Deepening concerns regarding the durability of the global economic expansion are having a debilitating effect on global share prices. These concerns have been given added impetus by the seemingly inexorable rise in oil prices in recent weeks.
The main global equity indices have traded in a very narrow range so far this year, although there is no doubting the downward bias. Weakness has been most evident in the US with the Nasdaq down 12 per cent and the broad-based S&P 500 index down 4 per cent. Europe has fared a bit better with a 2 per cent decline in the FTSE Eurotop 300.
The ISEQ Overall index has fared much better with a year-to-date gain of approximately 8 per cent, although much of this has been fuelled by the near trebling in the Elan share price. Excluding Elan, the result is a still creditable return of 2 per cent for the ISEQ.
Therefore, investors in the Irish market are faring a little better than their overseas counterparts. How much better depends crucially on stock selection: those portfolios that have a significant holding in Elan will have enjoyed very good returns so far this year.
Nevertheless, a review of the winners and losers in 2004 reveals that success need not have been entirely dependent on Elan. Many Irish stocks have delivered very healthy returns to shareholders so far in 2004.
DCC stands out among those companies with a market capitalisation of more than €1 billion as its shares have surged by more than one-third. DCC recently reported a very good set of financial results and this stimulated some active buying of the shares.
It operates across a number of sectors such as oil distribution, healthcare and information technology. Along with profit growth, this diversification is a further attraction in the current uncertain economic climate.
Kerry Group, capitalised at more than €3 billion, has also delivered solid returns this year, with a share price gain of 17 per cent. Kerry is experiencing good growth in revenues and profits - a key factor underpinning its strong share price performance.
Among the market's leading stocks (those with a market capitalisation in the region of €10 billion), CRH stands out with a year-to-date gain of 12 per cent. After a period of static profitability during the economic slowdown, CRH has re-entered a period of profit growth.
Its markets in the US and Europe have recovered over the past 12 months and prospects remain bright for further growth. The shares, therefore, seem to be well supported at current levels.
In contrast, financial stocks have struggled somewhat. Bank of Ireland's share price is more or less unchanged since the start of the year, while Irish Life & Permanent is down 5 per cent.
Despite all the negative publicity surrounding AIB, it has managed to eke out a small share price gain so far this year.
The financials have been enjoying strong growth in revenues and profits, but this has not been reflected in the stock market. Investors remain sceptical regarding the banks' ability to continue to grow profits.
Net interest margins at all the banks have continued to contract in 2004. As a result, the large expansion in their loan portfolios has resulted in a disproportionately smaller gain in profits.
Investors expect that this key measure of the banks' ability to generate profits will continue to decline due to intense competition and persistently low interest rates. In this environment, it is likely that the share prices of the financials will remain in a trading range until there is clear evidence that the decline in the net interest margin has been arrested.
Among the larger Irish-quoted companies, the weakest performer has been Ryanair. Its share price is approximately one-third lower than its level at the beginning of the year.
The price war in the low-cost airline sector combined with the rise in the oil price is cutting into Ryanair's profits. The company is still very profitable but tough competitive conditions are likely to persist for quite some time.
Of the smaller companies, Heiton stands out with a rise of more than 50 per cent in 2004, with much of that rise occurring after the takeover announcement from Grafton Group. Indeed, Grafton has also enjoyed a good run in 2004, with the shares up by an impressive 20 per cent.
With the US presidential election looming and the oil market so volatile, the second half of the year could well be even more unpredictable than the first half. However, a careful stockpicking approach is capable of bearing fruit, even in very testing times.
