The past two weeks have witnessed some dramatic upward moves in the share prices of basic industrial stocks in sectors such as oils, chemicals and paper and packaging. This has been a global phenomenon, but it has resonated in the Irish market as the share prices of the ISEQ's heavyweight industrial stocks have risen sharply.
CRH has built on an already strong performance with the shares scaling new peaks in recent days. However, the most dramatic move has come in the once unloved Smurfit share, which has jumped by more than 40 per cent in the space of a week. It is difficult to believe that only a few months ago the Smurfit share price was languishing below £1 (€1.27) compared with its current level of more than £2 (€2.54) with most analysts predicting further rises.
The mirror image of this quite sudden shift into basic industrial stocks has been a big decline in value of companies in the high-flying sectors of technology, telecommunications and pharmaceuticals. The share prices of the buoyant banking sector have also come off the boil, but to a much more limited extent. The share prices of pharmaceutical giants such as SmithKline Beecham and computer maker Compaq have fallen sharply in recent days.
The Irish market is under-represented in these highly rated sectors, but the recent sharp falls in many of the Irish stocks quoted on Nasdaq at least partly reflects these global trends. The sharp falls in Iona's and ICON's share price were caused by unexpected profit warnings specific to those companies.
However, in the case of the largest Irish Nasdaq stock, Elan, the decline in the shares seems to be partly due to the negative sentiment sweeping the pharmaceutical sector. Of course Elan has also suffered because of delays in getting some key new drugs through the FDA (Federal Drugs Administration) approval process.
The shift of investment funds into the more cyclical sectors of the economy is being driven by the view that global economic growth will be quite strong from 2000 onwards. It is argued that Japan and other Far Eastern economies have stabilised and will be growing steadily by early next year. Brazil and other Latin American economies have also turned the corner and could well be enjoying rapid economic growth by 2000. The amazing American boom shows no sign of abating and is forecast to continue into next year. Finally, the very sluggish European economies should be responding to interest rate cuts by late 1999 and therefore should be growing more strongly into the new millennium.
The above line of reasoning paints a compellingly favourable picture and if it turns out to be correct then the recent turnaround in industrial company share prices has indeed much further to run. However, before rushing out to invest further sums in shares such as CRH and Smurfit, it is worth considering an alternative scenario.
This is one where the green shoots of recovery in Japan and the Far East prove to be a false dawn and growth in the region peters out by late 1999. Europe fails to respond to interest rate cuts and the European economy stays under pressure into 2000 and finally the great American boom finally runs out of steam.
In such a scenario the recent rises in basic industrial and oil stocks would quickly be reversed and therefore investors should probably await firmer evidence of a global economic upturn before making a final judgment.
