The global economic recovery has faced a few bumps during the past quarter with some momentum being lost in markets such as the US. While there are risks to the sustainability of the global recovery, the probability of the global economy falling back into a recession appears low at this stage. US exports are expected to remain robust while some recovery in discretionary spending, which is at historical lows relative to GDP, should help to sustain positive economic growth. The falling away of tax related stimulus will impact economic growth in the short term but should be compensated to some extent by the introduction of infrastructure and capital investment related incentives and stimulus measures. Emerging markets are a significant force in the global economy and will dominate global economic growth in the years to come. In the short term, they have remained robust but measures are being implemented by their authorities to cool off various sectors of their economies and prevent pricing bubbles. Europe is currently a mixed bag with Germany recovering strongly on the back of exports while continental Europe tries to address their sovereign debt and fiscal related issues. The significant movement in currencies noted over the past few weeks will assist in driving US exports while impacting negative~ the competitiveness of the Eurozone. Global equity markets recovered somewhat during the third quarter on the back of better than expected earnings from corporates and attractive valuations. While European markets have recovered and the currency has strengthened in recent months, they still remain flat or in negative territory in US$ due to the performance of the Euro (-5% year to date). Emerging markets performance has been mixed with India continuing to steam ahead while China has seen its market underperform this year on the back of concerns around policy measures being implemented by the Chinese authorities as well as the excessive valuations noted earlier this year. Our portfolios are overweight developed markets with an increasing exposure to the US. While we remain underweight emerging markets, our portfolio contains high quality companies with a substantial exposure to the higher growth emerging markets, but trading at a significantly lower risk and valuation. While major developed economies such as the US and Europe are facing challenging economic conditions, it is worth noting that many companies, especially the large multinationals, generate a significant portion of their revenues and profits outside their home markets. During 2009, around 28% and 52% of company revenues and pre-tax profits in the S&P500 respective~, were generated outside the US with an increasing proportion from emerging markets such as China, India, etc. Interestingly enough, profitability in the foreign operations have been much better and therefore increased focus and investment is continuing in these businesses. Sectors that have a significant exposure to foreign markets and have been increasing over the years include the technology, industrial, energy, basic materials, etc. Consumer driven demand in major emerging markets in the future together with the recovery in capital investment and tech related spending should see the market leaders in these sectors realise decent earnings growth and robust profitability in the years to come.

Developed market equities are currently offering investors great value particularly in the large cap arena, with these stocks appearing to have de-rated substantially over the past few years. Global mega-caps are currently trading at their lowest relative value to non-mega caps despite the fact that many of these high quality companies have decent growth profiles through their foreign exposure, strong balance sheets and robust cash flow. Importantly, with their substantial cash holdings and their ability to borrow at very low financing costs, the utilisation of the cash and debt towards value enhancing acquisitions should be accretive to shareholders. Recent MM announcements by the likes of IBM, HP and Oracle in the tech sector as well as BHP Billiton in the resources sector highlights a trend that should continue in the foreseeable future. In addition, with many of these large caps trading at attractive valuations in relation to their history and other asset classes such as bonds and cash, share buyback activity should gain momentum in the year ahead. As these large cash balances, which are current~ earning close to zero in cash deposits, are effectively utilised in the MM, share buybacks, etc. the substantial improvement in earnings and ROE% should come through very strong~ in the future. A concerning trend that has emerged in global markets over the past 2 years has been the substantial inflows into bonds. Institutions and pension funds appear to have reduced their equity exposure (particularly developed market equities) significantly over the past few years despite the low yields currently being offered by bonds (in some cases zero or negative real yields). In many instances, we are seeing quite a few of the larger cap, higher quality companies offering higher dividend yields than their own corporate bond yields, further highlighting the expensive nature of the bond market. Global equity markets appear to be pricing in a worst case scenario with a fall back into a recession. However, should the global economy continue to grow, albeit at a slower rate, then developed market equities are offering investors a window of opportunity to generate competitive returns over the medium to long term. Our portfolios are well exposed to superior quality companies within the technology, industrial and basic materials sectors which provide exposure to emerging markets and are geared to the global economic recovery at attractive valuations. Our significant exposure to the communications and healthcare sectors provide downside support should economic growth remain muted for a sustained period to time. Our portfolios trade at a significant discount to the market across various measures with a higher sustainable ROE% through the cycle. With global bond and cash yields close to historical lows, the decent growth profile and attractive real dividend yields being offered by higher quality global equities does lay the foundation for outperformance of equities over the long term.

