Investor An insider's guide to the marketThere is a familiar ring to the economic and financial background at the start of the second quarter. The oil price continues to surge and recently touched $58 per barrel for Brent crude.
US investment bank Goldman Sachs released an eye-catching report saying that oil markets have entered a "super spike" period that could eventually drive the oil price to over $100 per barrel.
Another familiar theme in recent years has been the persistent underperformance of the euro-zone economy and the just-released report from the European Commission shows that 2005 will not be any different.
Surging oil prices and the strong euro have forced the commission to cut substantially its forecast for euro-zone growth this year. The commission has revised its 2005 growth forecast to 1.6 per cent from last October's 2 per cent forecast.
The main culprits are Germany, whose growth forecast was revised down to 0.8 per cent from 1.5 per cent previously, and Italy with a downward revision to 1.2 per cent from the previous 1.8 per cent.
In contrast the forecast for the British economy was unchanged at a healthy 2.8 per cent.
The commission is more optimistic for 2006, forecasting euro-zone growth of 2.1 per cent, driven by acceleration in employment growth, with three million new jobs expected to be created in 2005/06.
Given the persistent failure of Europe to live up to expectations in the past, market participants are likely to take the more optimistic medium-term forecast with a grain of salt.
The clear signs of slowdown in some of Europe's largest economies should deter the European Central Bank (ECB) from raising interest rates any time soon despite their protestations after the watering down of the Stability and Growth Pact at last month's summit meeting. Developments in the euro-zone economy are of course highly relevant to the Irish economy.
However, sluggish growth in the European heartland will only result in a minor dent to the demand for Irish exports. The UK and US economies, which are growing strongly, are giving a positive stimulus to the Irish economy.
Also, much of the current phase of rapid growth in Ireland is being driven by internal demand. Private consumption is strong as evidenced by recent Exchequer returns for the first quarter, which showed a surge in VAT receipts.
Of even greater significance is the now long-running construction boom that shows no sign of abating. Record output of residential housing combined with a wide array of large infrastructural projects mean that construction is set to remain the key force in driving Irish economic growth for the foreseeable future.
Therefore, the most relevant development in the euro zone for Ireland continues to be the prospective actions of the ECB. While some rise in euro interest rates is still likely in 2005, the recent weakening in euro-zone growth has probably pushed the timing of any increase further out into the future.
With interest rates remaining low, worries about a sudden end to the Irish boom will abate even further. The economy can probably cope comfortably with higher oil prices, whereas rising interest rates would be damaging given the build-up in debt levels over recent years.
Turning to the Irish stock market, only companies in the transport and construction sectors are materially affected by the rising oil price.
Ryanair stands out in terms of its sensitivity to oil price trends. The Ryanair share price suffered badly during last year's oil price surge.
As the oil price rose to $50 per barrel, for the first time Ryanair's share price fell below €4.
A strong business performance over the winter months combined with an easing in the oil price created the conditions for a sharp recovery in the share price to the €6.80 range.
Now with the oil price surging towards $60 per barrel it is highly significant that its share price is proving to be very resilient. The price has fallen but only to just under €6 and there has been no excessive selling in response to the oil price spike.
Ryanair's performance over the past six months demonstrates that it can prosper through phases of rising oil prices. The actions of its competitors provide at least a partial explanation of why this is so.
European flag carriers have been quick to introduce fuel surcharges on their fares, thus widening the gap with Ryanair's low fares. Ryanair can respond in two ways: either it keeps its fares very low, thus stimulating extra demand, or it can edge up its fares to maintain the relative gap with the flag carriers.
Either way Ryanair makes revenue gains at the expense of its competition, thus partially offsetting the additional cost burden due to the higher oil price.
Higher oil prices are a major negative for all airlines, including Ryanair. However, Ryanair has now proved that its business model is capable of coping with this squeeze on costs and therefore the medium-term investment case for Ryanair remains strong.
At a price of €6 the shares are trading on a price-earnings ratio of 18 compared with EasyJet's 12.5. However, the pioneering US low-cost airline, Southwest, is on a rating of 35.
Investor takes the view that Ryanair's medium-term growth prospects justify its relatively high PER and despite ongoing volatility in the oil markets the shares represent good value at their current level.
