Fed fear wipes €1.3bn off ISEQ

MORE than €1.3 billion was wiped off the value of shares traded on the Irish Stock Exchange yesterday as stocks fell on bourses across the globe on fears of an increase in US interest rates.

Irish stocks fell, in keeping with drops in Asia and North America, on concern the Federal Reserve may raise interest rates in the US earlier than some investors had expected.

Financials took a major hit with high-flyer Anglo Irish Bank falling 4.8%, AIB down 1.55% and Bank of Ireland down 1.50%. CRH fell 2.66%, Elan was down 4.12% and Kerry Group fell 1.83%. The benchmark FTSE 100 Index posted its biggest fall in a year, losing 103.2 points, or 2.3%, to 4395.20.

In Europe, companies that had lead a 14-month rally, such as Ericsson AB and Allianz AG, led declines. Bayer AG fell after saying operating profit shrank in the first quarter.

Franz Wenzel, senior investment strategist at Axa Investment Managers in Paris, which manages $354 billion, said: "The Fed will tighten rates by the end of June, which is very bad for equities. The rally will slow down from now on."

Stocks have risen since March 2003 on optimism growth in the US, Europe's largest export market, would boost corporate profits.

Despite the fall, shares traded on the Irish Stock Exchange are undervalued by at least 10bn, according to Davy Stockbroker's head of research and chief economist Robbie Kelleher.

In a note to clients yesterday, Mr Kelleher concluded: "All in all, we would see fair value for the overall market being at least 15% above current levels, which implies the ISEQ should be trading above 6,000."

The total value of Irish shares at the beginning of the month was €67bn and a 15% increase would add more that €10bn to their overall value. The ISEQ closed at 5,111.37, well below Mr Kelleher's fair value target of 6,000.

Mr Kelleher said, excluding Elan, the Irish equity market is down 1% year-to-date and has under performed mainland Europe by about 15% since markets bottomed in mid-March of last year.

Mr Kelleher argues that this leaves the overall market trading on a current year P/E of a little over 13x and not much more than 11x if the projected losses at Elan are excluded.

"The earnings yield ratio is now close to 1.8x against an historic norm of 1.0x," said Mr Kelleher.

"A return to this historic norm would imply that the market is almost 60% undervalued," he said.

Mr Kelleher said there is also some considerable distance between the current dividend yield ratio of 1.7x and the historic average of 2.8x.

"That gap would imply that the market is as much as 70% undervalued," he said.

"Bottom-up analysis also supports the view that the market is trading well below fair. All of the top three stocks (AIB, Bank of Ireland, CRH) which between them account for more than 20% of the index look to be trading more than 20% below fair value," he told investors.