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2005 proved to be a good year for investors and the New Year began with the key question of whether the global economic upturn could continue in 2006? Optimists were suggesting that this year would be similar to last, while those with a half-empty glass expressed concerns about the latter half of the year and suggested we should be mindful of inflation, oil and gas prices, weakening company balance sheets and effects of the increasingly debt-laden US.

The UK ended 2005 with stronger than anticipated growth, mainly driven by the services sector offsetting weakness in production industries. A period of fiscal tightening could be in store for the UK now base rates have stopped falling and this could be significant for consumer confidence during 2006. Consumer spending has largely been driven by rising house prices in recent years and now this trend has come to an end the effects on the high street could be notable.

Consumers remain key to growth in the US and have proven highly resilient to a tide of increasing gasoline prices and interest rates, plus the worst hurricane season recorded. Consumer spending has been driven largely by rising house prices. Whether the house price bubble evaporates (and with it consumer spending), is dependent on whether house prices were previously undervalued and have now reached a fair value, or whether they are now overvalued and at risk of a sharp correction. Despite several increases, interest rates are still considered to be in the neutral range. More increases are expected, the magnitude and frequency of which will depend on the Fed's reading of inflationary pressures.

The Eurozone has at long last turned a corner after several lacklustre years. While Germany, the largest economy, has gained some momentum, consumer demand remains subdued. This looks set to continue as the Government has proposed increasing the level of VAT in 2007 from 16% to 19%, which looks poised to dampen consumer appetites even further. At the same time the Government is trying to tackle some much-needed but controversial economic reforms, there are also concerns about resulting political instability.

Japan caught the attention of investors in the last quarter of 2005, albeit somewhat belatedly. It was therefore ironic that the first excitement of the year was when the Japanese equity market closed early on 18th January triggered by high volume trading. Livedoor, an internet services group, was raided by the Securities and Exchange Commission on the premise of 'creative accountancy'. This triggered widespread selling. The Nikkei fell 6.5% and tech-related stocks plummeted 23%. After a flurry of activity, calm returned and investors realised this was a company-specific incident, which had created an ideal buying opportunity. None of this undermined the argument that Japan is in a period of secular recovery with wages increasing, Tokyo land prices rising, improving consumer spending.

Strength in Asian economies continues above trend. How the trend continues is potentially dependent on the demand for exports from China, including those to other areas in the region. Asia will also benefit from a stronger Europe, which contributed to a larger share of China's export growth in 2005 than the US. Indonesia could begin to prove itself this year. A number of domestic reforms and improving confidence could have a positive effect on that market and the wider region.

The year got off to a good start and - despite a setback for equity markets in February - there remains a reasonable degree of optimism across major economies.

The ECB has recently increased forecasts for economic growth and inflation after increasing interest rates for the second time in three months (to 2.5%) on the back of oil-driven inflation. ECB President, Jean-Claude Trichet, predicts growth rates should be strong in the short term and ongoing expansion looks favourable - the main risks to both growth and inflation being oil prices. Manufacturing has achieved its fastest pace in 19 months while unemployment in the region has been declining. There are sufficient positives for the region to be optimistic. However, a key determinant is inflation, which is likely to exceed the ECB’s 2% ceiling in 2006 for the 7^th consecutive year.

In Japan the real yen rate is at its lowest level in 23 years. On this basis alone the seriously-undervalued currency could be a precursor to strong economic growth. Appreciation of the yen could encourage capital to flow back to Japan, the downside of which is external financing problems for some high current-account-deficit nations.

The Chinese have expressed a desire to reduce the number of listings in Hong Kong and H shares are now being talked down by a number of analysts. While there is speculation about the shares being overvalued and a narrowing of the gap with mainland A shares, the outlook remains reasonably positive - thanks to a growing number of affluent investors, high savings rates and ever-increasing local spending power.

The US continues to be a market that won't overly disappoint but offers little really to inspire investors. Growth is expected to be slightly lower than 2005 with the housing market slowing, inflation worries and the debt ceiling being reached. However, Fed Chairman Bernanke is likely to reach for the printing press to increase liquidity and (barring any significant geo-political threats) it looks to be a year of safe mediocrity.

There are signs that the global economy is rebalancing away from the US. Gold continues to trend upwards as investors seek assets uncorrelated with equities or bonds. The majority of traders predict that gold will either rise or remain stable with some forecasts predicting a rise close to $600 per ounce ($544/oz at the time of writing). As touched on earlier, if rises in yen interest rates encourage investors to repatriate their foreign investments, the gold price could come under pressure.

One certain aspect of the Japanese investor is that, until there is clarity about what the Japanese central bank will do, there will be no immediate reaction and selling of assets.

While there is scope for optimism for the remainder of 2006 it would be negligent to ignore issues that could derail global economic growth: oil prices, current account imbalances, house prices, currency instability or terrorism. None of these factors is an imminent cause for concern, however, and the markets do not currently foresee any of these factors becoming a serious cause for concern. That said, broad macro and political risks are not normally the greatest concern for markets and they often err on the side of optimism. Ultimately the optimal route for investors throughout 2006 is to have a well balanced and diversified portfolio with carefully selected exposure to specific regions and an eye on pragmatic rebalancing.

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This commentary should not be seen as a recommendation or solicitation to invest. Anyone considering investing should first seek advice specific and appropriate for their own needs, objectives and risk appetite.