This year could well be the fourth in a row in which major equity markets lose ground, Davy Stockbrokers has warned.

In its latest equity strategy document, the broker says it is still of the view the global economy is headed for several years of sub-par growth and equity markets will remain under pressure.

While a quick and benign resolution to the war in Iraq would stimulate some recovery in consumer and business spending, and spur some further gains in equities, Davy believes the global economy faces a number of serious challenges unrelated to geopolitical disputes.

"Most have their origin in the post-bubble adjustments necessary after the excesses of the 1990s," the broker said.

It is particularly concerned by recent evidence of retrenchment by US consumers and house buyers, two groups that it says have provided critical growth leadership in recent years.

However, describing itself as "cautious globally, positive locally", the stockbroker believes, in such an environment, the Irish equity market will continue to outperform. It notes that in the first three months of 2003, the ISEQ outperformed the Eurotop 300 by 13 per cent while it has outperformed by more than 30 per cent over the past year.

Davy says the defensive structure of the Irish market is its main attraction. More than 75 per cent of the market's capitalisation is accounted for by financial, building and food stocks while the market has only a small exposure to the hard-pressed technology and media sectors.

In addition, the earnings performance of Irish companies has proven more resilient than those of their peers, partly reflecting their exposure to the relatively resilient Irish economy but also the more robust structure of their businesses, Davy says.

It points to AIB, Bank of Ireland and Anglo Irish Bank as outperformers in the banking sector, Irish Life & Permanent in the insurance sector, CRH in building materials, Ryanair among airlines, and Kerry and IAWS in the food sector.

However, it notes that while Irish firms are likely to outperform in difficult times, the Irish market is probably not the place to be for those with an optimistic view on equity markets. "Because most of these stocks have outperformed so much in the downswing, the bounce is likely to be more muted in any sustained and broadly based equity market recovery," Davy says.

It remains a fan of the market, however, pointing out that valuations look undemanding with a price/earnings ratio of 11 times for the current year, below the European average of 16 times. In addition, Davy notes the yield on the Irish market in 2003 is 3.2 per cent, below the forecast yield of 3.5 per cent for Europe, while dividend cover is a healthy three times.