Bright spots light up market gloom

November was another very difficult month for equity markets and particularly so for the once highflying technology, media and telecom (TMT) stocks. Over the month, the Nasdaq Composite Index fell by 25 per cent while in Europe the telecom and technology sector dropped by 18 per cent.

In contrast, some sectors of the stock market, such as banks and pharmaceuticals performed quite strongly during November.

Indeed this year is proving to be exceptional in terms of the sharp diversity of returns across market sectors and indeed between companies within the same market sector. In terms of the broad stock market, it seems certain that all the larger stock markets will show declines this year.

For example, in the year to the end of November, the S&P 500 is showing a return of 10.5 per cent, the FTSE 100 is down by 11.4 per cent per and the Nikkei 225 Share Average has fallen by 22.6 per cent. Only the euro zone has any prospect of producing a positive return in 2000 and this will only be the outcome if European returns are strongly positive during December. However, an analysis of sectors and individual stocks provides a far more illuminating picture regarding the divergent trends experienced by stock market investors so far this year.

The accompanying table provides a by no means exhaustive sample of returns across global sectors and selected Irish shares that illustrates the contrasting experience of different market sectors during the year.

Clearly the most startling shift across markets is exemplified by the 36 per cent fall in the Nasdaq in the year to date. In fact the bursting of the technology bubble is even greater than this since the Nasdaq is now 50 per cent below its peak in March.

The story in Europe is similar and the European telecom sector has now fallen by one-third so far this year. Closer to home, high-flying Baltimore Technologies has now almost halved in value this year and now faces ejection from the FTSE 100 index for the second time this year.

Despite its recent bounce on the back of takeover talks, Eircom has fallen in line with the European telecom sector. In contrast to this unmitigated gloom across TMT stocks, some sectors such as banks and pharmaceuticals have produced some stellar returns over recent months. In pharmaceuticals, Elan stands out and shareholders have enjoyed a doubling in its share price during the year.

Worldwide, pharmaceutical stocks have done well as investors have been attracted to the drug company's twin characteristics of above average profit growth and a relatively secure stream of earnings.

Another strong sector during 2000 is the financials, with Irish financials doing particularly well. The Irish banks have now outperformed their European counterparts by a significant margin so far this year, and growing profits from the buoyant domestic economy seem set to underpin the sector for the foreseeable future.

However, the poor returns experienced by many traditional industrial sectors highlights that there is not a neat "old economy" versus "new economy" dichotomy that can explain the divergent returns in stock market returns.

In the Irish market this is starkly illustrated by Smurfit and CRH, which have declined by one-third and more than 20 per cent respectively this year. These share price declines mirror closely the experience of the global paper and global construction sub sectors.

For investors in the stock market, the past 12 months seem set to be the poorest for several years. However, individual experience will vary enormously and those investors who resisted being sucked into the technology and telecom euphoria that was rampant this time last year could well show quite healthy returns, particularly if they concentrated on financial and pharmaceutical shares.