Over the duration of the current record equity bull market there have been quite a few downward interruptions. Most have been characterised by a relatively sudden and sharp sell-off in response to a financial crisis in one or more of the world's emerging economies. However, up to now, often after a short period of time, equity prices have recovered and moved on to new high ground.
The opening weeks of 1999 have witnessed this all too familiar pattern. Stock markets surged in the first few days of the new year on euphoria over the smooth introduction of the euro. The devaluation crisis in Brazil caused share prices to fall sharply only to recover again as fears over financial market contagion quickly dissipated. On this occasion the catalyst for recovery was the speedy response of the Brazilian authorities to allow their currency - the real - to freely float on the currency markets.
Equity prices received a further boost by another bout of merger and acquisition activity, the most notable of which was the agreed take-over by Vodafone (Britain's largest mobile phone operator) of its US counterpart, AirTouch. This will create Britain's third largest publicly quoted company. In response to this deal and others, equity markets were led higher by a surge in the share prices of stocks in the telecom, pharmaceutical and financial sectors.
Typically, companies in these sectors tend to be very large and hence the most recent rise in the markets has continued the trend whereby large capitalisation stocks have been doing better than small cap stocks. In virtually all markets, small cap stocks have been left far behind in this bull market and hence many are now cheap on most valuation yardsticks. In the Irish market the arguments against small cap stocks has been compounded by the advent of the euro. This is because Irish financial institutions have been diversifying their portfolios into Europe thus reducing their demand for Irish stocks.
For the large Irish stocks this demand vacuum is being filled as European institutions are also diversifying their portfolios out of their respective home markets and some of this investment money is finding its way into the leading Irish stocks. However, very little seems to be going towards the smaller stocks and in the short term it is difficult to see what will lead to a change for the better in investor sentiment towards smaller Irish companies.
However, there are times in investment markets when taking a contrarian view can reap handsome rewards. The accompanying table lists a selection of Irish publicly-quoted companies with a market cap of less than #250 million and highlights the very low price-earnings ratios exhibited by these stocks. Admittedly many of these companies are in unfashionable and slow growing segments of business such as plastics and paper. However, the very low price-earnings ratio mean that even if they grow their earnings at less than half their larger counterparts they will ultimately deliver higher returns to their shareholders.
Most of these companies are experiencing reasonable earnings growth and therefore for any investor prepared to take a long-term view investing some funds in a selection of these stocks could well result in healthy gains.
