As we reach the end of the first quarter of the millennium, the Irish equity market has finally begun to shake off its recent lethargic performance. This has coincided with several optimistic brokers' forecasts that the overall ISEQ index can rise to 6,000 or above by the end of the year.
If these forecasts prove correct it implies a further rise of 10-15 per cent in the overall market index for the remaining nine months of the year.
A review of the performance of the Irish equity market over the past two years highlights just how poorly the market has fared. The ISEQ has recently peaked at around 5,500 just surpassing the previous peak that was reached as long ago as April 21st, 1998. Therefore, while the Irish economy and property market have boomed, share values have remained static.
When contrasted with the performance of international equity markets the comparison is even starker. Over the past two years the FTSE has risen by over 20 per cent, the Dow Jones by 38 per cent and the technology-laden Nasdaq in the US has almost trebled. For Irish investors who had the wisdom and good fortune to invest overseas, returns have been further enhanced through currency gains. Over the past two years the appreciation of the dollar and sterling versus the Irish pound would have added an additional 10 per cent to Irish pound returns.
This static overall performance from the ISEQ does hide some very significant trends among the markets constituents. Financial stocks have declined by 30 per cent while industrial stocks have risen by 25 per cent over the period.
Among individual stocks there have been some real winning performances from newcomers such as Ryanair and Esat. Also, some of the long-established industrial shares such as CRH and Independent News & Media have provided handsome capital growth over the past two years.
There has been a much steadier pattern of trading in the Irish financial stocks in recent weeks and prices have bounced back from very oversold levels. If the overall market is to make further headway, then financial stocks and some of the under-performing heavyweight industrial shares such as Smurfit and Kerry will need to build on their recent gains.
The prospects of this occurring seem to be reasonably promising since several of the prior negative influences on the market have probably run their course.
International portfolio diversification by Irish fund managers' post the introduction of the euro has clearly weighed heavily on the share prices of the Irish financials in particular.
The Irish equity weighting in large pension funds has now dropped from 30 per cent to just over 20 per cent and the pressure to diversify further is now less pressing.
International investors in Irish shares will in all probability remain worried that the Irish economic miracle will eventually boil over. However, the low valuations of Irish shares relative to their international peers could well begin to act to attract some overseas buying of the Irish market.
While it is too early to judge whether the bear market in Irish financial stocks is over, the odds are certainly growing that a modest but sustained rise in share values is likely over the remainder of the year.
