But as a stellar earnings season draws to a close, many firms in Africa's biggest economy are predicting a more muted mood for the year ahead, which could temper a record-breaking rally on the country's stock exchange.

"I don't think earnings momentum is going to fall off a cliff, but we can't expect to continue at the same rate we saw in 2005," said Bruce Anderson, head of research at Trilinear Investment Managers.

Two of South Africa's top insurers, its biggest casino operator, its largest car dealership firm and several major retailers have predicted slower earnings growth in either the first six months, or full year in 2006.

Of 26 blue-chip firms that have reported annual, interim or quarterly earnings so far this year, 24 chalked up double-digit percentage rates of growth.

Only one posted a loss.

Retailers and banks benefited as low interest rates and tax cuts spurred consumer spending, and mining firms cashed in on gold prices at multi-year highs.

High oil prices kicked profits higher at petrochemicals firm Sasol and a flourishing stock market swelled the investments of the country's insurers.

South Africa is enjoying its longest expansion on record, with low interest rates helping to drive a consumer-led boom partly fuelled by a growing black middle class.

But the benefits have yet to filter to the poor majority - many of whom remain unemployed.

Foreign investors snapped up South African equities, which many said were undervalued until recently, powering the top-40 index 44 per cent higher in 2005 to a string of historic highs.

But while investors are still expecting an impressive performance from South African companies in 2006, growth will be much slower.

Anderson expects the top-40 companies to post average earnings growth of 18 to 22 per cent in 2006, compared with around 30 per cent in 2005.

That will affect the stock exchange.

The top-40 index has climbed only 7 percent so far this year amid increased volatility, with daily rises or falls of more than 3 per cent not uncommon.

Investors say they expect the top-40 to rise about 15 per cent in 2006.

Dividend yields - now at 2,4 per cent - are expected to shrink, and on a price-to-earnings basis, South African stocks are not looking as cheap as they once did.

"Our market is not seriously expensive yet compared to emerging market peers, but it certainly isn't a cheap option any more," said Abri du Plessis, chief investment officer at Gryphon Asset Management.

The Johannesburg top-40 index trades at 14 times 2006 earnings, according to Reuters data.

That puts it on a par with Russia's RTS index, makes it marginally cheaper than India's BSE index at 15 times, and pricier than Brazil's Bovepsa, which trades at 9 times earnings.

Investors say their more modest forecasts for this year depended on a best-case scenario and that a catalyst to the downside could stymie growth, or even push the index lower.

- Nampa-Reuters

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