Tough going

PLC PERFORMANCE:WHEN MARKETS across the world tumbled during 2007 following a crisis in the US housing market and fears of a recession, Ireland was one of the worst performers, decreasing in value by 26 per cent. So far this year, the market is showing no signs of turning and is down by 39 per cent in the 12 months to May 23rd.

Globally, financial stocks were one of the worst hit sectors of the past year, as the crisis in the US sub-prime market, which began last summer, took no prisoners on both sides of the Atlantic, leading to the near-collapse of several major banks and the collapse in valuations of many others.

In Ireland, the major banks escaped direct exposure to the US sub-prime market, but the global credit crunch, which followed in the wake of the crisis, meant that funding in the wholesale markets became increasingly difficult and expensive. This was compounded by the on-going economic slowdown in Ireland and the faltering construction industry, meaning that valuations of some financial stocks hit near 20-year lows.

Over the 12 months to May 23rd, Anglo Irish Bank was the worst financial performer, with more than 50 per cent wiped off its share price. The bank was hit hard by hedge funds shorting its stock during the year.

As oil prices soared and consumer confidence fell, airlines faced very strong headwinds over the past year, with both Aer Lingus and Ryanair suffering share price drops of around 50 per cent. Going forward, how they manage the increase in oil prices will be key, as price increases show no signs of slowing down, following the new high of $135 a barrel. As the global economy continues to slow, passing on higher fuel charges to higher fares may no longer be feasible. Michael O'Leary, chief executive of Ryanair, believes that if oil prices maintain their upward trajectory half of the world's airlines will be bankrupt by Christmas.

One of the worst performers on the Irish market during the year was Waterford Wedgewood, the 69th largest company in Ireland. Its share price fell by over 80 per cent over the 12 months to May 23rd , to drop to below 1c for the first time, despite emergency fundraising injections, such as a €50 million investment from a private equity fund run by US investment bank Lazard late last year and capital injections from Sir Anthony O'Reilly, group chairman, and Peter Goulandris, deputy chairman. The firm now has a market capitalisation of just €43 million, and is in urgent need of financing, following the Government's rejection of the group's request for a guarantee for a €39 million loan. The firm argued that it needed the money to secure the remaining 550 jobs at its Waterford plant, following its decision last year to cut 490 jobs.

Companies in the building materials and construction sector also faced a difficult year. CRH, the largest company in Ireland, earns a little less than 50 per cent of its operating profits in the US and had to deal with the double difficulty of a slowing US economy combined with a weaker dollar. This saw its share price fall by over 36 per cent during the past year.

Smurfit Kappa Group also had to deal with a weakening US dollar and its share price was slashed by 67 per cent over the past year. Having just announced a profit warning it looks like the coming year will be just as difficult for the firm.

Independent News & Media, the 30th largest company in Ireland, saw its share price fall by over 40 per cent over the past 12 months, following the collapse of expectations that the group was primed for a leveraged buy-out as a result of the credit crisis.

Although food and beverages has been one of the better performing sectors over the past year, C&C Group has had a desperate time, as poor weather in the summer saw sales of its Magners product fall off in the UK.

On the upside, Glanbia was one of the few stocks on the Irish Stock Exchange which recorded a positive 12 months, and its share price increased by 27.7 per cent to €4.85. The firm benefited from a strong growth in its food ingredients and nutrition business.

Pharmaceuticals firms Elan also had a good year, with its stock price up 15 per cent on May 2007. Strong sales of multiple sclerosis drug Tysabri mean that the firm expects to show a profit by 2010.

Looking ahead, Emer Lang, a financials analyst with Davy Stockbrokers, says that until credit markets normalise and uncertainty in the Irish housing market ends, the outlook for Irish financial stocks remains volatile, although she concedes that maybe the worst of the credit crisis is over.

"To see any sustained rally, investors will need to see more certainty. But, when share prices do bounce, they bounce quite quickly and markets can look ahead, so we could get quite a good rally quite quickly," she says.

Despite the volatility, analysts maintain that now is a good time for patient investors to look to the Irish market, with current price levels representing good value over the long-term. Bank of Ireland is currently Davy's top pick amongst financial stocks.

However, while some long-term investors might start to come back to the Irish market, the international growth investors which flocked to the Irish Stock Exchange during the Celtic Tiger boom, have now, in large part, rejected the Irish story. Bernard McAlinden, investment strategist with NCB Stockbrokers, says that the only international investors looking at the Irish market now are value investors, who are looking for a high dividend yield and a low price/earnings ratio. He says it will take some time before the growth investors come back.