CROESUS/AN INSIDER'S VIEW:Over the past week many equity market indices have remained under pressure in response to an environment of slowing growth combined with sharp rises in commodity prices from oil to gold to foodstuffs.
The Irish market has mirrored moves elsewhere, with the Iseq Overall index alling from 6,730 on February 26th to 6,202 on March 4th - a fall of 7.9 per cent.
Croesus continues to hold the view that the absolute downside in the Irish equity market is now quite low, although a long period of bouncing along the bottom of a trading range is more likely than any imminent recovery.
The Iseq Overall index hit a peak of 9,981 on February 20th, 2007, and touched its 2007 low point of 6,342 on November 22nd, 2007, a slide of 36.5 per cent.
The Iseq Financials index hit a peak a day later at 17,951 and hit its 2007 low of 9,216 on the same day as the Overall index, which equates to a much larger decline of 48.7 per cent.
To put this in context, the peak to trough decline for the 2001/02 bear market was 44 per cent. If this were to be repeated it would imply a low for the index in this bear market of 5,589.
The bear market earlier this decade lasted about 16 months whereas the current episode has lasted for over 12 months so far. The market did bounce from its November 2007 lows although the strength of this bounce has proved to be anaemic.
For the ISEQ Overall index the recent low of 6,202 is just below the November 2007 low.
There is little doubt that all equity markets will have to endure difficult headwinds for the foreseeable future. Upcoming newsflow regarding the health of the US economy is almost certain to confirm that the economy is effectively in recession. All the evidence concerning the credit crunch is that it will be a long time before "normal" conditions resume.
Many banks are likely to continue to announce large-scale debt write-offs as the impact of the credit crunch spreads.
Another sign that all is not well in the wholesale money markets is a recent increase in interbank interest rates in UK markets. Central banks continue to provide large-scale support to the banking systems in all major economies through collateralised loans.
On the domestic front, the Irish economy is slowing and Croesus believes that forecasts of economic growth and corporate profits remain too high and will be revised down as new information becomes available.
Amidst this gloomy background it is very difficult to present a case for a sustained rally in the market. However, the internal dynamics of the market provide support for the view that the downside is limited from here.
Since Christmas the Irish market has outperformed many international markets - at its low on Tuesday last the year-to-date return for the Iseq Overall index was - 10.5 per cent compared with - 15 per cent for the FTSE Eurotop 300 index.
Also of note is that the ISEQ Financials index has performed in line with the Overall index since the November lows. This is despite the fact that the European bank sector and the US bank sector have continued to sharply underperform so far in 2008.
Given the high weighting of financials in the Irish market, a prerequisite for a sustained rally in the market is a better performance from the financial sector. The sector has now stopped falling relative to the rest of the Irish market, and has started to outperform the international sector.
Croesus takes the view that this is a sign that valuations are now sufficiently attractive to provide a floor to financial share prices around current levels.
