Over the past week or so signs of stability have become apparent in many of the world's equity markets. Although the declines from the most recent 12-month peak in all markets has been very large, some markets are still showing positive returns year-to-date.
Even a cursory glance at the data in this table highlights a number of salient issues regarding the recent market meltdown:
The fall from 12-month highs in all markets are sufficient to classify this as a bear market rather than just a market correction;
The year-to-date returns are still respectable in a number of markets and highlight just how strong share prices were up to this recent drop;
The fallout in the Irish market has been particularly sharp with the ISEQ now in the unenviable position of performing in line with the Japanese market in the year-to-date.
Two key questions arise from the perspective of Irish investors:
Firstly, does this market meltdown represent a sea change in the overall outlook for stock markets implying much weaker returns in coming years?
Secondly, why has the Irish market been much weaker than its European peers - does it presage a weakening of the Celtic Tiger in coming years?
Looking at the former issue the answer is that after several years of strong market returns a period of much weaker returns is probable. It is impossible to predict how long the period will last - much depends on how the global economy deals with the current myriad of problems. Long-term investors know that it is best to patiently sit through these periods and indeed such periods usually present attractive investment opportunities.
However, the old maxim of spreading risk across different investments should be kept to the forefront of investment decisions in the current uncertain economic, political and financial climate.
The second question regarding the particularly weak performance of the Irish market is a little more puzzling. Only a short few months ago the professional stockbroking forecasters were bullish to a man - one notable analyst was predicting the ISEQ to reach 6,000 by the end of 1998 and 7,000 by the end of 1999. With the benefit of hindsight these were wildly optimistic although they were predicated on the buoyant fundamentals of the Celtic Tiger economy.
Although the Celtic Tiger may well slow down over the next 12 to 18 months the prospective decline in short-term interest rates is likely to continue to support economic growth and corporate profits. The standard valuation yardsticks of price-earnings ratios and dividend yields are now showing that many Irish stocks are cheap compared with their international peers.
Therefore, neither a deterioration in domestic economic conditions nor an overvalued market seem to be the likely causes of what seems to be the excessive weakness of the Irish market. A more likely explanation probably lies in some technical factors which are currently all acting to depress the market.
Firstly, the bull market of recent years has been driven by overseas investors who bought into the concept of Europe's Celtic Tiger. While there is not much evidence of heavy selling by these investors they have certainly stopped buying. Typically in situations of general market weakness investors tend to stick to their domestic markets.
Secondly, and possibly of greater significance, is that the domestic Irish institutions seem to be trying to diversify their portfolios into Europe prior to the advent of EMU. Although they may not be actively selling the fact that they would seem to have withdrawn from actively buying the market means that there is now no natural buyer of Irish equities.
Until this technical situation is resolved the Irish market will find it hard to make much headway. If international markets improve in coming months Ireland will rise in tandem, but probably at a somewhat more sedate pace.
