A few closing comments for 2007, and a look at the year ahead

As the end of the year approaches fast, 2007 has proven to be another successful year for SA equities. Up roughly 16% so far this year, the market has after a period of exuberance delivered roughly what most market commentators were expecting. The higher interest rates, the New Credit Act, a slowing economy and even the reintroduction of the lotto have all contributed to spoiling the consumer party that has raged for the past four years.

While growth has done 5%+ for the past 3 years, (the fastest rate in 25 years!), 2008 should see it slowing closer to the 4% mark. Yet South Africans need not despair, SA corporates are finally starting to spend, and government’s massive infrastructure program over the next 3 - 5 years will drive growth, jobs, earnings and therefore markets. SA markets remain reasonably priced and therefore should continue to generate solid inflation beating returns for the next 2 - 3 years.

Inflation remains cause for concern. While it will peak during the first quarter, it may surprise on the upside and the potential for a January rate hike cannot be ruled out. Although the driving factors of higher inflation, fuel and food are oblivious to rate hikes, another 50bps is quite possible, with relief in the form of rate cuts expected hopefully during the second half of 2008.

Expect global markets in 2008, like 2007, to be contaminated by more sub prime carnage, more soggy US housing prices, more dollar weakness, an increasingly bruised US consumer and slower US growth. Basically more of the same. Fortunately, the influence of Asia means that despite US woes, you will see a world that slows, but doesn’t stumble. This is evidenced by the fact that emerging market returns are roughly four times those of developed markets this year.

By all accounts, the new political dispensation thus far have stressed that economically nothing will change. However, this is unchartered territory and investors will be monitoring closely for any deviations from current policy.

The rand should remain fairly stable against the damaged dollar, whilst continuing its gradual decline against the world’s other major currencies. Our massive current account deficit does however render us vulnerable to any change in sentiment towards SA or emerging markets as a whole.