This Week In The Markets

The market's gaze has been firmly focused eastward in recent weeks as investors kept a close eye on the turmoil in Asia but attention turned to home this week as the Minister for Finance, Mr McCreevy delivered his first Budget.

The market was not disappointed with what one trader described as "the first equity-friendly budget in years" and responded by racing to record highs. The overall ISEQ index of shares closed the week more than 200 points or 5.4 per cent higher with most of the gains notched up on Thursday when the index jumped 3.15 per cent. The 4,000 level is now within the market's sight.

The decision to cut corporation tax to 32 per cent from 36 per cent and confirmation that the Government plans to reduce it to 12.5 per cent from 2006 gave the market plenty cause for cheer.

Financial stocks, which pay tax at the standard rate rather than the reduced rate which applies to manufacturing firms, will particularly benefit and the two main banking stocks surged to all-time highs on the news. Analysts say the impact on earnings per share in coming years will be considerable and should guarantee earnings growth in the stocks affected, which also include firms in the service sector.

Meanwhile, the general economic stimulus provided by the budget by way of tax cuts and extra spending should prove especially positive for the financial sector which is among the most exposed to the domestic economy.

Mr McCreevy's decision to halve capital gains tax from 40 per cent to 20 per cent was also warmly welcomed in the market as the move is expected to release hundreds of millions of Irish pounds for reinvestment in Irish companies and boost private client business.

One of the less welcome measures from an equity market point of view was the decision to abolish the tax credit attaching to dividends. The Minister has also moved to make scrip dividends less attractive by taxing them as income rather than treating them as an investment.

The move will erode the net income investors receive from their dividends and companies may have to look at using the profit boost resulting from lower corporation tax to increase the gross dividend to compensate investors. The changes may also make share buy-backs more popular as a way of returning value to shareholders.

But on balance the budgetary changes were positive for the equity market and have resulted in a re-rating, analysts say. The Irish market, which is trading at around 17 times 1997 earnings, remains attractive given its strong earnings outlook while it also looks good relative to overseas markets, although it is expensive on a historical basis.

"Valuations are not especially stretched by reference to valuations in other markets especially as the trend is for Irish earnings estimates to be upgraded," one equity analyst said.

Brokers believe there is more good news to come on the domestic front with Irish interest rates set to fall substantially next year as entry to the single currency approaches, giving the economy a further fillip.

And provided the pound's central parity in the ERM is not revalued upward, the expected drop in the pound next year will also help the profit translation of those companies with operations in continental Europe.