CROESUS - An Investor's View: At this time of year the newspapers and airwaves are full of economic forecasts and stock-market predictions for the coming year.

Some are the result of weighty and considered analysis while many involve the age-old tradition of tipping the new year's winners.

It is a notoriously hazardous activity and all forecasts made in the current highly uncertain environment are even more suspect than would usually be the case.

The reasons are not hard to find but one of the critical issues is whether the US economy enters recession in 2008. This is true for any global investment strategy, but is arguably of particular relevance to the Irish market given the importance of US multinationals to the export sector.

Of course, developments within the domestic economy have played a crucial role in the 2007 Irish equity bear market. Last year was a watershed for the economy as the longrunning Celtic Tiger finally ended. The economy grew quite well in the first half of the year but rapidly lost momentum during the second half.

Economists are now predicting growth in gross national product (GNP) in the 2 per cent to 3 per cent range for 2008 with the slowdown almost entirely due to the collapse in residential construction activity. A growth rate of less than 2 per cent is a distinct possibility if the recession in construction proves to be worse than expectations.

However, an economic statistic like GNP (or gross domestic product) growth can hide as much as it reveals.

In this regard, Croesusrecalls the early 1990s, when the rate of growth in GNP had begun to accelerate markedly. Taken at face value, the growth statistics portrayed an economy that was doing very well, yet the mood in the country remained stubbornly downbeat. The reason was that all of the growth was driven by the export sector. Private consumption was flat so most individuals experienced no improvement in their living standards.

Croesustakes the view that the reverse will occur in 2008. The decline in the construction sector will be sharper than anticipated and therefore the GNP statistics will paint a gloomy picture. Nevertheless, activity outside the construction sector will continue apace. Employment levels in most sectors will be sustained and incomes will continue to grow in real terms.

The economy is now much larger and more diversified than it was just 15 years ago and the less cyclical services sector accounts for a high proportion of overall activity. Therefore, Croesusexpects 2008 to be a year when statistics will paint a bleaker picture than the on-the-ground reality.

The deterioration in investment sentiment towards the Irish equity market during 2007 was driven by the early assessment of international investors that the Irish economy was about to turn down. In this regard they have been vindicated and this suggests that a recovery in the Irish market will depend on developments in the domestic economy.

However, Croesustakes the view that Irish economic developments will have only a limited impact on the domestic market in 2008. International developments will play a much bigger role than in 2007.

A remarkable feature of last year was not so much the large decline in the Irish equity market, but the fact that the market was virtually alone in having to endure a severe bear market. This suggests that Irish share prices fully discount the impending slowdown in the economic growth story.

A more fruitful approach for 2008 will be to concentrate on developments at a sector level. The financial and construction sectors form a large portion of the Irish market and, at a global level, these sectors underperformed in 2007.

An indication of this may be gleaned from the sector performances of the FTSE Eurofirst 300. The bank sector declined by 17 per cent and construction and materials held steady with a return of just 0.3 per cent.

In the US the S&P bank sector fell by 39 per cent and the S&P construction and materials sector fell by 20 per cent.

The overall S&P 500 and FTSE Eurofirst 300 indices rose by 3.5 per cent and 1.6 per cent respectively in local currency terms.

With financial stocks making up about 40 per cent of the Irish market by market capitalisation, any recovery in the global financial sector would quickly feed through to an outperforming Irish stock market. Good news from this international sector has the capacity to overcome domestic bad news and signs of sustained improvement in the performance of international financial stocks should be taken as the key signal to invest in the Irish market.