middle of difficulty lies opportunity ”. to a large extent this wisdom can be applied to the world economy and financial markets. there are numerous examples of how it sometimes takes a disaster or a crisis for a structural improvement to occur. it was only after the asian crises of the late 1990s that asian emerging markets started to build foreign exchange reserves and strengthen their macroeconomic fundamentals. today, emerging markets are the net savers of the world, and reap the good results of their macroeconomic discipline in the form of low risk premiums and borrowing rates, ratings upgrades, increased foreign investment and accelerated growth rates. on a micro level, companies have behaved in much the same way. after having been plagued by accounting scandals, downgrades to “ junk ” status, section 11 classifications and some verging on the edge of bankruptcy, they have pulled themselves together. corporations have deleveraged their balance sheets and became net savers, accounting standards have improved and corporate governance has become a major focus area. in an environment of strong economic growth, this should definitely put them on a ‘ pathway to higher growth ’. consistent with the strength of corporate profits, improved balance sheets and diminishing excess capacity, investment is expected to be strong, contributing to renewed growth. a positive development in the global economy that tentatively seems to be emerging is that growth is becoming more balanced and broad - based. in 2004, the us growth rate was double that of europe and japan. although the us remains the main engine of growth among the industrialised countries, the gap in growth rates is expected to narrow, with us growth moderating from 4, 2 per cent in 2004 to 3, 4 per cent in 2006, european growth remaining around 2, 0 per cent and japanese growth accelerating from 2, 3 per cent in 2004 to 2, 8 per cent in 2006. developing asia is also likely to remain an engine of growth, with output expected to increase by 8, 2 per cent in 2006, and that of china alone by 9, 5 per cent. another remarkable thing about the current cycle of strong global growth is that it has been taking place whilst oil prices have been hovering between usd60 and usd75 per barrel for some time now – levels that would have been almost unthinkable a few years ago and which would have caused market analysts to significantly revise down their growth forecasts. perhaps more surprising is that high oil prices do not seem to have filtered through to other prices to the extent that might have been

anticipated. the so - called “ core inflation ”, which excludes energy and other volatile prices, remains subdued in most countries. a third factor that distinguishes growth in the current and next few years from previous years is that, while the period of expansion started in an environment of highly accommodative monetary conditions worldwide, it ( growth ) is now forecast to continue in an environment of higher interest rates. the us fed has increased the fed funds target rate to its current level of 5, 0 per cent, from 1, 0 per cent at the start of the tightening cycle, and the general expectation is that it might be close to its peak. the ecb started to increase rates in december 2005 with further increases expected, and market expectations are that the bank of japan would follow suit later in the year, having ended their policy of quantitative easing ( pumping liquidity into the banking system ) in march 2006. nevertheless, global financial market conditions remain favourable, characterised by unusually low risk premiums and volatility. despite monetary policy tightening, long - term rates remain below average. the relatively flat us yield curve is a “ conundrum ” which even mr greenspan could not solve before going into retirement! given this favourable environment, equity prices have risen significantly. since the beginning of 2003 until the end of april 2006, the dow jones has risen by 35 per cent, the nasdaq by 77 per cent, the german dax by no less that 117 per cent and the japanese nikkei 225 by 104 per cent. in this bull run, equity markets experienced an unprecedented flurry of activity with regard to mergers and acquisitions, which further boosted investor sentiment. ( some retracement in equity prices occurred in the first part of may 2006 – let us hope that it is temporary and that share prices will continue to be supported by positive economic fundamentals. ) low bond yields in industrial countries caused funds to flow into alternative investment opportunities and into emerging markets. despite a recent warning by the bank for international settlements ( bis ) in its quarterly bulletin that emerging - market assets might be becoming overvalued, investors continued to favour these assets. in south africa, non - residents increased their holdings of domestic bonds and equities by a net amount of r48, 4 billion in 2005, and by a further r49 billion in the year to the end of april 2006. some sell - off in emerging - market assets occurred during may 2006, due partly to three factors : seasonal position sq