THE Irish stock market is likely to undergo a significant downward correction in the first quarter of 1997 but should recover strongly later in the year, says Goodbody Stockbrokers in its 1997 Equity Strategy document.
With the Irish market benefiting from the strength of the Irish economy - Goodbody has increased its growth forecast for 1997 to 6 per cent - the broker believes that the stock market could end 1997 with the ISEQ Index at 2875, almost 9 per cent above the current level.
Goodbody believes that the focus of the market will switch from being momentum driven to value driven and as a result shares that have been out of favour may underperform the market. Financial stocks are likely to be affected negatively by an expected fall in bond markets after a possible new year rise in interest by the Federal Reserve "but underlying value will be reflected in a recovery of those on less demanding ratings by year end".
The brokers believe that Smurfit should outperform the market early in the year as the benefits of a strong American economy come through. Greencore and Fyffes will also be helped by the fact that their multiples of profits are undemanding, the Goodbody report adds. The second half of the year should see other stocks returning to favour and Goodbody identifies Waterford Wedgwood as one whose medium term prospects are good.
The broker also believes that the inclusion of Northern Ireland companies in the ISEQ Index from next year should mean that high growth stocks such as Powerscreen and Boxmore will become an integral part of Irish institutional portfolios while Northern Ireland Electricity provides a new sector with a high and sustainable dividend yield. These stocks add another 7 per cent weighting to the ISEQ Index.
Irish investors may also become more receptive to technology stocks, although Goodbody notes that in a period when its share price has risen 50 per cent, the Irish institutional shareholder base in Elan has only moved 5 per cent in recent times. Likewise, Irish high technology companies have tended to look to the NASDAQ market in New York for funds.
Goodbody expects at least six Irish high technology companies to go public in the next two to three years. "The index will inevitably broaden to include these even if their primary quotes are on NASDAQ. Taking an average market capitalisation of $300 million (£180.5 million), these would lead to an additional weighting of some 5 per cent of the ISEQ."
Goodbody believes it is only a matter of time before State privatisations add another 10 per cent weighting to the ISEQ. "We would expect that a more open attitude by Irish investors to dealing in new (if different) stocks would be paralleled by a more open attitude to allowing Irish investors to participate in the sale of State assets," the Goodbody report says.
