NCB and Merrion Stockbrokers think European equities should continue to outperform their US counterparts, writes Laura Slattery.

Rising interest rates, currency risks and a strengthening global economy will all determine stock selection for 2004, according to stockbrokers' outlook for the year ahead.

So where should newly confident investors whose faith in equities is fully restored place their cash?

Both NCB and Merrion Stockbrokers state that European equities should continue to outperform US equities.

One caveat to this prediction is that rising interest rates have traditionally resulted in underperformance from banks and building materials companies - sectors of particular interest to the Irish market, according to Goodbody Stockbrokers. But any interest rate increases in 2004 will be of a modest nature and on top of historically low rates, it adds.

Merrion expects Irish corporate earnings to grow by 11 per cent in 2004, assuming the dollar does not fall sharply further against the euro.

Investors may find it hard to ignore currency considerations this year. A recent note from Davy Stockbrokers said it expected the rally in the dollar to continue in the short-term, but that it was not convinced that this represented a turn in the long-term fortunes of the US currency.

Davy Stockbrokers does not compile a formal list of stock picks for the year ahead.

However, a quick scan of other brokers' stock picks for 2004 reveals that building materials group CRH and low-cost airline Ryanair top the table of recommendations for companies listed on the Irish Stock Exchange (ISEQ), with four nods each in their direction.

Banana distribution company Fyffes is close behind with three recommendations.

Goodbody

Goodbody Stockbrokers has made six key Irish stock recommendations for the year ahead.

Anglo Irish Bank and Irish Life & Permanent (IL&P) are chosen on the basis that their earnings might surprise people - in a good way. The broker has also chosen four stocks because they believe their earnings capabilities have not been properly reflected in their share ratings.

These are CRH, Ryanair, food manufacturer Kerry Group and food distribution company DCC.

The ratings of each of these four stocks are near historic lows, Goodbody says. In relation to CRH, the broker notes that the building materials sector tends to underperform in an environment of rising interest rates.

"While this may be the case again, we would argue that investors' exposure to this sector would be best achieved by a company that, while not impervious to an interest rate impact, is still very much in expansionary mode."

NCB

Ryanair could benefit from improving consumer and business confidence in Europe, according to NCB Stockbrokers.

The Irish economy has scope to grow under the influences of an improving global economy and ongoing low euro-zone interest rates, NCB says. Bank of Ireland and AIB would be beneficiaries of this.

CRH, meanwhile, has "good cyclical upside and a proven growth formula". NCB envisions no reversal of the recent global trend for smaller companies to outperform.

IAWS, Viridian, DCC, Kingspan, Fyffes, Irish Continental Group and Abbey offer "sound fundamental value" at current levels on this basis, while Elan, Iona and Unidare have speculative appeal.

Merrion

Merrion's favoured Irish stocks for 2004, included in its 10 Stock Model Portfolio, are AIB, Anglo Irish Bank, CRH, Fyffes, Grafton, IAWS, Independent News & Media, Kerry Group, Kingspan and Ryanair.

"For us, Ryanair looks the clearest bet," said Mr Rory Gillen, head of research at Merrion, who described the low fares airline as a company capable of further substantial growth over the medium term. CRH and Kerry are two companies that could be affected by a weak dollar.

"Any significant $/€ exchange rate induced weakness in CRH's or Kerry's shares should, in our view, be seen as an opportunity to move to an overweight position in both companies."

Dolmen Butler Briscoe

Finally, Dolmen has published a list of the Dolmen Dozen stock picks for 2004. Ryanair, Bank of Ireland, IL&P, Elan, Waterford Wedgwood, Fyffes, Galen and CRH are the Irish-listed stocks included.

Ryanair can continue expanding regardless of how its dispute regarding the Charleroi airport in Belgium is resolved, according to Dolmen.

Pharmaceutical companies Elan and Galen both have positive pipeline news that should push their prices higher in 2004, it continues.

Among the financials, Dolmen says Bank of Ireland has real potential for a resumption of strong earnings growth over the next six months, while IL&P's earnings momentum looks very positive due to a robust residential mortgage market.

Waterford Wedgwood is a "speculative buy".