Ireland unlikely to escape US bear market

The weak trend in stock prices that has been evident for several months reached a peak in the week ending March 16th.

During that week the S&P 500 and Nasdaq indices declined by 7 per cent and 8 per cent respectively, and even the defensive sector mix of the ISEQ could not prevent it from declining by 4 per cent during the week.

These declines, coming after previous falls, have led many commentators to talk openly about a bear market.

A fall of 20 per cent is typically viewed as being of sufficient magnitude to be characterised as a bear market. The Nasdaq is well and truly in the throes of the worst bear market of its 30-year history.

The cumulative decline in this index is now more than 60 per cent from its peak of 12 months ago. However, until very recently, the decline of the Nasdaq could be explained by the bursting of the unsustainable valuations that pervaded the technology sector.

Even as the share prices of technology and telecom stocks crumbled, the more broadly based indices such as the Dow Jones Industrial Average and S&P 500 were holding their own. The sharp falls of last week brought the cumulative decline in the S&P 500 to over 20 per cent, thus earning the title of a bear market decline.

Possibly the most significant aspect of the stock market weakness has been the breadth of share price declines. Virtually all sectors of stock markets suffered falls and no geographical area was spared.

Yet again all eyes are now focused on the near-term prospects for the US economy and US interest rates. Despite the recent bout of share price weakness, the majority of analysts are still holding to the view that any US recession will be shallow and short-lived.

Indeed some of the recently released economic data support the view that the pace of deterioration in US economic activity has been arrested. Both the housing and labour markets have proved to be very resilient.

Although the Irish stock market will continue to be influenced by these overseas trends, it has in the past diverged significantly from global financial trends both on the upside and downside. Despite the scale of the Irish technology sector, the persistent weakness of the US technology sector so far had only a limited impact on the Irish economy.

However, Intel's recent announcement that it was deferring a major expansion in Leixlip could well serve as a wake-up call. So far the Irish subsidiaries of American multinationals have emerged relatively unscathed from job cuts announced by their respective parent companies. If, however, continuing weak global conditions lead to further rounds of job cuts, it is difficult to see how the Irish subsidiaries of American technology companies can escape.

A further negative that has emerged in the past month is the foot-and-mouth crisis. Even if Ireland succeeds in keeping the disease out, the agricultural sector will still suffer. Furthermore, other sectors, notably tourism, are already seeing sharp declines in business.

It now seems certain that it will be several months before the outbreak will be brought under control in the UK. In this context restrictions to prevent the disease from spreading to Ireland could well remain in force for much of this year.

The booming Irish economy has enabled many Irish-quoted companies to rapidly grow their earnings in recent years. If the economy slows, then it is inevitable that the pace of earnings growth from quoted Irish companies will also slow. Although financial results with respect to the year 2000 have generally pleased investors in Irish shares, greater attention will now begin to be placed on statements from company chairmen regarding the prospects for the forthcoming year.

If company managements begin to sound more cautious, then investment analysts would quickly start paring back their earnings forecasts for Irish quoted companies.