Indicators positive for share revival to continue

Official statistics for first quarter GDP growth in the Republic confirm that the economy began the new millennium as it finished the old one. Irish GDP grew by 11.7 per cent in Q1, 2000 to record the third successive quarter of double- digit growth, following rises of 10.5 per cent and 12.5 per cent in Q3 and Q4 of 1999.

Furthermore, the data indicate that, if anything, the economy has probably gained momentum during 2000, with final sales growing at an annual rate of 13 per cent. Export growth remains strong due to continuing strong growth in the pharmaceutical and computer sectors. However, the traditional sectors of the economy are also experiencing healthy foreign demand, presumably reflecting competitiveness gains due to the weak euro.

Clearly the main danger to the economy remains the risk that overheating may eventually lead to recession.

During the earlier part of the year such fears seemed to be exerting downward pressure on the Irish stock market, as overseas investors steered clear of Irish shares. More recently there seems to have been a perceptible shift in sentiment with investors taking a more sanguine view of the long-term prospects for the Irish economy.

It is still generally recognised that the economy will ultimately have to slow down to a rate of growth in the 5 per cent per annum range. However, there seems to be a greater degree of confidence that this can be achieved over a period of two or three years in a managed fashion.

The Irish inflation rate of over 6 per cent remains a concern and will almost certainly feed through to higher wages and salaries. Further tax cuts in the coming Budget are a certainty and will add more fuel to the consumption boom.

However, the economy is now so competitive that it can probably live with higher wages and salaries without suffering an undue loss of competitiveness.

Regarding inflationary pressures there are tentative signs that the rate of increase in the consumer price index is reaching a plateau. Furthermore there are signs that the steam is finally going out of the housing market in response to increased supply.

Certainly the Irish equity market seems finally to have moved clear of the doldrums that were a feature up to recently. Another good month for the index in October leaves the ISEQ as one of the best-performing markets so far this year in local currency terms.

In the early part of the year the strong Elan share price was the prime factor in this out-performance. More latterly, the advance in Irish share prices has become more broadly based. Financial stocks have been very strong in recent months and this is reflected in a rise in the ISEQ financial index of over 11 per cent in the year-to-date.

The mooted twin bids from Vodafone and E-Island for Eircom's mobile and fixed line businesses respectively have put a floor under the Eircom share price in excess of €3.

The story across the mid and small capitalisation stocks has been similar. In some cases bid and management buy-out activity have rejuvenated once moribund share prices.

The most recent activity has been among the property companies, where both Dunloe and Green Property seem likely ultimately to be taken over. In other cases, investors have responded positively to good financial results and healthy future prospects. Examples include the food company IAWS and Anglo-Irish Bank.

Overall, it does seem that the recent rise in the ISEQ index is firmly based on growing profits and a sustained improvement in investor sentiment towards Irish shares. Therefore, in the absence of negative international developments, the signs are that the Irish stock market can continue to gain ground from current levels.