The Irish economy would be among the "pockets of growth" in a declining European investment market, a Merrill Lynch market analyst predicted yesterday.

Speaking at a conference on global equity strategy, Mr David Bowers, chief European equity strategist with the stockbrokers, said that the effect on the financial sector of the collapse of Japan's banking industry was to make people more risk averse and a `deleveraging' in the financial sector. Banks were going to rein in credit lines in the manufacturing and service sectors, leading to a slowdown in industrial production growth, which was not a good environment for equity markets.

But economies such as Ireland and Spain had good domestic demand and were not dependent on a global boom, he said. Liquid domestic stocks exposed to good domestic demand would hold up well. "Visibility and quality is top of the list."

The challenge for Ireland was to keep inflation under control and the British manufacturing recession and economic slow-down might come to the country's aid, putting a brake on business dependent on British trade.

He added that a concern for Ireland of a new German red-green coalition government, composed of the SPD and the Green Party, was its "cultural attitude in the Euro zone to corporate restructuring", and whether it would go down the less corporate-friendly French route. Mr Chuck Clough, chief investment strategist with Merrill Lynch, said that one could assume that there would be further hedge fund crises following the bail-out of the US Long Term Capital Management fund.

The growing US current account deficit, amounting to $250 billion annually, was a further reflection of over-investment, showing a growing imbalance between savings and investment and a dependence on foreign borrowing.