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Equity rally to continue Back  
Performance of global stock markets to improve further.
Eugene Kiernan
Stockmarkets have done a lot of the heavy lifting already. From their lows of March 2003, global markets are up some 40 per cent. Economic policy, notably in the US with lower taxes and low interest rates, has been on full thrust to get the economy going again. Company profits have come in well ahead of expectation and corporate integrity has been somewhat restored.

From here, while we remain constructive in stocks, they may have lost the element of surprise. The tail winds of better revenue and profits growth will still be there but going forward, the comparisons will be tougher. Added to this, market valuations will be facing into the headwind of slightly higher intterest rates. Going forward we still see equities as the superior asset class but returns will be in line with underlying company profit growth. We believe we will see solid profit growth in the US, UK and Ireland in the forecast period.
The ISEQ continues to live up to its reputation as a market of stocks rather than a stock market and so far in 2004 Elan has once again resumed pole position as driver of the index. Looking out on the ISEQ we are positing that some of the other stocks, notably the heavy weight financials, start punching in the numbers.

Dan McLoughlin
Equities markets rallied strongly in 2003 from oversold levels and have consolidated in recent months. Ratings are not overly demanding however, and I expect the US market to rally afresh in the coming months on the back of robust earnings growth and increased pricing power in the corporate sector. The consensus generally underestimated last year’s rally and analysts may be erring on the side of caution after criticism over excessive bullishness through the equity downturn. Firms too have been reluctant to express optimism as any shortfall in earnings relative to expectations has been severely punished in terms of market price. The UK market also looks good value as the consensus there has consistently underestimated growth in the economy, with many analysts fearing a sharp retrenchment by consumers, and a fall in house prices. As a result the banks are particularly mispriced.

Alan McQuaid
Equities face headwinds in the months ahead, but favourable fundamentals and monetary conditions point to further upside. However, gains will pale compared to those of the past year and volatility will rise. Equity market and sector rotation will be crucial to generating good returns. The key risk for stocks is when the Fed begins signalling the eventual start of its tightening cycle. A go-slow Fed suggests that any adverse equity market reaction should be moderate, but high valuations make the US stock market potentially vulnerable. I think investors should overweight non-US equities, with emerging markets and Japan the preferred picks. Equity valuation comparisons favour non-US markets in global portfolios. Emerging market equities sell at significant P/E discounts to both the global benchmark and their historical averages, and offer substantial earnings leverage to the global economic cycle. Near-term prospects for Japan’s equity market are also increasingly favourable. The recovery is spreading into the consumer sector, which is boosting confidence in the sustainability of solid economic growth.

Brendan Seaver
Stronger profit growth remains the anchor of performance in the equity markets. US profit growth at this stage in the current recovery compares favourably with past expansions. Profit gains reflect the combination of continued unit labour cost declines and expanding revenues. Businesses have produced more output without large increases in labour inputs given the recorded reticence to hire. As labour inputs are added to the production process, productivity will likely moderate, while growth in unit labour costs will start moving into positive territory. Although strong revenue streams will partly offset higher costs, the pace of growth in profitability and overall corporate earnings will likely moderate over time. Still, the overall performance will likely remain healthy throughout the forecast horizon. How much has already been discounted into stock market prices? A fair amount of good news is already priced in at current market prices, but there is still room for some positive surprises. Liquidity conditions will likely remain supportive for several quarters, although less than in the past. Eurozone stock indices will likely underperform US indices as a result of more moderate corporate restructuring in the past two-three years, lower productivity and profitability gains, and weaker domestic demand.

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