The local equity market continued its strong run during the first half of August, with the FTSE/JSE All Share Index reaching an all-time high. However, upbeat GDP data and higher inflation for July put an end to expectations of further interest rate cuts. This, together with the decline in global markets, saw the local market taking a breather during the second half of August. Despite this, the All Share Index yielded a return of 2,1% for the month, with resources (+2,9%) outperforming industrials (+1,7%) and financials (+1,3%) on the back of higher commodity prices.

On the fixed-interest front, the bond market was flat for the month despite the higher oil price and the increase in inflation. However, the money market has changed its tune. After discounting potential lower short-term interest rates, the derivatives market is factoring in stable to upward adjustments in interest rates for 2006.

The exposure to Nedbank Rainmaker and Investec Value was reduced slightly and the proceeds invested in Allan Gray Equity. The performance of Allan Gray lagged the performance of other major investment companies when financial, industrial and small cap shares outperformed the large cap and resources shares, but has improved significantly since the beginning of the year. We believe that the improved performance will continue going forward and that investors will benefit from the investment skills of Allan Gray.

The South African market had a sparkling month in July, with all the asset classes performing very well and delivering exceptional returns. The general consensus is that, based upon the current economic data being published, the local economy is in good health, with low inflation and vibrant growth. An additional factor to be positive about is that fact that foreign players are becoming more risk tolerant and are starting to show a strong interest in the emerging markets, as indicated by the shrinking yield spread between emerging market and US treasury bonds. From a domestic perspective, net foreign purchases of SA-listed securities are also evident. This renewed interest is creating additional demand and is helping to push local investment returns.

The FTSE/JSE All Share Index showed a total return of 7.2% for the month and is now up 21.8% for the year. Monthly returns were generally good, with industrials (9.0%) and financials (7.8%) outperforming resources (5.0%). Best-performing sectors included pharmaceuticals and leisure, while the mining, financial and paper sectors experienced negative months.

On the fixed interest side, most of the action was in the longer bonds that benefited from a stronger rand and subdued inflation data. Both categories of bonds above the 7-year duration mark returned 1.4%, while the shorter-dated bonds returned 0.7%. The money market was stable and up 0.6% in July.