Growth expectations for developing economies have been revised lower since the beginning of the year given the negative impact of interest rate increases and currency volatility on domestic demand. Although these headwinds are likely to persist over the short term in the form of economic imbalances and deteriorating terms of trade, we maintain our positive long-term view on developing economies, given favourable demographics, high saving rates, strong urbanizing trends. However, over the near term horizon, the impetus to global growth will likely be driven by developed economies such as the US, where personal consumption expenditure growth has remained robust on the back of improving employment conditions, rising consumer confidence and the positive wealth effect from rising home prices. In Europe, investment growth has been depressed over the past five years, and a pickup on this front combined with a lower fiscal drag could also provide an important tailwind to its recovery over the next decade.

The South African economy has been impacted by on-going strikes in the mining and manufacturing sectors, bringing 2014 growth expectations steadily down to 1.5%. In light of these developments, policy interest rate increases in South Africa have been more tentative than those within its emerging market peers, as domestic policymakers are reluctant to further squeeze short term economic growth. While headwinds have been significant in recent months, there are still a number of reasons to be optimistic about South Africa's future growth prospects. With respect to inflation, currency volatility has created significant uncertainty over the past year. However, a steady oil price and declining agricultural prices globally should provide much needed downward pressure on headline inflation figures, supporting consumer demand to some extent. Over the long term, additions to electricity capacity also have the potential to unlock significant growth in the industrial sectors of the economy, as major power projects are rolled out over the course of the next 10 years. The intensification of policy implementation could also prove to be an important tailwind to growth, as investor confidence in South Africa improves and structural reforms lift the economy's potential growth rate.

Global equity markets continued their upward march during the past quarter, however the growth in earnings outpaced the growth in the index levels. During the past few years emerging markets have been the beneficiaries of strong inflows while developed market equities have lagged. As a result of the withdrawal of the financial stimulus (tapering of quantitative easing) we saw a reversal of trend during which funds started flowing into developed market equities - during the past quarter this trend however has slowed. Emerging market companies have continuously increased their debt levels over the past few years and this trend recently accelerated. The inevitable turn in the rate cycle should create the potential for higher demand for quality developed market equities which should be positive for our portfolios.

During the quarter, South Africans witnessed the failure of African Bank Investments Limited (Abil), which caused significant damage to many investors. From the various opinion pieces in popular news publications to the large number of heated letters from ordinary South Africans, it has become clear that many of those who have entrusted their savings with some of the country's most well-known wealth management institutions have suffered loss of wealth due to this debacle. South African equity markets remained resilient during the quarter despite this failure with the Industrial and Financial sectors driving the continued rise in the JSE All Share Index (ALSI) this year. While the resources sector has lagged year to date, and it does face challenges around lower commodity prices, there are some attractive opportunities within the high quality, lower cost producers. The significant focus on cost cutting and capex containment should see an improvement in free cash flow generation going forward.

As sentiment over global economic growth has shifted, South African yields have tracked those of other emerging markets closely over the course of recent months. Domestically, the South African Reserve Bank has entered into a medium term tightening cycle, but continues to acknowledge the challenge of managing a weaker Rand and higher inflation at a time when economic growth is relatively slow.

Our balanced portfolio is well diversified across geographies, currencies, asset classes, sectors and instruments. This appropriate level of diversification allows for a relatively lower level of risk and is positioned to generate real returns for our clients over the long term.

Global economic growth is likely to improve during the current year despite a weather related slowdown in the US economy during quarter 1. Personal consumption expenditure has remained robust in economies such as the US and UK on the back of better employment prospects and rising home prices, which has led to greater consumer confidence. Furthermore, normalisation in private sector fixed capital formation is likely to be a significant tailwind to growth over the medium to long-term. Europe's leading indicators and purchasing managers' indexes continue to point towards improving growth prospects. Consumer confidence is rising and retail sales are showing marginal signs of recovery, while employment levels have also risen moderately. While demand indicators have been picking up, inflationary pressures in developed markets remain subdued, which should allow low rates to be maintained over the short-term. Developing markets have faced some short-term challenges due to rising inflation and increasing interest rates. However, capital flows have stabilised in recent months, which could see the weaker emerging market currencies translate into greater export competitiveness. Over the long term, we believe that given their high saving rates and young urbanising populations, developing markets remain well positioned to drive global growth.

The South African economy has been impacted by on-going industrial action, bringing 2014 growth expectations steadily down to 2% and below. The slowdown has been further intensified by a credit extension pullback, led by more sustainable unsecured lending growth. In light of these developments, policy interest rate increases in South Africa have been more tentative than those within its emerging market peers, as domestic policymakers are reluctant to further squeeze short term economic growth. While short term headwinds have been significant, there are still a number of reasons to be optimistic about South Africa's growth prospects over the next five years. Additions to electricity capacity in the next two years have the potential to unlock significant growth in the manufacturing and mining sectors. The intensification of policy implementation could also prove to be an important tailwind to growth, as investor confidence in South Africa improves and structural reforms lift the economy's potential growth rate. These factors underpin the South African Reserve Bank and IMF's forecast for substantially improved growth in the years ahead, to average above 3% in the years through 2019.

Global equity markets continued their upward march during the past quarter, but the index levels outpaced earnings growth. During the past few years emerging markets have been the beneficiaries of strong inflows while developed market equities have lagged. As a result of the withdrawal of the financial stimulus (tapering of quantitative easing) we saw a reversal of trend during which funds started flowing into developed market equities - during the past quarter this trend has continued. Flows into developed market equities should continue to receive support as pension fund allocation normalises. The inevitable turn in the rate cycle should create the potential for higher demand for quality developed market equities which should be positive for our portfolios.

