Investors will have breathed a sigh of relief in the past few weeks as Irish financial stocks finally came back into favour. Jitters in the high technology sector have sent large fund managers scrambling into the relatively cheap Irish bank stocks and boosted their value.
In a month, AIB shares have increased in value by 37 per cent, while Bank of Ireland is up 30 per cent with stockbrokers all reviewing their forecasts for the rest of 2000.
The surge in international interest in Irish financial stocks over the past four weeks took the market by surprise. Irish stockbrokers are almost hoarse from telling the major fund managers that Irish banks represent exceptionally good value but it took some time to focus their minds.
Some of the world's biggest fund management groups, such as Fidelity, have now built up sizeable stakes in companies such as AIB, Bank of Ireland and Irish Life & Permanent at what they view as very favourable prices given their long-term growth prospects.
Irish financial stocks have been trading at a substantial discount to their peers in the UK and Europe despite being among the most profitable operations in Europe. Add in the continuing upbeat economic forecasts for the Irish economy and it is easy to see why a fund manager would view the banks as cheap at current levels.
These stocks peaked in value last year with AIB hitting highs of €18.20 (£14.33), Bank of Ireland reaching €10.50 (£8.27) and Irish Life & Permanent trading up to €14.93 (£11.76) only to suffer declines of up to 50 per cent some months later as investors became increasingly enamoured with technology, media and telecoms stocks.
Technical factors particular to the Irish stock market also weighed heavily on the sector as Irish fund managers reconfigured their stock holdings in the wake of the adoption of the euro.
Concerns about the impact of the Internet on the banking sector in turn took much of the sheen off bank stocks even though financial institutions were achieving strong growth and posting huge profits. Fund managers began to sell off financial stocks, switching their funds into higher growth technology stocks depressing the share price.
The recent rally comes as the same fund managers are now more cautious about the prospects for the technology sector taking fright from profit warnings from the likes of Intel and are once more ploughing funds into safer havens such as the banks.
Another very negative influence on the sector was the scepticism, particularly in the UK market, about the underlying health of the Irish economy and whether it was heading for a crash landing.
European banks analyst at Commerzbank, Mr Piers Brown, says these concerns have not completely abated in the UK, while European and US institutions are definitely more relaxed about the prospects for the Irish economy.
In his recent report Irish Banks, Worth A Closer Look, Mr Brown says fears about overheating in the Irish economy are "over-exaggerated". And when you factor in the possibility of further consolidation in the Irish market, with Irish banks making acquisitions or in turn being acquired by foreign institutions, he suggests these stocks are a "compelling buy".
Mr Brown is very upbeat about the prospects for AIB and Bank of Ireland at the moment, and forecasts these shares could rise in value by between 15 and 20 per cent by year-end.
Bank of Ireland has already signalled a strong performance in the first half of 2000 in a trading statement to the Stock Exchange last week. The news helped to give a bounce to the bank's shares ahead of the formal announcement of its interim results in November.
The bank has also been linked to takeover speculation with Bank of Scotland being mentioned as a potential bidder. Such talk can be beneficial for Bank of Ireland's share price although so far it is considered to be without foundation.
All Irish banks are considered to be ripe for a takeover, with Bank of Ireland and Irish Life & Permanent seen as the most vulnerable. Mr Brown says even if mergers and acquisition activity fails to materialise, the fundamentals of the Irish banks are still very positive.
AIB's progress should also improve now that its DIRT liability is settled. But of all the financial stocks, it is Irish Life & Permanent that is the current favourite.
Merrion Capital and Davy Stockbrokers are extremely positive about this stock and are recommending it as a buy for investors. Its key attraction is that it is predominantly a life assurer operating in an economy where the demographics support its long-term growth. It is less exposed to any downturn in the property market and is an easier story to sell to investors, according to the brokers.
Another stock attracting buy recommendations is Anglo Irish Bank. It continues to perform strongly but is considered a riskier bet than the others because of its exposure to the small and medium-sized business sector which tends to be the first casualty of an economic downturn.
There is also more optimism about First Active. Most analysts suggest the stock can hardly move any lower and most expect the company will be taken over in the near term.
The general advice for investors is that the banks represent good value and may be worth buying, particularly on days when they are weakened by investors selling the shares to take profits, as was seen this week. No one is forecasting when or if the shares will move back to record highs, but the prospects are definitely brighter now than they have been for a while.
