Taking Stock : Fair to mild conditions forecast

Remarkably, we are already halfway through 2007. The first six months provided much for markets to digest. A rate hike, rising oil prices, increased inflationary fears, a wobble in the US sub-prime housing market, a correction in February as a result of emerging market fears and further blows in the ANC's presidential succession race.

Despite all of the above, and although typically volatile, the past six months have been characterised by strong equity markets and a stable currency, as has been the case for the past four years. Up 15.1% for the first half of the year, the JSE has already achieved roughly what we predicted it would return for the whole year.

Despite the massive increases from 7360 in March 2003 to current levels around 28500, opportunities still remain. However, the glory days are probably over for now. That does not, however, mean that investors have to get out of equities. In an environment where world markets are reasonably priced and where world growth is according to the IMF going to be around 5% and therefore driving earnings, another two to three years of stable, gradually rising markets is not inconceivable.

Although inflation is a worry, the US Fed doesnt seem overly concerned and the US housing market, while slowing, is showing no signs of collapse. The 'soft landing' for the US housing markets, which we spoke about at the beginning of the year, increasingly looks to be a reality. In a world less reliant on the US, a world where the Asian consumer picks up any slowdown in spending from US consumers, the result is likely to be a global economy that slows rather than stumbles.

For the investors willing to take profits in the SA equity market, a switch offshore at current exchange rate levels would not be a bad idea.

So, what should we expect for the next six months?

Expect a firm oil price, inflationary pressures and probably another rate hike of 50 basis points. Expect a fairly stable currency and a fairly bumpy equity road. Expect a fair amount of rhetoric around the presidential succession debate. However, were not too concerned from a financial perspective; we believe that while some candidates will be more market-friendly than others, the processes within the ANC should see the election of a candidate which will not impact significantly on the markets or the currency. While the possibility of a non-market friendly successor does exist, there is also a fairly good chance that we will see the election of a candidate that is positive for markets, which would be very encouraging for the equity market and the currency going forward.

There is much debate currently around whether or not an equity market correction is imminent. While it is always possible, strong economic growth generating reasonably strong earnings means that any weakness should be limited to a correction (i.e. 10%, 15% or maximum 20%) rather than a collapse, which at this stage remains highly unlikely.

By Jeremy Gardiner, director, Investec Asset Management