South African equity markets have had a robust 2014 year to date with the JSE All Share Index (ALSI) being one of the better performing global equity markets this year. The improving global economy, earnings recovery and a successful, peaceful election in South Africa have all contributed to the rise in the equity market. Within the emerging market space, South Africa is viewed as a "safe haven" due to our stable political and regulatory environment, which has attracted foreign flows into our equity and bond markets. The financial and industrial sectors have been the major drivers of the rise in the ALSI this year while the resources sector has lagged on the back of concerns around the mining sector strikes and lower commodity prices. The lag in performance of the resources sector and with their earnings at relatively depressed levels, attractive opportunities are to be found in high quality, low cost producers who are trading below their intrinsic values.

There is solid demand for warehouse and logistics space and rentals for industrial properties in South Africa remain stable and vacancies are low. In the retail sector we are seeing an increase in new shopping centres in Johannesburg and Pretoria but the demand from national food and fashion tenants for good locations remain robust. The office market is going to take time to recover due to the demand being closely linked with business confidence and employment and we have also seen significant new supply in the Sandton and Cape Town office markets. As sentiment over global economic growth has shifted, South African yields have tracked those of other emerging markets closely over the course of recent months. Domestically, the South African Reserve Bank has entered into a medium term tightening cycle, but continues to acknowledge the challenge of managing a weaker Rand and higher inflation at a time when economic growth is relatively slow.

Our balanced portfolio is well diversified across geographies, currencies, asset classes, sectors and instruments. This appropriate level of diversification allows for a relatively lower level of risk and is positioned to generate real returns for our clients over the long term.

Global economic growth prospects have continued to improve over the last quarter, being driven primarily by developed markets. The better growth outlook for countries such as the United States and United Kingdom is underpinned by improving employment prospects, leading to greater confidence and increasing consumer spending. Europe has probably experienced the worst effects of austerity as peripheral countries continue to reign in their budget deficits, and it is expected that the drag on economic growth will be significantly reduced going forward. Developing markets continue to face short-term headwinds due to volatile capital flows following the scaling back of quantitative easing in the US. Growth over the short-term is thus likely to be impacted by weaker currencies, higher inflation and higher interest rates. However, we believe that weaker exchange rates in developing economies are likely to boost their competitive standing and ultimately exports. Additionally, given their high saving rates, young urbanizing populations and rising consumer incomes, developing markets still remain well positioned to drive global growth over the long-term. South African economic growth is expected to accelerate in 2014 after coming in at 1.9% last year. While consumption growth has come under pressure due primarily to a slowdown in credit extension, the exporting sectors of the economy and tourism are expected to benefit substantially from recent weakness in the currency. Inflationary pressures are likely to intensify over the short term, as higher agricultural prices begin to reflect at retail stores. However, over the medium term an expected stabilisation in the rand should keep inflation within the Reserve Bank's 3% to 6% target band. The current account deficit narrowed to 5.1% of GDP in the final quarter of 2013, and is expected to continue narrowing over the medium term as import growth slows and export figures improve. Although the wide deficit and concerns over the end of quantitative easing continued to put pressure on the exchange rate in recent months, the country's relatively strong fiscal position and improving competitiveness will in all likelihood mitigate these pressures going forward.

Global equity markets have continued to move higher during the past quarter with the index levels outpacing earnings growth. During the past few years global bond and emerging markets have been the beneficiaries of strong inflows while developed market equities have lagged. As a result of the withdrawal of the financial stimulus we saw the trend of flows reverse and this continued during the past quarter with inflows into global equities, specifically developed market equities, and outflows from global bonds. Global pension funds have increased their allocation towards equities, however it is still below the long term average which combined with the inevitable turn in the rate cycle create the potential for higher demand for quality developed market equities. This bodes well for our portfolios as we have maintained our investment in high quality companies that have strong competitive advantages, and the ability to leverage off those competitive advantages to deliver a higher level of sustainable Return on Equity (ROE) through the economic cycle. We believe that companies which have healthy balance sheets and strong cash flows have the ability to sustain themselves during challenging economic environments while delivering real earnings growth over the long-term.

South African equity markets had a decent start to 2014 with positive returns being delivered during the first quarter. Resources, having underperformed over the past few years, were the major driver of performance during the quarter as earnings growth started to come through. Within the ALSI, there are still attractive opportunities in high quality, globally competitive companies who are trading below their intrinsic values. South Africa is being viewed as the gateway to Africa and increasingly the ALSI is deemed to be an ideal platform for investors to get exposure to the African growth story. South African companies have been very active in pursuing growth opportunities in Africa with many companies being leaders in their respective sectors. The huge growth potential and the increasing flexibility being provided by the South African government to increase trade with the African continent should see the African contribution for the ALSI rise significantly going forward.

We continue to see new office property supply coming to the Johannesburg and Cape Town markets and any recovery in rental is dependent on stronger growth in the economy and a recovery in corporate employment and activity. Demand from national and international retailers for space in strong nodes continue to support South African shopping centre rentals while the demand in the industrial logistics market is firm and vacancies remain low. Based on the steadily improving growth outlook for the US economy, the Federal Reserve continues to reduce the pace of its stimulatory support. However, US policymakers have shown that they will be prudent in their actions, withdrawing stimulus in an orderly fashion. While global yields have been volatile, they are widely expected to continue on a medium term upward trend. Against the backdrop of increasing US yields and some reversal in the foreign flows to developing markets, South African yields have been volatile.

Our balanced portfolio is well diversified across geographies, currencies, asset classes, sectors and instruments. This appropriate level of diversification allows for a relatively lower level of risk and is positioned to generate real returns for our clients over the long term.