Global equities disappointed over the quarter, yielding 2% in USDs and -0.5% in rands. The pedestrian returns were due to a sharp rise in credit spreads following the sub-prime blowout and concerns that the credit freeze would drive the US economy into recession. Following the US Fed's 50 basis point rate cut in September, global equities surged towards quarter end. With a further rate cut expected before year end, equities are likely to continue rerating.

This fund continues to track the MSCI World Index closely.

Global equities returned 5.8% (in USDs) over the quarter, handsomely outperforming the -1.7% yielded by bonds. The improved visibility in the global growth outlook and the rebound in US leading economic indicators were all generally supportive of equities. While US growth will still fall short of trend growth this year at around 2.2%, the re-synchronisation of the US with the global economy will have positive spin-offs for Japan and the rest of Asia.

Emerging markets continued to outperform developed markets during the quarter. The fund continues to track the MSCI World Index closely.

Global equities yielded 2.1% in USD terms over the past quarter, significantly lower than the 8.0% reported in the forth quarter of 2006. The disappointing relative performance can be attributed to slowing earnings growth, mixed economic data releases and heightened market volatility. Although valuation metrics remain positive, with the Fed funds futures supportive of equities, slowing earnings momentum on the back of slowing growth will limit the upside to equities in the year ahead. While this view is at odds with the Greenspan view that the US economy could be headed for recession by year end, SMMI supports the Bernanke view that growth will pick up in H2 as manufacturing recovers. This fund tracks the MSCI World Equity Index.

The welcome mollification of global inflationary fears around mid-2006 led to lower bond yields and higher equity prices in the second half of the year. Credit spreads narrowed again after widening in the middle of the year, volatility stabilised and emerging markets recovered strongly along with developed equity markets. All eyes remained on the next step of the US Fed, and the end of US interest rate hikes was heralded by many market commentators. Judging by the latest statement early in the fourth quarter, this expectation appeared to be on track. However, strong economic performance in many major areas around the globe during the last quarter has served to shift expectations again, and long-term interest rates rose towards the end of the quarter and into the new year, albeit not back to the June peak.

The question of "whether" rather than "when" the US interest rate cycle will peak in 2007 is once again being asked. If the anticipated global economic slowdown in 2007 is more muted than expected, the outlook for global equities remains positive, but stronger growth and the accompanying interest rate adjustments may introduce more risk to global bond yields. During 2006 global equities outperformed bonds strongly. We expect equities to outperform bonds in 2007 as well, but perhaps not to the extent seen in 2006 (20% for equities versus 7% for bonds in US$). There were no manager changes in this fund, which has the objective of tracking the MSCI World Index, during the past quarter.