Irish and other European equities can continue to deliver double-digit gains in 2006, according to a new market analysis from Davy Stockbrokers.
The broker believes that stocks will take support from a "solid but unspectacular" economic performance in Europe, and the competitive pricing of equities relative to other assets. Davy also highlights the momentum in estimates for corporate earnings this year.
For the Iseq, the broker expects capital appreciation of more than 15 per cent in 2006. This would be driven in large part by strong performances from the five largest stocks on the market: AIB, Bank of Ireland, CRH, Anglo Irish Bank and Ryanair.
Davy's economists also acknowledge that the support stocks should draw from the "accommodative policy background" created by both low interest rates and the domestic fiscal position.
In separate research, Dolmen Stockbrokers, also forecasts a solid year for equity markets but warns the upward momentum "will not be without setbacks".
The broker highlights factors such as inflation, energy prices and the future for the US housing market as "crucial swing factors" for the year.
Davy sees a 33 per cent chance that the US housing market will collapse this year, acknowledging that this would damage the Irish equity market more than the Irish economy.
For the domestic housing market, Davy says that there is a 25 per cent probability of a price correction, and identifies this as the biggest "internal" risk for 2006.
Economist Rossa White notes, however, that this year may be the best time for the economy to cope with a house price correction, principally because of the high level of equity in the market and the imminent drawdown of special savings incentive accounts (SSIAs).
Mr White notes that a new setback in the UK economy would also hit Iseq companies that have exposure to that market, such as AIB, Bank of Ireland and Kingspan.
Davy and Dolmen, both of which earn a significant proportion of their income from selling equities, see significant upside in financial stocks this year. Both also favour companies in the construction sector, such as Grafton. Davy believes housebuilders, McInerney and Abbey, will consolidate their 2005 gains.
As well as being overweight in banks, insurers and building stocks, Dolmen stresses the potential in oil shares such as Tullow, and transport stocks such as Ryanair.
Despite favouring Independent News & Media, the broker is more circumspect on the media sector in general. It is also cautious about the wider retail sector (although it sees Next as a good pick), utilities and chemicals.
For pharmaceuticals, Dolmen sees potential in GlaxoSmithKline and AstraZeneca, while Davy likes United Drug.
Davy analyst Jack Gorman also judges there is "considerable upside" in Elan, based on the expected relaunch of Tysabri and progress in the firm's Alzheimer's programme with Wyeth.
On Eircom, Davy says that Meteor will be key to the firm's share price in the absence of bid speculation.
Davy's tips for 2006
AIB: Should achieve mid-teen price growth.
Bank of Ireland: Appreciation similar to that of AIB.
CRH: Upside of about 13 per cent.
Anglo Irish Bank: Possible rise of 15-20 per cent.
Ryanair: Close to 20 per cent increase.
