Global economic growth is anticipated to remain positive in the year ahead, albeit at lower levels than 2010. Developing economies, which have emerged as a major force in the global economy, will be the key driver of this economic growth. Actions to control inflationary pressures and cool certain parts of their economies will see some slowing in economic growth in the coming year but should remain at reasonable levels. Importantly, while significant fixed investment has been a major driver of economic growth in developing economies, these countries do have huge populations with a rising middle and upper class. The expected expenditure by the consumer from this rising middle to upper income households should sustain robust economic growth in these countries for years to come. While the US is expected to realize positive economic growth in the year ahead, the high fiscal deficit, rising government debt levels and a depressed housing market pose key challenges for this economy. Europe is anticipated to be the laggard in future economic growth as rigid policies and painful austerity measures drag economic growth in the region over the next few years.

Global stock markets continued their recovery in the fourth quarter, with the MSCI World gaining 9.0%, on the back of a strong recovery in the United States and other developed markers. Emerging markets lagged during fourth quarter as some of these countries started tightening their monetary policies in order to contain inflationary pressure and currency appreciation. For the FY201 0, emerging markets gained 16%, and outperformed developed markets by 4.0%. The strong economic growth as well as high foreign inflows into the emerging markets, were the main reasons for the outperformance during the 2010. 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 2010, around 32% and 40% of company revenues and pre-tax profits in the S&P500 respectively, were generated outside the US with an increasing proportion from emerging markets such as China, India, etc. Interestingly enough, profitability into foreign operations have been much better and therefore increased focus and investment is continuing in their offshore operations.

While technology, industrial, energy and basic material companies in the S&P500 benefited from the emerging market infrastructure spending in the past decade, it is expected that this trend will continue as infrastructure in emerging market continue to be strong on the back of the fast economic growth. However, 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 strong earnings growth and robust profitability in the years to come. Despite the fact that many of the high quality companies in the developed markets have decent growth profiles through their foreign exposure, strong balance sheets and robust cash flow, it is currently trading at a significant discount to their emerging market peers. 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. M&A announcements recently by the likes of IBM, HP and Oracle in the tech sector as well as some smaller acquisitions in the resources sectors highlight 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 start to gain momentum. In recent months, companies such as BHP Billiton, AT&T and WH Smith started buying back already. As these large cash balances, which are currently earning close to zero in cash deposits, are effectively utilised in the M&A, share buybacks, etc. the substantial improvement in earnings and ROE% should come through very strongly in the future.

Bond markets globally are looking expensive and appear to be trading at a significant premium to equities globally. While the developed economies face challenging conditions, many developed market companies have increased exposures to higher growth markets providing for decent earnings growth at attractive valuations. In addition, the strong balances sheets and robust cash flows allow for many of these multinationals to make strategic acquisitions of companies into higher growth markets. 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 health care sectors provide downside support should economic growth remain muted for a sustained period of 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.