2004 has been an exciting and prosperous year for most local investors. For the year to date, which is rapidly nearing an end, we have seen, the rand power up to R5,70/ from an already firm starting level of around R6,55/US Dollar, a gain of some 14% against the weak US dollar. The local equity market has risen 21% so far with the Financial 15 index up 42% and Industrials up 10%. Into December, this pace started to slow, and some profit taking set in. House prices continued their upward momentum, gaining around 35% for the 12 months, with the outlook on interest rates benign.

Going back to June 2003, I put out a detailed report, titled Five Trends in Investments, which outlined some of the major investment themes, in an attempt to provide a broader top down view. 4 of the 5 points have materialised - Please mail me, if you want a copy of this report, which is still largely topical:

2004, especially the latter part has been characterised by a weak US dollar, and repercussions for most global economies, which rely to varying degrees on exports. Pimco?s Bill Gross, put it succinctly, ?The dollar has gone down. The dollar is going down. The dollar will continue to go down because it?s the easiest way out (for the US) to begin to rectify its imbalanced finance-based economy. Balance the budget? Fugitaboutit. Raise the interest rates to historic norms? Fugitaboutthattoo.?

Local Interest rates

The Reserve Bank announces on interest rates this week. All in all a difficult call to make, but the outlook for 2005 is widely tipped with interest rates at the lower end. This effectively lowers the hurdle rate for yields and continues to support asset prices such as property and equities.

JSE

December saw the local market move up to new highs, with the JSE All Share at 12638. The local market is also trading at new highs in dollar terms. The economy is booming along, aided by low interest rates, strong currency, which favours imports and consumer spending.

At the same time the price to earnings ratio has doubled to around 16,8 times. So not exactly cheap, but when looking at the relative yield on the local government bonds, which themselves have been driven down due to low inflation and a firming exchange rate, yields from local shares are still attractive.

Conclusion

Clearly the local market has gained a lot of momentum from all the positive news generally and more specifically the numbers and outlook emanating from the specific companies themselves.

The time to be investing is typically not when the outlook for the economy and for companies looks so rosy. Instead investors should rather to be looking to take profits off the table and or protect capital gains.

Share prices have been anticipating most of the strong fundamental performance that has come through from the companies, and hence from the overall economy. The fundamentally weak US dollar, does appear to be a risk to global financial markets, including South Africa.

Investors must appreciate that capital re-ratings of share prices come in lumpy periods. The market has seen a strong re-rating, and looks set to continue, but the volatility is likely to increase. The main theme for me for 2005 is capital preservation first and steady gains second.