Overseas developments

CROESUS/AN INSIDER'S VIEW:Investors in the Irish market must be hoping for a less stressful second quarter.

IN TESTIMONY to the US Congress this week, Ben Bernanke, chairman of the Fed, admitted that the US economy "could even contract slightly" in the first half of this year.

His comments led to a pull-back in US equity indices that had enjoyed a rally in the early days of April. The catalyst for this recent rally seemed to be news that Lehman Bros in the US and UBS in Europe were raising substantial amounts of new capital. UBS also announced further big write-offs related to the US subprime market.

Investors ignored the negative implications of the fresh write-offs in the hope that these latest bad debt charges will be the final round of large-scale write-offs.

Some are taking the view that the worst may be over in terms of share price declines, although the majority view is that any rally is likely to be shortlived.

After such widespread sharp falls in stock markets in Q1, some rally in share prices was overdue. In the US, the S&P500 index fell by 9.9 per cent and the technology heavy Nasdaq fell by an even larger 14.1 per cent.

For euro-based investors, the fall in their US investments would have been even greater given the sharp depreciation in the dollar.

The FTSE 100 index declined by 11.7 per cent during the quarter and again, Irish investors in UK stocks would have been hit much harder due to the weakness in sterling. European indices underperformed, with the German Dax falling by 19 per cent and France's Cac 40 down by 16.2 per cent.

Considering the big falls endured by Irish share prices in 2007, it is not too surprising to find that the Irish market did a little better than overseas markets in Q1. The Iseq overall index fell by 10.9 per cent in the quarter compared with a decline of 12.4 per cent in the MSCI world index and a fall of 16.2 per cent in the FTSE Eurofirst 300 index.

The magnitude of the Irish market's relative outperformance will be cold comfort to investors given that the 12-month decline in the market is now approximately one third. While financial stocks have tended to be the focus of attention during this bear market, analysis of the performance of the Iseq financials index compared with the Iseq general index shows that industrial stocks have also endured large declines during Q1.

Financials did a little worse during the quarter with the index down by 11.8 per cent compared with a decline of 10.3 per cent for industrials. However, over the past 12 months the financials index is down by 41 per cent compared with a much smaller decline in the industrials of 27 per cent.

After such a torrid first quarter, most investors must be hoping for a less stressful quarter two. The odds of a bear market rally occurring over the next few months are probably quite good, if for no better reason than that markets have by now become almost immune to bad news.

Signs that the share prices of many international financial stocks are holding on to some of their recent recovery is good news for the Irish market and may lead private investors and some institutions to purchase the Irish banks for their high dividend yields. Given that developments in the Irish economy are unlikely to produce any positive near-term news, any rally in the Irish market remains heavily dependent on overseas developments.