International investors are still running scared
As markets fell on the back of the heavy international selling, domestic institutional investors were also forced to sell, thereby compounding difficulties for the market. Unfortunately, the carnage was spread widely across the market with just a few companies in food and oil bucking the trend.
So far in 2008 the story has been pretty similar, although the rate of decline is not as pronounced. Still, the market has shed another 10% of its value so far, with financial, housing stocks and airlines doing particularly badly — pretty well most of the market. For Irish pension funds this is bad news as they have higher weighting in the market here than its size would warrant.
Alas it is hard to see the Irish market making a sustained recovery anytime soon. As was the case last year, international investors are still running scared of the market here as they are justifiably concerned that the severe housing correction will continue to impact on corporate earnings, particularly in financial sectors.
The comments that accompanied Bank of Ireland’s results this week provided a stark reminder of how difficult that has become. The chief executive said the pace of slowdown over the past six months has been more pronounced than expected and the downturn would continue to affect its earnings in the year ahead. This looks like a realistic assessment, albeit a painful one.
The big story in the Irish economy, of course, is the savage adjustment under way in the housing market. Given the inordinate dependence on housing in recent years, the adjustment is proving very painful.
However, the pain is being compounded by the impact the subprime crisis is having on the cost and availability of credit, the ongoing escalation in oil prices, and the sharp strengthening of the euro. The Irish economy and companies are now being battered on all fronts.
The currency issue is particularly painful for corporate earnings. It is estimated that 28% of Irish corporate earnings are sourced in Britain and 11% in the US. So as well as undermining Ireland’s export competitiveness on the US and British markets, the strength of the euro is impacting negatively on sterling and dollar earnings translated back into the euro. Bank of Ireland stated the strength of the euro against sterling knocked €30 million off its sterling profits.
The euro had lost some ground to the dollar and sterling over past weeks, but this week saw it gaining renewed strength, and this has the potential to go further. At the same time oil has topped $135 a barrel in recent days, and with markets still extremely nervous about future supply and ongoing demand, oil prices can certainly go higher.
For an already ailing Irish economy, these developments are certainly not positive and are compounding an already difficult situation.
For potential investors in the Irish equity markets, it is difficult to identify too many reasons to invest.
There is of course a longer-term argument for buying Irish stocks based on current relatively low valuations, but the problem is that they could remain cheap for a protracted period, and could get even cheaper before they get stronger.
Keynes once pointed out that stocks could remain cheaper for longer than one can remain solvent. One would need deep pockets to invest aggressively in Irish market at the moment because sentiment towards it remains very poor and it is hard to identify too many reasons why this might change anytime soon.
Jim Power
chief economist
Friends First
