Equity markets are set to fall over the coming months before recovering, according to NCB's head of equity research, Mr John Reynolds.

Mr Reynolds correctly forecast the closing level of the Irish index last year.

Presenting the company's equity outlook for 2000, Mr Reynolds warned that the US stockmarket may be set for a 10 per cent to 15 per cent fall over the coming months, which would feed through to European and Irish stocks.

However, he insisted, this would be a case of "buy on the dips", with the market likely to recover thereafter.

As a result, the ISEQ index of shares should end the year at 6,000 from 5,031 yesterday, a rebound of 18.5 per cent.

The key assumption which Mr Reynolds is making is that the US authorities and the chairman of the Federal Reserve in particular will be able to "glide" the economy back to a non-inflationary growth rate of 3 per cent to 3.5 per cent from over 4 per cent at the moment.

In the meantime, however, equities are "very vulnerable". He said any weakness in the stock markets should reinforce the trend towards a cooling off in the economy and thus a subsiding of interest-rate fears.

Mr Reynolds insisted that the Irish equity market now looked to be reasonable value following last year's disappointing performance.

However, a rebound depended on overheating fears subsiding, and investors revising down their expectations for European interest rates in 10 years time.

"Any interest-rate-induced dip in the Irish market should be viewed as an opportunity to buy," he said.

An ongoing problem for Irish stocks has been the bias of Irish institutional holders away from buying.

At the beginning of 1999 the average holding of Irish stocks was 30 per cent and that should have fallen to between 20 and 25 per cent by the end of the year, according to NCB.

According to Mr Reynolds it is set to fall further to 15 per cent by 2003, but that should be done through cash-flow management rather than selling.

Nevertheless, he added, any recovery in the Irish market would be driven by overseas rather than domestic institutional investors.

Deals such as BT/Esat will also underline the value in the Irish market going forward, he said.

In terms of individual stocks, according to Mr Reynolds, a switch to recovery stocks which benefit from growth at this stage of the cycle was now in place.

As a result, he said, the two industrials, Smurfit and CRH, ought to be well placed.

In the financial sector the group is particularly recommending Anglo Irish Bancorp.