| At end ‘99, take a Greek holiday |
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| If you're unconvinced by the Asian recovery or the Irish boom, Greece may be the place for you, writes Kevin McConnell in his 1999 equity markets review |
The global equity markets posted a strong performance in 1999, although the correction in Q3 tested investors' confidence in the sustainability of valuations against rising interest rates and the upcoming Y2K effect. Of the three major regions, the Far Eastern markets have posted the best overall returns this year, with European equities marginally outpacing the increase in their US counterparts.
A faster than expected recovery of the Asian economies after the currency crisis in mid 1998, has propelled Japanese equities by 34 per cent in 1999. The performance of the Far Eastern economies has raised fears of global economic sychronisation, triggering the growth verses value/cyclical debate which dominated investment strategy for much of the year. The effect of increasing global demand on commodity prices hammered bond markets in Q2 and Q3, in the process hitting long duration sectors such as pharmaceuticals as investors favored sectors such as oil, mining and paper.
US Market
Despite a _ per cent increase in US interest rates since the summer, the S&P has managed to produce a decent 15 per cent return in the year. After breaking below the key 1260 level in early October, the S&P has risen 11 per cent, as investors bought into the belief that the Fed Reserve's pre-emptive moves against inflation will prolong the economic growth cycle, avoiding the necessity to pump up interest rates at a later stage. Spurred by the strength of internet related stocks, NASDAQ has significantly outpaced the broader US market, posting 50 per cent growth. However, 1999 did not yield a change in fortune for US small cap stocks, which under-performed the S&P by 6 per cent.
Europe
Growing confidence in the recovery of the European economies has provided some substantial gains for the French and German markets in the year, up 33 per cent and 20 per cent respectively. In broad terms, eurozone equities have increased by 21 per cent in 1999, and remain favourable valued against US comparatives. However, it is no surprise to note that the Irish market is languishing at the bottom of the international league table of equity returns, posting a flat return so far in 1999.
Ireland: Fears
After the phenomenal growth period of the last few years, the international investment community fear Ireland may be the 'bubble waiting to burst', similar to Britain in the 80s. Domestic economic commentators don't expect this to happen citing the strength of the Irish demographic profile and unique growth factors underpinning the economy. However, the negative feeling created by this speculation has made it difficult for foreign investors to buy into the Irish market. The domestically focused Irish bank stocks in particular have suffered from this trend, resulting in a significant underperformance against the larger industrial stocks such as CRH, Smurfit and Independent Newspapers.
Irish equities have also struggled as domestic institutional investors continue to re-weight their portfolios towards the Euro-zone, robbing natural buyers from the market. However, having significantly reduced weightings in Irish equities over the last eighteen months, the worst of the domestic institution's technical effect may have passed.
Should the Irish economic growth story defy the pessimistic foreign assessments of future growth, then the under performance of the Irish market in 1999 will be reversed in 2000, as the strength of corporate earnings extends the value available to investors. However, much will depend on the success of the next round of collective wage bargaining and the preliminary effects of the new National Development plan, helping to resolve the threat posed by escalating labour costs and infrastructure bottlenecks.
The pessimists among us should consider moving to Greece, where the local equity market produced a massive 103 per cent return in 1999, on hopes of entry to EMU in the medium term. |
Kevin McConnell is an equities analyst at Bloxham Stockbrokers
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| Article appeared in the December 1999 issue.
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