2006 - More of the same, just a bit less

As the sun sets on 2005, and before the collective country grinds to a complete halt, a couple of points to ponder.

Although the US economy is firmly back on track, with growth for 2005 expected around the 3.6% mark; US markets are not convinced. Deficits, an overextended consumer and rising interest rates, not to mention hurricanes, oil and Iraq, have see US markets largely drifting sideward. Next year US growth will slow marginally, with 3.3% currently forecast.

On the subject of Iraq, British and American troops have been there over 1000 days now and progress can at best be described as 'limited'.

Alan Greenspan hosted his last Fed Funds meeting, taking rates up to 4.25%, with probably another 0.25% to come before they peak at 4.5%. February will see Mr Bernanke assume the chair, and for a world that hangs on every word Mr Greenspan says, they're going to have to learn a new language!

For many years, the gold price was the refuge sought whenever the US Dollar was looking vulnerable. Therefore, whenever South African goldmines got the benefit of a rising gold price, by definition it meant a weak Dollar and therefore stronger Rand. Now that inverse relationship has broken down and this year we finally saw a strengthening Dollar and gold price, which means our minds can look forward to a rising Rand gold price. Expect gold to remain firm in 2006 as huge Indian and Chinese jewellery demand outstrips supply, and as the world's central banks start increasing their depleted gold resources.

Expect oil, despite this year's volatility, to trade in a more stable range of between $40 - $60 going forward, as more refining capacity comes on board. This should filter through to a more stable petrol price.

At one stage this year the Rand was down 16% against the US$. Finally this year we have seen the much predicted gradual weakening of the Rand. Recent gold/commodity demand has however seen some Rand strength coming through, and this together with a more benevolent oil price, has seen inflation's peak surprising on the downside.

A lower than expected inflation peak means interest rates have therefore peaked as well, which means no interest rate increases next year. This will result in less pressure and more spending from consumers which means stronger than anticipated earnings for companies. Throw in increased government infrastructural spend and a stronger push for growth, and 2006 should provide a firmer than expected equity market.

So for 2006, certainly in South Africa, equities remain the place to be. Adjust your expectations (the days of CPI + 45% are over), but given that the returns from cash and bonds are going to prove disappointing, equities should provide another year of strong inflation beating returns.