THIS year will be another good one for Irish investors but returns will be more modest than last year, according to the investment managers at Allied Irish Bank.
Mr Joe Costello, the group's investment director, is expecting returns of around 10 per cent on the year for the Irish equity market. He will also be putting money into Japan and the Far East but will be avoiding the US, which provided the biggest returns last year.
AIB's managers believe that continuing low inflation and interest rates will benefit markets across the world this year. But this sort of prediction is notoriously difficult to make. This time last year the group was predicting rates around 3 per cent higher than they are now.
Another problem is that last year's rise in markets was caused by a sharp fall in bond yields. Most economists, including AIB, believe these are likely to start rising slowly again this year, which will hold returns back to some extent.
Nevertheless, Mr Costello remains optimistic. "Irish equities still offer good value and are cheap historically", he says. He will be buying industrial stocks rather than financials, which did extremely well in 1995.
In particular, Mr Costello recommends buying Smurfit, which he believes looks good value at current levels. "It should be stronger in 1996," he added.
This is not a sentiment that he readily applies to the US. Last year, the US market returned over 37 per cent in dollar terms. "It would be most unusual for such an exceptional performance to be followed by another year of strong growth," says Mr Costello.
He adds that AIB is expecting only "moderate growth" in US corporate earnings but he stresses that he doesn't expect a huge correction. If that were to happen, the negative impact on other markets could be quite serious. AIB is hoping that the old adage that presidential election years are good for equities, will hold true in 1996.
Mr Costello is slightly more positive on Britain, where there is "a huge amount of money sloshing around the corporate sector" following recent mergers and acquisitions. He expects further takeover activity as many companies will be bringing forward their plans to get deals through before a Labour government arrives in office. However in price terms, British equities are only "fair" value.
In contrast, Japanese shares are set to run in 1996, with increases to of the order of 30 per cent likely, according to AIB. Mr Costello bases his argument on the yen remaining weak in 1996 and the economy beginning toe recover. In addition, foreign investors have been pouring money into the Japanese markets, which should encourage the domestic Japanese institutions to commit more funds during the year, he said.
One factor which held back the Japanese market last year was the fear of a banking collapse. Daiwa may have survived a multi-million pound, scandal but others are unlikely to be so lucky, according to many commentators. But MrCostello remains determinedly upbeat. "When the US had a banking crisis in 1982 and 1989, it proved a great time to buy. The same applied to AIB in 1984."
