The Irish stock market was the worst performer in the EU last year and so far this year has lost value again.

The market closed 1999 at 5,017, only around 1 per cent higher than it opened. At the time of writing it was 4 per cent below even this figure.

Despite this considerable underperformance, Irish stockbrokers are still trying to sell the story of the rampant Irish economy. But despite their best efforts, the end of the ISEQ's woes does not appear to be in sight.

Goodbody chief economist Mr Colin Hunt points out this is an economy which is the best performing in OECD, where interest rates are going up by marginal amounts, valuations are very modest and Irish price to earnings ratios are competitive.

In other words stocks are cheap and growth prospects good. So the stocks ought to be a buy.

But the problems for the Irish market are legion, ranging from a lack of buying interest from domestic institutions, to a reluctance on the part of international managers to invest and a decline in interest globally in the sectors making up most of the market.

Whether or not the market will be able to survive these negative influences this year is not at all clear yet.

Optimists point towards the relative cheapness of many Irish stocks, the possibility of merger and acquisitions activity and the performance of the economy.

On top of that it has generally been true that if you buy the worst performer at the end of a year it will outperform the following year.

One of the main problems for the ISEQ is that the two big banks, Bank of Ireland and AIB account for around 22 per cent of the market overall and both are effectively dead in the water at the moment.

Mr Liam Igoe of Goodbody Stockbrokers who is currently changing his forecast for the Irish market, says that globally financials have fallen out of favour as investors rush to buy into high-technology stocks and telecommunications.

Even normally conservative pension fund managers are now coming more to the belief that they had better get into the sector or risk falling to the bottom of their respective league tables.

Of course, the other question for banks generally is how they are going to develop their Internet businesses and how that will impact on valuations.

Bank of Ireland is already suffering pressure on its UK mortgage margins and those in the Republic are also coming under more pressure since the arrival of the Bank of Scotland last summer.

Interest rates which are set to rise, not only in the euro zone but in the US and in Britain, are also negative for banking stocks and no turnaround in their fortunes seems likely in the short term.

NCB is hoping that an improvement will be on the cards as the interest rate environment turns. Failing this, assuming the economic picture remains benign and valuations low, its analyst Mr John Kelly sees a possible increase in corporate activity increasing share ratings.

The industrial sector has not been doing as badly, but each rally in a company like CRH has been met with profit taking while Smurfit has come off its best levels in the past week despite what were perceived as good results from its US associate Smurfit Stone.

One of the other major problems for the Irish market is the lack of interest among international investors.

Many, particularly in London, and to some extent Frankfurt, are worried about the economy overheating. Warnings to this effect from the OECD and even the Central Bank have added to these fears, while last week's inflation figures further fuelled their concerns.

According to Mr John Laurie of Scottish Provident, who manages Irish stocks, the market is not overheating but Irish interest rates would be higher if the currency were not in the euro.

But for many German investors it is easier to buy say a Portuguese bank than a Irish one with the possible risks associated. And as Mr Des Doran of Standard Life points out, many foreign investors look at the Irish market and do not see anything outstandingly cheap.

The lack of so-called "sexy sectors" also means many ask why they should bother investing.

There are also problems on the sell side. Irish institutional investors have been cutting back on their holdings of Irish stocks. There is a widespread view that Irish pension funds should have closer to 15 per cent or lower in Irish equities rather than more than 20 per cent which they generally hold at present.

This is putting inexorable downward pressure on the Irish market as fund mangers - even if they are not selling - are certainly not net buyers of Irish equities.

For the moment the sellers seem to have gone away, but as Mr Laurie points out there is no guarantee that they will not reemerge.

After all, for the moment there is often little justification for selling an Irish asset at 10 times earnings to buy a German one at 20 times.

Of course, significant merger or takeover activity - particularly among the banks or a buyer for the Telia stake in Eircom - could spur the market.

But in the meantime inflation may continue to rise for a month or two before falling back.

How inflation pans out and with it the warnings from the OECD and others as well as the outcome of the partnership negotiations will be key to the overall performance of the market this year.

jsuiter@irish-times.ie