Strong Iseq masks huge volatility

 

THIS OUTGOING year had it all – dead-cat bounces and bull rallies, crashes and cyclical recovery – but overall, global markets staged an impressive comeback this year, not least the battered Iseq index of Irish shares, writes CAROLINE MADDEN

In fact the Iseq marginally outperformed the main international markets, gaining 28.9 per cent over the year. This compares to a rally of 23 per cent delivered by the SP 500, 20.6 per cent by the FTSE 100 and about 24 per cent by the main European index, the FTSE Eurofirst 300.

However, the strong annual performance of the Dublin market masks the extraordinary developments and huge volatility that marked the year. The year started ominously with the demise of Anglo Irish Bank. Shares in the scandal-hit bank had collapsed by almost 99 per cent from a high of more than €17 in 2007 to 22 cents, and on January 15th it was nationalised.

Globally, markets slumped in the first quarter due to concerns over banking systems and whether the liquidity being pumped into economies such as the US and the UK would have the desired effect.

By March the Iseq had shed about 20 per cent, hitting a low of 1,916 on March 9th. It rallied strongly from this point and was 54 per cent higher by the end of the year, even though it lost a lot of ground after peaking at 3,469 in September. By Christmas week it was trading above 3,000, still about 70 per cent below its all-time high, but nonetheless this represented a decent recovery.

So what sparked the relief rally on the Dublin market? “In January, everybody thought the world was going to end and the banks were going to be nationalised,” says Barry Dixon of Davy Stockbrokers, then CRH came out and raised more than €1 billion through a rights issue in March.

Add to that the unveiling of the National Asset Management Agency (Nama) plan and, perhaps most importantly, the cyclical recovery as global fears abated, and the scene was set for a reversal of the Iseq’s fortunes as Dublin rode on the coat-tails of rising international markets.

International investors began to buy back into the Irish story in the second and third quarter, and bank stocks weren’t immune to this positive sentiment. On March 5th, AIB and Bank of Ireland were languishing at their nadir, having fallen to 27 cents and 12.5 cents respectively. However, investors became more confident that they were not going to be nationalised, and their share prices began to reflect this, according to Aisling Vaughan of Merrion Capital.

The two stocks then rallied strongly and peaked in September but had a “torrid time” in the back end of the year, she says. By the end of 2009, AIB was trading above €1.10 while Bank of Ireland was at about €1.40.

Indeed the index as a whole struggled in the fourth quarter, due to a combination of factors such as uncertainty over the extent of the haircut on assets being transferred to Nama and the capital requirements of the banks.

Outside the financials, other stocks that really influenced the performance of the Iseq included the two largest components of the index – cement giant CRH and budget airline Ryanair. CRH traded between about €17 and €20 over the year and, after enjoying a bounce in November, ended 2009 close to the higher end of this bracket.

Ryanair underperformed for much of the year as the airline industry struggled with overcapacity issues, higher oil prices and falling fares. Since the deal with Boeing on new aircraft orders fell through in mid-December, the stock has bounced and finished up about 14 per cent over the year.

Packaging group Smurfit Kappa emerged as the star performer of the Iseq’s larger-cap stocks, adding almost 255 per cent over the year.

Somewhat counter-intuitively, defensive stocks such as food and beverage companies advanced steadily despite the cyclical recovery in the global economy. Kerry Group ended the year 65 per cent higher, C&C was up over 100 per cent and Glanbia was up 36 per cent.

Beleaguered media group Independent News & Media was down about 50 per cent over the year, but has finally managed to achieve a balance sheet resolution, albeit at a significant cost.

Meanwhile, many Asian and emerging markets delivered stellar performances over the past 12 months. Hong Kong’s Hang Seng index gained almost 47 per cent, while markets in Taiwan and Indonesia rose by a spectacular 71 per cent and 82 per cent respectively. Elsewhere, Brazil soared by 75 per cent.

It wasn’t all good news. Not surprisingly, the loser of the year turned out to be Dubai, with the Dubai Financial Market General (DFMG) index plummeting from a high in October of 2,373 all the way down to 1,533 on December 9th when the Gulf state’s debt crisis reared its head.

As for what 2010 holds for global stock markets, analysts say that we’re not out of the woods yet, but at least the gloomy talk that abounded a year ago of a multi-year depression has dried up, which can only be a good thing for investor confidence.