Investor: An insider's guide to the market After a lacklustre first quarter, investors in equity markets must have been hoping for something better over the remainder of the year. However, April has disappointed the optimists as share prices across the globe drifted lower.

Record high oil prices and intensifying concerns regarding the prospects for global economic growth were the main factors creating negative sentiment amongst market participants.

As yet, the poor performance of equity indices so far this year is not particularly worrying. After strong years in 2003 and 2004, some consolidation was to be expected and the year-to-date falls in indices is quite modest.

The S&P 500 index is down 4.1 per cent so far in 2005 after an April decline of -0.9 per cent. European indices did worse in April, with the FTSE Eurofirst 300 index and the FTSE 100 index enduring falls of -2.4 per cent and -2.3 per cent respectively.

The ISEQ Overall index had quite a poor month, falling by -3.3 per cent, which means that it is down by -5.9 per cent year-to-date. Of course, Elan accounts for approximately 8 percentage points of this decline. If Elan is excluded, the Irish market is up 2 per cent, bringing its year-to-date performance into line with the European average.

The surge in the oil price to record highs in the early part of the year was the key negative influence on share prices during the first quarter. Although the oil price remained high in April, the focus of concern shifted to more intense questioning of the durability of the current rate of global economic growth. In particular, manufacturing activity shows signs of slowing in both the US and euro zone.

Although the services sector of modern economies now accounts for the lion's share of gross domestic product, manufacturing is often viewed as a good leading indicator of turning points in the economy. Euro-zone manufacturing production contracted in April for the first time since August 2003. In the US, manufacturing activity has been booming up to recently, but current surveys of business sentiment are pointing towards a slowdown.

The downward move in bond yields during April is also consistent with the view that an economic slowdown is emerging. German 10-year bond yields declined from 3.7 per cent to 3.4 per cent during April, a decline of 30 basis points. US bond yields also declined with the 10-year Treasury yield falling from 4.6 per cent to 4.2 per cent.

The US bond market has confounded most analysts in the past year as the consensus view was that 10-year bond yields would rise to more than 5 per cent due to the impact of rising short-term interest rates.

Short-term rates have indeed risen but bond yields have not responded as vigorously as expected. This suggests that participants in the bond market are much more sceptical about the ongoing strength of the US and global economies. Therefore, they see inflation remaining very subdued and, as a consequence, are prepared to continue to invest in bonds offering historically low nominal yields.

Weak phases in the equity market, such as the current one, are particularly challenging for investors as they try to assess whether share price weakness is likely to turn into a rout. On the other hand, the current weak phase may represent a good buying opportunity as the share prices of many companies fall below recent peaks. Investor is more inclined to the latter view and would, therefore, be trying to identify companies whose share price has fallen to a level that makes investment attractive.

In general, the economic and financial environment remains broadly supportive of equity markets. Low bond yields improve the relative valuation of equities and most companies are currently generating healthy profits.

The very rapid pace of profit growth of recent years is bound to slow down but it is most unlikely to ground to a complete halt. With interest rates and bond yields so low, a high proportion of investment funds are bound to seek a home in the equity markets.

This relatively benign international background combined with ongoing strength in the Irish economy supports the view that the medium-term trend for the Irish market remains positive.

Some of the markets largest stocks, such as Bank of Ireland and CRH, are now trading at more than 10 per cent below recent peak share prices. The more volatile Ryanair is approximately 15 per cent below its recent high and, at these somewhat lower prices, Investor believes that these three companies will not disappoint investors over the medium term.