As the e-commerce bandwagon continues to gather steam there continues to be a huge "tug of war" between the "old economy" sectors of the market and the "new economy" sectors of telecom's and technology. In general, the share prices of these growth stocks have continued to rise while shares in the more traditional sectors have tended to languish.
Until recently the major casualty of this e-commerce boom has been banking and insurance stocks with many share prices having halved over the past 12 months or so.
Meanwhile, this week saw results from three of the Irish market's industrial heavyweights - CRH, Smurfit and Green Property. The share prices of Smurfit and CRH in particular have been very weak over the past month and many investors must have been hoping that their financial results would serve to stem the slide. All three companies produced profits that were as good as or slightly better than the market's expectations.
CRH produced a rise of 55 per cent in its profits continuing its long track record of growth in both earnings and dividends. The statement accompanying the results also pointed to ongoing strong growth in Ireland and improving demand in the UK. Rising US interest rates may cause some slowdown in the US, but the underlying prospects remain positive.
Smurfit, which is in a highly cyclical business, reported a more modest 20 per cent rise in profits although exceptional items accounted for all of the improvement. Of more relevance to the share price is that product pricing and hence profitability has increased sharply this year. After a strong run in the latter half of last year, the share price has since given up much of its gains.
Given the buoyant state of the Irish and UK property markets it wasn't surprising to see Green Property produce a strong set of results. This has led brokers to revise upwards their estimate of Green's Net Asset Value (NAV) per share to around 840 cents. Despite this the shares have remained static and continue to trade at a significant discount to their estimated NAV.
The table below summarises the profit performance of these three companies and clearly indicates that they are in a healthy financial state. The prospects for all three remain good for 2000 so that the cause of the recent weakness in share prices must lie elsewhere.
Many analysts are arguing that the huge investor interest in e-commerce stocks has sucked demand away from the more traditional shares. Undoubtedly, there is some truth in this but some of the weakness would seem to reflect fears that rising interest rates in the US and Europe will eventually create an economic slowdown hurting the profits of cyclical companies. In some respects it would seem that the hype and buoyancy surrounding the technology sector are disguising the fact that bearish conditions have taken a firm grip on most sectors of the market.
This is reflected in leading broad stock market indices. International indices such as the Dow Jones Average and the FTSE 100 have declined quite sharply so far this year, while the ISEQ is barely changed. An improvement in these indices will require a swing in sentiment back towards the "old economy" sectors of the market. Although many companies now offer good value, the resumption of a bullish trend in their share prices will probably have to await the end of the current phase of rising interest rates.
