International
World markets succumbed in June to a number of pressures and declined by a significant 3.3%. This was due to two main issues: the Fed finally confirming that it would begin 'tapering' its QE purchases and a further deterioration in the Chinese PMI numbers which signalled a continuing growth slowdown in the world's former growth engine. The US market held up reasonably well (-1.3%) and Japan actually clocked up a positive 2.1% as the benefits of the Abenomics currency weakener began to flow through. However, China - hit by the softening PMI and an interbank crisis which saw rates soar briefly to 25% - was simply pummelled, crashing a numbing 14%! Emerging markets were not much better slumping 8% mainly due to increasing outflows from increasingly risk-averse investors. Gold shares were also hammered as the bullion price crashed through the $1,200 level falling almost 12% over the month and industrial commodities also tumbled on concerns about China's slower growth. Copper fell 7% to its lowest level in three years. The past month's developments have re-ignited concerns about the global growth outlook. We expect continuing volatility over the shorter term but remain of the view that a solid rebound will follow in 2014. The US, while likely to experience a mid-year slowdown in Q2 and Q3, appears best placed to emerge from the current doldrums and enter a strong recovery phase next year.

South Africa
In June the rand recovered almost 2% from its oversold position (it has been the worst performing emerging market currency this year). However, it remains vulnerable both structurally and in terms of imminent challenges on the labour front. The structural issues are that the currency is more at risk than almost all other emerging markets as we have one of the largest current account deficits and one of the most significant foreign ownership percentages of our bonds and equities. These metrics are particularly pertinent in the current global environment where the combination of Fed 'tapering' and fears of currency weakness are causing wholesale withdrawals from emerging market bond and equity funds. Foreign outflows from our bond and equity markets have been largely responsible for the rand's weakness and for the sharp reversal in our long term interest rates. SA's ability to attract fresh capital in this environment of deteriorating fundamentals is obviously severely impaired. Our trade balance remains under pressure and continued weakness in Europe and slowing Chinese demand for our commodities will inhibit any material recovery in the near term. Despite the slowing economy and the prospect of a tighter unsecured credit market, the Reserve Bank is unlikely to cut rates as recent rand weakness will continue to put upward pressure on inflation.

International
Despite pulling back from mid-month highs as a result of the Cypriot crisis, most major markets closed higher in March. A notable exception was China which fell almost 6% following an uptick in inflation and sterner measures to cool the rampant property market. In Europe, the solution to the Cypriot banking crisis (discussed in our quarterly Commentary) effectively eliminates any hope of Lehman-type bailouts in future European banking failures. It may also trigger increased outflows from peripheral banks and will heighten their difficulties in raising bond and equity capital. European bank shares have already declined sharply. While the Eurozone's economic recession appears to be stabilising at current lower levels, the recent developments have highlighted the risks which still remain. The US has been the major beneficiary of the European and Chinese problems enabling the dollar to firm sharply to the best levels in 7 months and driving the stock market to an all-time high. The powerful recovery in the housing market has boosted consumer balance sheets to the point where the enhanced wealth effect could well offset the deleterious effects of the fiscal cliff and sequester cutbacks (retail sales have held up far better than expected). In addition, the labour market continues to improve with initial jobless claims making a new post-recession low and hiring rising sharply. Combined with an upturn in the inventory cycle and a rebound in fixed investment outlays, it appears that businesses are becoming prepared to view the fiscal drag simply as a temporary impediment to growth. Nonetheless, there are stiff headwinds to be faced in the second quarter (particularly in the consumer spending area) which will test the resolve of businesses and markets to look through into the stronger growth anticipated later in the year, and into 2014. Although the second quarter could see a revival of market turbulence, equities remain the most attractive asset class and should provide the highest returns for several years to come as the switch out of low yielding bonds and cash gathers momentum. Strongly rising inflows into equities, increasing corporate buybacks and burgeoning M&A activity are already reflecting the growing confidence in the outlook for equities. Powerful corporate balance sheets and greater optimism in the US economic recovery provide a solid base case for expanding market multiples over the medium term.

South Africa
Domestic inflation is rising above expectations and CPI is forecast to rise to above the 6% upper level of the ceiling later this year. Thus, despite clear signs that the economy is slowing (such as a sharp decline in vehicle sales growth in February to just 1.6% year-on-year) the MPC kept rates on hold at 5%. Weak overseas commodity prices and below-trend growth globally will constrain our recovery in 2013. The rand, while seemingly oversold (it was one of the worst performers last year), is likely to remain under pressure due to the threat of renewed strike action, electricity blackouts, and the high twin deficits which are now coming increasingly into focus.