With returns from Irish equities slipping moderately in 2005, many believe the boom time of the previous years to be over, however, the opposite appears to be the case
A buoyant equity market and the release of cash from Special Savings Incentive Accounts (SSIA) will further bolster the already strong Irish market heading into 2006.
Compared to the strong performance of Irish equities in 2003 and 2004, when returns were 23% and 26% respectively, many investors believed last year's return of 19% indicated the upward trend had come to an end. However, there is nothing to suggest this is true.
Despite the impressive out performance of Irish shares in recent years, equity valuations still look very attractive, particularly compared to bonds. Low relative valuations are supported by the country's economic fundamentals, which remain incredibly strong.
Heading into 2006, the Irish economy is also due to receive an additional boost from maturing SSIA, which will see an additional 16bn (£11bn) available to consumers.
Rather than the possibility of a slowdown in economic growth, which has been the powerhouse driving markets forward, there is further cause for optimism this year.
The maturity of SSIA should act as a significant catalyst for stronger economic growth and in turn equity gains. The government introduced the SSIA scheme in 2001 to encourage people to save more of their earnings. For every 4 saved by an individual, the government contributed an additional 1, so anyone saving the maximum contribution of 15,000 over five years will have received 3,800 from the government.
During the life of the scheme, more than one million accounts were opened and now 16bn worth of savings are set to mature between May 2006 and May 2007. This is the equivalent of 11% of estimated gross national product (GNP) for 2006 or 20% of consumer expenditure.
This influx of capital should provide a general boost to the economy, but it will also have a direct impact on the Irish stock market as increasing numbers of wealthy Irish individuals invest money in domestic equities.
Traditionally, gilts and property have been the preferred investment choices for Irish individuals but the combination of a buoyant equity market and the release of savings from SSIA could trigger new interest in shares from Irish companies.
Another positive trend is growth in the resource sector. Resource companies led gains in global equity markets last year and Dragon Oil was one of Ireland's top performing stocks. This theme is expected to continue in 2006, further supported by high oil prices and rising commodities.
Sustained high oil prices have also increased interest in oil exploration in the waters around Ireland and it is possible prospective drilling companies could be one of 2006's greatest success stories. Island Oil & Gas is a company the market has found difficult to value, but the company's risk/reward profile is attractive.
With encouragement from the government - Ireland's tax rate on oil and gas profits are among the lowest in the world - it is possible the Celtic Sea and the Atlantic Margin could now be one of the most attractive oil exploration regions in the world.
Outside of the oil and gas industry, Ireland is already an attractive destination for companies looking for a base in Europe. The government's supportive attitude towards businesses, in particular the flat 12.5% corporate tax rate, which it has made a legislative commitment to, has helped make the country a major centre for foreign investment.
Ireland offers the dual benefits of being part of the Eurozone, while also being an English speaking country. As well as attracting investment from the US and Far East, the country is proving popular with its European neighbours - two German banks recently moved their headquarters to Dublin.
Ireland's young, skilled population has also helped make it a popular location for companies looking for a base in Europe. The workforce is young and expanding, with people moving back to the country, often bringing valuable skills. Last year saw an unparalleled 6.7% increase in people aged between 25 and 29, who now represent 8.5% of the population. This has helped create a flexible labour market, where the proportion of those attending university is high, technology skills are strong and work attitudes are modern and accommodating.
Companies that have successfully tapped into this market have already begun to reap the rewards, for example, recruitment business CPL Resources. The group specialises in the IT industry and is well placed to benefit from the buoyant labour market in 2006. The company's growth had stalled but acquisitions improved its market position and it has been one of the sector's more successful recovery stories, now offering stable margins and renewed profitability.
In addition to these sources of economic support, ongoing themes that have driven gains in recent years also remain in place. Ireland's demographic profile is particularly favourable. The average age is much lower than elsewhere in Europe, therefore the economy does not face the burden of a large, and growing, ageing population to the same extent as other nations.
Government finances are also strong and improving, compared to other European countries, with low government debt relative to growth domestic product (GDP). Using the budget surplus, it has set up a special capital pool to pre-fund a part of the state's pension liability. However, one issue that has unnerved investors recently was the first increase in European interest rates since 2000.
As higher energy prices increased inflationary pressures, the European Central Bank responded with a 0.25% rise to 2.25% in December.
This has led some to question whether the momentum behind Irish growth can be sustained as investors become more sensitive to risk with further increases to interest rate rises likely. However, despite this possibility, interest rates still remain at historically low levels. A combination of the factors already mentioned has helped deliver substantial GDP growth in the past, with the Irish economy sustaining a period of above average growth since 1993.
Money from matured SSIA will have to find a home in 2006 and capitalising on this will be a key issue for investors looking for performance from Irish equities this year.
Domestic growth will provide momentum in a number of sectors, including housing and related industries such as building supplies and DIY stores. In this vein, builders merchant Grafton, CRH (Europe's third largest maker of building materials) and Kingspan, which makes flooring and insulation panels, are all likely to deliver good returns.
Kingspan, which made five acquisitions last year, recently reported its 2005 earnings were ahead of expectations after sales rose and raw material costs eased. The company is also benefiting as governments tighten building regulations to improve heat retention. CRH, also an acquisitive group, is profiting from increased demand for rock, asphalt and concrete in the US and at this early stage in the year is one of the market's top-performing stocks.
Meanwhile, rising demand in Ireland is leading to fast sales growth for Grafton, as Irish builders completed a record number of houses last year. The group also operates two home-improvement chains - another area that is likely to continue experiencing growth.
Other plays on the theme of domestic growth include diversified holding company DCC and Northern Ireland's main electricity supplier, Viridian. DCC faced difficulties in its entertainment and technology divisions last year but looks better positioned heading into 2006. To some extent, this is due to its acquisition of Shell Direct UK, which is experiencing higher sales of its oil and fuel supplies. It is also actively pursuing other acquisitions.
The financial sector is also another beneficiary of the strong domestic economy. Low interest rates, rising employment and incomes, as well as the inflow of new and returning workers has fuelled demand for borrowing, particularly mortgages.
This is reflected in a positive earnings outlook for Ireland's two largest lenders, Bank of Ireland and Allied Irish Banks. In addition to the momentum provided by rising demand for loans, Bank of Ireland has introduced measures to cut costs.
Other financial groups may also prosper this year because a significant proportion of the SSIA pool is likely to be reinvested in other financial assets. A share of this money is certainly destined for the domestic equity market, which should provide a broad-based boost.
Following a brief period of heightened risk aversion in October last year, global equity markets have bounced back with renewed vigour, ending 2005 on a high and making a strong start to 2006.
In Ireland, an 8% gain in the fourth quarter, with further gains in January, proved last year's market setbacks were due to external issues rather than weakened prospects for Irish growth.
Key factors remain supportive of economic growth and maturing SSIA could boost domestic growth further. Irish equities are still relatively inexpensive and any valuation premiums will be more than justified as strong economic growth translates into strong growth in equities.
A buoyant equity market and savings from SSIA will boost Irish market in 2006
Ireland's demographic profile and low corporate tax remains favourable
Government finances remain strong compared to other EU countries
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