Fund manager tips Irish market to outperform

Despite delivering better returns than most of its global peers over the last four years, the Irish stock market still has the potential to outperform, a leading Irish fund manager has said.

Mr Eugene Kiernan, head of asset allocation at Irish Life Investment Managers (ILIM), notes that over the last 15 months the Irish stock market has risen by 41 per cent, while it is up nearly 11 per cent to date this year.

But he feels it has further to go, particularly as the banks, which make up 36 per cent of the ISEQ, still stand at a slight valuation discount to their global peers in terms of price to earnings and dividend yield.

"Business continues to go well and profits will increase both this year and next, suggesting that we can see higher share prices," Mr Kiernan says in a mid-year review of the stock market.

He also notes that the yield attraction of the Irish equity market has become increasingly pronounced over the past few years. He believes that yield may well be a highly desirable component of investor returns in the years ahead and that Ireland's yield attractiveness will draw in investors.

Overall, Mr Kiernan believes the continued growth in corporate profits and a relatively benign global economic outlook make equities the asset of choice for investors. However, he admits stock markets face a number of stumbling blocks in the months ahead which could cause "a summer swoon in share prices".

The outlook for oil prices remains uncertain but ILIM feels that as supply creeps up and the global growth rate of the first half of the year slows, the oil price should drift back. However, it still does not see oil prices falling back below $30.

The increased role of speculative players, who have borrowed in an extremely low interest rate environment, has been behind much of the volatility in financial and commodity markets in recent weeks and remains a threat to markets, the report also says.

"As this interest rate environment fades, the higher carry costs for a lot of these players sees them abandon many of these trades and prices are pushed below what fundamental values would suggest," Mr Kiernan says.

China, and the threat of a hard landing, will keep investors on their toes while the outcome of the US elections will also be an issue. But provided none of these issues damages markets over the course of the summer, ILIM believes share prices will make further progress.