The performance statistics for equity markets in October once again make for dismal reading for equity investors in the Irish stock market. During October, the Irish index declined by 4.5 per cent compared with rises of 3.5 per cent for Britain and 4.7 per cent for the US.
European markets forming part of the euro zone did even better as evidenced by strong returns of 7 per cent for the German market and 5.2 per cent for the French market.
In the year to end-October the Irish market has now declined by just less than 10 per cent compared with rises of 510 per cent in the major European and US stock markets. It is difficult to explain the severity of this Irish underperformance given that on the whole Irish quoted companies have continued to report strong profit growth. Furthermore, the prospects for corporate profitability for the next 12-18 months remain very good.
The heavy weighting of Irish financials in the ISEQ can explain some of the underperformance of the market earlier in the year. However, more recently international banking and insurance stocks have recovered quite sharply, but Irish financial stocks have failed to join in this recovery.
Although the reverberations from the Bank of Scotland's entry to the market continue to weigh on market sentiment, forthcoming interim figures from the Bank of Ireland are likely to confirm that business volumes and profits are continuing to grow strongly. Even allowing for further erosion in profit margins, the growth in business volumes will underpin further profit growth from the Irish banks.
It may seem something of a truism, but the current phase of weakness in the Irish market seems to be due to a lack of buying interest from both domestic and international institutions. Although there is still little sign of institutional funds flooding into the market, there has been a perceptible increase in the amount of corporate activity in the market, particularly among smaller companies.
Powerscreen was taken over earlier this year and the Clondalkin management has recently succeeded in taking the company private. One of the exchange newcomers, Marlborough Recruitment, has just announced that it is engaged in talks that may lead to a bid for the company.
Several companies are also currently engaged in buying in some of their outstanding share capital. All of this is evidence that the demand vacuum created by the absence of institutional interest is beginning to be filled by companies and their managements.
For private investors the fact that companies and their managements are now prepared to buy their own shares or to launch takeover bids should provide some comfort that Irish share prices could well be close to the bottom.
Furthermore, in the key financial sector there is likely to be a flurry of corporate activity given the decision of NatWest Bank to sell or float its Irish subsidiary, Ulster Bank. Irish Life & Permanent and Bank of Ireland are the most likely bidders, but there will undoubtedly be interest from other parties.
The possible sale of Ulster Bank will radically alter the corporate landscape in the financial services sector both North and South of the Border.
It could also act as a catalyst for further consolidation among the smaller players in the market such as Anglo Irish Bank and First Active.
Given the dynamics for change and consolidation in the financial sector and the increasing signs that smaller companies are beginning actively to address their low valuations, a period of sustained corporate activity could well be a feature of the market in coming months.
