'Wall of worry' takes toll on stock markets

There will be no quick recovery in stock markets, Irish Life has warned, as the current bear market reaches its one-year anniversary.

Market conditions will remain difficult for the first half of the year, with fear stalking investors due to economic uncertainty and the prospect that companies may downgrade their earnings forecasts, Irish Life Investment Managers cautioned in its 2008 investment outlook.

"The wall of worry is still there," said Irish Life's senior equity strategist James Forbes.

The sell-off of Irish equities by nervous investors started this week last year, with the Iseq index reaching its highest ever closing mark on February 20th, 2006.

But the Dublin market fell 37 per cent from its peak to its trough in January, and is still down 34 per cent.

But rather than run and hide from the volatile, unpredictable equity markets to more steady asset classes, investors should start to take advantage of the current market gloom to buy at low prices, Mr Forbes said.

The current low valuations on Irish shares are pricing in a "highly unlikely" collapse in corporate earnings of around 20 per cent in 2008.

One reason why share prices have plunged so deeply is that large institutional fund managers based overseas have taken steps to avoid the financial and construction-related stocks that dominate the Iseq.

"The Irish banks have been treated very harshly by international investors," said Mr Forbes.

Financial stocks listed on the Dublin market have fallen 33 per cent despite having virtually no exposure to the troubled US subprime mortgage sector, while €150 billion worth of write-offs at US banks prompted an 18 per cent decline in their values.

"Some of the international fund managers are making a direct comparison between the slowdown in the housing market in the US and the slowdown in Ireland, but the fundamentals are different," he said.

"The kind of reckless lending that was happening there wasn't happening in Ireland."

Equity investors may prefer to hear "another quarter or two" of earnings announcements before they jump back in the market, but they should consider dipping their toes in the meantime, according to Mr Forbes.

"It is very difficult to accurately pinpoint the bottom of the market. People who can afford to take a medium-term view of three to five years should start to drip feed money into the market now."

With average share prices at just eight times forecasted earnings, price/earnings ratios on the Iseq are at their lowest since the early 1980s, Davy Research noted yesterday.

"The market clearly has doubts that earnings forecasts for 2008 will be achieved," said Davy's head of research Robbie Kelleher.

"We are sceptical too and think downgrades will outnumber upgrades going forward - but not by the magnitude implied by current valuations," he said.

Mr Forbes said the Irish stock market was trading at a discount of around 25 per cent to euro zone markets, but that this gap will be closed over the next 18 months as more positive economic news begins to filter through to investors.