Bank of Ireland Private Banking today (Sunday 18 May 2008) suggests that equity markets may now have hit the bottom of the cycle and that investors should be alert to the potential for recovery. A positive indicator of this was highlighted by the fact that Private Banking’s Global Equity Fund has seen gains of nearly 10% since the low point in March.
According to Kevin Quinn, Director, Bank of Ireland Private Banking: ” No one foresaw the scale of the credit crunch related losses at the outset and it has taken a considerable time for this to work through, much longer than we originally anticipated. However, signs are that the market is now looking beyond these issues and we may be seeing some solidity in the gains that markets have made since March.
“Whilst the credit crisis may well not be over, we believe that markets are looking past this and have priced in the bad news at this stage. Of course the real economy impacts are there to be seen but if history repeats itself, we will see equity markets price in recovery well before the economy shows firm evidence.
“We believe that the ‘St Patrick’s Day Massacre’ may have been the bottom of the market and that we have now seen the typical signals that markets are in a bottoming out phase – namely a financial failure, a drop in investor confidence and a testing of previous market lows. What’s more, after all the difficulties of recent months, equity markets are looking comparatively cheap relative to other assets. With the Fed looking like it’s near completion of interest rate cutting and the dollar tentatively beginning a recovery, investors need to be alert.
“The key reasons for confidence in the short term are:-
- Volatility in markets has slowed markedly
- Confidence in the banking sector is increasing
- The Fed looks like it is finished with rate cuts and the dollar may be beginning its road to recovery
- The US economy looks more likely to be capable of bouncing off recession
- We continue to see robust growth from emerging economies
“The environment faced by investors has however changed. It is no longer one in which ‘all boats will rise’. Rather it requires a very discerning and considered approach. The market will turn its attention to the inflationary pressures rather than the credit crunch. We will most likely see continued volatility and investors will have to adopt a more savvy multi-asset approach to make money in these conditions.
“However the first step for private investors has always been the hardest. Individual investors are always the most cautious about getting back into markets after a period of turbulence such as we have seen. There is a risk that Irish investors’ perspectives on what is happening in world markets may get further clouded by local news as the Irish stock and property markets had such a difficult period in recent months.
“In summary, most, though not all, of these indicators point to an easing in the stress in markets that we have seen in recent months. We have seen all the major signs of a market bottom in equity markets – namely a testing of previous market lows, a major financial casualty (Bear Stearns) and increased investor pessimism. This combination should provide investors with reason to come back into markets. There are of course always reasons to be cautious – oil is one that is undoubtedly a worry, however, for the most part it appears the market now has a handle on the credit crunch.
“Whilst we are undoubtedly in one of those periods where investor confidence will tend to override investment rationality, the effect of this is that investors will miss out on the very best days. Private investors always look for too much evidence that the recovery is underway and thus miss the best returns. Missing the best 10 days can mean missing out on a third of the returns if history repeats”, concluded Kevin Quinn.
Media Relations Manager
Group Corporate Communications
Ph. 00 353 87 246 0358
Note to Editors:
Why investors might consider getting back into the markets
America and the world
- The Fed has acted to manage the credit crunch by halving interest rates, introducing tax stimuli and allowing currency to depreciate.
- The US appears to be in a period of sub-par yet still positive growth as opposed to outright recession. Rate cuts look to be at the end, meaning the dollar can begin its recovery.
- Economic growth around the world has weakened but remained positive with consensus estimates for US (1.3%), Europe (1.9%), Asia (4.7%), UK (1.6%), and Ireland (2.9%) all remaining positive for ’08. (Source: Consensus economies April ’08)
The Stock market and property market
- The worst of the crisis may have been St Patrick’s Day with the near failure of Bear Stearns. The world turned less risky in April.
- Stock markets have priced in the bad news about the credit crunch and are now looking beyond these issues. We are seeing a bottom in stock markets around the world.
- Many stock markets are at two decade valuation lows. Earnings growth rates may have been falling, but have remained in solid positive territory.
- The property market will present more bargain opportunities than it has had for many years as yields expand once again.
- Ireland’s stock market fell more and may take longer to recover. However, we should not confuse local issues with what’s going on around the world’s capital markets.
- The Irish economy remains robust with high savings rates, ample cash and continued positive growth. There will inevitably be some bad news in the local market in the short term, but don’t let that distract from the wider picture.