Investor/An insider's guide to the market: This has been a busy week for economic data releases, particularly in the euro zone, where investors and analysts have been watching closely for signs that the bloc's economy is indeed recovering. The slowly emerging theme of a euro-zone economic recovery has been quietly gathering followers and has led to renewed talk of rises in the European Central Bank's (ECB) short-term interest rate.
Economic growth figures for the euro zone for the third quarter were, in fact, stronger than expected, with growth of 0.6 per cent after growth of 0.3 per cent in the second quarter. On an annual basis, growth accelerated in the third quarter to 1.5 per cent, compared with an annual rate of 1.1 per cent in the second quarter.
The euro zone's largest economy, Germany, also reported a better than expected third-quarter growth in GDP of 0.6 per cent. This compares with 0.2 per cent in the second quarter and results in an annual growth in the third quarter of 1.3 per cent. This is much better than the consensus forecast of 1 per cent and is due to a strong export performance and some pick-up in consumer spending.
Reaction to the good news in Germany was muted though by the ZEW confidence index for November. The ZEW economic expectations index, based on a poll of 326 analysts and institutional investors, slipped slightly in November, taking some of the gloss off the good GDP numbers.
The euro barely reacted to the growth figures and traded at recent lows to the dollar of around $1.164. Most analysts expect the ECB to raise rates in early 2006, with short-term rates expected to be at 2.5 per cent by the spring. In Ireland, final retail sales figures for the third quarter showed volume growth was 4.9 per cent year-on-year, despite some earlier disappointing consumer confidence readings.
With indications that building and construction and industrial production were also stronger in the third quarter, it implies that GDP growth probably strengthened to a 5 per cent real growth rate in the third quarter.
The economy should cope with any conceivable rise in euro short-term interest rates. Its buoyancy seems set to provide a supportive background to the equity market. Another recent positive influence on the market is merger and acquisition (M&A) activity.
The takeover battle for the Jurys Doyle Group has concluded, with victory for the JDH consortium. The final take-out price valued the company at €1.2 billion. Prior to the advent of the euro, such takeover activity usually had a positive impact on the market, as investors reinvested funds back into the market. Now, as part of the euro zone, investors have a greater choice of investments and cross-border investment flows are greater.
In the case of Jurys Doyle, family interests already held a large proportion of the company's equity, and so only a portion of the €1.2 billion would be available to flow back into the market.
The potential takeover of Eircom by Swisscom places a value of approximately €2.5 billion on Eircom. If it occurs, it will provide significant funds to investors, even though a substantial amount of equity is held by a small number of investors. Nevertheless, some funds released would be likely to flow back into demand for Irish shares.
The combined amount of money involved in the Jurys Doyle and Eircom situations is, however, dwarfed by the money that is going to be released from the SSIA scheme, beginning in May 2006. Depending on investment returns, upwards of €16 billion will be available over 12 months, beginning in May 2006.
If all this money were spent, it would have a large stimulatory impact on GDP. Likewise, if a high proportion of these funds were directed towards the equity market, it would have a positive impact on share prices.
Several financial institutions have conducted surveys to establish how individuals are likely to behave regarding their SSIAs. So far, no clear message has emerged and we will probably have to wait until the funds begin to flow before any firm conclusion can be drawn.
