2014/08/29 00:00:00

Economic overview
Global economic conditions appear to be on the mend, but risks to the outlook remain. In support of the pedestrian recovery, key central banks have kept ultra-low monetary policy rates in place, which have, in turn, fuelled record stock market highs.
South African (SA) equities have moved in tandem with robust global bourses, despite faltering domestic growth prospects, as low volatility and SA's large dual-listed component have driven record highs in the equity market, with the SWIX outperforming the rest of the domestic asset classes over the second quarter.
The global economic recovery should see global equities supported by accelerated earnings momentum, low (but positive) inflation, improved shareholder capital returns and fair to cheap valuations. SA equity valuations are expensive (and are not supported by similar underlying developed-market fundamentals) and pose potential for some underperformance.
Market overview
The FTSE/JSE ALSI gained 6.6% in rands in the second quarter (+7.2% total returns), reaching an all-time high of 51322.7 on 20 June. The best performance came from fixed telecoms (+35.8%), defensive sectors, notably beverages (+17.2%), food producers (+15.5%) and healthcare equipment (+14.2%). Oil and gas (+8.8%) gained from rising oil prices. Cyclical sectors, including industrial metals (-9.7%), platinum (-5.9%), construction (1.6%) and general mining (2.7%) lagged. The best performing stock for the quarter was Telkom, up over 18%, and the worst African Bank, down almost 20%.
The five-month AMCU strike in the platinum sector ended with producers agreeing to a R1 000 per month wage increase for A and B band employees and a 7.5% to 8.0% increase for C band employees. Amplats and Implats expect to reach steady state production in the final quarter of this calendar year (no timeframe has been given by Lonmin). None of the three producers have indicated what 'steady state production' might be and have not ruled out the possibility of restructuring once the ramp-up process is complete. We do not think that a capital raise in the form of a rights issue is imminent. We do, however, believe that there will be material strain on cash holdings as these companies ramp up production to steady state.
Fund overview
The Momentum Top 25 Fund returned 6.90% over the quarter and 38.39% over one year, outperforming the fund's benchmark, the SWIX Top 40 Index, which returned 6.8% and 35.1% respectively. We are very pleased with the fund's absolute and relative performance. The fund is 3/124 and 7/111 funds in the SA-Equity-General sector over one and two years respectively.
We remain cautiously positioned within the equity asset class, largely on the back of valuation levels that appear stretched, in our view. The state of the underlying domestic economy, where growth is likely to disappoint, is not supportive of corporate earnings and waning emerging market risk appetite.