Serious Money: Although the World Cup has concluded, it is appropriate to borrow the expression "a game of two halves" to describe the first half of 2006 for Irish equity market investors.

The period was truly "a game of two quarters" as the Iseq advanced by 9.5 per cent to a high on March 31st, before retreating sharply to finish up only 2.1 per cent at June 30th.

This begs the question, where to now? Fragile sentiment reflects concerns over rising interest rates, inflation risks, oil prices and political uncertainty. In our view, the economic backdrop remains positive, company updates have been favourable and we expect gains in the second half.

The 2006 gross domestic product (GDP) growth forecasts have been stable to positive since January, with Ireland unchanged at 6.0 per cent, the US at 3.4 per cent and upgraded projections for the UK (2.3 per cent), eurozone (2.1 per cent) and Japan (3.0 per cent).

Recent interest rate rises have also affected equities, but we do not see cause for gloom. US policymakers have been unwinding an accommodative monetary stance and we expect the tightening cycle has nearly run its course while rate hikes in the eurozone and Japan reflect improved economic prospects.

Higher oil prices are negative for the market but economies have to date shown greater-than-expected resilience in managing their impact.

Similarly, geopolitical issues invariably hit sentiment but their effects are often short-lived. Corporate earnings have largely met or beaten expectations and recent trading updates from a range of companies (AIB, CRH, C&C, Grafton, Kingspan, IFG) have been positive.

Top picks for the second half are:

AIB is forecast to grow earnings by 17 per cent in 2006 and offers an attractive dividend yield of 3.9 per cent. The group's 42 per cent Ireland exposure makes it a major beneficiary of demographic trends and economic growth, while footholds in the US and Poland are attractive. AIB is valued at 9.0 times 2006 earnings (excluding the quoted Polish and US interests), a level we believe undervalues its prospects.

CRH has been overshadowed by fears over slowing US housing, despite the balance of its North American operations between residential, infrastructure and non-residential activity. Over 45 per cent of CRH's earnings arise in Europe, notably in the Netherlands, where a pick-up in activity is under way. A total of 16 per cent earnings per share (EPS) growth is forecast for 2006 and acquisitions, including a potential purchase of US-based Apac, would boost this further.

Ryanair has demonstrated resilience in the face of high oil prices, growing March 2006 earnings 11 per cent. The group's low fares drive 20 per cent traffic growth, while new revenue streams, such as baggage check-in, continue to be developed. Oil is hedged to October 2006 and stable prices, even at current highs, would accelerate forecast 15 per cent earnings growth to March 2008.

Elan's concentrated pipeline means the stock carries higher risk, but we see a potential upside from its Alzheimer's disease research program and/or from a uptake of Tysabri, which returns to the market following its withdrawal in 2005, that is stronger than expected. In the event of progress, Elan could also be a potential takeover target for its partners Wyeth or BiogenIdec.

Grafton is the prime player on the demographic-driven Irish house construction boom, which will see 2005's record 82k unit output surpassed this year. The UK, almost 60 per cent of sales, has been sluggish since mid-2005 but recent comment has been positive and recovery will contribute to Grafton's 12 per cent 2006 earnings growth.

C&C has to date executed the roll-out of its Magners (GB & NI) brand in textbook fashion and the group sees scope to grow volumes overseas threefold. The stock is not cheap at 17 times March 2008 EPS forecasts but news on market penetration over the remainder of 2006 should be positive.

Kingspan's insulation business, over 60 per cent of the group, will grow strongly as energy conservation moves up the political agenda and building regulations tighten. Initiatives in off-site construction (including Kingspan Century timber-frame) and expansion into Central and Eastern Europe also offer a significant upside. Kingspan has a record of successfully designing superior building solutions and we view 14 per cent earnings growth in 2006 as conservative.

IAWS' presence in par-baking technology, investment in new product development and range of attractive partnerships (eg Wendy's Tim Hortons) should allow it to perform strongly in the second half, following 20 per cent interim growth. Strong cash flows provide scope for further organic and acquisition-led expansion. IAWS has successfully managed a tougher trading environment in agri products and holds Irish property assets capable of realising significant surplus value over the medium term.

DCC's attractions lie in its consistently high returns on capital, 17 per cent annual earnings growth over the past decade and a highly defensive business mix encompassing the distribution of energy, healthcare, food and beverage and environmental products. The stock trades on 11.2 times March 2008 forecasts, with upside likely from acquisition activity.

Among smaller cap stocks, we favour McInerney, which has grown impressively in the past five years and trades on an undemanding 8 times 2006 forecasts. Expansion into the North of England housing market has diversified earnings and prospects in that region are attractive. IFG is set to grow earnings by 29 per cent in 2006 and continues to benefit from the rationalisation and restoration of balance sheet health in recent years.

The top 20 stocks in Ireland (ex Elan, which is loss-making) currently trade at an undemanding 11.7 times 2006 earnings and are forecast to produce double-digit dividend growth in 2006/2007. This is attractive relative to the low yields currently offered by alternatives such as property and cash deposits.

Potential takeover activity also provides support for equities given the availability of cheap finance and the funds raised by the private equity industry over the past two to three years.

After a volatile and challenging year to date for equities, we view prospects favourably and expect a portfolio of quality equities acquired at reasonable valuations to deliver useful gains in the second half.

John Sheehan is head of company research at NCB Stockbrokers.