Investor/An insider's guide to the market: Over the past week financial markets have rather abruptly lost composure compared with the boundless optimism seen so far this year. Niggling worries regarding US inflation and fears that the US Federal Reserve under its new chairman, Ben Bernanke, may eventually raise short-term interest rates beyond 5 per cent, were some of the reasons put forward by analysts for the sudden collapse in confidence.
The sharp 2006 decline in the dollar exchange rate was also seen as a catalyst for increased market volatility.
There are also those who take the simpler view that a bout of profit-taking was long overdue, given the recent strength of price gains across a wide range of securities that included emerging markets and commodities.
Not surprisingly some of the largest price falls occurred across those commodity markets which have experienced enormous price gains in recent months. Copper and gold prices fell by 5-10 per cent and share prices in emerging markets such as Russia, Indonesia and Turkey also fell sharply.
Equity markets in Europe, Asia and North America also suffered sharp losses that brought prices back to mid-February levels.
Despite these falls most equity indices are still ahead of their end-December 2005 levels. European indices, including the Iseq, are up by 4-5 per cent year-to-date, whilst in the US the Standard & Poor's 500 and Nasdaq remain in positive territory.
This recent bout of market weakness and heightened volatility has inevitably fuelled the debate regarding the potential longevity of the current equity bull market.
The start of the bull market can be dated to March 2003, which means that equity markets have now been rising for over three years. Over this period, there has not been any large or prolonged setback. Therefore, in the eyes of some analysts recent events could signal the beginning of a bearish phase for stock markets.
However, in Investor's view, the probability that the current bull run has come to an end is very low.
Some further short-term weakness may well occur as those investors and/or speculators with short-term investment horizons reduce their exposures to risky assets. Once such a phase of profit-taking and risk reduction is complete, the scene will be set for a continuation of the global equity bull market.
Underlying positive sentiment towards equity markets should be sustained as long as global economic growth remains strong. Recent events in the financial markets do nothing to derail the positive outlook for the global economy.
On the contrary, the pullback in commodity prices, if sustained, would be positive for future growth prospects. Strong economic growth inevitably leads to strong profit growth and this has been borne out in company results so far in 2006. Furthermore, the majority of company chairmen have expressed confidence in prospective business conditions.
In the Irish market, trading updates this week from AIB and Paddy Power, and results from DCC are symptomatic of the current benign operating environment of many companies. On Tuesday AIB surprised the market with a positive trading update.
The group guided the market to expect mid- to high-teens percentage growth in earnings per share (EPS) in 2006, compared with previous guidance of low double-digit EPS growth.
Better performance across the whole group is responsible for this improved outlook. Loan growth in the Republic of Ireland of 25 per cent is now anticipated while non-interest income is expected to benefit from strong growth in asset management, stockbroking and higher activity levels in the Irish corporate finance business. Asset quality is expected to improve which results in a lower than expected bad debt provision.
Paddy Power also released a trading update to coincide with its annual meeting. The company remains confident about its growth prospects for this year and noted that earnings growth should be in line with market expectations of a 37 per cent uplift in EPS. DCC reported its fiscal year 2006 results during the week which showed adjusted EPS about 3 per cent ahead of market forecasts. DCC's diversified businesses that include healthcare, energy, housebuilding and IT distribution performed ahead of expectations. In its outlook statement the company said that it anticipated good operating profit growth from its various subsidiaries.
If companies both at home and abroad continue to issue positive trading updates and results, investors can be confident that the underlying trend in share prices will continue to be positive for the foreseeable future.
