Financials given a run for their money by rest of market

As the end of the first quarter of 1999 draws near it looks as if it will be recorded as a very good quarter for equity investors. European and North American markets have maintained their strong performance whilst there has been a significant improvement in Asian markets. The Irish equity market has been one of the better performers in Europe rising by more than 8 per cent during the quarter. While Irish banking shares have done reasonably well in the first quarter, there has been a perceptible shift in the pattern of relative performance as between the various sectors of the market.

Up to the end of 1998 Irish financial stocks led the market higher for most of the bull market period. For example, over the past 12 months, banks rose by 20 per cent compared to a fall of 2.9 per cent in the nonfinancial sector.

Within industrial stocks, the food sector declined by 14.7 per cent over the past 12 months, not to mention the 65 per cent decline in the resource sector.

Year-to-date resource companies have continued to suffer, but in sharp contrast to previous periods, non-financial stocks have on average outperformed financials. The respective sectoral indices have risen by 11 per cent (non-financials) and 3.2 per cent (financials). This trend is reflected in the strong year-to-date performances by the market's two leading industrial stocks.

Smurfit has risen by more than 30 per cent from a depressed level, while CRH has continued to power ahead. In contrast Waterford/Wedgwood has continued to seriously lag the market.

Another sign of change in the underlying pattern of performance is that the relative decline of small capitalisation stocks seems to have halted. On average, small cap stocks rose by more than 4 per cent during the quarter compared with the decline of 15 per cent endured by the index of small cap stocks over the past twelve months.

It is very difficult to assess whether the trends evident in quarter one will be repeated for the rest of the year. However, examination of the factors influencing some of the major companies should provide some useful clues going forward. In the industrial sector the turnaround in the Smurfit share price looks as if it will be sustained. Confidence is rising that the price of linerboard in the US will rise which points to a healthy demand for Smurfit's paper and packaging products. The Irish markets largest industrial company, CRH, is performing very strongly with profits rising in all of its major markets.

Although CRH's shares are very highly rated, the prospects for the remainder of the year remain very favourable. Once one examines the prospects for the mid-capitalisation stocks such as Waterford/Wedgwood, Ryanair and Kerry the picture becomes more mixed. Some, such as Waterford/Wedgwood seem mired in a difficult business environment, whereas others, such as Ryanair and Kerry are continuing to enjoy strong demand for their products.

The position concerning small cap stocks is even more uncertain with many trading on low P/E ratios and offering high dividend yields.

Although their exposure to the Irish economy is a positive factor, institutional investors are continuing to shun these companies. However corporate activity in the form of mergers and management buyouts has created a more positive tone to share prices.

Meanwhile, financial stocks remain well underpinned as the Irish economy continues to boom and mergers and acquisition activity in Europe keeps interest in the sector at a high level. This leads to the overall impression that the divergence in performance between the various sectors of the Irish stock market will be much less pronounced in 1999 than was apparent in recent years.