Croesus:Turbulent market conditions such as those being experienced across global financial markets make it very difficult to make rational investment decisions.
Extreme weekly and daily volatility means it is harder than usual to judge whether a share price represents good or poor value. Even large blue chip companies such as CRH have experienced wide share price swings in recent weeks, trading as high as € 38 and as low as € 31.
In times such as this, it pays to refocus on valuation yardsticks, particularly in their historical context. Despite greater sophistication in valuation techniques, the two traditional measures of value - the price earnings ratio (PER) and the dividend yield - have held the high ground as reliable indicators of investment value.
They are not foolproof measures but they can help investors to anchor their portfolios in choppy seas.
The usefulness and popularity of the PER is in part due to its simplicity. It expresses a share price in terms of a multiple or ratio of after-tax profits - a high multiple points to a share being expensive, and conversely for a low multiple.
The PER for market indices is also easily calculated and the Irish equity market is currently trading on a PER of approximately 12.5. Over the past 15 years this ratio has averaged just under 14, which suggests that the Irish market may now be "cheap" in a historical context.
However, we have to be careful in jumping to this conclusion, as it is first necessary to establish how much confidence can be placed in the "E" or the earnings element of this ratio.
Corporate earnings can fall as well as rise and if they were to fall in the coming year, then the low PER is giving a false signal of attractive value.
Corporate profits for an overall market can normally be estimated one year forward with a reasonable degree of accuracy.
At economic turning points, however, the margin for error widens considerably.
The global economy may be at such a turning point if the turmoil in the financial markets acts as the catalyst for a global recession.
Such a development would clearly have adverse knock-on consequences for the Irish economy. Even in the absence of this global uncertainty the Irish economy is at an important crossroads.
The Celtic Tiger economy is moving towards a much more mature phase with the downscaling of the housebuilding sector being the most prominent and immediate manifestation. The key imponderable is not so much the extent of the eventual fall in housebuilding, as the knock-on impact on the rest of the economy.
Therefore, the relatively low Irish market PER is pricing in the uncertainty surrounding current earnings estimates. Ultimately, each investor has to form a judgment on whether the market currently represents a good buying opportunity, or whether tougher times and lower profits lie ahead. Whilst recognising the dangers, Croesus is of the view that the economy will weather the impending storm.
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Airline stocks are notoriously volatile so it is interesting to find that the two quoted Irish stocks have held up quite well over the summer.
Ryanair's share price is up by more than 10 per cent so far this quarter, which compares with declines of 3-6 per cent for the financial stocks. Aer Lingus has not performed quite so well although it has performed no worse than the overall market.
During this period Ryanair announced good quarterly financial results and it continues to be in expansion mode. As well as raising its investment in Aer Lingus, it recently announced its 21st and 22nd bases in Alicante and Valencia. Eleven new routes are being launched from each base and the company reportedly plans to make Spain its second most important market after the UK in four to five years.
Aer Lingus too is in expansion mode and its plans to develop Belfast as a major base signals its intentions in this regard. The experience in America has been that low-cost airlines have delivered value to their shareholders. Ryanair is the leading low-cost carrier in Europe, and although Aer Lingus is something of a hybrid, it too is seeking to operate a low-cost model.
As such, both stocks could offer safer havens than the traditionally more stable financial stocks in current market conditions.
