This year will be a good one for the Belgium stock market, although not as good as 1997, analysts say. The market is undervalued compared to some in Europe and they expect it to make up ground lost in the first quarter of 1997.

Excluding the catastrophic scenario in the Far East, with more bankruptcy hitting Japanese banks, we remain moderately optimistic," says Guy Lerminidux, an analyst with Petercam in Brussels. "Belgian stocks are among the cheaper ones. The recent rally will allow us to catch up some of the losses we have had on a relative basis in Europe since last year."

Patrick van Loij, head of asset management at Cera Bank in Brussels, expects returns including dividend returns of 8-8.5% for the next 12 months. He includes Belgium on a preferred list with Germany and the Netherlands.

Thierry Masset, financial analyst at Brussels-based Vermeulen-Raedonck, BBL's brokerage subsidiary, has a target 10% return next year and expects the index to reach 2550-2600.

"The main market driver is company results, not low fixed income returns," adds van Loij.

Lerminidux sees the domestic recovery and not just export-led growth playing an important role, although he also lists the established drivers as the low interest rate environment, the resulting switch of domestic investors to equities and the establishment of the euro.

"Consumers may see the efforts of the last few years bearing fruit. Consumer spending may be the most important macro for 1998 while sales for Christmas for Belgium and for Europe seem to have been good," adds Masset.

All analysts believe that the major risk comes from Asia with its impact on exports and the resulting volatility on investor sentiment.

This market will also fall in "sympathy" - as Lerminidux describes it - with any fall on Wall Street, which may also have Asia at its root. He does not however see any risks that are internal to Europe.

Examining the bond market picture, Masset says that he expects some upward pressure on the short-term part of the yield curve, with a short-term rate for the euro of between 4 and 4.5%.

The flattening of the yield curve, he says, will continue in 1998 as in 1997. "For 1998 this will continue but with a small increase in long-term rates. There may be a stronger increase in short-term rates but this will not destroy the market because interest rates will remain very low and the forecast increase is still limited."

Analysts largely agree that consumer stocks will do well, exporters will feel some pain where they are influenced by Asia and that M&A activity will bring some good buys particularly in financials.

Van Loij says: "We expect mergers and acquisitions in the banking sector and that might influence returns by the end of the year. Cyclical companies are looking up, but this will be a slower drive."

Lerminidux believes that the restructuring story will extend into insurance and possibly the retail sector. "They are not that interesting from a growth point of view from their restructuring potential and are a bit more speculative. For growth concentrate on technology and pharmaceuticals."

Masset adds that all stocks could be affected indirectly by Asia, although relatively low export exposure may mute the direct impact. Some of the fall has already been built into calculations.

"The most exposed are industrial stocks active in worldwide markets where a slow down in demand in Asia may affect prices. It has hit steel but may hit chemicals and other industrials if the news gets worse."John Lappin"