Growth expectations for developing economies have been revised lower since the beginning of the year given the negative impact of interest rate increases and currency volatility on domestic demand. Although these headwinds are likely to persist over the short term in the form of economic imbalances and deteriorating terms of trade, we maintain our positive long-term view on developing economies, given favourable demographics, high saving rates, strong urbanizing trends. However, over the near term horizon, the impetus to global growth will likely be driven by developed economies such as the US, where personal consumption expenditure growth has remained robust on the back of improving employment conditions, rising consumer confidence and the positive wealth effect from rising home prices. In Europe, investment growth has been depressed over the past five years, and a pickup on this front combined with a lower fiscal drag could also provide an important tailwind to its recovery over the next decade.

The South African economy has been impacted by on-going strikes in the mining and manufacturing sectors, bringing 2014 growth expectations steadily down to 1.5%. In light of these developments, policy interest rate increases in South Africa have been more tentative than those within its emerging market peers, as domestic policymakers are reluctant to further squeeze short term economic growth. While headwinds have been significant in recent months, there are still a number of reasons to be optimistic about South Africa's future growth prospects. With respect to inflation, currency volatility has created significant uncertainty over the past year. However, a steady oil price and declining agricultural prices globally should provide much needed downward pressure on headline inflation figures, supporting consumer demand to some extent. Over the long term, additions to electricity capacity also have the potential to unlock significant growth in the industrial sectors of the economy, as major power projects are rolled out over the course of the next 10 years. The intensification of policy implementation could also prove to be an important tailwind to growth, as investor confidence in South Africa improves and structural reforms lift the economy's potential growth rate.

Based on the positive growth outlook for the US economy, the Federal Reserve has substantially reduced the pace of its stimulatory support, and is expected to begin hiking its key policy rate as early as the middle of 2015. However, by remaining sensitive to developments in macroeconomic conditions, US policymakers have shown that they will be prudent in their actions, and will likely adapt to any unanticipated slowdown in the economy by pushing the tightening cycle further into the future. While developed market yields have been subdued in recent months by a lack of global inflationary pressure, they are widely expected to continue on a medium term upward trend as monetary policy normalises.

As sentiment over global economic growth has shifted, South African yields have tracked those of other emerging markets closely over the course of recent months. Domestically, the South African Reserve Bank has entered into a medium term tightening cycle, but continues to acknowledge the challenge of managing a weaker Rand and higher inflation at a time when economic growth is relatively slow. Our Income portfolios are well positioned to take advantage of opportunities while remaining focused on the quality of the instruments and the cash flows of the underlying issuers.

The South African economy has been impacted by on-going strikes in the industrial sector, bringing 2014 growth expectations steadily down to 2% and below. The slowdown has been further intensified by a credit extension pullback, led by more sustainable unsecured lending growth. In light of these developments, policy interest rate increases in South Africa have been more tentative than those within its emerging market peers, as domestic policymakers are reluctant to further squeeze short term economic growth. While short term headwinds have been significant, there are still a number of reasons to be optimistic about South Africa's growth prospects over the next five years. Additions to electricity capacity in the next two years have the potential to unlock significant growth in the manufacturing and mining sectors. The intensification of policy implementation could also prove to be an important tailwind to growth, as investor confidence in South Africa improves and structural reforms lift the economy's potential growth rate. These factors underpin the South African Reserve Bank and IMF's forecast for substantially improved growth in the years ahead, to average above 3% in the years through 2019.

Based on the positive growth outlook for the US economy, the Federal Reserve continues to reduce the pace of its stimulatory support, and is expected to end new bond purchases towards the end of this year. However, by withdrawing stimulus in an orderly fashion, US policymakers have shown that they will be prudent in their actions, and will likely adapt to any unanticipated slowdown in the US economy. While developed market yields have been subdued in recent months by a lack of global inflationary pressure, they are widely expected to continue on a medium term upward trend as monetary policy normalises.

As sentiment over global economic growth has shifted, South African yields have tracked those of other emerging markets closely over the course of recent months. Domestically, the South African Reserve Bank has entered into a medium term tightening cycle, but continues to acknowledge the challenge of managing a weaker Rand and higher inflation at a time when economic growth is relatively slow. Our Income portfolios are well positioned to take advantage of opportunities while remaining focused on the quality of the instruments and the cash flows of the underlying issuers.

South African economic growth is expected to accelerate in 2014 after coming in at 1.9% last year. While consumption growth has come under pressure due primarily to a slowdown in credit extension, the exporting sectors of the economy and tourism are expected to benefit substantially from recent weakness in the currency. Inflationary pressures are likely to intensify over the short term, as higher agricultural prices begin to reflect at retail stores. However, over the medium term an expected stabilisation in the rand should keep inflation within the Reserve Bank's 3% to 6% target band. The current account deficit narrowed to 5.1% of GDP in the final quarter of 2013, and is expected to continue narrowing over the medium term as import growth slows and export figures improve. Although the wide deficit and concerns over the end of quantitative easing continued to put pressure on the exchange rate in recent months, the country's relatively strong fiscal position and improving competitiveness will in all likelihood mitigate these pressures going forward.

Based on the steadily improving growth outlook for the US economy, the Federal Reserve continues to reduce the pace of its stimulatory support. However, US policymakers have shown that they will be prudent in their actions, withdrawing stimulus in an orderly fashion. While global yields have been volatile, they are widely expected to continue on a medium term upward trend. Against the backdrop of increasing US yields and some reversal in the foreign flows to developing markets, South African yields have been volatile. Adding to the uncertainty, the South African Reserve Bank continues to face a challenging period due to a weaker Rand and higher inflation at a time when economic growth is relatively slow. Our Income portfolios are well positioned to take advantage of opportunities while remaining focused on the quality of the instruments and the cash flows of the underlying issuers.