Equity markets may move lower over the summer months but are on track for a "sustained rally" in 2004, according to Hibernian Investment Managers (HIM), writes Una McCaffrey.

In its latest investment outlook, the company argues that the case for equities over bonds remains compelling over the longer term, as long as deflation can be avoided.

For the moment, HIM chief investment officer Mr Martin Nolan is remaining on the stock-market sidelines, citing short-term doubts about the scale and sustainability of the buoyancy that followed the war in Iraq.

He will seek opportunities to buy equities over coming months, however, and has maintained a prediction that stock markets will deliver a 10 per cent return this year.

The uplift will be driven by the emergence of recovery in the US economy as 2003 progresses, according to HIM. It is predicting that the "awaited revival in global business investment spending" will then arrive.

As soon as earnings forecasts are realigned, the conditions will be in place for a rally, according to the outlook. This, in Mr Nolan's view, will be the time to increase equity positions.

HIM is expecting to remain conservative on equities over the next few months before gaining exposure in more cyclical sectors towards the end of the year.

The firm also remains reasonably optimistic on the commercial property sector, despite oversupply problems in the office and industrial sectors.

Even without the prospect of rental growth, healthy demand remains in place for "well-let" developments, according to HIM's analysis.

Economic forecasts in the outlook put growth in gross domestic product (GDP) at 3 per cent in the State this year. HIM's economists foresee greater pain in the indigenous sector, however, predicting gross national product expansion of less than 2 per cent.

HIM has cut its euro-zone GDP forecast from 1.6 per cent to just 0.4 per cent to reflect the appreciation of the euro over sterling and the dollar. For the US, HIM expects GDP growth of 2.1 per cent.