Irish shares have fallen farther and faster and greatly underperformed those in international equity markets in the global financial turmoil that has followed the US sub-prime mortgage crisis. The Iseq index, which measures the market value of companies listed on the stock exchange, peaked last February when it reached an all time high. But yesterday the Iseq touched its low point this year, reflecting a 37 per cent decline in just nine months that has seen €42 billion wiped off the value of Irish shares.
A Dublin trader has, quite aptly, described the market for Irish equities as a "loveless" one. With more sellers than buyers still in evidence, the market has yet to find and form a bottom from which it can consolidate, before recovering.
What can explain the remarkable underperformance of the Irish stock market? Certainly, the make-up of the domestic market is a major factor. The Iseq index is largely dominated by financial and construction companies. These companies, which include AIB, Bank of Ireland and CRH, account for nearly two thirds of the overall index. Second, the fallout from the sub-prime market in the form of a global credit crunch has hit the financial and property sectors harder than others, particularly in Ireland. In addition, the domestic property market has been seen as overvalued, most notably by international investors. They have become increasingly concerned about the financial exposure of Irish banks to that sector. Indeed, such investors will not have been impressed by the imprudent lending practices of some of the banks as revealed in the multimillion euro loans they gave to the two Dublin based solicitors for what were multiple mortgages on the same properties.
Clearly, the Irish market was set for a correction. That said, the collapse in the value of Irish stocks has caught most investors by surprise. For many years Ireland has been one of the best performing equity markets in the developed world. But Irish equities have been a huge underperformer this year, as a bull market gave way to a bear market. Underperformance on such a scale matters. It matters to shareholders who have seen the value of their investments fall sharply. And not least it matters to those saving for their retirement by investing in a pension. The average Irish pension fund is worth five per cent less than last January.
Equity investment, however, is a medium to long-term investment, with a time horizon of years, not of months and days. That time perspective should not be lost in assessing the market reversal of recent weeks and months. Irish shares are selling at a discount to their international peers and, on a valuation basis, have rarely been cheaper. The old stock market adage that they do not ring a bell at the top of the market applies equally at a market bottom. And given the strong underlying fundamentals of the domestic economy, the current mismatch between share price valuations and economic fundamentals seems unlikely to persist.