Stock market in for another bumpy ride

A rocky start to the new year on international markets amid fears of rising interest rates is just one of the issues facing the Irish stock market.

After several years of strong performance in the mid-1990s, Irish shares lagged their international counterparts last year as the introduction of the euro prompted Irish institutional investors, the main drivers of the market, to turn their attention to a wider stage.

Although the Republic's economy remained the strongest in the European Union and companies continued to turn in record levels of profits, Irish fund managers busied themselves switching into European equities.

Meanwhile, foreign investors, themselves preoccupied with adapting to the post-euro world, showed a marked reluctance to take up the slack in the Irish market which ended the year broadly unchanged.

"The Irish market had a difficult last quarter to 1999 and I would expect the same over the next few months," says one stockbroker. "One of the main issues for the Irish market is its weak technical position because of restructuring by Irish fund managers. It's a well-worn theme, but it's still an issue and is likely to act as a dampener on any move ahead."

One market source notes that the Irish equity weightings of most Irish managed funds have already declined from 30 per cent plus to 20 per cent plus. And most market observers believe this process is not over.

Irish funds are expected to continue to reduce their holdings of Irish shares until they account for less than a quarter, or even a fifth, of their overall investment portfolio.

However, most observers believe that the Irish market continues to offer value relative to overseas markets and that this will eventually be recognised.

"Everything has its price and something will trigger the realisation that the Irish market is attractive. A catalyst will emerge," says Mr Dara Fitzgerald, portfolio manager with Hibernian Investment Managers.

"There is nothing wrong with the stock market or the economy and companies are making good profits. It's just that people have taken their eyes off the ball."

Hibernian is expecting the ISEQ index to finish the current year at between 5,900 and 6,000 compared to its current level just below 5,000.

Stockbrokers believe that the best performing shares again this year are likely to be found among the leading industrial stocks such as CRH, Smurfit, Waterford Wedgwood and Independent Newspapers, all of which should benefit from recovering economies in Europe and elsewhere.

By contrast, financial companies are likely to find it difficult to make progress as competition in the sector intensifies and margins tighten further as interest rates rise.

But even tougher times are in store for the second-line sector which is expected to continue to face an uphill battle in attracting investor interest.

This means more of the second tier of firms are likely to go the way of Clondalkin and Hibernian, subject to either management buyouts or takeovers.

According to a report issued by ABN-Amro late last year, the smaller stocks most likely to attract some form of corporate activity include house-building group Abbey; industrial firms like Athlone Extrusions and Barlo; property group Dunloe Ewart; Heiton; IWP; Marlborough and Ryan Hotels.

The food sector, where companies are finding it difficult to acquire or diversify because of their low ratings, is another area ripe for consolidation, corporate financiers believe.

And after the speculation that swirled about AIB early last year, analysts will be keeping a close eye on the big firms lest any overseas predators emerge with takeover offers.

Meanwhile, the Eircom stake being sold by Telia and KPN must yet be placed while the upshot of the Natwest bidding war, with its implications for Ulster Bank, is likely to be a critical factor for the banking industry.

Finally, Aer Lingus looks likely to be the biggest company to come to the market this year. While there should be little slowdown in the number of hi-tech companies coming on stream, most are expected to continue to bypass the Dublin stock market, tempted by the higher valuations on offer from the Nasdaq and emerging European markets like the Neuer Markt in Germany.