Analysts and market commentators see no cause for panic but there are concerns over the impact of a construction slowdown, writes Claire Shoesmith

July will be remembered as a bad month for many. Not only did it rain non-stop on the holidaymakers, but things were not pretty for those that stayed behind in the office either.

"Things have been quite messy," said one Dublin equity trader this week, adding that he can't remember the last time sentiment was quite so negative.

"Usually at this point we start saying that things are cheap, but even though this is the case now for several Irish stocks, there isn't much appetite for buying."

This might have something to do with the losses seen over the past month. In July alone the Iseq index fell 8 per cent, wiping almost €10 billion off its value and sending it back to levels not seen since November last year. The index is well off the record high of 10,000 it hit briefly back in February and about 9 per cent off where it started the year.

On an individual stock basis things are just as bad. Anybody holding shares in AIB, Ireland's largest bank, saw the value of their holding decline by almost 5 per cent over the course of July and so far this year the bank's shares are trading down as much as 18 per cent, a decline that has taken €3.7 billion off the company's market value.

The situation hasn't been much different with Bank of Ireland, whose shares fell 6.6 per cent in July and are down 20 per cent so far this year.

While these are just two individual stocks, their heavy weighting in the index - together they account for almost 30 per cent of its total share capital - means that how they perform can have a very significant impact on the market as a whole.

Still, analysts and market commentators say there is no reason to panic - after all periods of volatility are nothing new, and are particularly apt to occur during quieter trading periods such as the summer.

Moreover, the catalyst for the recent declines has come from overseas, and more particularly concerns about a tightening in the credit market prompted by worries about the subprime mortgage market in the US.

Players in this market offer mortgages to people who can't get approval from a traditional financial institution because of a poor credit history.

In return for the loan, consumers pay a higher interest rate than normal, thus making the whole thing more expensive and, at the extreme, more precarious. In recent months, foreclosures in the sector have jumped.

John Sheehan, head of equity research at NCB in Dublin, says that while subprime mortgages have started to make their way into the Irish market, they aren't big enough yet to have a significant impact.

"The Irish weakness stems from the doom and gloom about the economy and the effect of rising interest rates on the property market in particular," he says. He adds that when the US market sells off because of subprime concerns, then so do we, although the reason isn't really subprime concerns, it's more the psychological effects of negative sentiment in the housing sector.

Property, and in particular growth in the number of new homes being built, has played a big part in the economic growth that is associated with the Celtic Tiger, and any signs of a slowdown - about 80,000 new homes are expected to be built this year, compared with 88,000 last - plays havoc with general sentiment.

"Any talk of problems in the mortgage market in the US, whatever the sector, has an over-exaggerated impact on the Irish market," said a Dublin trader.

Eamonn Hughes, head of research at Goodbody Stockbrokers in Dublin, agrees, pointing out that the tight link to property stems from the fact that the residential construction sector accounts for about 15 per cent of economic output in the Republic.

"Any economy that's perceived to have a relatively high dependence on residential construction has suffered more than most," he says, adding that the rising interest rate environment hasn't helped.

Still, according to Hughes people shouldn't be overly concerned. As the better than expected interim results released this week by AIB show, the Irish financial institutions appear to be more resilient than people think.

While the bank's shares fell on Wednesday after it revealed its interim operating profits had risen 18 per cent to cross the €1 billion barrier for the first time, analysts said it was more as a result of weakness in the European banking sector, rather than disappointment at the bank's financial performance.

While international markets have been concerned about the possible impact of a downturn in the Irish housing market on Irish institutions generally, AIB said its mortgage book was good and the overall level of bad loans and loans which were the subject of some concern had declined since the start of the year.

So, while nobody seems to be predicting an immediate turnaround in the fortunes of the global stock market - something that would require a top-of-the-range crystal ball given the increasing amount of negative news coming out of the US - this week alone Bear Stearns said it had halted redemptions to nervous investors in a third fund after having to wind up two others because of a deterioration in the credit environment.

American Home Mortgage Investment, the country's 10th largest residential mortgage lender, admitted it may be forced into liquidation.

However, Irish market commentators are adamant the doom and gloom cannot last forever.

Moreover, anybody concerned about the fate of their pension fund, most of which are invested heavily in equities, need not be overly worried. "A pension is a long-term investment and volatility is not critical unless you have to realise assets at an inconvenient time," says the Pensions Board's Aongus Horgan.

Even if you are due to cash in on your pension savings soon, it is likely that your money will have been moved to less risky investments, meaning that the short-term declines in the stock market won't have any impact on your retirement fund.

"You can never tell where things are going," said one Dublin trader. "But the important thing is that the fundamentals are strong, even if for the time being they are being overridden by negative sentiment."