While global economic growth has remained positive year to date, risks to the sustainability of the recovery are high. Robust emerging markets have supported global economic growth and are anticipated to grow faster and become a larger contributor to global economic growth in future. In the short term however, China and India are facing risks such as rising inflation and potential property bubbles. This has resulted in aggressive monetary measures starting to be implemented by the authorities in an effort to cool their economies. The US has been largely supported by an uptick in the manufacturing sector while the US consumers' recovery has been fairly slow due to weak job creation and high debt levels. The stringent austerity measures announced by various developed countries over the past few months to address their bloated debt levels and huge deficits, point towards a period of below trendline economic growth over the next few years.

Global equity markets experienced sharp losses during the 2nd quarter of 2010 on the back of the fiscal and sovereign debt crisis in Europe. The MSCI world market is down -10.0% year to date, with the major decline coming from the Eurozone. European markets have underperformed the US substantially this year on the back of the crisis as well as the direct impact of the weakening of the Euro against the US$ (-14% year to date). Emerging markets such as China and India have seen their equity markets come under some pressure on concerns around high valuations and rising inflation. Aggressive policy measures introduced by the Chinese authorities to curb the residential property bubble further impacted the market negatively. Our portfolios are currently underweight emerging in markets while our significant exposure to Europe has impacted the portfolio negatively in the short term, due to the factors mentioned above. We have however increased our exposure to the US over the past year as the market continues to provide great opportunities to buy high quality, large cap market leaders with strong balance sheets. During 2010, we have seen a recovery in earnings growth, particularly in the US, on the back of the severe cost cutting measures implemented during the recession. Management's focus on the basics such as cashflows and balance sheets has allowed for corporates in the US to be in the strongest financial position in years (Net Debt to Equity at its record low in 15 years). With a mountain of cash and some uptick in demand, corporates are looking at opportunities to expand and grow their businesses profitably over the medium to long term. This has resulted in a pick up in M&A activity (year to date close to double whole of 2009), particularly in the US as cash flush companies are acquiring small to medium businesses with valuable intellectual property (IP). We therefore anticipate that market leaders with strong balance sheets and robust cash flows will continue to grow and gain share while poorer quality companies with weak balance sheets will fall away.

Despite the recent bumps in the global economic recovery, there are signs of increased business confidence. Recent results by major global companies seem to highlight that private sector capex is starting to recover. Corporate capex relative to GDP was at 50 year lows in 2009. As the demand recovers and economic growth gains momentum, we anticipate a pick up in capital spending as companies look to invest for the future. Our significant exposure to the technology and industrial related sectors, positions our portfolios appropriately for any recovery in this area. In addition, increased exposure to emerging markets for many of these companies such as Hewlett Packard and Microsoft, ensures further benefit from growth opportunities in these markets. The average effective tax rate of corporates has reduced over the last 15 years in majority of the developed markets globally. Barring the recessionary impact on earnings in 2009, this has contributed to an improvement in earnings, return on equity and valuations of companies in majority of these countries. The increase in direct and indirect taxes will impact earnings growth over the next few years through lower net profits (high effective tax), reduced spending by consumers (reduced disposable income) and potential increase in unemployment as the cuts in the public sector take effect. We therefore anticipate that earnings growth could come in below expectations over the next few years. We continue to focus on companies in consolidating industries, with lower ROE% contraction risk and are increasing their exposure to higher growth markets at acceptable levels of risk. We have a significant exposure to the technology, telecoms and healthcare sectors with recent M&A activity in the cash flush technology sector, highlighting the opportunity in this area. Our portfolios have increased our US exposure during the past year while our overweight exposure to Europe has impacted negatively in the short term. A key point to highlight is that our portfolios trade at significant discounts to the global markets across various measures while providing much better dividend yield. Of more importance, our sustainable ROE% is higher than the markets through the cycle with the gap having widened quite substantially against the MSCI over the past few months. We believe the value gap existing between the higher quality companies in our portfolio and inferior quality companies will close over the medium to long term, providing significant outperformance at lower downside risk.

