WHILE the Irish equity market is still in strong shape, developments in the key US and British equity markets are likely to restrain performance over the next three to six months, according to NCB Stockbrokers. Nevertheless, in a comprehensive review of the market, the brokers forecast a 6 per cent rise in the ISEQ to 2,850 by June 1997.

The Irish economic fundamentals remain "compelling". NCB backs this contention up by estimating real GNP growth at more than 5 per cent for 1997 and inflation at below 2.5 per cent.

With the likelihood of Ireland joining EMU in January 1999, the brokers say interest rates will fall over the next two years as "they inescapably converge on German levels".

The current gap between Irish and German short term interest rates is about 2.5 percentage points and NCB stresses that this gap has to disappear by January 1999. Even if German interest rates were to rise, the "chances of them rising by enough to eliminate that gap are small".

The move towards EMU will prompt investment inflows, according to the review. The pace of these inflows will depend on the progress of EMU negotiations but the reduction in interest rates "will impart a significant boost to the economy".

NCB notes that the valuation gaps between the leading Irish companies and their benchmark sectors overseas have narrowed. However, earnings predictability for 1997 is greater and the bias in earnings revisions is still likely to be upwards. Also, the review believes that there is upside potential from acquisitions.

NCB views the inclusion of Northern Ireland stocks in the ISEQ from January 1997 as a positive development. And in the medium term, if EMU goes ahead, as appears likely, the market will face the challenge of attracting greater investment from overseas to compensate for the likely restructuring of Irish pension funds, the review says.