Delayed C&C float reflects conditions

Investor: The postponement of the C&C initial public offering (IPO) occurred in the context of a very weak market environment for new share issues.

The number of IPOs in Europe and America over the first half of 2002 was much lower than in previous years.

To a large extent this fall-off in IPO activity reflects the bursting of the bubble in technology and telecom stocks. However, in recent weeks the equity market environment deteriorated to such an extent that several share issues in stable industry sectors have been shelved at the last minute. Therefore, the postponement of the C&C flotation entirely reflects overall market conditions and the issue is likely to be resurrected once market conditions improve.

Of course, the million-dollar question is when this is likely to happen. In the short-term, financial markets seem set to remain volatile. There is still considerable uncertainty regarding the near- term economic outlook in all the world's major economies.

However, it is the steady stream of negative news-flow concerning corporate accounting policies, particularly in the US, that is proving to be the single main cause of share price weakness. It seems highly likely that issues surrounding the veracity of company financial statements will remain at the forefront of investor concerns for a considerable period of time.

However, the uncovering of accounting scandals will eventually have a positive outcome in that regulators and professional accounting bodies will seek to improve standards across the board. This will take time but it should ultimately lead to greater investor confidence in published financial statements.

In the meantime, investors' attention is likely to shift back towards overall economic prospects and whether business prospects are likely to improve over the remainder of the year.

Despite the gloom that pervades global stock markets, the prognosis for the global economy is, in fact, reasonably good. The US economy grew rapidly during the first quarter of the year but has slowed considerably during the second quarter. Growth during the first quarter was boosted by the rebuilding of inventories that had hit very low levels.

Inventories are now back to "normal" levels and it is this absence of inventory building that explains the slowdown in growth during the second quarter. Nevertheless, the majority of economic forecasters now expect US growth to run at a creditable rate of 3 per cent over the second half of the year.

Support for this moderately optimistic scenario comes from the fact that US monetary and fiscal policies are very stimulative. US interest rates are at 40-year lows of less than 2 per cent and the Federal Reserve is unlikely to raise rates until it is sure that the economy is doing well. The Bush government is increasing public spending across a broad spectrum of areas and this is acting to buoy up economic activity.

Finally, the recent weakness in the dollar exchange rate should improve the relative competitiveness of the US economy. This should eventually lead to a reduction in the very large trade deficit that the US has been running with the rest of the world in recent years.

The prospects for the European economy are also reasonably bright. The recent appreciation of the euro has eased the pressure for interest rate hikes, as it will ease inflationary pressures. Moderate economic growth seems to be the most likely environment in Europe over the medium term.

Low interest rates and inflation combined with moderate economic growth should, in fact, provide a very favourable backdrop for stock markets. The fact that global equity markets have remained weak would seem to be due to a view that company share valuations are still too high. However, after the recent falls in share prices much better value is now emerging.

The accompanying table provides summary information for the Irish equity market. The price earnings ratio of the overall market is 11.7 whilst the dividend yield is 2.5 per cent. The financial sector is now rated on a slightly lower P/E ratio of 11.2 compared with a P/E ratio of 12.3 for the ISEQ-General Index, which covers industrial stocks.

These figures imply that, on average, the share prices of Irish- quoted industrial companies trade at a price that is 12 times the relevant earnings per share. Compared with the past 20 years this is an undemanding rating and as long as Irish companies can grow their earnings it suggests that the current level of prices is attractive.

Therefore, in the absence of external shocks share prices should have scope to rise over the second half of the year.