Global equity markets remained positive during the first quarter of this year, on the back of solid earnings reported by corporates for the last quarter of 2009. Many companies reported better than expected earnings with earnings growth seen for the first time in many quarters due to a "softer" year on year comparison, the impact of the cost cutting efforts during the past year as well as some recovery in global demand. Developed markets performance year to date have been mixed with the US outperforming. Concerns around the debt crisis in Greece combined with the weakening of the Euro, resulted in the Eurozone underperforming during this quarter. Major emerging markets such as China and India saw some momentum being lost due to excessive valuations and concerns around rising inflation in these countries. The increased reserve requirements in China for banks and the unexpected rise in interest rates in India, highlights the potential downside risk facing these markets in the year ahead, having been supported by loose monetary policy and foreign inflows during 2009. We continue to maintain an underweight exposure to emerging markets while having increased our exposure to the more attractively priced developed markets such as the US, in our global portfolios.

Global corporates (ex-financials) are currently in a solid financial position, particularly the major US companies. These companies used the recession to restructure their cost bases, shore up their balance sheets and focus on the basics of generating an abundance of cashflow. This has contributed to the significant decline in capital investment noted during 2009. Increasing management confidence around the economic recovery together with the excess cash generation by corporates, should result in increased capital investment in the year ahead as well as increased distributions to shareholders. Our significant exposure to the technology and industrial sectors, with the likes of Hewlett Packard and IBM being market leaders in various categories, does position our global portfolios well for any recovery in capital investment by corporates in the year ahead. Optimism around the global recovery has seen risk appetite approach the record levels seen in 2007. This is clearly evident not only in the low volatility in equity markets, but importantly in the substantial decline in junk bond spreads as investors have pursued the higher risk, higher beta asset plays. While we have highlighted that global corporate balance sheets are possibly in their strongest position in years, many highly indebted companies are issuing capital at a record rate to reduce their debt levels. 2009 saw US$831bn (source: Nomura) net issuance, surpassing the peak seen in 2000. The major industries leading this surge has been financials, basic industries and capital goods while emerging markets and the UK saw a significant rise from a regional perspective. This therefore highlights the risk of avoiding the poorer quality companies who were forced to raise capital, leading to significant earnings dilution and poor ROE's in the future. Our global portfolios remain exposed to higher quality companies in largely consolidated industries with lower issuance of capital and lower ROE contraction risk.

Despite the rise in equity markets over the past year, global institutional investors equity exposure remain well below the levels seen in 2000 and 2007. Majority of the increased flows seen during the past year has been directed towards emerging markets, where net flows were beyond the peaks seen during the past decade. Institutions underweight exposure to higher quality, developed market equities does provide some support to these markets while the exuberance being reflected in major emerging markets highlights the potential downside risk facing these markets. Our global portfolios are overweight developed equity markets with a key focus on companies that are market leaders in consolidating industries, generate robust cash flows, quality management and realize above average return on equity through the economic cycle. Our overweight positioning to Europe did however impact our performance negatively during the quarter on the back of a weaker Euro (down -6% year to date). We continue to focus on companies in consolidating industries with lower ROE contraction risk, with a significant exposure to the telecoms, technology and healthcare sectors. This focus on quality is clearly reflected in the gap in sustained ROE between our portfolios and the global indices. Our portfolios are also well positioned for the global recovery through our substantial holdings in market leaders in the technology and industrial sectors. These companies, including the likes of Hewlett Packard and IBM, provide upside to any pick up in capital investment by corporates globally at substantially lower risk than their emerging market peers. The significant discount our portfolios trade at relative to the global indices across various measures and our sustainably higher ROE should provide investors relative outperformance through the cycle at lower downside risk.

