INVESTOR: Since its inception, the European Central Bank (ECB) has developed a reputation for surprising the financial markets. Its latest interest rate cut was well signalled in advance but most commentators expected the ECB to cut interest rates by 50 basis points.
The cut of 25 basis points was viewed as something of a surprise although the accompanying statement made it clear that the Bank was prepared to lower rates further if warranted by economic and/or political circumstances.
It does seem that the ECB decided to hold something in reserve depending on how events unfold in the Middle East.
However, even if there is a benign outcome in the Middle East, economic conditions across the euro zone point towards further interest rate cuts. Euro-zone official interest rates of 2 per cent and possibly lower are very likely as the year progresses, particularly if the euro exchange rate remains firm. Across the Atlantic, a minority of analysts have begun to discuss the possibility that the US Federal Funds rate may be cut even lower than the current level of 1.25 per cent.
As well as the looming war with Iraq, some recent economic data concerning consumer confidence and employment has pointed squarely towards weakening economic conditions. In response throughout recent weeks, equity markets have been grinding relentlessly lower.
There has been no panic selling but there has been an almost complete absence of determined buyers. In the face of all this global gloom and uncertainty, the Irish equity market has been quietly outperforming international markets over recent weeks and months.
The Irish equity market has not been immune to the global bear market, but so far this year it has declined marginally compared with substantial falls in the UK, US and Europe.
Good corporate results from quoted Irish companies have been the major factor in explaining this outperformance. Against the background of major dividend cuts from insurance companies in the UK and Europe, Irish Life & Permanent announced a strong set of results for 2002 and the maintenance of its policy to consistently grow its dividend. The company has been growing its dividend at around 10 per cent per annum and, unlike many of its overseas counterparts, the company has the financial strength to maintain this progressive dividend policy.
The Irish market's largest industrial company, CRH, also reported a very solid set of financial results for 2002. In a year when many of its peers suffered declines in revenues and profits, CRH succeeded in achieving 4 per cent growth in its earnings per share and increased the dividend payout to shareholders by 10 per cent. The company is generating substantial free cashflows that will enable it to continue with its active acquisition policy.
The company expects a tough trading environment throughout 2003 although it expects to continue to acquire new businesses.
Several firms in the mid-capitalisation sector have also published results in recent weeks including Jurys Doyle and Glanbia. Most of these firms have performed somewhat better than prior market expectations. Glanbia delivered a 10 per cent rise in its earnings per share and raised its dividend by 5 per cent. The company also reduced its debt levels due to lower interest charges and tighter control of working capital requirements.
Jurys also managed to increase its dividend by an underlying 5 per cent. Despite the big decline in North American tourists, Jurys Irish hotels performed somewhat better than expectations. The company continues to expand its budget Jurys Inn hotels in Ireland and the UK and the long-term growth prospects from this sector appear to be very good.
Although the financial results from Irish-quoted PLCs has been uniformly good in recent months, the share price reaction has been variable. This clearly reflects justifiable worries regarding the short-term economic outlook.
However, if Irish-quoted PLCs can continue to produce solid financial results, the Irish market will continue to do better than international markets.
