INVESTOR: Despite a swing in sentiment towards a much more positive economic outlook, there is plenty of room for share price disappointment in the Irish Stock Exchange and other indices

The debate concerning prospective financial and economic conditions both at home and abroad continues to rage.

The extent of divergence in views among the experts is unusual, but symptomatic of the situation when economic conditions are going through turning points.

Whilst a high degree of uncertainty persists concerning the prospects for financial markets, analysis of the first examples of 2002 economic and financial data does warrant the removal of at least one or two layers of uncertainty.

Key economic data from the US economy covering consumer confidence, unemployment claims and manufacturing output firmly support the view that the worst of the US recession is over.

More importantly, the seeds of an economic recovery have probably already taken root and it now seems highly likely that meaningful economic growth will have resumed in the US economy by the second quarter.

Stock markets around the globe have been responding positively to this more optimistic economic news.

The share price recovery that began last October has continued on into the early weeks of 2002, and most stock market indices have now enjoyed a sharp recovery from the lows hit in the aftermath of the September 11th terrorist attacks in the US.

Not surprisingly, the sectors that suffered most in the downturn have enjoyed the sharpest recoveries. For example, the Nasdaq index has now climbed more than 40 per cent from its low point of last year, whilst the Dow Jones Euro Technology index is more than 80 per cent higher.

However, despite these gains, both of these indices are still trading at levels much less than half the peak reached during the stock market technology boom.

Given this swing in sentiment towards a much more positive economic outlook, it is tempting to conclude that 2002 will prove to be a good year for share prices.

Although global economic growth may well be quite strong in the second half of the year, share prices may not necessarily follow upwards.

A critical factor pointing towards caution is the fact that on most measures of fundamental value, share prices look expensive. For example, the table shows the prospective 2002 price-earnings ratios (PER) for the Irish, British and US stock markets compared with their respective 15-year average values.

In the US, the average company's share price is trading at more than 20 times that company's forecast earnings per share for 2002. This is in line with the average PER over the past 15 years.

Therefore, compared with the experience of the past 15 years, US share prices are neither dear nor cheap - but offer fair value, and this pattern is common to most other stock markets.

There are two caveats to this sanguine view of the attractions inherent in current share values.

Firstly, corporate profits in 2002 could well turn out to be much lower than current forecasts. If this is the case, then the prospective US market PER for 2002 is, in fact, much higher than 21, which would indicate that current share prices offer very poor value.

Secondly, although the market PER of 21.5 may be in line with the 15-year average, the stock market over most other periods has traded on a much lower PER. In other words, the experience of high share prices over the past 15 years may, in the fullness of time, prove to have been an aberration.

Compared with the big international markets, the ISEQ seems to offer very good value given its much lower PER of 14.1.

However, this flatters to deceive since the Irish market PER is low because of the preponderance of financials in the index. Banks and insurance companies throughout the world trade on relatively low PERs.

Analysis of the Irish market on a sector-by-sector basis shows that most Irish companies are valued on a similar basis to their overseas peers.

Therefore, there is ample room for disappointment in the Irish market, and in overseas markets, if companies do not meet the demanding profit expectations that are built in to current share prices.