While the South African economy realized robust annualized growth during the first half of this year, some momentum appears to have been lost in recent months. The strong Rand has been very beneficial for consumers with lower inflation, but it is making it increasingly difficult for our manufacturers and exporters to compete effectively. While utilization levels are unlikely to increase substantially from current levels in the near term, they should be maintained considering inventory levels are still at very low levels in relation to history. The consumer appears to be on an improving trend with positive changes in net household wealth and rises in real disposable income helping to spur growth in consumer expenditure. With above inflationary wage increases continuing and inflation remaining low, household consumption expenditure should provide support to economic growth in the short term. The South African government appears to be in a relatively stable financial and fiscal position and the potential for cheap funding should help the infrastructure program gain momentum in the year ahead. However, the industrial action experienced in the public sector in recent weeks will impact economic growth negatively in the short term. In summary, economic growth will face some headwinds in the short term. In order to ensure sustained economic growth in the coming years, South Africa is reliant on the manufacturing, mining and government related sectors coming through.

Due to the consistent decline in short term yields, the yield curve has steepened substantially over the past 18 months with the shorter end of the yield curve continuing to decline faster over the past 9 months. Driven by the unprecedented low level of yields in developed markets there has been strong foreign demand for SA bonds with year to date net foreign inflows of R80bn. However, over the medium term there is a risk of South African long term interest rates moving higher due to inflation pressure and the high level of government infrastructure spending resulting in an increased level of borrowing. The resultant increase in supply of government bond issues combined with potential selling by foreigners, if they decide to reduce exposure to emerging markets, will result in higher yields and potential capital loss. In line with our philosophy we remain focused on the quality of the instruments and the cash flows of the underlying issuers and the Oasis Bond Fund is invested primarily in high quality instruments.

The South African economy appears to have lost some momentum in its recovery in recent months after robust annualized growth being realized during the first quarter of this year. Manufacturing capacity utilization remained relatively low highlighting the cautious stance from manufacturers around sustainability of demand and the impact of the strong Rand. Post the World Cup and extended school holidays, we could expect a pick up in restocking from the current low inventory levels. Sustainable growth in manufacturing is important to overall economic growth and a pick up in global and domestic demand together with a weaker currency will assist in meeting this objective. Household consumption expenditure came through strongly as the benefit of the rise in real disposable income encouraged consumer spending in both semi-durables and durable goods. Despite household debt levels declining somewhat during the year, debt levels by historical standards remain very high. Having been a key driver of economic growth in South Africa over the past decade as consumers ratcheted up debt from low levels, consumer spending is unlikely to be as a significant driver of economic growth over the next few years. The South African government is in a relatively better position than its developed market peers with lower budget deficits and debt levels to contend with. This should allow for financial flexibility and hence support the fixed investment related program over the next few years. Sustained economic growth over the next few years will have to come through the manufacturing, mining and government related sectors as the high debt levels of consumers is likely to constrain the rate of growth in consumer spending.

Due to the consistent decline in short term yields the yield curve has steepened substantially over the past 18 months as indicated below with the shorter end of the yield curve continuing to decline over the past 6 months. There has also been strong foreign demand for SA bonds with year to date net foreign inflows of R39bn. However, there is a risk of long term interest rates moving higher due to pressure on the current account deficit and the high level of government infrastructure spending resulting in an increased level of borrowing. The resultant increase in supply of government bond issues combined with potential selling by foreigners, if they decide to reduce exposure to emerging markets, will result in higher yields and potential capital loss. In line with our philosophy we remain focused on the quality of the instruments and the cash flows of the underlying issuers and the Oasis Bond Fund is invested primarily in high quality instruments.

Due to the consistent decline in short term yields the yield curve has steepened substantially over the past year as indicated below. There has also been strong foreign demand for SA bonds with year to date net foreign inflows of more than R20bn. However, there is a risk of long term interest rates moving higher due to pressure on the current account deficit and the high level of government infrastructure spending resulting in an increased level of borrowing. The resultant increase in supply of government bond issues combined with potential selling by foreigners, if they decide to reduce exposure to emerging markets, will result in higher yields and potential capital loss. In line with our philosophy we remain focused on the quality of the instruments and the cash flows of the underlying issuers and the Oasis Bond Fund is invested primarily in high quality instruments.

Despite reasonable net foreign bond inflows of R26.3bn in 2009 the yield curve has shifted upwards by approximately 2% in the lOyr and longer duration during 2009 due to the impact of the global financial crises and the increase in government bond issues. The Oasis Bond Fund was well positioned with a relatively low exposure to the long end of the yield curve where capital losses were the most pronounced. In line with our philosophy we remain focused on the quality of the instruments and the cash flows of the underlying issuers and the Oasis Bond Fund is invested primarily in high quality instruments with more than 70% of the current holdings being government bonds.