IRISH share prices should move ahead as international equity markets improve, according to Irish Life Investment Managers (ILIM).
In its review of investment markets ILIM expects good return from Irish bond and property markets this year.
But growth in share prices will be moderate in a climate of moderate economic growth and moderate inflation, according to the largest fund managers of Irish assets.
ILIM has funds of over £6 billion under management.
Companies which have "true" growth prospects such as CRH, Independent Newspapers and Waterford Wedgwood should outperform the market, ILIM forecast in its review of investment markets.
AIB and Bank of Ireland should perform in line with the market because of their exposure to the strong Irish economy. In addition, the performance of Irish bonds is expected to be better than that of international bonds.
There is a question mark over what AIB will do with its surplus cash, according to ILIM head of Irish equities, Mr Paul Turpin. The outcome "could be very positive for AIB earnings or not", he said.
European Monetary Union (EMU) is not "in the current investment horizon" for the banks, he said. But the overall impact of EMU should be positive for bank shares.
Losses of foreign exchange earnings should be offset by higher earnings on bonds and the removal of currency risk should attract more investors into the Irish market.
The outlook for the Jefferson Smurfit Group share price was "not so good", because of the continuing weakness in the price of linerboard. The shares are now "fair value", according to Mr Turpin.
The next big price move will be upwards but the timing could be six to nine months ahead. It will depend on when investors are willing to come back to the cyclical stock, he forecast.
World economies should start to pick up later this year. With no inflationary pressures, international equities should continue to improve, according to ILIM.
The "fly in the ointment" is bond markets where "the best returns in international bond markets are behind us", according to ILIM head of investments, Mr Frank O'Brien.
The Irish economic performance continues to provide a favourable backdrop for equities, he said. High economic growth with low inflation has boosted the earnings of companies with a significance presence in the domestic market.
However, because of a significant narrowing of valuation discounts with comparable foreign companies, international sect oral trends are expected to be the key influence on market developments, according to ILIM.
The current economic environment is "very comfortable" for investors. There is a soft landing under way in the US where ILIM expects a recovery to start later this year which will be followed in other economies.
There is more potential for equity investors in Europe and Japan than in the US because the investment cycle is less advanced in these areas. This means there is much scope for enhancement of company earnings through rationalisation and mergers, ILIM forecast.
In foreign equity markets ILIM is shifting from defensive stocks to stocks which are expected to benefit more from an uplift in their economies, Mr O'Brien explained.
"We are now focusing on large blue chip companies stocks which have a growth dimension and will respond to an improvement in the world economy.
Examples of investment targets include retailers and manufacturers in the UK and mainland Europe. Other targets include companies which are reducing costs through mergers and rationalisations.
Growth in company earnings will be stronger in Europe than in the US, Mr O'Brien forecast.
ILIM considers current earnings forecasts for continental European companies to be too pessimistic and expects results to be ahead of expectations.
