International equity markets responded to lower oil prices and the waning expectation of further rate hikes, particularly in the US, by steadily climbing throughout the quarter. Emerging markets kept pace with the MSCI World index for the past quarter after a sharp retreat earlier in the year and still outshine developed markets for the past 12 months. As far as developed markets were concerned, Europe continued to fare well, followed by solid numbers from the US. The UK market showed muted returns and Japan performed in line with the MSCI World index. However, returns were generally positive, and given the weaker SA exchange rate, local investors with foreign equity holdings fared better offshore than at home.

The key risks to the global equity markets include a renewed build-up of inflationary fears and a significant economic slowdown as opposed to the hoped-for soft landing. We remain positive on equities, with a slight preference towards developed markets at present.

Further tightening in liquidity, rising risk aversion and credibility issues surrounding the new governor of the Fed fuelled investor uncertainty - leading to a sharp pullback in global equity markets towards quarter-end.

Although the MSCI World Index only declined 1.1% in dollar terms, this masks diverse returns with emerging markets particularly hard hit in the flight out of risky assets. India and Dubai where the worse hit, with declines in excess of 30%. In developed markets, Japanese equities fared badly with a 9.1% drop in $ terms as the quantitative easing in monetary policy drew to a close. The US weathered the storm better with the S&P 500 index only down 1.9%. The European markets where positive in dollar terms due to a strong Euro. In local currency terms the declines where muted with the FTSE 100 (Pound) and Euro 300 Index (Euro) down 2.2% and 4.1 respectively. A 15% decline in the rand over the quarter more than offset the pullback in the underlying assets, with the result that the fund actually had a positive return in rand terms.

The swing in sentiment was largely lead by growing concerns that the Fed would continue hiking rates beyond the 5.25% level. Some extreme forecasts have even put the Fed Fund rate at a high of 6%. Other central banks followed suite as inflationary concerns dominated in line with still high oil prices. Synchronised global tightening shifted concerns from inflation to growth - impacting on equities.

With the froth out of the market, conditions have actually improved for equities with global valuations at unusually attractive levels with the 12month forward PE multiple of the MSCI index at 13.5 times - the lowest since January 1990. Profit growth should remain healthy under present growth expectations. In addition the strong trend in merger and acquisitions shows little signs of abating. Overall at this stage we would caution on turning too bearish but rather to see the recent pullback as signs of a maturing bull market.

Despite a more volatile start to the year, world equity markets ended the quarter on a positive note, with several indices reaching five year highs (such as the US and UK markets). Developed markets, while still outshone by emerging equity markets in general, staged a solid performance. The German equity market reached an all-time high in March. Exposure to Germany was increased in this fund over the quarter.

Global bonds generally produced negative returns, with interest rates reflecting the first signs of liquidity tightening seen in years.

This took place against a backdrop of continued growth in corporate profits, a higher oil price and surging precious metal prices. Other commodities, notably the softer ones such as agricultural commodities, put in a more muted performance, moving sideways throughout the quarter, while base metal prices soared. Softer commodities have, however, started the second quarter on a more positive note.

There are a few reasons to be cautious at this point when reviewing the outlook for global markets. We have probably seen the low point in global interest rates for some time to come. This is likely to place a dampener on both equity and bond markets. The good earnings season recently experienced, particularly in the US, may be the best we're going to see this year relative to expectations. While equity market valuations remain reasonable given expectations for growth, there is not much room for disappointment. Lower than expected earnings numbers are unlikely just to be shrugged off. Finally, while there was a small sign of risk aversion returning to the mind of investors at the start of 2006, the appetite for risk generally remains high, bringing with it increased levels of speculation and corporate activity. We are confident that the combination of managers in this fund will be the optimal approach to investing in this environment.

Global equity markets proved to be remarkably resilient throughout the quarter, shrugging off some of the world's worst terrorist attacks and natural disasters. Investors continued to direct funds towards areas perceived to offer better growth prospects, such as the Asian economies. As a result, emerging markets continued to out-perform developed markets. The Morgan Stanley Emerging Markets Free Index out performed the general global index by some 10% over the quarter. Regional allocation is likely to remain important, as equity markets have provided quarterly performances (in rand) ranging from over 20% for some Asian markets to -2% for the US. Among developed markets Japan performed well, with investors gaining courage from a favourable election earlier in September.

As we enter the new quarter, reality seems to be setting in. Global equity markets have corrected somewhat in the early weeks of the quarter as investors temper their rather enthusiastic growth forecasts in the face of further rate hikes, particularly in the US. Again, the Asian markets have out performed during this correction.

While valuations in global equity markets are generally reasonable, a potential sell-off in global bonds remains a risk, and a further pull-back in equity prices may represent the opportunity to buy in at lower prices.