Domestic consumer demand has slowed considerably in the last two years, as the unsecured lending boom has come to a halt. Adding to consumer headwinds, petrol price increases pushed the CPI inflation rate above the South African Reserve Bank's 3% to 6% target, squeezing disposable incomes. While domestic GDP is expected to grow by just 2% this year, rand weakness seen in the first three quarters of 2013 will drive greater industrial production in the economy over the next 6 to 12 months, offsetting the slowdown in consumer expenditure and lifting the country's growth rate to above 3%. Additionally, inflation is expected to dip back into the target band over the short term, with global food and oil prices stabilising. As a result of both greater export growth and weaker import growth, the current account deficit as a proportion of GDP is expected to stay at recent levels over the short term, and decline steadily in the years ahead.

Based on the steadily improving growth outlook for the US economy, the Federal Reserve has indicated its willingness over time to reduce the level of stimulatory support. However, US policymakers have shown that they will be prudent in their action, offsetting an initial spike in yields by delaying the beginning of the Federal Reserve's tapering programme in September. Global yields have since come off of their short term highs, but are widely expected to continue on a medium term upward trend. Against the backdrop of short term uncertainty in US yields and some reversal in the foreign flows to emerging markets, South African yields have been volatile. Adding to the uncertainty, the South African Reserve Bank is facing a challenging period due to a weaker Rand and higher inflation at a time when economic growth is slowing. 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 slowing in recent quarters, and is expected to expand by 2.4% in 2013. Demand for consumption goods has been weakening on the back of tightening unsecured credit conditions and stagnant or declining employment in the mining and manufacturing sectors, which continues to pose a threat to the growth outlook. A weaker rand will however provide a boost to these industries, as South African exports become more competitive in the global markets. Over the longer term, implementation of government industrial and social policies such as the Industrial Policy Action Plan and National Development Plan will be more critical to realizing a growth recovery. We have seen some success in this regard, as our state owned enterprises drive new infrastructure investment programmes. Further success in reforming the supply side of the economy will have major implications for South Africa's competitiveness and trade balance as we diversify our production mix towards more value added goods. However, while the trade deficit narrowed to 5.8% in the first quarter of 2013, it remains high relative to our emerging market peers and has added to inflationary pressures, as imported goods have become more expensive due to a weaker domestic currency. Achieving a more sustainable level in the trade deficit will therefore have positive implications for both the currency and the inflation outlook, which will provide a needed boost to consumer confidence and disposable incomes.

Based on the improving growth outlook for the US economy, the Federal Reserve has indicated its willingness to reduce the level of stimulatory support which resulted in yields increasing from the low levels reached during April 2013. However, the Federal Reserve is expected to be prudent in their action with the objective of ensuring that the increase in yields have a measured impact on the global economy and markets. Against this backdrop of increasing US yields and some reversal in the foreign flows to emerging markets, the South African yields are moving higher. The South African Reserve Bank is facing a challenging period due to a weaker Rand and higher inflation at a time when economic growth is slowing. 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 National Development Plan (NDP) was the cornerstone of both the State of Nation Address (SONA) and the Budget speech this year. Key aspects of the NDP revolve around addressing major issues such as job creation, improvement of education and skills for young people and improving our economic competitiveness as a country by investing in infrastructure and raising our productivity. In the short term, the macro environment remains tough with the South African economy anticipated to deliver economic growth of 2.7% for 2013. The South African consumer has been the key driver of economic growth over the years but will face pressure from rising inflation (fuel and food costs), a moderation in real wage increases (both public and private sector) as well as access to credit pulling back due to concerns around the unsecured lending market by the major financial institutions. Infrastructure investment should gain momentum with government related spend expected to start coming through, which together with spending by the major public enterprises (Eskom & Transnet) will provide some support to economic growth in the foreseeable future. The manufacturing and mining sectors could potentially surprise on the upside. Challenges around labour, administered prices and poor productivity are well publicized and have impacted these sectors. However, the Rand has weakened significantly on the back of our weak current account and negative sentiment around the industrial action during 2012. A weaker Rand for a sustained period and stable commodity prices has the potential to surprise on the upside contribution to growth and company earnings for both the manufacturing and mining sectors. From a fiscal perspective, while our sovereign debt levels are on a rising trend, they are at manageable levels. The budget deficit remains high but with the risk of further downgrades, Treasury can be expected to be fairly tight around budgeted expenditure for the year ahead and improve recoveries around taxes.

Against the backdrop of global stimulatory monetary policy, South African yields are expected to remain low over the medium term but inflation risk has increased over the past 6 months due to the Rand weakness and there could be upside surprises. 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