Investor: An insider's guide to the marketThe trends that featured in 2006 across the main investment asset categories have continued into the first few days of 2007. After an initial flurry of optimism on the opening day's trading, share prices have settled into a more muted pattern of performance. However, the underlying tone to trading across most equity markets appears to be quite firm.
Bond markets in 2006 produced cash-type returns as yields traded in very narrow ranges. Yields moved higher in the early days of 2007 in response to much stronger than anticipated employment figures from the US and signs that the European economy continues to strengthen.
Bond yields are likely to continue to edge higher in 2007 if the major economies grow close to their respective trend rates of growth.
The majority of market strategists are optimistic regarding prospects for 2007 and most argue that equity markets offer more upside potential than either bonds or property.
Despite its very strong end-year rally, the Irish equity market has shown no sign of tiring over the opening days of 2007.
After such a strong rise in 2006 it would not have been surprising to witness some profit-taking. This has not happened and most Irish-quoted stocks are trading close to or at all-time highs.
The Iseq index is now widely predicted to post another strong gain in 2007 based on the benign global economic backdrop and another year of domestic GDP growth in excess of 5 per cent.
Stock-specific news over the past 10 days has been generally positive. ICG, Irish Continental Group, announced on December 14th that earnings in 2006 would exceed forecasts, aided by lighter than expected competition from its main competitor, Stena.
The closure of the Swansea-Cork route by Swansea Cork Ferries could give an unexpected boost to ICG, at least in the short term.
Swansea Cork Ferries sold its ageing superferry last year and had planned to resume operations in March this year. However, the company failed to secure a replacement ship and has been forced to make most of its staff redundant.
The removal of competition should benefit ICG's Rosslare-Pembroke service in particular. In the longer term other firms may fill this gap and, indeed, Swansea Cork Ferries may succeed in relaunching its service in 2008. Nevertheless, this news should boost ICG's 2007 profits.
A further positive is the recent further decline in the oil price, which, if sustained, would deliver a further boost to profit growth in 2007. ICG is not a highly rated stock and it looks cheap when measured by cash-flow yardsticks, reflecting its strong free cash-flow characteristics. Investor expects this stock to do well in 2007 on the back of improved trading conditions and its attractive cash-generating capability.
The early 2007 news flow for companies involved in building and construction has also been positive. The Construction Industry Federation expects a record 90,000 housing units to have been completed in the Republic in 2006, representing 56 per cent of total construction output.
The federation expects housing output to be sustained at a similar level in 2007, although other forecasters are predicting a modest decline to 88,000 units.
Grafton Group is a beneficiary of the strong Irish housing market and its Irish businesses should continue to do well this year. About half of Grafton's business is in Britain where there are clear signs of an improvement in trading conditions.
A trading update from one of Grafton's British competitors, Marshalls, said its domestic and DIY markets remained subdued, but the trade market was improving.
Grafton's British business is focused on the trade sector and its absence from the highly competitive DIY segment has enabled the company to successfully manage the British consumer downturn over the past 12 months.
The relative weakness of the British market had a negative impact on sentiment towards the stock in 2006.
Investor expects the shares should benefit from an improving British market in 2007 and continued strength in the Irish market. In the context of an upward trend in the overall market, Investor expects ICG and Grafton to perform well in 2007.
