As Irish shares threaten to enter a bear market for the first time since 2011, the outlook may depend on two events: how the UK “bails out” of the EU and whether Italy is forced to “bail in” bondholders in its ailing banks.
While the Iseq index rallied almost 3 per cent in the last two days to 5,580 points, it remains 14 per cent below its May highs, driven by a sharp slump following the Brexit referendum.
The benchmark may fall below 5,200 points before the year is out, marking a 20 per cent decline and what's officially known as a bear market, according to the average estimate of five analysts and money managers surveyed by The Irish Times.
"Everybody's going around shell-shocked since Brexit and it's difficult to know when the equity markets will bottom out until we get a sense of when the UK economy has reached a trough," said Bernard Swords, chief investment officer at Goodbody Wealth Management.
International indices
The Iseq has underperformed most international indices in the past two weeks. Even the FTSE 250, which has borne the brunt of selling in the UK as it is made up of more domestic-focused companies than the FTSE 100, has fared better.
"The Irish and UK markets will be driven more by developments in the UK Conservative leadership election and the rhetoric and soundings we hear between the UK and EU and what deals the UK is likely or not likely to get," said Gerard Moore, head of research at Investec in Ireland. "It's hard to see how this is suddenly going to get better in the near term."
Banks have been among the worst hit, with the sector further affected by Italian lenders grappling with €360 billion of soured loans.
Italy wants to inject billions into its banks and circumvent new EU rules that junior bondholders should share the burden or be “bailed in”. The outcome of the battle between Rome and Brussels may have wider consequences.
As sterling plunged 11 per cent against the euro, to €1.17, Mr Moore said those exposed to a likely fall-off in tourism, such as Irish Continental Group and Dalata Hotel Group, had also been in the firing line. Similarly, companies with high UK earnings exposure, such as cider-maker C&C and Kingspan, have also been sold off.
Sterling's drop against the US dollar has been even more pronounced, sliding as much as 14 per cent to a 31-year low of $1.29 this week. Justin Doyle, a senior foreign exchange dealer at Investec, sees sterling ending this year at $1.28.
Central banks
Still, some analysts believe markets will be underpinned as central banks commit to providing stimulus to prop up economies.
"The chances are that you won't see significant moves in the [Iseq] index either way from here," said Aidan Donnelly of Davy's private clients division, noting that four companies, CRH, Ryanair, Kerry Group and Paddy Power Betfair, make up more than two-thirds of the market's value.
