Investor/An insider's guide to the market: The exuberant bullish start that swept equity markets in early January has dissipated somewhat over the past 10 days.
First, the Japanese equity market fell sharply as investigators swooped on one of the market's high-flying internet companies, Livedoor.
Livedoor had become a symbol of a new generation of entrepreneurs who were prepared to challenge the status quo. Many investors bought into Livedoor hoping that it would eventually become the Google or Yahoo of Japan.
Such expectations suddenly crashed when it was revealed that Livedoor executives were suspected of violating securities exchange laws by window-dressing accounts of group companies, and providing false information to manipulate the market.
The news led to such a surge in the volume of selling orders across the market that the Tokyo stock exchange had to close the market early on the day. The Tokyo market has since recovered but the sudden rise in daily volatility has reminded investors of the risks of investing in Japan.
On Wall Street, investors and analysts are currently far more concerned with trends in US corporate profits. Most US companies continue to perform very well, but there is a growing belief that profit growth in 2006 may not be as good as previously expected.
Fourth-quarter results so far would seem to support the current level of the US equity market, but prospects for 2006 are unlikely to be good enough to justify a re-rating of the market.
Naturally, share prices in Europe and at home gave up some ground in response to the weakness in Japan and the US. However, the magnitude of these recent moves in equity markets is not particularly large.
Market volatility declined to well below average levels in 2005, so the price volatility witnessed so far in January could be the precursor to a reversion towards more normal, and higher, levels of equity market volatility in 2006.
Although the Irish equity market may be subject to higher levels of short-term volatility in 2006 as part of a global trend, the news on the home economic front continues to get better. The most significant economic news this week was the announcement that 80,957 homes were built in the State last year, up from the 76,954 completions in 2004.
This marks the 11th consecutive year of growth and means that approximately one-third of the State's housing stock has been built over the past decade.
Despite this enormous increase in annual housing supply, there are good reasons to believe the trend will continue in 2006 and possibly into 2007. Recent evidence from building registrations indicates that 2006 is likely to be another strong year for housebuilding.
Employment continues to grow at a healthy pace and there is no sign of a slowdown in the pace of immigration.
Furthermore, the maturing of €16 billion of SSIA funds begins in May and this has the capacity to add further fuel to already strong housing demand.
Continued strength in the construction sector, and housing in particular, has positive implications for a wide range of quoted Irish companies. Financial stocks will continue to experience rapid growth in mortgage credit and associated financial products such as life insurance and property insurance.
Companies involved in supplying the building industry such as Grafton Group and Kingspan should continue to enjoy growth in their Irish divisions.
The quoted housebuilders, McInerney and Abbey, are obvious beneficiaries of the continuation of this housing boom.
The exchange's largest industrial stock, CRH, will also benefit even though Ireland now accounts only for around 11 per cent of group operating profits.
Other companies with some exposure to Irish homebuilding include DCC through its stake in Manor Park Homebuilders.
Given the underlying strength in the economy, Irish share prices should be able to sustain momentum in 2006 albeit with somewhat greater short-term volatility than experienced in 2005.
