Lost consensus on ISEQ's future

FOR the best part of three months since the bull market in Irish shares became a virtual stampede, there has been a consensus among Irish analysts that more gains are on the way.

Now that happy consensus has been broken with Bloxham analyst, Mr John Conway forecasting a sharp fall in the market between now and the end of the year, and a fall in the ISEQ index to possibly as low as 2,400 from its current level of 2,680-2,700.

With that forecast, Mr Conway is very much in the bear pit, while the bull pen - those analysts who see the market continuing to surge ahead - is occupied firmly by Riada's Dr John Hogan and Davy's Mr Robbie Kelleher. Dr Hogan believes that the ISEQ will reach 2,800 by the end of the year while Mr Kelleher believes that the bull market will run well into next year with the ISEQ reaching 3,000 by mid-1997.

Markets thrive on divergent views, but in Ireland's case the forecasts vary so widely that The Irish Times felt it worthwhile to ask the various analysts to defend their positions.

Mr Conway concedes that his ISEQ end-year forecast of 2 400 may be over-negative, given the rebound in the market in the past couple of weeks, but he firmly believes the market will end the year down on its current level. "The level of risk has not been factored into the market, and I don't think a 10 per cent correction is being over-negative" says Mr Conway.

He cites various factors behind his "outlook negative" description of the market, but the most significant factor is a view that American treasury bond prices will fall, pushing yields (long-term interest rates) above 7 per cent next year. He believes this will make equity yields less attractive and cause weakness in international equity markets.

The Bloxham analyst also believes a weaker American economy will bit earnings and dividend growth, and will affect the long-term valuations of American equities. On the domestic side, Mr Conway also has concerns about domestic earnings growth and forecasts an earnings multiple for the market of no more than 11 for next year. "This lack of earnings growth is one of the main features that makes us believe that the Irish market is close to peak for the foreseeable future," he states.

But Riada's Dr Hogan disagrees fundamentally with the Bloxham analysis and believes the market is set for further growth, with the continuing strength of bond markets boosting the yield-sensitive financial shares.

Dr Hogan believes the financials may go to a premium against the British banking sector. Other reasons for continued growth, he believes are the continued speculation of a Credit Lyonnais sale of its Woodchester stake and bid speculation surrounding Anglo Irish Bank. Bids for Woodchester and Anglo Irish would probably release £300 million for Irish shareholders, and would add to the strong technical situation where demand for Irish shares is at an unprecedented level but the supply of stock is virtually nonexistent.

A wall of cash, boosted by strong institutional cash flow and overseas demand, is already driving the Irish market; another £300 million would only make that wall of money bigger, he argues.

"The circumstances for the financial shares are unusually favourable," says Dr Hogan, citing low had debts and the strength of domestic lending. He believes industrial shares will continue to be valued in line with international markets, and that, as long as these markets remain firm, there us little danger to the valuations of Irish industrial shares.

Mr Kelleher of Davy's agrees that the current bull market is being largely driven by the financial stocks.

"Bank of Ireland on a prospective price/earnings ratio certainly looks good value, AIB is trading at a level where it's giving the same yield as bonds while Irish Life is offering a 6.5 per cent yield. "Those figures speak for themselves," says the Davy analyst.

Davy's forecast for the ISEQ at the end of the year is 2,709, but Mr Kelleher believes that, at this stage, it is more realistic to look ahead to next year. "We have already stated that we believe the ISEQ will reach 3,000 by the middle of next year. We've no reason to change that forecast."

So there it is. One analyst believes that the Irish market could fall 10 per cent by the end of the year, another believes that it could rise by more than 10 per cent by the middle of next year.

What is pretty certain is that the focus of the market will remain fixed on financial shares and that bond yields will be a major factor on the direction of financial shares.

Bond prices may have come off their best levels since the so-called convergence trading fizzled out - at least for the moment. But there is still no sign that bond markets are set to collapse.

Normally, it is those involved in bond markets who monitor even the most obscure economic statistic from the US. With the direction of the Irish market likely to be driven by events on Wall Street for the foreseeable future, equity-watchers will also be keeping a close eye on Wall Street and the state of the American economy.