Every bear market tends to have its own unique characteristics, but all of them begin during a phase of extreme optimism and end during a period of extreme pessimism. This time will be no different. We have witnessed in most of the JSE a severe bear market over the past year, but it has been masked by the positive performance of commodity counters.

The out-performance of Resources relative to the rest of the market during the last few months has been the most extreme since the seventies, which tells an important story of inflationary pressures that have reached levels last seen when the Federal Reserve Bank embarked on its inflation-fighting mission in the late seventies. Physical commodities usually are a safe place to hide when inflation is rampant. However, this has tended to change quickly in the past when marginal buyers, these are the real drivers of share prices, flee as they get wind of an economic slowdown. Global slowdowns are never a good time to hold commodities. We claim to have no omniscient insights into when commodities will correct, but we do believe that a market consisting of two sectors with such bi-polar performances cannot exist perpetually.

At face value, making a call on equities relative to other asset classes is certainly not an easy task at the moment as the JSE hardly looks cheap at an index level and again as mentioned above, this is ascribable to the performance of resource shares. Based on the valuation level of the ALSI, one would be inclined to take the view that a significant underweight exposure to equities is warranted. This idea would be confirmed too if the valuations metrics of price-to-book, price-to-earnings and dividend yield were considered. In all instances, the market does not look cheap! However, delving deeper into the underlying sectors of our market clearly reveals huge value and excellent long-term buying opportunities that we feel will smartly outperform cash given a reasonable time period. This is an environment where stagflation fears are dominating headlines and investor psyches and asset prices are falling as people become more pessimistic and focus exclusively on short-term capital preservation strategies. Fear is so evident that assets are being sold at all costs, even if it involves locking in losses or selling at depressed prices. The best buying opportunities always occur though during these periods of irrational selling and we are actively lifting equity exposure within all our portfolios. Our focus remains on companies with the ability to pass-on price increases and therefore maintain profit margins, but where the ratings have imploded, in line with the broader financial and industrial indices.

Bonds remain an asset class that we have avoided and their dismal performance during the last quarter with a total return of -5% speaks to why we have done so. Over six months, the performance of -6.7% does not look much better. We have been negative on bonds for quite a while and struggled to understand why they did not reflect the potential for currency weakness considering South Africa's large current account deficit as well as the inflationary pulses emerging domestically and globally. Until the end of 2007, interest rate sensitive assets, and particularly bonds, had held up well relative to previous cycles. This changed rapidly in 2008 as domestic as well as global inflationary pressures accelerated significantly and the South African Reserve Bank's rhetoric and actions drove bonds yields. The 10 year SA government bond yield has increased from 8.35% in December 2007 to its current level of 10.69%.

As mentioned above, we have not owned any bonds for the last few years and in the short-term there is no need to rush back into this asset class. At some point bonds will again look attractive; our cue for building a position will be determined by clear indications of potential monetary easing which will coincide with a more constructive picture for inflation. The bond market traditionally preempts the turn in inflation and interest rates, but given the longevity of the current inflationary cycle as well as the fact that inflationary pressures have spilled-over to non-food-and energy related items, investors are likely to be very cautious before aggressively investing in interest rate sensitive instruments such as gilts. Furthermore, the fact that SA bonds price off offshore bond yields, remains important as bond yields in the US have in our view been too resilient to inflation and some weakness should be expected. Thus, as far as we are concerned, the risk-return trade-off still favours cash.

Thus in summary, we remain overweight cash, we are building equity positions steadily and we are not bond or property bulls.