In stock markets an extremely high degree of volatility in the technology, media and telecom (TMT) sectors continues to be a key feature of stock market performance. In general, the once high-flying TMT stocks have continued to see downward pressure on share prices, while many shares in the "old economy" sectors have enjoyed a recovery in their fortunes.
Across global stock markets investors seem to be focusing increasingly on the financial performance and growth prospects of companies on a case-by-case basis. As memories of the frenzied stampede into "new economy" stocks that was seen earlier this year begin to fade, investors have returned to trying to assess quoted companies on the basis of their underlying merits.
This return to investment fundamentals has in general been very positive for the Irish equity market as companies with good underlying fundamentals have once again begun to attract their fair share of investment flows.
The sector within which a company operates is receiving a lower weighting from investors, as a company's own history and business prospects take centre stage. This change can be most clearly seen in the discriminating reaction of the market to financial results. For example, a good set of results from Vodafone lifted its share price even though telecom stocks generally have remained weak. In the US a very poor set of results from Hewlett Packard led to a sharp fall in its share price, while investors flocked to Sun MicroSystems in response to its strong results.
In this environment recent interim results announcements from Bank of Ireland and DCC have acted to reinforce the generally positive tone underlying the Irish market. The bank's underlying profits before tax in the six months to end September grew by 15 per cent over the same period last year. Profits in the Corporate and Treasury division grew by 33 per cent while strong lending growth in Retail Ireland led to a 28 per cent growth in profits in that division. In contrast profits at its UK subsidiary Bristol and West declined by 13 per cent in sterling terms.
Against this background of rapid growth in lending in recent years, asset quality has become a key issue. Overseas investors in particular have been worried that an overheated housing market could lead to bad debt problems. In its most recent results report, the bank provided some additional information to show that it would not suffer unduly from a fall in Irish house prices.
In the case of owner-occupiers the average loan to value ratio is 56 per cent, based on the original purchase price of a house. The group has "stress-tested" its Irish mortgage book for a 3 per cent rise in interest rates and a 40 per cent decline in house prices. It does seem as if overseas investors have come round to the view that the Irish economy is not going to suddenly go from boom to bust. Given the ongoing buoyant domestic economic conditions it is not surprising that stockbrokers have been revising up their profit forecasts for Bank of Ireland and that the share price responded positively to the bank's interim results.
Development Capital Corporation (DCC) which operates across the IT, healthcare, energy and food sectors also reported a strong set of interim figures. Operating profit grew by 25 per cent and the dividend was raised by 20 per cent.
All of its business segments showed strong growth and business conditions remain favourable throughout the group's markets. Despite buying back 25 million worth of its own shares and investing over €100 million (£79 million)in developing the business, the group is still in a net cash position. The company's strong financial position will enable it to invest for future growth and to continue to buy back shares.
These recent interim results from Bank of Ireland and DCC confirm the evidence that the Irish quoted corporate sector is performing well. Furthermore, there is every reason to expect that full year results that will appear early next year will continue in this positive vein and will act to generate investor interest in the Irish market.
