Brokers see more life in Iseq bull run

The performance of the Irish Stock Exchange last year exceeded that of most of its European counterparts, but can it do it again, wonders Claire Shoesmith.

The outstanding performance of the Irish market last year begs one simple question: can it do it again?

Not only did the Iseq have a record year, gaining 28 per cent and breaking through that all-important 9,000 level during 2006, but its performance also exceeded that of its European counterparts.

While this bodes well for the Irish story, it also has the ptoential to set the domestic market up for a fall. December market chatter was rife with dealers questioning whether the gains - the Iseq added almost 10 per cent in December alone - could continue.

Posing the same question now, four weeks into the new year, and you could be forgiven for surmising that the answer may be in the negative. (The Iseq is currently trading about 2 per cent down over the year to date.)

Still, as anyone involved in the stock market knows, trading shares is not a short-term activity and, given the lack of stock-specific news in the first four weeks of the year (and of course the significant gains seen in December), dealers and analysts were hardly surprised the Iseq failed to continue its upwards march.

"We are playing a waiting game at the moment," says one Dublin trader, adding that when the earnings season kicks off later this month, things should start to pick up.

And that, it seems, is exactly what Ireland's brokerages expect the market to do.

"Global equity markets in 2007 look set to continue the strong performance experienced in 2006," says Stuart Draper, head of equities at Dolmen Stockbrokers. "While there may be concerns about the rate of global growth and the impact of the weak dollar, these will not be sufficient to derail the performance of markets."

John Sheehan, head of research at NCB Stockbrokers, agrees, saying he expects to see the Irish market outperforming the other major European indices yet again this year.

During 2006, London's FTSE added almost 11 per cent, while Germany's DAX and France's CAC 40 were up 22 and 17.5 per cent respectively.

In its strategy review for 2007, Dolmen predicts the Iseq will rise 10.7 per cent this year, to close at 10,300. This compares with growth forecasts of 9.7 per cent for the FTSE and 10.8 per cent for the Dax.

Davy Stockbrokers meanwhile estimates the Iseq will end the year at 11,000, helped by strong earnings from the index's main components. This is an increase of 17 per cent on where it ended 2006. "We will certainly have stronger earnings growth than Europe this year," says Rossa White, head of research at Davy. (The brokerage is forecasting earnings growth for the Irish market of about 14 per cent.)

"On this basis, we should outperform the other markets."

As for the declines seen so far this year setting the tone for the rest of 2007, commentators are dismissive.

"Investors did well in equity markets once again last year, so an element of profit-taking is inevitable," says Dolmen's Draper, "but that doesn't signal the end of the current bull market."

Davy agrees. In its equity review for 2007, the brokerage says that despite the very impressive gains seen in recent years - 2006 was the Iseq's fourth consecutive year of 20 per cent-plus growth - the overall valuation of the Irish market remains compelling.

Looking at things from a more technical point of view, Davy believes the current arithmetic on the Irish market bears an uncanny similarity to the position that existed this time last year.

At that time, the forward price/earnings (p/e) ratio was 11.5 times and Davy was forecasting earnings per share (EPS) growth of 13 per cent for 2006. In the end 2006 saw some significant earnings upgrades and the actual EPS growth was closer to 23 per cent.

Currently the aggregate of analyst forecasts again implies EPS growth of 13.3 per cent for 2007 but, with the strong upwards momentum in earnings revisions, Davy estimates that the market could easily appreciate by between 15 and 20 per cent from current levels without any change in the overall valuation.

So why do things look so rosy for the Iseq and its members? According to analysts, the bottom line is the healthy state of the Irish economy. "The main question is what's going to happen in the Irish economy," says Joe Gill, head of research at Goodbody, adding that he expects 2007 to be a strong year for economic growth.

The brokerage is forecasting GDP growth in Ireland of 5.6 per cent this year, compared with 2.2 per cent in the rest of the euro zone.

According to Gill, there are enough companies in the Iseq that have significant exposure to the Irish economy - in particular the banks.

As well as appearing in the majority of Irish brokerage's stock picks for 2007, together they account for more than 45 per cent of the Iseq's total share capital and as a result should perform well.

Strong earnings performance drives share prices and if the index's main components perform well in the long run, so will the index, he says.

The key thing for this year, according to Gill, is to focus on those companies with significant Irish exposure. Draper at Dolmen agrees.

"The implications for investors are that companies that derive a significant level of their profits from the US are most likely to underperform," he says. "The bottom line for investors therefore is to be selective in the stocks with a dollar exposure."

As a result Dolmen favours European and British equities over their US counterparts.

So, in the same way you shouldn't judge a book by its cover, it seems that you shouldn't judge a market by its performance in the first month of the year.

After all, 2006 wasn't without its wobbles - the Iseq fell back in the middle of the year amid a global sell-off in equities - and look where it ended up.