Is it time to get back into the market?

With the global economy looking more upbeat, people are again considering the equity market as a target for investment. They may have missed the boat for huge gains, but share prices can still rise, writes Laura Slattery

Is the US recession over? According to the National Bureau of Economic Research in Washington, a recession in the US officially began in March 2001. Fast forward to March 2002, and the economic picture for investors seems a lot brighter.

Although some US analysts fear that the world's largest economy might slip back into the second slump of a "double-dip" recession, most are now cautiously optimistic about a substantial recovery from last year's slowdown.

Recent evidence "increasingly suggests that an economic expansion is already under way", Mr Alan Greenspan, chairman of the US Federal Reserve, said at the beginning of the month.

Since then, disappointing consumer spending figures for February in the US clouded the short-term forecast but positive thinking is still the order of the day.

"People who like to worry can worry about interest rates or Enron, but the positive background is still intact and it is going to be a positive year," says Mr Eugene Kiernan, head of asset management at Irish Life Investment Managers. "The key message is that normal service is being resumed."

Economists are even questioning whether normal service in the US was interrupted by anything more than a temporary blip, caused by the events of September 11th. Before the terrorist attacks some sectors had already shown "tentative signs of stabilisation", Mr Greenspan told the US Senate banking committee.

Instead of grabbing hold of signs that a recession is over, some commentators are searching for evidence that a full-blown recession occurred in the first place. The US gross domestic product figure was expected to fall in the fourth quarter, as it had in the third. It didn't, and the US economy failed to fulfil the definition of a recession as two consecutive quarters of negative growth.

"It seems quite clear that our economy never suffered a recession," concluded US treasury secretary Mr Paul O'Neill, while a report from the US Labor Department suggested that rapid growth in productivity took place in the fourth quarter of 2001.

The rise in productivity was a striking aspect of the US economic performance in 2001, reflecting the flexibility of the US labour market, according to Dr Dan McLaughlin, chief economist at Bank of Ireland.

"In a flexible system, it is easy to sack someone. That sounds negative, but companies will also more readily employ someone as soon as there looks like there will be a recovery. If you can't fire someone, you are reluctant to hire them," he says.

The spate of job losses in the technology sector may have been the most visible sign of a slowdown in the Republic, but employment legislation protecting workers' rights is one of the factors causing difficulties in the German economy, Dr McLaughlin notes. The euro zone's largest economy shrank by 0.3 per cent in the final quarter of 2001.

"The problem is there are so many structural difficulties there - over-taxation, overspending, a rigid labour market," Dr McLaughlin says.

On the other hand, the most dynamic economy in Europe is the Republic. "We got away lightly. It was a very mild downturn," he says.

As well as a number of upbeat company trading statements, consumer spending was "pretty robust", he adds.

"What people need to understand about the downturn last year is that it was predominantly a corporate downturn affecting the profits of companies that had invested too much, particularly in IT. Companies then cut their investment quite sharply, but consumers didn't particularly feel that there was a recession. They just kept spending."

A cyclical global downturn will mean a cyclical upswing: although Europe's recovery may lag the US it is still expected to follow its lead. European Central Bank president Mr Wim Duisenberg believes most economic developments have been in line with expectations and are pointing to gradual euro-zone recovery during the rest of the year.

"Europe has more catch-up to do," says Mr Rory Gillen of Merrion Stockbrokers. "We would be reasonably optimistic that we would have turned the corner but low interest rates are the key. Lower interest rates make the environment much better for investors and equities more competitive, and Irish equities are no exception."

So with signs pointing in the direction of a healthy, relatively bump-free recovery, is now a good time for people to invest in shares?

"We're coming out of a tough time. To some degree, the visibility is less than you would hope for, but on balance it's a reasonably good time to invest," says Mr Gillen.

"This year we have seen an unwinding of some of the fears that hit the market last year after the foot-and-mouth crisis and September 11th," says Mr Liam Igoe of Goodbody Stockbrokers. "The short answer is, yes, it is a good time to invest, but people would certainly want to be selective and look for stocks that aren't too expensive."

