You may wonder why it is that the stock market has kicked off 2015 in relatively good shape, with a number of Irish companies, in particular, starting the year with positive share price movements, says Joe Gill.
I’m inclined to believe a series of macro events, rather than stock-specific issues, lie at the heart of an encouraging bounce in equity prices. These factors also have resonance for the health and prospects of the economy.
The most immediate dynamic at work, in a positive way, is the decision by the ECB to train its powerful financial guns at the European economy. A sustained and aggressive period of pump-priming is under way, designed to boost spending and lending across the eurozone.
We should not be too surprised as quantitative easing is having a very positive impact on large economies such as the US and UK where GDP and employment measures have all travelled in the right direction for a number of quarters. When you see economies of that size grow and create jobs it is reasonable to ask why a large developed and fundamentally sound eurozone cannot do the same. This ECB action is designed to get such a reaction.
The effect of the ECB money torrent is to push bond yields down even further. If you would like to own a 10-year German bund now it will pay the princely sum of about 0.4% per year. Across the eurozone, bond yields are falling too.
They are joining the zero rates found in many deposit accounts and the developing habit of negative interest rates in countries like Switzerland. Rational investors are taking profit in some bonds and shifting cash to pursue better returns. The earliest beneficiary is equities.
We noted flows of money hunting construction-related stocks since year end. The logic here is that easy money will stimulate greater levels of construction activity in many places.
In addition, a lot of construction companies have strong balance sheets so their risk profiles are healthy. Many of them offer dividends that look handsome next to bonds or cash. Hence, the buoyancy in all construction-linked equities.
A second important factor not to ignore is what is happening in oil. With prices down 50% it is dawning on investors since last autumn that oil-linked companies will suffer.
Energy stocks account for a large piece of global equity indices so money managers have chosen to take assets out of energy funds.
Where to go is the biggest challenge as they want to replicate the attributes that used to define large oil and gas companies i.e. reliable cashflows, consistent profits and steady dividends.
This we think, explains partly why food companies have seen good share price advances in the fourth quarter 2014 and in to 2015.
Investors are buying these as harbours in which solid balance sheets, dependable dividends and profits abound.
At a broader level, they are big movements in macro economic measures that have a lot of positive consequences for Ireland. The most direct effect is from currencies. Our most important trading partners are the UK and US and both the dollar and sterling have surged in recent weeks against the euro.
That improves our cost competitiveness and boosts the attractions of Irish industries including agrifood, beverages and tourism. When currencies fall you normally have imported inflation but subdued pricing pressure worldwide and the collapse of energy costs will limit that effect.
All of this suggests Ireland is now working with low inflation, low interest rates, a highly competitive exchange rate and a flush of quantitative easing-driven investment spending.
Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal
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