This Week In The Markets

It was a week when profit-taking continued to hit the Irish market, with financial stocks in particular continuing to feel the brunt of the shift in sentiment towards the market. Up to a few weeks ago, the Irish market was one of the best-performing in Europe; since then a combination of factors has seen the market give up a substantial portion of its gains.

Is this recent weakness the result of the traditional "sell in May and go away" maxim, or is there anything fundamental to justify a 6 per cent fall in the value of the market since the beginning of May? Certainly, the end of the company reporting season meant that there has been a shortage of corporate news to drive the market, but that is recurs annually and should not really have a huge impact.

Davy's Mr Robbie Kelleher believes a number of factors are behind the recent weakness, not just good old-fashioned profit-taking by investors after a good run. The fear of overheating in the Irish economy and wage inflation well ahead of Partnership 2000 levels are other factors he cites. Another issue that has hit the major financial shares, in particular, has been the fall-out in the British banking sector, which has fallen by over 6 per cent since the beginning of May. The British banks have been hit by fears over the direction of sterling and a resulting shift to lower-rated industrial stocks that had underperformed during 1997.

But Davy, and indeed most of the Irish brokers, remain bullish about the prospects for the Irish market in the next year and a half - mainly on the basis that the Irish market offers greater earnings momentum than other markets. Indeed, such is Davy's confidence that Mr Kelleher believes that, by the end of 1999, the market should be well over 40 per cent above its end-1997 levels.

That sort of growth implies the market would be trading at around 15 times 1999 earnings when most European markets are trading on multiples of over 20 times earnings. With interest rates remaining low, and destined to go lower by the end of the year, valuations in excess of 20 times earnings can be sustained as savings flows find higher return investments. According to Mr Kelleher, that implies that the bulk of the 40 per cent-plus rise in earnings will be available to fuel share price appreciation.

What Davy may change is the sectors and stocks it believes should benefit most from the anticipated growth over the next year and a half. Bank of Ireland and Irish Life have both fallen 20 per cent from their 1998 highs and both, according to the Davy analyst, are at competitive valuations. Bank of Ireland is trading at little more than 13 times projected 1999 earnings and is one of the lowest-rated banks in Britain and Ireland, having been one of the top-rated only a few weeks ago.

Next week sees Ryanair report its maiden results as a public company. The expectation is that the airline will turn in pre-tax profits in the £36 million to £37 million range with earnings per share of around 18.5p. One question that may be answered will be whether the results will be accompanied by the mooted London listing and possible selling of shares by the Ryan family, by chairman Mr David Bonderman or by chief executive Mr Michael O'Leary.