The exuberance experienced by global equities in the first quarter of 2013 was revived in the third quarter, after a flat second quarter. Despite the Chairman of the Federal Reserve hinting in a speech during Q2 that there could be a tapering of the quantitative easing program, this has so far failed to materialise. The failure of the US Congress to agree a funding plan, mainly due to the rejection of "Obamacare" by some hard-core elements, has subsequently led to a shut-down of the US Government. This has been shrugged off by markets, which appear to have taken the view that a solution will shortly be found to this problem, as well as to the problem of the nearing debt ceiling which, if not resolved, would result in the US defaulting on its debt. The Chinese economy is likely to continue to slow going forward as the economy attempts to move to one driven by consumption rather than by investment. Europe, with the help of Germany, does appear to have turned the corner, while the unprecedented stimulatory measures introduced in Japan appear to be succeeding, although the upcoming VAT increase is of some concern. Although the potential for inflation to rise has been a worry for some time, the low level of employment globally is likely to keep it in check for the foreseeable future. As concerns over the tapering of quantitative easing were seen to be unfounded, bond yields fell again, offsetting some of the rise seen in the second quarter. In the medium term, however, bond yields are likely to gradually rise. Although economies across the globe are moving at different rates, with many facing their own hurdles, careful stock selection should be able to provide acceptable returns. On a broad basis, however, some balance does appear to be returning to global growth.

The market strength experienced in the first quarter of 2013 continued until the middle of the second quarter when a sharp reversal of direction was experienced, leaving the MSCI World Index at an almost unchanged level in US Dollar terms over the period. Underlying this reversal was a speech by the Chairman of the Federal Reserve during which it was hinted that there could be a tapering of the extensive quantitative easing program that is currently in place. Later comments by the Fed, however, eased this nervousness. Signs of a slowdown in the Chinese economy have had a corresponding negative effect on commodity prices, although the additional concern over a potential banking crisis in that country appear to be overdone. Europe, with the exception of Germany which seems to be in a healthy state, remains in a "funk", although some stability does appear to be returning, while the unprecedented stimulatory measures introduced in Japan have started to gain some traction. Although the potential for inflation to rise has been a worry for some time, it appears to be well under control in the near-term. Concerns over the tapering of quantitative easing also had a marked impact on bond yields, the US ten year government bond yield rising by 64 basis points over the quarter, as investors feared that a cutback in the Fed's purchasing program would be very negative for bonds. Although economies across the globe are moving at different rates, with many facing their own hurdles, careful stock selection should be able to provide acceptable returns. We believe, however, that due caution still needs to be exercised.

The US equity markets rose strongly during the first quarter of 2013 as the concerns over the potential effects of the "fiscal cliff" eased somewhat once a compromise had been reached. Most developed markets followed suit, outperforming developing markets over the period. The MSCI World Index returned 7.7% in US Dollar terms as the S&P 500 Index reached record highs at the end of March. Solid, although unexciting, data releases and healthy corporate earnings growth provided a further boost to US equities, overriding any anxieties over the negative effects that the March government spending cuts are likely to have. Europe, however, remains sluggish. The debacles of the Italian elections and the financial crisis in Cyprus are stark reminders that the Eurozone is still a long way from "business as usual". Japan provided the real surprise for the quarter. The unprecedented stimulus measures introduced in Japan by Shinzo Abe have been very positively received, resulting in a sharp rise in the value of the Nikkei 225 Index over the quarter, particularly over the last few days of March. Interest yields remained at extremely low levels during the quarter. Rates in the USA are being held artificially low, while the low economic growth being witnessed in the UK and Europe have kept yields at depressed levels. The risk of inflation does not seem to be on the horizon in the near future but the expansive measures deployed by central banks will surely raise this risk at some time in the future. While the global economy continues to stumble along, opportunities will keep presenting themselves. We believe, however, that the caution still needs to be exercised.

Equity markets delivered positive returns in the final quarter of 2012 as data releases pointed to some stability returning to the global economy. The MSCI World Index returned 2.6% in US Dollar terms over the quarter, bringing the return for the year to a pleasing 16.5%. In the USA, the focus was firmly on the Presidential elections, coupled with the so-called "fiscal cliff", while Europe concentrated very much on sovereign debt issues and austerity measures. Third quarter US GDP growth of 3.1% was slightly at odds with stagnant unemployment numbers, although signs of improvement in the housing market generally gave rise to more positive sentiment. Economies in the eurozone are likely to remain soft while austerity measures remain in place. While these measures have successfully resulted in vastly improved balance sheets in several of the peripheral countries in the region, measures to stimulate growth now seem overdue. On a more positive note, China's economic slowdown seems to be behind us while Japan has announced a significant stimulatory package in order to drive growth. Movements in global sovereign bond yields were mixed during the quarter, yields rising slightly in the US and the UK, but declining in the Eurozone. Although higher returns in equities are certainly being sought by investors, the "safe haven" of bonds does not appear to have been completely abandoned. The risk of inflation does not seem to be on the horizon in the near future but the expansive measures deployed by central banks will surely raise this risk at some time in the future Although the global economy continues to stumble along, we do see signs for renewed optimism, but will continue to remain very cautious in our stock-picking.