The past year was a year of extremes, in terms of both asset prices and investor confidence with global equity markets recovering strongly after reaching extreme lows in March 2009 supported by improving economic indicators and better than expected earnings reported by global corporates. The improved risks appear to be driven by the aggressive cost cutting implemented by corporates rather than sustained demand driven topline growth. Emerging markets have substantially outperformed developed markets with significant downside risk emerging for these markets due to excessive valuations driven by a combination of loose monetary policy and foreign inflows. With major emerging markets such as China and India trading at premiums across various measures in relation to major developed markets such as the US and Europe, we are underweight emerging market equities In our global portfolios. Developed markets such as the US continue to offer great value with corporate debt (ex-financials) declining significantly while their free cash flow Yields are at decade highs. This could result in value enhancing share buy backs and increased dividend payouts in this market in the year ahead.

Risk appetite has undergone a dramatic turnaround and is currently approaching record levels last seen in the dotcom bubble of 1999/2000 with investors piling into higher beta, lower quality and highly geared companies as well as emerging markets. The support and bail outs provided by governments for many of these indebted companies will lead to poor return on equity (ROE) for various industries as the weak are allowed to survive. Increased taxes by governments in future to fund their various support packages will further contribute to lower ROE's in future. Our portfolios are however exposed to companies in largely consolidated sectors, are market leaders, have great franchises and brands, generate sustainable profits, maintain solid balance sheets and generate strong free cash flow which could see ROE expansion rather than contraction. A company incorporating these characteristics and taking a lead role in MM activity in the cash rich global technology sector is Hewlett Packard. Hewlett Packard is at the forefront of the global technology industry providing clients across the globe with complete solutions to meet all their technology related requirements. Strong cost focus and product innovation together with targeted acquisitions across its business segments has resulted in strong profitable growth and market leading positions across the technology industry. The appointment of Mark Hurd as CEO in 2005, heralded an era of cost focus and execution which has worked according to plan during his tenor. The successful integration of EDS over the past year highlights management's ability in executing and leveraging off their various businesses and extracting costs in common related functions such as administration, etc. Hewlett Packard has been far more adept at managing its cost base due to its flexibility with its suppliers and manufacturers, allowing for stable margins and robust profitability.

Hewlett Packard has achieved strong earnings growth and ROE% expansion over the past 5 years, despite the recessionary environment and the headwinds faced from the stronger US dollar in 2009. Importantly, its robust cash flow generation has allowed the company to pursue major acquisitions such as the US$13bn EDS acquisition, implement value enhancing share buy backs, provide a stable dividend to shareholders while maintaining a healthy balance sheet. Its increasing exposure to higher growth emerging markets such as China, India, etc provide investors with growth opportunities at substantially lower risk and value relative to its emerging market counterparts. The company is well positioned for an economic recovery while at the same time providing investors with downside support through its business diversification, cost focus and execution. The significant discount it trades at in relation to the market and its history makes Hewlett Packard a great investment for patient, long term investors.

The value gap that has developed between lower quality and higher quality companies as well as emerging and developed market equities highlights the potential downside risk for these inferior quality companies and emerging markets, should the economic recovery not materialize as expected. Our portfolios are focused on great quality companies operating in defensive and consolidating industries such as telecommunications, healthcare and technology with an overweight positioning to developed market equities. The downside risk in cyclicals such as financials and major emerging markets such as China and India drives our underweight positioning in these sectors and regions respectively. The significant discount our portfolios trade at relative to global indices across various measures together with the widening gap in sustainable ROE's between our portfolios and the market ensures our portfolios, brimming with great companies of the likes of Hewlett Packard, should provide investors with lower downside risk and relative out-performance through the cycle.