Returns from stock markets for the first half of 1999 are shown in the table below and make some very interesting reading. From an Irish perspective the figures highlight how out of step the Irish market decline of the second quarter has been compared with the very positive trends evident elsewhere. In particular, returns from the Asian economies have been very buoyant as exemplified by the 35 per cent rise in the Hong Kong market which has seen a huge recovery from the depressed levels of last year.
The more mature markets have also been doing well and even the German stock market rose strongly during the second quarter. This occurred despite ongoing worries about the slow pace of German economic growth. Is this weak performance from the Celtic Tiger stock market an early warning signal that the economic boom is about to bust? Certainly, the Irish economy shows some signs of overheating but recent official figures for 1998 GDP and Exchequer returns for the first half of 1999, indicate that the prospects for economic growth remain very favourable.
Revisions to the Irish national accounts to bring the methodology into line with EU practice, has raised the estimate of the total value of GNP to £45.5 billion (€57.77 billion) compared with the previous estimate of £41.9 billion. The net effect of the various statistical changes is to increase the absolute estimate of national output over recent years but to decrease the rate of economic growth each year. Nevertheless, growth in GNP over the years 1997 to 1999 will probably still average a staggering 9 per cent per annum. Additionally, the Irish Debt/GNP ratio is now below 50 per cent and declining rapidly, highlighting that the Irish public finances are among the healthiest in Europe.
Although most forecasters are expecting some slowdown in growth in coming years the recent buoyant Exchequer Returns covering the first half of the year indicate that economic growth has not yet started to slow. Indeed, the current strength of the public finances now means that the economy is well-placed to invest in new infrastructure to sustain long-term economic growth.
Against the background of all this good economic news the poor performance of the Irish equity market does need some explaining. Rather than being an early warning signal of a coming downturn, the explanation probably lies in a series of technical factors. First, Irish institutions seem to be reducing their Irish equity exposure leading to a lack of demand for Irish shares, both large and small. Second, the Telecom Eireann issue has probably meant that both domestic and overseas investors have held cash back to fund investment in TE. Finally, the advent of the euro would seem to have had an adverse impact on all of the smaller peripheral European stock markets during the first half of 1999.
Also, there has been some stock-specific events such as the aborted Alliance and Leicester merger with Bank of Ireland which has had a negative impact on sentiment towards the market.
Another negative has been reports that AIB, the market's largest stock is likely to be removed from the Stoxx Euro 50 index. While all of these technical factors are significant, the critical aspect is that they are unlikely to persist over the long term. Once, some or all of them have run their course, it is likely that the positive underlying fundamentals of the Irish economy will reassert themselves leading to a better second half for the Irish equity market.
