The Irish market, despite dramatic growth recently, should still outperform this year, according to ESB fund management, management company for the Irish Electricity Services Board pension fund.
The market saw growth of 53% in 1997 and has continued its upward progress with an increase of 23% for the first two months of this year.
John Walsh, fund manager for ESB, which also manages for third parties, expects further market growth to year end of 10% driven by the economic outlook and company earnings growth which is attracting overseas investors.
“There has been very strong interest from overseas this year. They are attracted by the headlines about the economy performing so well,” he says.
ESB is bullish on bonds medium term, noting that credit risk will be the main determinant of trading spreads and expecting Ireland’s credit status to im-prove in this new environment. The group, believing in the global disinflation story, expects Irish 10-year bonds to fall to 4.7% by year- end.
Walsh sees few risks to this scenario. “Looking at Ireland specifically, we don’t see any bad news developing,” he says. “There is a one in a hundred risk that we won’t enter Emu and that would be negative but the main risk is external; that the international market will fall back.” This is the only situation in which he sees international investors withdrawing money.
“As we go into Emu, you will probably get Irish fund managers reducing their Irish equity holdings but that hasn’t started to happen yet, and it won’t be a negative story for 1998.
“Obviously Ireland has zone specific problems with inflation, especially if we go into Emu, at the central rate of 241 which we anticipate but I think the negative forecasts are overdone,” says Walsh.”
He sees any pick up in Ireland compensated by fall in the US, UK and low rates in continental Europe, underpinned by increased global competition.
“What is important is the inflation rate throughout the euro economy, where inflation is going to remain very low and may even fall further.” He adds that the negative aspects of the fall in the value of the punt will be offset at least in part by the fall in rates of 2–3% due to Emu which will knock 0.5% off inflation as mortgage rates fall.