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The Global Economy: The current consensus forecast for the global economy sees the shape of 2006 as being very similar to 2005. Growth in the global economy in 2005 is now estimated at 3.2 per cent and a similar rate of expansion is forecast for 2006. Some modest deceleration is anticipated in Japan (2.0 per cent vs 2.4 per cent) and the United States (3.4 per cent vs 3.6 per cent) but being offset by stronger growth in the United Kingdom (2.1 per cent vs 1.7 per cent) and the Eurozone (1.9 per cent vs 1.4 per cent). It is a ‘muddle through’ scenario that we would not take great issue with.
 | | Robbie Kelleher |
The Irish Economy: There are very strong tailwinds behind the Irish economy as we enter 2006 and we expect GNP growth of 5 per cent in each of 2006 and 2007. We expect consumer spending to be particularly strong given the very strong growth in real incomes, a very supportive fiscal stance, a high savings ratio and the release of €16 billion in SSIA accounts between May 2006 and May 2007. We are forecasting 6.5 per cent growth in consumer demand in 2006 and 6.0 per cent in 2007.
Interest rates: We expect this process of tightening b the Fed will continue after Greenspan retires a the end of January and we are looking for a Funds rate of 5 per cent by the end of 2006. We expect the ECB refi rate to go to 2.5 per cent in the Spring and to 2.75 per cent by the end of 2006.
Exchange rates: This year we expect interest rates in the US and the Eurozone to rise by broadly similar amounts, Hence we suspect that the focus of foreign exchange markets will return to the burden of financing the ever growing trade imbalance in the US. We see the $/€ back at 1.30 by the end of the year.
Bond yields: Underlying inflationary pressures in the US and Europe remain well contained and, if movements in short term interest rates in 2006 are confined to the relatively small increases that we expect, then bond yields will probably end 2006 not much changed from current levels.
International equities: European equities trade on a forward P/E of 13x and double digit earnings growth is forecast again for 2006. With the momentum in corporate earnings revisions still very firmly upwards those ratings look very undemanding against a ten year bond yield which is below 3.5 per cent. We see mid teen capital appreciation as a realistic prospect again in 2006.
Irish equities: Overall ratings in the Irish equity market are a little lower than those in Europe and earnings growth is expected to be a little quicker. With the growth in the economy as strong as it is it is not surprising that the momentum in earnings revisions is also strongly upwards. Hence we believe the Irish market can at least match the performance of Europe in general and we have set a target of 8,500 for the ISEQ for the end of 2006. |
Robbie Kelleher, head of research, Davy Stockbrokers, and voted as both top equity strategist and research economist in the 2005 FINANCE Stockbroking Survey.
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| Article appeared in the January 2006 issue.
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