Mr Igoe envisages an 8 per cent growth in the ISEQ this year. "There has been a reduction in our bullishness because Elan has come crashing down and also because several companies have done well to date," he says.

But sharp recovery in share prices began as early as last October; returns for people entering the stock market now are not likely to be as dramatic, says Dr McLaughlin. "The equity markets bottomed on September 21st, 10 days after September 11th, and some of the gains since then have been spectacular," he says.

"If you look at Intel, on the 20th of September it was trading at under $20, but two months later it was trading at $35. Since then it has traded between $30 and $35. It does look as though it's going to rise again, but I don't think it's going to go up by the same percentage."

The best opportunity for gains may have passed while the US was still in shock. But there is still room for improvement in prices and still room for investors to make a profit, according to Mr Kiernan at Irish Life Investment Managers.

"When you look at the Irish market, the ISEQ seems to have performed quite poorly, but that is mainly due to Elan," he says.

"People have to be realistic," he adds. "Market timing is a mug's game. You can't always be waiting around for the next statement from Alan Greenspan or whoever."

But for brave buyers, the post-September 11th economy offered low share prices on stocks that would bounce back as the US war on terrorism got under way and companies stopped panicking.

Goodbody

Mr Liam Igoe, a senior equity analyst at Goodbody Stockbrokers, picks out Abbey and Grafton as stocks with very competitive rates. His next selection is Greencore. Thanks to its acquisition of Hazlewood Foods last year and proceeds raised from the disposal of non-core businesses, the group can operate more effectively in fast-growing sectors of the food market.

Irish Continental Group (ICG) is one of Mr Igoe's selections because of its relatively low rating. Finally, investment group DCC is a share Mr Igoe has been recommending for some time.

Share prices:

Abbey      €3.85

Grafton      €4.00

Greencore  €3.16

ICG         €7.97

DCC       €11.75

Hibernian

Mr Bernard Swords, head of equity at Hibernian Investment Managers, says there should be a "reasonable rate of return" up to the summer months, when there may be a lull in the market. Mr Swords tips Irish Life & Permanent from the Irish financials and says it should see good pick-up on mortgages and good cross-selling through its recent acquisition of TSB.

Growth in the low-fares airline industry in the long-term is why Ryanair would be another favoured Irish stock. Internationally, Total is his pick for the oil sector, while IBM is his tech stock of choice. Pfizer is his pharmaceuticals pick.

Share prices:

Irish Life & Permanent €13.90
Ryanair Holdings   €6.65
Total Fina Elf   €170.7
IBM     $105.6
Pfizer    $40.51

Friends First

Mr Gerry Mangan, a senior investment director at Friends First, picks CRH as one of his three favoured Irish stocks. "CRH has a superb management team and increasingly strong balance sheet, and has skill at finding acquisitions and making them work," he says. Grafton is also very well managed: "It's a bit like CRH, except on a smaller scale so there is a little more flexibility."

Lastly, Mr Mangan thinks Irish Life & Permanent's strategy of focusing on the Republic is effective. "The demographics here are in its favour in the life and pensions market, so from that point of view they will be very strong going forward."

Share prices:

CRH  €20.00

Grafton €4.00

Irish Life & Permanent €13.90

Irish Life

Mr Eugene Kiernan, head of asset management at Irish Life Investment Managers, expects to see returns of between 8 and 10 per cent on stocks this year but has selected five that should do even better - "in the 10 to 15 per cent type of range", he says. From the Irish market, he has picked Bank of Ireland, Kerry Group and Ryanair. "Bank of Ireland has performed very well and is still a quality name," he reasons.

"The Kerry group has done well through acquisitions and should have room to build after the acquisition of Golden Vale."

Ryanair, meanwhile, has "tremendous growth potential". From the US stock market, Mr Kiernan has selected the media corporation Viacom. In Britain, Vodafone is his favoured choice."There may be a big gap before people update their mobile phones, but Vodafone is still a key player."

Bank of Ireland   €12.57

Kerry Group    €15.32

Ryanair Holdings   €6.65

Viacom      $50.31

Vodafone Group   £1.34

Share prices (close March 22nd, 2002):