Make a call...

Someone at work, or a friend, tries to pin you down for your stock pick of the year.

Now, nothing against having a bit of fun choosing your winner for 2005, but when you are an investment professional, the stakes are higher. If your share does well the response is: "after all he's paid to pick stocks every day", and if it bombs out its something along the lines of: "should I trust this clown to manage money on my behalf".

Inevitably the shares that shoot the lights out in a particular year are undervalued small caps, and while it is possible to pick up on the odd sitter, these shares are generally cheap for a reason and don't come without some risk.

Interestingly enough, many of those looking for the sure bet for 2005 wanted nothing to do with the stock market in 2003 and 2004, and as I recall the buy list back then was a lot longer than it is today.

The problem we find ourselves in right now is that we have seen a significant re-rating by the financial and industrial sectors of the JSE, to the extent that it is difficult to find shares that are cheap without an obvious reason.

So, if you are looking for 2005's winner your best bet is to fish around in one of the following two areas: recovery stocks and above the norm growth stories.

So, which sectors are the top shares of 2005 going to come from? Of course it depends what the rand gets up to - a sneaky avoidance of the question I know.

The bottom line is this: movements in the currency (or lack thereof) will impact movements in interest rates, both of which will have a huge say in the performance by the different sectors of the stock market.

If you are looking for the rand to strengthen from these levels, look at the stars of the past two years led by retailers (particularly credit retailers) and banks, which will benefit directly from the interest rate cuts that are sure to follow.

Avoid resource stocks at all costs. If you favour rand stability (wouldn't that be a change!) around current levels for the next 12 months, you are possibly looking at one more cut in rates and a reasonable performance from most of the local financials and industrials.

Here, I would have a preference for growth stocks as earnings growth would play a large part in relative performance, and this list would include diversified miners. If you are of the belief that the rand will come under pressure in 2005, losing in excess of 10% of its value, you can start to look at some of the more geared rand hedge stocks.

Remembering that many exporters, including gold and platinum miners, sugar producers and manufacturers require a weaker rand than current levels to justify their valuations, a rotation out of the recently top-performing local sectors into the struggling resource sector would be supportive of exporter share prices.

The bulk of the potential recovery stocks are exporters. The other sectors that are worth a look for recovery situations are the embattled IT sector and the fast recovering financial services sector.

IT shares have fallen some way from their dizzy heights of the late 1990's. Trading conditions locally and globally have been extremely tough, much needed consolidation is not yet complete and the long-awaited recovery in corporate IT spending is showing first signs of arriving.

Some of the locally-listed IT counters are going to continue to struggle, but we expect some of the top performers on the stock market to come from this sector. Many of the smaller financial services stocks have languished since the 1998 collapse and recent profitability and improvement in share prices have been encouraging.

There is nothing like a bull market in equities to light up financial services shares and value can still be found if you dig deep enough.

In the weeks ahead we will spend some time on the stocks we like and those we prefer to avoid, as well as share some of our macro-economic views on the world at large.

Health warning: This article shouldn’t be construed to be offering advice. Speak to a specialist who has done, or can do aneeds analysis and who understands the investor’s requirements and risk appetite.