INVESTOR: With Christmas coming into focus, retailers are gearing up for what is their busiest period.

Despite the economic and political uncertainty throughout the world there are as yet few signs that consumers have begun to seriously pull in their horns. While forward-looking indicators of consumer sentiment are pointing to slower spending, actual consumer spending has proved to be very resilient, particularly in the key US and British markets.

Investors in equity markets must be fervently hoping that this strength in consumer spending will continue through the festive season. Whether the stock market rally that began in early October continues for several more months is still an open question. Investors remain very nervous and investor sentiment seems to be on a knife-edge.

Therefore, the investment community will carefully monitor the strength of consumer spending over the Christmas period. Any significant weakness would increase fears of a double-dip recession and would probably abort the current very fragile stock market recovery.

On the other hand, if consumers live up to the more optimistic recent trends, it could well be the critical factor that would underpin a further recovery in equity prices.

Of course, retailing is a seasonal business but the stock market itself also exhibits seasonal patterns. According to work carried out by the stock market historian, Mr David Schwartz, October and November tend to be good months and often start the best six months of the year.

Throughout the 1980s and 1990s, the bulk of annual equity market returns tended to occur between November and April. Therefore, if consumers in the industrialised economies continue to spend through Christmas and the New Year, it may just provide the fillip necessary to provide another leg to the current tentative stock market rally.

In Ireland, recently released retail sales statistics for September showed that after a lull in early summer, consumer spending has once again picked up speed. Excluding car sales there was a volume (that is, adjusted for inflation) increase over August of 3.3 per cent. These September figures mean that for quarter three as a whole, there was a 1.3 per cent volume rise in sales over the previous quarter. If car sales are included, the quarter-on-quarter volume increase rises to 2.3 per cent. On an annual basis, the figures show that retail sales this September were 5.2 per cent higher than in September 2001.

If car sales are excluded, the rise becomes a slightly lower 4.5 per cent in inflation-adjusted terms. Compared with the heyday of the Celtic Tiger economy, this is a modest rate of growth. Nonetheless, compared with long-run norms, real growth in consumer spending of 5 per cent per annum is very healthy.

These sales figures tie in with positive recent statements from the two Irish quoted stocks that are most closely linked to consumer spending, namely, Arnotts and Paddy Power. The share prices of both companies have risen strongly so far this year.

Despite being a relative newcomer to the market, Paddy Power has a much higher profile than Arnotts. Arnotts is a company that tends to adopt a low profile with the investment community but it has delivered solid returns for many years.

Arnotts is entirely dependent on the Irish market and its principal asset is its Henry Street store. This is Ireland's largest retail store with almost 300,000 sq ft of space.

Reflecting the strength in the Irish economy and property market, the shares have soared by over one-third so far this year.

The shares have also benefited from the switch in investor sentiment away from technology and telecoms into companies that operate in more stable sectors of the economy.

Even after the strong rise in its share price this year, Arnotts shares still offer good relative value.

The price-earnings ratio is just over 10 times earnings and its dividend yield is a healthy 3.4 per cent. With the Irish economy now growing at a much slower pace,Arnotts will not be able to grow its sales as rapidly as in recent years.

Nevertheless, as long as the economy grows in line with current more modest expectations, Arnotts should be capable of steady growth.

In the medium term, the store should benefit from some of the infrastructural developments in Dublin. In particular, the introduction of the Luas line that will stop beside its main Henry Street store will be a long-term positive for the company.

Also, it is refurbishing its Boyers store that accounts for about 10 per cent of turnover. With its strong franchise and healthy balance sheet, Arnotts seems capable of coping comfortably with the more difficult economic climate that seems to be in prospect in coming years.