Equity markets should produce growth of 8 to 10 per cent this year with the best growth in cyclical rather than defensive shares, according to Hibernian Investment Managers (HIM).
In its Investment Strategy for 2002, HIM forecast a fall in Irish gross domestic product growth to 4 per cent from 6.5 per cent in 2001, with growth mainly towards the end of the year.
But it expects a further 10 per cent fall in house prices at the €500,000 (£394,000) end of the market, unemployment to rise to 5.5 per cent and inflation to remain above the EU average, driven by service sector price rises.
The Irish equity market is likely to underperform because earnings forecasts are below the euro-zone average for 2002 and because of the dominance of defensive sector stocks, according to chief investment officer Mr Martin Nolan.
HIM is negative on the Irish commercial property market, forecasting zero growth this year.
Retail property in quality locations could do well, but industrial and office property will remain under pressure, he forecast.
Economic recovery in the US will be muted following a shallow recession, HIM predicts.
Forecasting a sub-consensus growth of 0.5 per cent this year in US GDP, HIM expects a lower interest rate increase of 0.75 of a point to 2.5 per cent than the market expectation of a 2 percentage point rise.
European economies will lag behind the US recovery by six to 12 months, Mr Nolan forecast, hampered by European Central Bank interest rate cuts which are coming too slowly.
The recovery in US equity markets will be muted because earnings multiples have remained high and HIM sees better growth potential in UK, European and Pacific Basin shares.
"In the US, company directors are selling stock at a rate of three (sales) to one (purchase), while in the UK the rate is four buyers to every one seller.
"I do not know what this says about the direction of the market but it says directors in the US expect earnings to fall," he commented.
In the technology sector, HIM is "cautious about chasing the rally".
It favours telecoms and companies with clear restructuring potential, through which they can increase margins and earnings.
Among its share picks are Vodafone, China Unicom, IBM, Microsoft and Analogue Devices.
Out of favour with HIM are healthcare, energy utilities and basic industries.
On pharmaceuticals, Elan - whose share price fell sharply last week when it suspended tests on its new Alzheimer's drug - HIM head of research Ms Joan Garahy said the fall could be a buying opportunity on pure valuation grounds - "but only for brave investors".
Ryanair was on the favourite stock picks list because it offered better share price growth potential than its peers, according to head of equities Mr Bernard Swords.
He said the shares were not expensive at current levels "on the basis of achieving their earnings growth forecasts".
