It has been another good year for stock markets. The FTSE 100 has risen by more than 14 per cent and that, with dividends, takes the return for the year to more than 17 per cent.

It is that crystal ball time of the year again, when investors' thoughts turn to what 2006 holds in store for the markets.

Of course with markets, it is always news that moves indices. However, even in the absence of knowing the news for next year, it is possible to find trends.

They are encouraging and at Wise Speke, we are looking for the FTSE to push ahead strongly, ending the year at 6,100 or thereabouts, while the S&P 500 will reach 1375.

With the FTSE currently at about 5,500, it is a relatively bold prediction, but one that is soundly based on solid grounds of GDP growth, inflation forecasts, bond markets and corporate earnings. The four strands come together to make a powerful argument for 2006.

Economic growth as measured by GDP is likely to be stronger than expected, with buoyant corporate profitability feeding through to investment, jobs and consumer spending.

Inflation, expected by many to be ready for a comeback, will remain tame in 2006. While it is true that headline inflation has edged up, it is also the case that core inflation in the major economies has declined over the past year and will continue to fall.

Oil prices have peaked and the drop in headline inflation will increase real disposable income growth, while moderating demands for wage increases. Improvements in GDP growth and investment will be accompanied by improvements in productivity.

With inflation tame - if not absolutely tamed - then the pressure for increased interest rates eases. This will feed through into greater stability in bond markets.

The recent strength of the US dollar might be a problem for inflation in the UK, the Eurozone and Japan. However the link between the dollar and inflation in the other major economies has weakened.

The expectation is that the US Federal Reserve is likely to take interest rates to 4.5 per cent or 4.75 per cent by the first quarter of next year and then hold that position. Wall Street has already got the message that the Fed is close to achieving its desired interest rate level and could be ready to climb a good deal higher.

So far so strong. But we also believe corporate earnings will provide more positive surprises. Better than expected economic growth will provide a boost, as will improved productivity.

However, the ongoing story of globalisation will provide a further push for corporate earnings. Globalisation has been a force for the good in pushing down prices and forcing companies to reassess competitiveness. Firms will continue to cut costs and restructure. They will also be pushed down the road of mergers and acquisitions.

All of that will feed through into positive news flow which, as we said at the start, drives markets. We may not know the detail yet, but the forecast is for stronger economic growth and stable inflation. Against that, the bond markets can expect a satisfactory year, while the equity markets can look forward to a good year.

* For investment advice contact Anthony Platts on 01642 608855.

Published: 13/12/2005