Investor/An investor's guide to the market:Seasonally December is often a good month for equity investors and the current year-end rally is proving to be more robust than most. Sentiment in many markets would seem to be close to euphoric. The global surge in mergers and acquisitions during 2006 has generated enormous revenues for the global investment banks.
A high proportion of this revenue is now flowing into investment bankers' bonus pools that are adding up to billions of dollars. Individual bonuses for the top tier of investment bankers will run into tens of millions of dollars in many instances.
The bonus payments are so large this year that they are boosting high-end property prices in London and other major financial centres.
Large-scale merger and acquisition activity has only been one factor underpinning the 2006 equity bull market. Arguably, low inflation and strong economic growth have been more important in creating such a positive overall business environment.
Global equity indices are now posting very strong year-to-date gains, and barring a major exogenous shock over the holiday period, 2006 will go into the record books as an exceptional year for equity returns. At the time of writing the year-to-date gains for the major indices were:
• Standard & Poor's 500 - 14.3 per cent;
• FTSE Eurotop 300 - 16.7 per cent;
• FTSE 100 - 11.4 per cent;
• ISEQ Overall - 25.2 per cent.
These returns are even more impressive when one remembers that in May/June many equity markets were barely in positive territory. For example on May 31st, the year-to-date gains were just 0.9 per cent for the S&P 500 and 3.1 per cent for the ISEQ.
Share prices declined further up to mid-June but since then share prices have been buoyant with the S&P 500 up 17 per cent and the ISEQ up 33 per cent from the June nadir.
When examined in the context of the period since 2003, the performance of equity markets in 2006 is even more impressive given that it is the fourth successive year of positive returns.
The MSCI World index (in euro terms) rose by 9 per cent in 2003, 5 per cent in 2004 and by 23 per cent in 2005. European markets have been outperforming during this period with the FTSE Eurofirst 300 up by 18 per cent, 9 per cent and 22 per cent respectively in these three years.
The Irish market has performed even better again with back-to-back price gains of 23 per cent, 26 per cent and 19 per cent. Depending on how trading goes over the final days of the year, 2006 may well turn out to be the strongest year of this four-year bull run.
The single outstanding feature of this equity bull market is the strength of corporate profitability.
Companies throughout the world have successfully translated robust economic growth into large gains in profits. The share of corporate profits in national income is at record highs in many countries.
Current trends point towards further growth in profitability albeit at a slower pace than in recent years. The cumulative rise in share prices since 2003 has therefore been built on solid foundations.
For many Irish companies the booming Irish economy has turbo-charged this underlying trend in profitability. Trading updates and financial results from several quoted Irish companies in recent weeks suggest that 2007 will be another year of positive trends in profitability.
On December 6th, Anglo Irish Bank reported an excellent set of results for their financial year (to end-September). Earnings per share (eps) rose by a faster than expected 32 per cent and the management were very confident regarding prospects for 2007 and beyond. Record net lending of € 8.5 billion was achieved during the second half of the year and work-in-progress of € 8.7 billion points to another strong out-turn in 2007.
In a trading update issued the following week, Irish Life & Permanent stated that it expects its earnings growth to exceed 20 per cent for 2006. The group is experiencing a strong performance across all of its businesses. The life business, which accounts for 55 per cent of operating profit, is benefiting from very strong growth in new business earnings.
IL&P is also benefiting from the booming Irish economy and property market through strong growth in investment bonds and protection policies.
The group's investment management arm - Irish Life Investment Managers - continues to perform very well with assets under management of €28.1 billion at end June.
A few days later, Kingspan issued a trading update signalling that full-year operating profit growth would be 33 per cent, approximately 8 per cent ahead of broker forecasts.
Kingspan is clearly benefiting from the trend towards environmentally friendly methods of construction. A positive feature of Kingspan's performance is that organic growth is strong across all of its product ranges. Future prospects should also be enhanced by the company's policy of making regular small acquisitions.
The trading updates from these Irish companies demonstrate that positive macroeconomic trends are feeding through in a very positive way to the bottom lines of quoted companies, and augurs well for a continuation of the bull market into a fifth year.
