For Irish investors 1998 has got off to a resounding start in the domestic market, but conflicting signals are emanating from overseas markets. The recent sharp decline in the pound and the growing expectation that Irish interest rates will fall sooner rather than later has pushed the ISEQ to all-time highs.
Meanwhile, the situation in the Far East is going from bad to worse. The Hong Kongbased Peregrine Investment Holdings filed for liquidation encouraging a one-day 8.7 per cent drop in the Hang Seng index and creating nervousness in western stock markets.
Therefore, the opening days of 1998 in international stock markets contrast sharply with 1997 which can only be characterised as an annus mirabilis, at least as far as US, European and Latin American stock markets are concerned.
After three years of very strong stock market conditions investors could well be forgiven for taking something of a back seat during 1998. While there is little doubt that the cross currents in the economic and financial environment during 1998 will create a far more difficult investment environment this year, the likelihood is that it will be another rewarding year for investors.
The domestic market gives cause for optimism. The advent of European Monetary Union will bring with it lower interest rates which will be very positive for the Irish market.
There is still uncertainty with regard to the exchange rate at which the Irish pound will lock in to the new monetary union. The recent decline in the value of the pound has been a boon for Irish public companies exporting. However, there are dangers that too low an exchange rate could set off an inflationary spiral.
It would probably be better for the overall economy and the stock market if the pound entered EMU at an exchange rate significantly higher than current levels. The long-term benefits of lower inflation which a higher exchange rate virtually guarantees, would far outweigh any short-term pain.
There have already been some very good company results in the first few days of 1998. Abbey, Fyffes and Jurys Hotel Group reported better than expected results. Of even greater significance all three were upbeat about current and prospective trading conditions.
This has set a positive tone for the Irish market and profits are likely to rise strongly despite any possible weak international markets. On the international markets the burning issue is whether the Asian crisis will be contagious leading to a more general slowdown in global economic growth. The meltdown in Asia has already led to downward revisions in global growth forecasts to about 2.5 per cent from a previous 3.25 per cent. The silver lining in this particular cloud is that global inflation is also likely to be much lower than previously expected.
For private investors the overall conclusion is that the stock market in 1998 is again likely to produce better returns than alternative investments. However, a policy of sticking close to home is likely to prove most rewarding. The Far Eastern turmoil could well continue for all of 1998 and while braver investors may buy at these cheap levels, for most private investors waiting until the environment stabilises is probably the best policy.
Although the US economy continues to power ahead, stock market valuations are at very high levels. European markets including Ireland could do better as they respond positively to EMU and improving economic growth across the Continent.
