What does 2006 hold for investors?

I try not to make too many predictions at the turn of each year on the basis that the more I make the more stupid I am likely to look when the next year comes around. So I am pleased to see that looking back to my last column of 2004 I made only one: that 2005 would be the year that the UK consumer finally threw in the towel and that the retail sector would suffer as a result. Given the record levels of personal debt in the UK at the time and the fact that house price growth was already flattening, this wasn't the boldest call around but its always nice to be right and, so far, it seems I was.

According to the CBI, sales growth in November was the worst recorded for 22 years and shopkeepers' expectations for December were dreadful too. The sector has horribly underperformed as a result and, while it has picked up in recent weeks, I'd still be steering clear in 2006. I just can't see consumption recovering any time soon. The number of people claiming unemployment benefit in the UK has now risen for ten months in a row, we are starting to panic about our debts (we are actually paying back more than we are borrowing on our credit cards) and most importantly of all, house prices, the biggest driver of consumption there is, are at best flat and at worst falling.

I predicted falling house prices in 2004 and in 2005 and I think I'm going to continue to do so. According to Hometrack (which to my mind produces some of the more honest house price statistics) prices have fallen 2.5% so far this year. Add inflation into that and prices are down 5% in real terms. This may not count as a crash in everyone's book but its still pretty nasty for anyone who bought at the top (if they put down a 10% deposit they've lost 25% of their capital in nominal terms already) and also for the buy to let investors who, no longer making much in income after costs on a monthly basis, keep hoping to see all their returns in capital gains. And I think it is going to get much nastier. Houses are still impossibly expensive and it looks as though this year will end up having seen the lowest level of residential property transactions for over 2 decades. That doesn't bode well. So here's one prediction for 2006: house prices will keep falling.

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Moving on to more market specific comments, early in the year I looked at two of my favourite markets, Germany and Japan. Both countries have their problems, I said, but "their economies and companies are moving from bad to better and that is the perfect time to invest." It might not have been the perfect time but it wasn't a bad time. The Nikkei is up nearly 30% since and Germany's Dax has gained just over 20%. I'm still keen on both though I wouldn't expect quite the same scale of return next year.

Later in January I was back to one of my favourite subjects, oil. I was getting nervous about some of the smaller companies that did so well in 2004 but was still convinced the oil price was going to keep rising and so continued to tip both Shell and BP. Again they both turned out to be reasonable bets, rising 20% or so each over the year. I'd hang to both of them for 2006. The fundamentals in the oil market are as sound as ever with supply tight (OPEC is still running near full capacity) and demand strong so I don't see the oil price falling.

In the same month I looked at non-oil ways to get access to Chinese growth. Don't buy in directly, I said, the stock market is "in its infancy" and too risky for most. Instead I suggested getting exposure to the explosive growth in the region via shares in LVMH (nouveax riche economies love luxury goods). This worked out pretty well too. The Shanghai composite index is down 10% since but shares in LVMH are up 32%. So should you keep them? I think so. The case for luxury good sales in Asia is as solid as it was last year.

Finally on the success side I should point to silver and gold, both of which I have mentioned several times over the year. They have been volatile but overall have had splendid years the gold price is up 15% and the silver price up 30%. I still love them both and think that they will do just as well in 2006. Indeed if you haven't finished your Christmas shopping yet you won't go wrong if you buy everyone a Kruggerand or two.

So there are some of the successes. What of the failures? Back in February I got excited about diamonds and predicted fast rising prices. That didn't go too badly De Beers have raised prices twice in 2005 but my stock picking wasn't quite so hot. One tip, Firestone Diamonds has fallen 9% since and the other Brazilian Diamonds has fallen over 40% over the same period. But the fundamentals of the market are still good and if you can cope with the risks of being in small mining companies such as these, they aren't bad punts at these levels. I was also more bearish on the US market and on the dollar than was wise. Instead of falling as I thought they should, they have both risen the dollar by a lot and the market by a little.

Still, my views on the US haven't changed much, so that at least makes this year's prediction straightforward. The dollar wrong-footed much of the market with its strength this year but I think it will do the opposite next year. The trade deficit hit yet another record high in October and while the market has been distracted from this by the Fed's rate rises this year that can't last. At the same time the US economy doesn't look quite as good as many like to think. As in the UK, the main driver of growth in the US is consumption but given that real incomes have fallen in 2005 and that the housing market has begun to slow there's no guarantee that Americans will keep spending. Note that in November, if you remove heavily incentivised car sales from the equation, retail sales were actually down 0.3% year on year. 2005 was the year the UK consumer folded. 2006 may be the year the US consumer does the same. And that won't do much for the market.

First published in The Sunday Times, 18/12/2005