Since March, the Irish equity market has risen by more than 20 per cent, enabling the ISEQ index to hit new all-time highs in recent weeks.
On average, Irish shares have comfortably outperformed their British and European peers over this period. For example, in Britain, the FTSE 100 index has struggled to rise beyond the 6,000 level, still well below its all-time high of 6,900 reached at end-December 1999.
The pattern across Continental European bourses is similar to the British experience. The French CAC-40 index is trading at 20 per cent below its all-time high, while Germany's DAX index is currently trading at 6,223 compared with its all-time high of 8,064.
The pattern of returns from the Irish equity market has differed quite significantly from global trends in recent years. During 1999 and the early part of 2000, the TMT (technology, media and telecoms) induced global bull market had only a limited impact on the Irish market. This reflected the sectoral make-up of the Irish market, which has a small exposure to the technology sector.
However, of greater significance during this period was the fact that the Irish institutions were actively selling their substantial holdings in Irish shares. This domestic selling was a direct consequence of the introduction of the euro, which led Irish investment funds to diversify their equity holdings across the new euro zone.
The proportion of Irish institutional funds invested in the Irish equity market is now estimated to be well below 20 per cent compared with the weighting of in excess of 30 per cent prior to the euro's introduction. Active selling of Irish shares by Irish fund managers now seems to have largely abated and this is clearly a key factor underpinning the recent better performance of the ISEQ.
The bursting of the TMT bubble has been a second positive influence on the Irish market over the past 12 months. The funds released from the aggressive selling of technology stocks by investors worldwide, both institutional and private, created increased demand for shares in the old-economy sectors.
The financial, pharmaceutical and construction sectors account for more than 70 per cent of the market capitalisation of the ISEQ index. Over the past year, this sector mix has been a key factor in the strong performance of the ISEQ given the strong relative performance of these sectors globally.
However, of even greater significance has been the fact that several of the larger Irish companies have performed far better than their international peers in recent months. For example, Bank of Ireland's share price has sharply outperformed the European bank sector index over the past year. Likewise, CRH has outperformed the European construction sector by approximately 10 per cent over the past year.
In the pharmaceutical sector, Elan has performed strongly and, with a market capitalisation equivalent to 20 per cent of the ISEQ.
There are a number of factors pointing towards a pause in this pattern of ISEQ outperformance. Firstly, the Irish economy is slowing modestly and, therefore, profit growth from domestic activities can be expected to moderate in coming years.
Secondly, many Irish companies are now trading on price-earnings ratios that are in excess of those afforded their international peers. While a premium rating is probably justified in many instances, it does suggest that there is now no further room for a re-rating of Irish shares. Therefore, further significant progress by the Irish equity market is probably now heavily dependent on strong overseas equity markets.
