Irish equity investors are still feeling the pain
The subprime mortgage crisis in the US during the summer is still showing little sign of abating and we continue to be treated to an almost daily diet of bad financial news. There is no doubt but that when the various books on bubbles and financial euphoria are being updated, the current market turmoil, which is a direct result of irresponsible behaviour on the part of bankers, will warrant a long chapter in its own right.
When we see the heads of two of the world’s major banking organisations walking the plank within a week of each other, it truly does signify a remarkable period. Mind you, the two particular victims in the past week are being well rewarded for professional failures. Nice work, if one can get it.
Marketplace reality is a difficult one. The financial system worldwide is still trying to get to grips with the losses suffered as a result of totally irresponsible lending to people who should never have been put in a position to borrow. Amid all the financial turmoil, it is interesting that with the exception of a few markets such as Japan and Ireland, global equity markets are holding up pretty well despite the plunging dollar and rising oil prices.
Oil prices are touching the $100 per barrel mark over the coming days and the dollar looks eminently capable of breaching the very significant €1.50 level. God only knows where both might go from there, but it is very clear that a solid momentum has been created that might prove difficult to arrest in the near-term.
The weaker dollar might be good news for the hordes of Christmas shoppers flocking to the US, but it is not good news for the domestic economy in general.
Equity market investors are obviously still of the view that the global economy continues to display solid momentum. That is true to a point, but the US housing market is still plunging on all fronts, and most key economic indicators in most markets have turned down in recent months.
This is not to suggest that the global economy is in trouble, but it does suggest the risks are growing and global growth will certainly be weaker in 2008 than we have seen for at least the past four years.
Equity investors are also clearly of the view that the global central banking system will come to the rescue of the world financial system and the world economy. Indeed, the Federal Reserve has already cut rates by 0.75% and the Bank of England might not be too far away from an about-turn of its own.
The ECB is not yet for shifting, but the notion of further tightening from the ECB is gone well off the agenda. There is certainly some question mark over the ability of international equity markets to continue to defy gravity.
Meanwhile, the Irish equity market continues to go through the horrors and so far this year has shed more than 21% of its value. Bank shares have been particularly badly hit; AIB is off more than 27%, Bank of Ireland and Irish Life & Permanent have both shed more than 32%, and Anglo Irish Bank has shed almost 30%.
By any standards, such losses are pretty phenomenal, and one could certainly argue such losses are totally unjustified given the continued strong profitability of all of these organisations. Their valuations are certainly suggesting recessionary conditions in the Irish economy over the next couple of years, yet few commentators are expecting such an eventuality.
The harsh reality is that when sentiment turns against you, it certainly turns against you. Hedge funds are on a roll with the aforementioned stocks and look set to drive them lower in the coming weeks. At some stage they will decide enough is enough, but that appears some distance away.
