Happy New Year. It's been a happy start to 2006 so far, with the stock market having increased by two per cent already.

Last year proved to be another good year for investors. The FTSE 100 rose by nearly 17 per cent in 2005, and if dividends from shares are thrown into the mix, that equates to a return of 20 per cent.

The picture was just as good in most cases with global investment, with Japan in particular providing exceptional returns. So, what can we expect for 2006? Surely shares can't keep going up at this rate? Perhaps not, but the economic conditions are still in place for growth.

UK inflation looks set to continue within its required range, meaning that interest rates will remain at their relative historic lows. With growth forecasts on the bullish side, that means the cost of debt will continue to be well below company earnings projections, providing an excellent continued background for equity investment.

Investment in bonds is lower risk but, with the performance coming from coupon interest, the returns are expected to be pedestrian in comparison to equities. Having said that, they continue to provide a better return than cash on deposit.

One area of concern is inflation in the US, which is running at a higher rate than in the UK or Eurozone. US interest rates may need to keep on rising. As the US economy, being the largest in the world, has a dominating effect on other economies, we may not see UK interest rates fall much beyond their current level.

Maintained UK interest rates should allow the housing market to keep pace with inflation, which in turn should allow consumer discretionary spending to continue along its current trend. Consumer spending is vital for the retail sector, which is in focus again at this time of year.

There is light at the end of the retail reporting tunnel. Most of the big retailers have now revealed how they traded over Christmas. Is there any pattern ? No. Some did dreadfully - Body Shop, Clinton Cards and Matalan are in that camp. On the other hand, those retailers who held their nerve and didn't start sales before Christmas have done OK. Reasonable results have been posted by the likes of Next, Marks & Spencer and Sainsbury's.

Today sees Tesco reveal how it fared in the seven weeks to January 8. Analysts are predicting a strong showing. A record number of online shoppers should help to push full-year sales up by 11.5 per cent. Tesco is hoping to match Sainsbury's sales increase. That should boost full-year revenues to next month to a staggering £38.1bn, up from £33.9bn.

DSG International will report a less upbeat set of half-year results to November 12, 2005, tomorrow.

The group issued a profits warning a few weeks ago, reporting a three per cent fall in sales. Growth in the international division offset negative like-for-like figures at Currys and Dixons. Link, the phone retailer, showed no improvement at all, with a 28 per cent drop in like-for-like sales in the first half of the year.

Looking at Dixons' share price graph gives the impression that things have picked up. The stores were certainly busy over the festive season, as millennium-bug-era PC users upgraded to join the 21st Century.

* For investment advice contact Anthony Platts on 01642 608855.

Published: 17/01/2006