at least the first quarter of 2008.

Money supply numbers (M3) increased, but importantly, Private Sector Credit Extension (PSCE) slowed.

Money market rates increased marginally with the likelihood of another rate hike in October.

The fund has maintained a short-term re-pricing strategy. The yield on the fund has been improving as market rates continue to rise in anticipation of possible further repo rate hikes. The portfolio is ideally positioned for the existing market scenario, and the yield is likely to continue to rise.

There is a fair probability of another rate hike in October. However, while this rate hike may be in the balance, interest rates will continue to be under pressure, while inflation targeting is the South African Reserve Bank's main objective. We will thus continue to maintain a short duration strategy.

Saleem Gamza
Taquanta Aseet Managers

The last quarter of 2006 saw the South African Reserve Bank (SARB) raising the Repo rate by a further 100bp with each of the October and December Monetary Policy Committee meetings (MPC) delivering a 50bp hike. Economic data released seem to favour a further increase in rates at the February 2007 MPC meeting. The strengthening of the local currency together with a relatively stable oil price appears to be a foil for inflation. However, private sector credit extension continues to show little sign of slowdown even in the face of higher inflation and a total of 2% in interest rates hikes for the year. Inflation is expected to peak Q2 2007 with a potential February rate hike being the last of the upward rate cycle. Money market rates were higher than the previous quarter as a result of the rate hike and a potential further hike

The duration on the fund has been short enough for it to benefit from the bearishness in the market. However, the last quarter has seen two rate hikes, the effect of which has not yet fully impacted the fund. The lag in the impact of rising rates means the fund will continue to show improvement as assets re-price over the next month. We expect another 50bp rate-hike in February. Thereafter the rate cycle is expected to be flat until much later (Q3 2007) in the year. The fund will continue to be managed on a short duration over the next quarter