THE Irish stock market is in for a good fourth quarter and "there is enough good value in certain stocks to leave us with no shortage of buy ideas," HSBC Asset Management has stated.
In a paper prepared for NZI Life, for whom it manages funds, HSBC fund manager Stephen Macklow Smith says that based on the current level of gilt yields "there is still double digit upside left in the market." The HSBC fund manager says that the recent rally in the Irish market has been very much bond driven.
HSBC Asset Management, a large London based fund manager, also notes that the Irish markets have been unique in that both bonds and equities have respond strongly to a perceived movement of bond prices towards a hypothetical Euro yield curve.
"Ireland is unique among European countries in seeing both bonds and equities respond positively to this - in all other high yielding countries the economic fundamentals are so weak that the measures necessary to bring interest rates down are crippling the domestic economy with the concomitant affect on company earnings. The Irish economy, on the other hand, remains in rude health and earnings expectations are still being revised upward rather than downward," says Mr Macklow Smith.
The HSBC fund manager warns that there are two risks to the market at current levels. One risk is that the current progress towards EMU will be slowed or halted - a risk put at no more than 25 per cent. A far bigger risk is a possible correction on Wall Street - estimated at a 60 per cent likelihood.
But HSBC says, that while there is a strong possibility of a Wall Street correction, "we would be buyers of European assets on the weakness that would doubtless follow."
On individual stocks, HSBC notes that there has still not been any share buybacks from Greencore and Bank of Ireland, the two companies most commonly linked with buybacks.
In another comment on the markets, Scottish Provident investment manager John Lawrie says that the sudden increase in Irish bond prices which brought yields down from 7.5 per cent to 6.75 per cent within a five week period is unlikely to be reversed in the short term.
Mr Lawrie says that while the bond market may consolidate and yields may rise again, the market will not fall back by anything like the amount it has risen. He adds, however, that bond yields much below 6.5 per cent "would begin to look distinctly unattractive so we would be wise to expect that the most spectacular strength is over.
