From Gareth Stokes, MoneyWeek editor,

Dear Money Morning Reader,

Do you believe everything you read in the financial press? Are you among the investors lapping up stories of the imminent house price recovery and remarkable vehicle sales turnaround? If you answer in the affirmative it might be time to temper your expectation. You may have to dispense with your ‘shooting the lights out’ attitude in favour of a more conservative ‘slow and steady’ catchphrase through 2010. Economists warn that South Africa’s recovery will be a long, drawn out affair, and that enthusiasm for recent improvements in real economic data is misplaced. You’re not witnessing a turnaround, but a capitulation at levels that are as bad as things get...

Will the economic malaise infect domestic equity performances?

Undoubtedly! In his article Investing in 2010, Dr Prieur du Plessis, chairman of Plexus Group, says the ‘easy’ money has already been made in equities.  There is little chance that locally listed shares will repeat the 60% plus (in US-dollar terms) return since March last year. Du Plessis’ view – that further gains in equity market capitalisations hinge entirely on corporate earnings – is shared by a number of his peers. You’re going to need an edge to get ahead!

There are some international trends that should guide your domestic investment activities. The most prominent among these is ongoing US dollar weakness. Analysts disagree on the duration and extent of the dollar decline, but agree it will weaken for as long as developed world interest rates remain low. Under such conditions Standard Bank Economics sees the rand at 700c/$ in the first quarter and 750c/$ by year end, provided there are no significant shifts in Reserve Bank foreign exchange policy. The accuracy of their prediction is secondary to the importance of a trend that points to short-term improvements in dollar-based commodity prices and a knockon boost to locally-listed resources companies. A second trend to watch is the continued resurgence of Asia (excluding Japan).

It’s going to be tough to earn large capital returns from equities this year. Your challenge will be twofold – to correctly identify sectors and shares that are likely to outperform and to maximise returns by timing your entry to the market to coincide with the turning point in the rand/dollar trend. Local resource company profits are a function of commodity prices and exchange rates. Your investment in these and other counters with rich offshore revenues will only be realised when the rand weakens against the dollar. If you’re lucky this profit switch could flip as early as Q3 this year, if not the investment gods could keep you waiting until 2011!

The ‘soft’ outlook for domestic equities, property and cash should tempt you to move a portion of your portfolio offshore. The herd will probably flock to Chinese equity markets in search of the next big thing. But they’re making a mistake! Shares in the world’s largest emerging market are already fully priced. Your best option is to take advantage of the strong rand and reasonable equity valuations to gain exposure to blue chip US-listed companies. Need convincing? You can find expert opinions in this week’s feature article. Turn to page 16 to find out what South Africa’s top market commentators expect from equities, bonds, cash and property for 2010. We’ve also asked them about the possibility of a second market crash and to identify the most important investment trends over the coming year.

Turning to the markets...

The JSE all share index slumped 0.76% on Friday. The gold mining index slipped 2.55%. Resources fell 1.35%. Banks grew 0.15% while financials fell 0.34%. Industrials pulled back 0.29% and the platinum mining index decreased 1.75%.

London's FTSE100 shed 0.78%. The Dow Jones slipped 0.94% and the Nasdaq fell 1.24%.

Tokyo's Nikkei closed down 1.47%. Hong Kong's Hang Seng lost 0.33%.

Brent crude is currently trading at $76.76 per barrel.

Spot gold's trading at $1,134.88 and platinum was last quoted at $1,621.50.

And here's how the rand is performing against the major currencies:
R/$7.42
R/₤12.11
R/€10.67