Assessments of the South African market are largely optimistic, with predictions of increasing political stability and an end to the economic downturn that began last year.

Graham Mason, chief investment officer of Prudential Portfolio Managers, South Africa, says he expects much better equity and bond performance this year, with cash the poorest performer. This is almost the reverse of last year which saw returns of about 16% for cash, 9% for equities and 6% for all bonds.

He predicts company earnings growth of 20% one year out and 17% the following year. The prospect of the short rate declining will lend support to the equity market and he expects one or two cuts in prime overdraft rates before the end of this year.

Peter Cronshaw, executive director, marketing and investor relations at Genbell Investment Asset Management, is also bullish. There is still significant growth coming through from a lot of companies and we are seeing foreign investment."

He adds: "We would not be surprised if the long bond rate was down below 14 by the end of the year, somewhere between 12 and 13, despite a recent rebound."

Richard Jesse, in charge of portfolio strategy at Fleming Martin, describing South Africa as a high bond area, says he expects bonds to be down to 14, with inflation of around 7-8%. He says that the market is shaped more by earnings growth than by ratings so, taking account of the weak rand, he agrees with the earnings growth assessment of 20% or more.

He adds that he is advising pension funds to increase their bond weighting from the typical 20% currently to 30% with 65% in equities.

Mason thinks industrials have been neglected. "We are looking for reasonable economic growth of 2-2.5%. I think industrials were really downrated this year. We are looking for them to perform."

Cronshaw favours financial services. "It is becoming part of the international market. We are starting to see all kinds of innovation with companies in the distribution business moving into financial services on the back of their existing customer base." He also rates the IT companies - some of which have gone offshore -but cautions they have seen good runs already.

"This year we think anything connected with fixed investment is going to have a rebound if confidence comes up in areas such as construction. We expect the consumer sector to slow up as there is a lot of consumer debt around, so there has got to be a lot of consolidation."

On the question of sectors, Jesse describes 1996 as a dull year. "It was a question of stockpicking. There were no particularly big themes. This year, we have already had a bit of a recovery among big retailers which has a little bit further to go. I'm talking about share price gains of 40-50% and that doesn't go on for ever."

The stock picking will continue although he points to certain trends. "Black empowerment - business affirmative action - is the hot story and will be for the next few years. Companies with black shareholders are increasingly seen as being important in various industries if you want to get contracts or gain market share."

Mason sees the big risk factor as the gradual removal of exchange controls but adds: "As long as the rand remains fairly stable exchange controls can be abolished and short rates cut."

Cronshaw says that the end of exchange controls will be very positive. John Lappin"