Buy cheap, sell expensive - By Jeremy Gardiner, director, Investec Asset Management.

The second quarter of 2008 continued along a theme that is becoming all too familiar, and is a trend that has now been in place for seven years. Simply put, if you weren't in commodities, you didn't make any money. In fact, you probably lost money. The resource-heavy JSE All Share Index maintains its positive façade, as commodities keep it positive (up 6.4% so far this year), but the truth is that if you were invested in anything else that relates to the consumer, financials, the economy or property, times are tough indeed. With resources up 33% so far for 2008 and financials down 25%, the deviation has been enormous. Given the above, investors must be careful not to react emotionally, because emotional reactions often come at a significant cost. The two primary risks investors are currently facing is being overweight either commodities or cash. While the long run commodity story is fundamentally sound, in the short term any thing is possible, and a significant correction within the next two years is quite possible. Investors need to understand this risk. Commodities are an important part of any investment portfolio, but y our exposure should be appropriate to y our risk profile. Similarly, be careful of being overweight cash for too long. The risk of being out of the market when it turns up is as high as the risk of being in when the markets turn down.

While South Africa's first quarter GDP growth was relatively robust, there is no doubt that non-commodity growth is slowing fast. Expect another three months of bad inflation numbers before inflation peaks. From a psychological perspective, the Governor has achieved his objective and therefore interest rates may already have peaked, although the possibility of another 50 basis points cannot be ruled out. Of course, all of the above rests on the oil price. Food prices are stabilising, but if oil goes for another significant rise from here, every thing else rises as well - food, inflation, every thing! The earliest it looks like we can expect any interest rate relief is the second half of 2009. If, as we expect, South African company earnings decline rather than collapse, or even rebound in 2009, equities (aside from commodities) are looking cheap. The age-old cliché states: 'buy cheap, sell expensive'. Pay careful attention to this adage, as you are pretty definitely closer to the bottom than the top, and selling equities now could be an expensive mistake.

The financial market woes continued throughout December 2007 and it became evident during the month that the traditional end-of-the-year rally would not materialise. In fact, world markets as represented by the MSCI World Index ($) lost 1.3%.

The market participants seemed cautious as the US housing slump continued with mortgage defaults increasing and the risk of a severe downturn in economic activity heightening. Even a further Fed rate cut of 0.5% in December could not turn the markets bullish.