Watchful traders toast convergence trade

AS BOND and equity markets closed for the year a week ago, passers-by in the environs of the country's major stockbroking houses would have had heard the sound of champagne corks being popped.

It has been that kind of year for the Irish markets, and the volume of business generated on both gilt and equity markets has been enormous. No doubt end-of-year bonuses will be commensurate with the level of trading.

With the ratification by the European Union heads of government of the terms for the single currency two weeks ago, those involved in the Irish market are looking forward to a resumption of the "convergence trading" which saw volumes on some of the days in October and November go over £1.5 billion.

Convergence trading, where investors buy Irish gilts in the expectation that they will rise to German levels by the time the euro is introduced in January 1999, was a new phenomenon for the Irish market and particularly for the fledgling market-makers in Irish government gilts.

But those very same market-makers in Irish gilts face a major challenge in the two years ahead leading up to the single currency. As the yield on Irish gilts begins to converge on German bond yields, the market-makers and their assembled teams of economists will have to work that much harder to persuade investors of the attractions of gilts. If and when EMU begins, and Irish and German bond yields have converged - at least that's the theory - that work will be even harder.

For those working to promote the attractions of the Irish equity market, two words will dominate their thinking in the months ahead - Alan Greenspan. If a couple of comparatively innocuous after-dinner remarks can send Wall Street into a tailspin, what will happen if the Fed chairman actually uses more forceful remarks to reflect his clear view that the US stock market is fundamentally undervalued.

Certainly, the Irish market will do extraordinarily well to go anywhere near matching the gains of last year, and most Irish analysts believe that come this time next year, the ISEQ Overall Index will be trading around 2850 to 2875. And even that 7 per cent rise in the market from current levels is probably going to come after a correction following an expected increase in US interest rates.

How big that correction remains to be seen, but some analysts are expecting Irish stocks to fall by as much as 10 per cent before they recover. Even then, many analysts believe that the focus will be on specific stocks and the days of a rising market lifting even the deadwood of the Irish stock market may be at an end.

Value stocks and momentum stocks have become two of the latest buzzwords in the lexicon of stock market investment in Ireland. It is the value stocks which can provide earnings growth that will contribute the vast bulk of whatever the eventual rise in the ISEQ index is in the coming year.

So much for the year ahead, who were the stars and who were the duds of 1996. Simply going on the basis of who outperformed the index then there are plenty of stars, but one company stands out from all the rest in terms of price growth. Kingspan may not be long on the stock market, but for those who put their money in the company early in the year have been well rewarded.

Kingspan, like the rest of the construction-related stocks, has had an excellent year, and with the recent acquisition of Ward Building Systems seems well set to build on its recent record. For returns to shareholders, Kingspan gets top prize.

Among the higher capitalisation stocks,

CRH was the undoubted star and the company showed consistently throughout the year its ability to make a series of acquisitions without doing any serious damage to its balance sheet. CRH is by any standards a significant player in the international building materials industry and will undoubtedly remain an essential component of any investment portfolio.

Whether Smurfit - once the biggest company on the market and now relegated to number four position - is in a similar category remains to be seen. Smurfit has had a dismal year, but there are tentative signs that the US packaging sector is facing into an upturn. Whether that upturn will allow Smurfit break out of a depressingly narrow trading range with a ceiling of 170p remains to be seen.

For most of the financial stocks, it has been a steady if unexciting year and even Bank of Ireland's £600 million takeover in Britain has not prevented the stock under-performing the market. The one big exception among the financials is, of course, Irish Permanent, which peaked at 500p in early December trading.

Given the lack of liquidity in Irish Permanent shares - two years after flotation the company still has over 110,000 share-holders who have shown a marked reluctance to sell and the speculation that at some stage the Permo may become a bid target - the share is likely to remain one of the best performers.

Food companies are dealt with elsewhere in this section (see page 2), but suffice to say that Kerry, Greencore and lAWS are likely to remain the best of the crop, Avonmore and Fyffes somewhat further behind, while Golden Vale - and to a lesser extent Waterford Foods - have a lot of ground to regain.

The exploration sector is still very much a case of caveat emptor and this reporter remains very much unconvinced of the attractions of investing in far-off and sometimes not very exotic locations for Irish companies. The entire sector remains a speculative punt - and given the recent Pan Andean experience - a sector to be avoided by those looking for security.

Despite its recent setback, Tullow Oil remains very much the pick of the explorers. An Irish exploration company that actually produces oil or gas remains something of a novelty, but Tullow - which will always remain a possible takeover target - stands apart from the crowd.

And finally, the Irish market will have the novelty of having the Northern Ireland public companies included in the ISEQ Index next year, a move that will certainly boost demand for these shares.

Some of these companies are top of the range: Powerscreen makes the existing Irish engineering stocks look very much second rate; Boxmore will provide a welcome exposure to the packaging industry (other than Smurfit); NIE gives direct exposure to a privatised British utility while UTV gives exposure to the television industry. All four will be very welcome additions to an Irish stock market that remains very short on new blood.