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| From the 2006 Annual Report of Anglo Irish Bank |
On Thursday, Irish Life & Permanent said in a trading statement that its Irish residential mortgage book is expected to see growth of about 20% this year, on foot of new lending of circa €3.4bn compared with €4.2bn in 2006 and on the Irish Stock Exchange, disappointed investors dumped shares and the market lost €2 billion in value. On Friday, Irish shares lost an additional €1.3 billion led by the financial services' shares.
The negative reaction to a 20% rise in mortgage lending signals that 2008 will be a very rocky one for the Irish stock market.
Seven companies account for almost 75% of the market capitalisation of the Irish Stock Exchange.
The four financial services' groups account for 44% of the market; CRH has 17.6%; Ryanair and Elan both have 6.4% of the market value.
The slowdown in the Irish housing market which will result in a fall in economic growth in 2008, will hit bank shares which have got investors addicted to impressive double-digit returns during a long boom; CRH, the biggest building materials supplier in the United States and the only world class company to develop from Ireland during the Celtic Tiger period, has significant US dollar exposure. It's currently unclear if the US housing shakeout will worsen before the sector improves. This week, Ryanair's Michael O'Leary said: `We expect a big downturn in the next 12 months, we just don't know what's going to cause it. We must be due one.''
Foreign Ownership of Irish Shares
The Irish Stock Exchange told Finfacts earlier this year that an estimated 60% of Irish shares are owned outside the Republic of Ireland.
In the past decade cross-border holding of shares has jumped as countries have eliminated barriers to investment and the rate of globalisation of finance has accelerated.
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In 2004, foreign investors, most of whom are institutional investors from North America and Europe, held more than 40% of the market capitalization of Korean firms while domestic institutional investors hold only about 18%. On Monday this week, it was reported that overseas investors have raised their share of corporate Japan to a record, potentially intensifying the influence of western-style capitalism in a country still resistant to shareholder activism. International investors increased their stake in the stock market to 28% in March from just over 26% in 2006 and only 4.7% in 1990, according to figures released by the Tokyo Stock Exchange and four smaller Japanese bourses.
Foreign holding of US stocks was 9.2% in June 2004 up from 4.7% in 1978 while US investment in foreign securities has been rising rapidly of late. In fact, foreign holdings now account for 17% of all US stock ownership.
The proportion of UK ordinary shares held by overseas investors increased from 4% in 1981 to almost a third between 2000 and 2004. This reflects both international mergers where the new company is listed in the UK and also floatations of UK subsidiaries of foreign companies. It is also due to the greater internationalisation of institutional investors’ portfolios. Their share ownership is mostly in FTSE-100 companies.
The Financial Times reports that more than 160,000 former Scottish Power shareholders have just become the latest group of UK investors to swap their shares for holdings in an overseas company, following a £12bn takeover by European utility firm Iberdrola.
Another Spanish corporate giant, Banco Santander, thanks to its army of 1.3m Abbey National investors, is one of the most widely held of all shares in the UK.
The FT says that takeovers such as these are one strand of a growing internationalisation of Britons’ shareholdings. Along with share option-type awards to those working in the UK for foreign companies, there are also growing numbers of private investors actively buying overseas shares.
Some brokers now charge no more commission than for UK trades. On most foreign purchases there is also no stamp duty, or at least less than the UK’s 0.5 percent.
Stamp duty on share transfers in Ireland is 1 percent.
Looking at the breakdown of ownership in individual companies, 64% of the shares of Ireland's biggest bank AIB, were held outside the Republic of Ireland at Dec 31, 2006. Nokia's foreign ownership grew from less than 20% in 1992 to 90% today. A Forbes report in May 2007, said that total foreign ownership in Sony Corp surged by 2.6 percentage points from a year earlier to a record 52.7% at the end of March because of buying by European and US investors hoping for a turnaround at the electronics manufacturer.
There is evidence that foreign investors are attracted by dividends but not necessarily high levels, and also stock buybacks. The growing influence of hedge funds in recent years compared with pension type funds with a long-term perspective, is likely to result in greater volatility with the high earnings of big companies in emerging economies and a stable fast-growing economy like Ireland's attracting attention. However, sell-offs during less exciting times can damage overall market sentiment as the bellwether shares take a pummelling.
This is the likely scenario for the Irish market in 2008.
Anglo Irish Bank said in 2006 that 81% of its equity was held by shareholders who owned blocks of 500,000 or more shares.
It's not that the economy will be in recession but with other economies continuing to grow rapidly, foreign investors will dump Irish stocks.
So high foreign ownership has been good for Irish shares during the boom period. Even though companies may still report impressive results in 2008, the focus will be on the comparisons and fear of worse to come.
Irish Housing Slowdown
Davy Stockbrokers say that Irish economic growth could be cut by a half later this year because of the the impact of a plunge in house building.
In a report, the brokers say house completions are expected to fall by 30% in the last quarter of 2007, compared with the same period last year. "Completions, rather than starts on new houses, matter for GNP, employment and tax revenue," Davy economist Rossa White says.
As a result, growth could fall below 3% in the second half of the year, compared with more than 6% in the past six months. "The first half has been very strong, with consumption and exports both performing well. But we see a sharp decline as completions fall," White said.
That would give average growth of 4.7% this year, which is below other forecasts. Davy expects that growth in 2008 next year will be just 3% - again lower than most estimates.
White says that the new government should still meet its budget targets this year, with a strong commercial property market holding up stamp duty receipts. The big effect may be on VAT, which is charged at 13.5% on new houses. In total, property taxes may be €500m less than projected in the Budget, but could fall by a further €1bn in 2008, the report says.
With employment growth projected to also fall by a half to 1.5%, there could also be less revenue from income taxes.
The report bases its conclusions on existing data for housing starts, and the usual lag of nine months between starts and completions.
Housing starts peaked last September and have fallen from a twelve-month running total of 90,571 to 77,442.
"We still expect about 80,000 completions this year. The number of houses completed in the last quarter may decrease by close to 30% over 2006, due to the sharp decline in starts in the first quarter of 2007," the report says.
Davy expects new house completions to fall to 65,000 units next year, which is a 28% drop compared with 2006.
Every 10,000 fall in new housing units results in a 1% fall in economic growth.
The Davy report says that despite the pressure on the public finances, it expects Finance Minister Brian Cowen to deliver a Budget boost to compensate for the slowdown and the end of the SSIA spending, which could keep growth at 3% next year.
