Some long-term stalwarts are still likely to outperform the market

Over the past month, global equity markets have regained some of their previous losses as interest rate cuts from the Federal Reserve, the European Central Bank and the Bank of England have acted to boost investors' confidence. In addition, tax cuts and promised increased government spending in the US have generated expectations in some quarters of an economic revival during 2002.

Nevertheless, stock prices continue to be very volatile and, in general, financial reports from companies continue to point to tough times ahead. Several leading corporations have produced results that have been in line with expectations and this has acted to improve market sentiment.

However, analysts have by now sharply cut profit estimates for this year so it should not be surprising that companies are meeting these revised lower profit forecasts.

A high degree of uncertainty remains over next year's profit forecasts and there is still a general sense that an early resumption of bullish market conditions is unlikely.

The Irish equity market has followed this global trend and it is instructive to review the companies that have led this revival in share prices in recent weeks. The list of the top 10 share price performances over the past month is headed by Parthus Technologies (up by 62 per cent) and includes Smurfit, Irish Continental Group and Bank of Ireland. Technology companies fill the top four slots and Baltimore Technologies makes it into the top 10.

Therefore, in the Irish market, five of the top 10 share price performances in the past month are technology companies. This is consistent with the global pattern where bombed-out technology stocks have led the market bounce-back.

The fact that this share price revival has had such a narrow focus does not bode well for a near-term sustainable rally. It is noteworthy that, of these top 10 monthly performances, only one - Bank of Ireland - managed to outperform the ISEQ index over the past five years.

The accompanying table sets out the top 10 price performances relative to the ISEQ over the past five years. This list is headed by McInerney Holdings, which was on the brink of bankruptcy five years ago but managed to survive and has since prospered. The small financial services company IFG holds the second slot but, thereafter, the list includes several large and mid-capitalisation stocks.

In the banking sector, Bank of Ireland and Anglo-Irish Bank outperformed the ISEQ by 53.7 per cent and 89.7 per cent respectively over the period. The building and construction sector is well represented with CRH and Grafton Group joining McInerney in the top 10. Pharmaceuticals are also strongly represented, with Elan Corporation outperforming the ISEQ by 82 per cent over the past five years.

The food sector is poorly represented, with only IAWS making it into the top 10 with a relative performance of 80.4 per cent.

Technology companies are not represented at all, although the majority of quoted technology companies were not even listed five years ago. The year-to-date relative returns from these 10 companies are in fact quite good, and only McInerney has underperformed so far this year.

Most investors in the stock market will have an investment time horizon of three to five years or longer. Will those stocks that have historically performed well continue to outperform over the next three to five years? No one can answer this question, but the list of companies shown here probably provides a good starting point.

Ultimately, the economic environment that emerges in the next few years will determine share price returns. Given that the economy is likely to be more subdued over the next three to five years compared with the past five years, food stocks could well do better in coming years given their defensive characteristics.

Tech stocks could also feature, given that the share prices of most of these companies have now fallen to more realistic levels. Those technology companies that survive the current market shakeout should be capable of growing faster than the overall market average.

Whilst food and tech stocks could well do better in the next three to five years, it is still likely that some of the market's long-term stalwarts will continue to feature in any list of outperformers.