Investor: Most equity markets fared poorly in March due to ongoing concerns regarding the sustainability of the global economic recovery.

This fragile investor sentiment was further strained due to the Madrid terrorist attacks, which led to heightened geopolitical tensions.

As the table shows, across the board declines were recorded by international equity markets for the month of March, although the Irish equity market managed to avoid a decline by a whisker, posting a positive return of 0.1 per cent.

The poor performance in March meant the good returns recorded over January and February were largely eroded to give a decidedly mixed picture for the first quarter of 2004.

In the US, the S&P 500 index rose by 1.3 per cent while the technology-heavy Nasdaq declined by 0.5 per cent. In Europe, the FTSE Eurotop 300 rose by 2.5 per cent in contrast to the decline of 2 per cent for the UK market's FTSE 100 index.

Compared with these returns, the 5.1 per cent gain from the Irish index stacks up very well, even if a substantial portion of this outperformance was due to the phoenix-like recovery in the Elan Corporation share price.

The key economic factor that was negatively impacting on investor sentiment during the first quarter was the monthly data on US non-farm payrolls. This is viewed by most economists as the key indicator of employment conditions in the US.

More importantly, it is also viewed as one of the most important regular economic releases by the Federal Reserve. The reports covering January and February indicated that the US economy was creating jobs at a snail's pace by comparison with previous economic recoveries.

The report covering March was released on April 2nd and the consensus forecast was for a rise of 120,000 in US non-farm payrolls. As it turned out the report recorded a job creation figure that was the strongest in four years.

Non-farm payrolls in March rose by 308,000 and, more importantly, there were upward revisions to the previous two months data. This means that we have now witnessed a healthy half a million US jobs being created in the first quarter of 2004.

If this pace of job gains can be sustained, it would mean that the monthly pace of job gains would be in the 150,000-200,000 range. Such a pace of job creation would be sufficient to dispel most of the fears regarding the sustainability of the current US economic expansion.

Market reaction to the report was instantaneous across the globe. Share prices rose, the prices of long-term government bonds declined and the US dollar strengthened on the foreign exchange markets.

As a result, the second quarter has started on a positive note for equity market investors. Whether this more positive tone can be sustained for the full quarter will depend on whether the US payroll figures for April to June confirm the healthier trend evident in the March data.

In the Irish market, it was the financial sector that responded very positively to the sharp initial rise in international equity markets. During the first quarter, Irish financials underperformed the European average by approximately 4 per cent so that Irish bank share prices did have some recovery potential.

International investors, in particular, seemed to be worried about the ongoing erosion of net interest margins in Irish banking. This fed fears that there could be an ongoing squeeze on the profit margins of Irish banks due to heightened competition. Worries about the potential for an asset price bubble in the Irish housing market also resurfaced.

However, recent data regarding the health of the Irish economy seem to belie these fears. Statistics on the labour market showed that the number of people at work continued to rise last year.

Recent national accounts data on the overall economy covering the last quarter of 2003 showed that the economy accelerated sharply in that quarter. Real gross domestic product grew by 3.1 per cent between the third and fourth quarters, which was a significant recovery from the fall of 1.2 per cent recorded between the second and third quarters.

Exchequer figures for the first quarter of 2004 showed that tax revenues were buoyant, which indicates that the end-year momentum was carried through into this year.

The improving Irish economy on its own will not be sufficient to lead to uplift in the share prices of Irish financials. However, if a positive global trend re-emerges, it is likely to quickly feed through to demand for Irish stocks, given the good domestic economic fundamentals.