As 2004 draws to a close most investors will be wealthier than they were a year ago unless they have been over exposed to the US$, which has continued its three-year decline against the euro. 
Cautious sterling investors have benefited from the rise in interest rates with gross deposit returns as high as 5% available. For those spending euros, however, the exchange rate fluctuations have seen their real returns vary considerably with losses from July’s high of around 5.5%, but slightly up on the year to date.  Where sterling will be relative to the euro in a year’s time is difficult to predict, for that reason euro investors chasing higher headline interest rates must run the exchange rate risk. A negative factor for sterling/euro exchange rate is that interest rates are set to fall in the UK next year.
Real estate has had another good year both in the UK and Spain, however in recent months UK residential prices have clearly started to soften and for the first time in some people’s memory both owners and estate agents in Spain are talking openly about an impending property price correction.  A price correction has been overdue for some time, and in my opinion the relevant question is how large the correction will be and over what period prices will fall or be eroded by inflation?
Oil has dominated financial headlines this year and as the price rocketed fears grew over the impact on the global economy’s fragile recovery. These fears were reduced in October and November by price falls and continued growth in production. However, threats to disrupt Saudi Arabian Oil production by the usual suspects have again raised speculation about future oil production and prices therefore remain volatile.  Provided oil prices do not rise significantly above the $45 a barrel level for any sustained period the prospects of the global economy should remain positive in 2005.       
Equities are an asset class that many private investors continue to avoid because of the poor total returns between 2000 and 2002. Despite this, income investors should not lose sight of the fact that good quality equity income investments continued to pay dividends whose real value increased throughout the equity and interest rate cycle. Investors seeking an income which has the potential to increase in real terms over the longer term should consider some exposure to this sector. This is particularly important for sterling investors who are likely to see sterling interest rates fall next year. For euro income investors higher equity yields can be found and yields of over 4% are attainable. European equities are historically more volatile than UK shares however with euro deposits yielding below 2% and rates unlikely to move upwards until at least the second half of 2005 this is one option for euro investors wishing to increase short term income and longer term growth potential within their portfolio.

The year ahead
In the year ahead, as with any year, the most important point for investors to remember is that their percentage exposure to different investment types will determine their returns.  This means that investors should not make longer term investments unless they or their advisers have a clear process to monitor and adjust asset exposure as investment conditions change.   
Where investors have made solid profits over the past year investments should be reviewed and consideration given to taking profits.  Where assets have failed to meet expectations investors shouldn’t be afraid of accepting a loss; be pragmatic when reviewing holdings and determine if other investments have greater potential in the coming year.     
Probably the best news for expatriate investors is that legislation will be enacted next year to increase investor protection. The regulatory responsibility for the new legislation will be carried by the current investment regulator the Comisión Nacional del Mercado de Valores (CNMV) and the Bank of Spain. The legislation which should be enacted in the spring will mean that Spain meets higher European investor protection requirements. Hopefully it will be a happy and prosperous New Year for investors.