Elan leads remarkable rise in Irish shares

IRISH share values rose 23% in 2004, with Elan the runaway success that few if any predicted would be the stock of the year.

Elan was a recovery story in itself, gaining 258% to close out 2004 at €19.60, from €5.46 a year earlier.

Even with Elan out of the picture, the Irish market was still up 16% since the beginning of 2004 compared with 6% to 7% returns from Europe, the US and British markets. Most of the 9% to 10% out-performance over the other key markets was achieved from August on as the market responded to the positive economic outlook.

That growth story was reflected in end year valuations. The Irish financial sector had risen 15% since August, with many stocks setting historic highs towards the end of the year FBD and Anglo Irish being two examples.

That surge was achieved despite the sector struggling to stay in positive territory in the first eight months of the year, according to Peter Jackson of Bloxham Stockbrokers.

Thirteen Irish companies registered lifetime highs in November or early December, representing 25% of the number of listed companies in the ISEQ.

And as a result of last year's gains the ISEQ is just 5% away from its lifetime high.

In general brokers here expect equity markets to continue to perform well in 2005.

But two factors overhang all markets and could have a dampening impact on markets overall.

The continuing weakness of the dollar and the impact of higher US interest rates on corporate earnings in the US could pull down share prices across all markets, some analysts believe.

US interest rates could double as inflation becomes a real threat for the first time in many years while dollar weakness shows no signs of relenting.

Perception is important however and the general view being fed to investors is that the global economy is sound, implying that Irish equities will do the job again in 2005, while Europe with a more stable economic backdrop should outperform the US, despite the poorer growth outlook for the eurozone.

Irish economic growth is back near 5%, a rate of growth which the Economic Social & Research Institute in Ireland (ESRI) believes is sustainable for the next six years.

We currently expect Irish corporate earnings to grow by 10.3% in 2005, having incorporated a euro/dollar exchange rate of €1.33.

For Merrion the performance of financial and industrial stocks in the ISEQ has been fairly balanced in aggregate in 2004.

They are confident of a repeat of this in 2005.

In terms of stock selection, the premium traditionally afforded growth stock has narrowed considerably leaving scope for a re-rating this year.

It favours Allied Irish, Anglo Irish, Ryanair and CRH.

Elsewhere stocks such as Kingspan, IAWS, Grafton, Paddy Power, Fyffes and Independent News and Media are seen as good bets.

The general argument is that the Irish economy will do well again this year irrespective.