Attention must be paid to volatility in markets

Bears argued for some time that shares were overvalued in relation to future profits

Sometimes the ups and downs of the markets are best ignored, or at least not taken too seriously. However, yesterday’s sharp fall in equities, and particularly the Irish market, should be noted, for at least two reasons.

The first is the seeming inability of investors to get beyond their worries about global economic growth. Bears have been arguing for some time that shares were overvalued in relation to future profits, but for much of last year this argument did not hold sway. However, since the turn of the year it has all been different.

Yesterday banks were particularly in the firing line. Bank profits depend on economic growth, of course, but investors are also now worried about the impact of the era of super low interest rates on bank profits – particularly given the hangover from the financial crisis. Banks typically find it difficult to get decent basic profit margins when interest rates are very low – though our banks seem to make a decent enough effort.

Weak results from some big European banks have added to the mood of nervousness and led to yesterday’s big sell-off, with Bank of Ireland shares down almost 10 per cent. European banking stocks have now lost almost a quarter of their value this year, representing a really serious movement of investor cash.

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Irish politicians might be wise to cast at least a sideways glance at all this fear about global growth. Our economy has considerable momentum at the moment and all the forward-looking indicators are pointing in the right direction. But if world growth does slow it is bound to have some impact here.

There is another reason government hopefuls might pay attention, too. The planned sell-off of AIB is counted into most of the election plans in one way or another. It may still all be fine.

However, you would certainly not be wanting to flog a 25 per cent share in a bank to investors just at the moment, and the likely valuation of any AIB share is now a lot lower than it would have been a few months ago.

The market volatility may well pass. But it could also be a signal of slower growth ahead. Time to be cautious, not a trait familiar on the doorsteps during an Irish general election.