SHARES: Old-economy stocks lead rally as investors begin to show growing confidence due to better economic news

The final quarter of 2001 witnessed a strong bounce in global equity markets from the lows reached in the immediate aftermath of the September 11th terrorist attacks. It was always going to be difficult for markets to continue to advance during the early months of 2002. Indeed, during January and February, equity prices declined albeit not precipitously.

The focus of investor attention shifted to accounting issues in the aftermath of the Enron collapse in the US. This focus on the quality of reported profits saw many high- profile companies in the telecom and technology sectors in particular come under the analytical and media spotlight. In some cases investigations by the US Securities and Exchanges Commission were announced.

In this environment, investors have been quick to sell stocks where there is even a whiff of accounting related issues. On the Irish market the collapse in the share price of Elan was symptomatic of this change in investors' perceptions.

The global media focus on the issues surrounding the bankruptcy of Enron served to disguise signs of an improvement in global economic conditions over the first quarter.

Closer to home, the collapse in Elan's share price and the revelation from AIB that a rogue trader had lost $691 million in its Allfirst subsidiary naturally grabbed the financial headlines. However, these dramatic events distracted attention from the more mundane economic data, which was showing that the Irish economy continues to perform well.

During March, economic data from the US economy confirmed that a resumption of growth had firmly taken hold. Furthermore, revisions to previously issued data now indicate that the US experienced only one quarter of negative growth in 2001. In the US the technical definition of a recession is two consecutive quarters of negative growth. Irrespective of the technical definition of recession, it is clear the US recession in 2001 was very shallow and short-lived.

During March stock markets around the globe began to respond to this better economic news. For example, the FTSE 100 rose by 2 per cent while many European indices rose by between 2 per cent and 4 per cent. The ISEQ rose by 4.5 per cent in March driven mainly by the continued strong run in the financial sector.

Despite the emergence of a tentative improvement in investor sentiment during March, the returns from equities over the first three months of the year were somewhat mixed. The broad US market as measured by the S&P 500 was barely changed over the quarter, while the tech-laden Nasdaq slipped by a further -4.5 per cent.

European equity markets were somewhat better although the magnitude of out-performance was unconvincing. The FTSE 100 rose by 1 per cent while the Eurotop 300, which includes Europe's largest publicly quoted companies rose by 1.5 per cent.

The ISEQ index was one of the worst performing indices across Europe with a negative return of more than 9 per cent in the first three months of the year. The Finnish market did worse due to the dominance of Nokia in its index. A similar situation explains the under-performance of the ISEQ where an approximately 70 per cent decline in Elan's share price dragged the overall index down. At the beginning of the year Elan was the largest Irish company measured by market capitalisation. If Elan was excluded from the calculations then the Irish index would have risen by approximately 4.5 per cent during the first quarter.

"Old economy" shares dominate the list of the top performing shares over the first quarter. Companies that produced the strongest returns in the first quarter include McInerney Holdings, Jurys Doyle Group, Irish Life & Permanent and First Active.

The only technology stock to get into the top five was Riverdeep Group, whose share price rose by 32 per cent during the first quarter. The only other technology company of note to deliver a strong positive quarterly return was Parthus Technologies. Technology companies dominate the worst performing shares over quarter one.

Excluding Elan the bottom five performers are all technology companies and include Trintech, Baltimore Technologies, Horizon Technology, Alphyra and Iona Technologies. The share prices of these companies declined by between 15 per cent and 38 per cent during the quarter.

The sectoral pattern of relative returns in the Irish market does reflect trends on a global basis. In general, financial and cyclical stocks have out-performed companies in the high-growth sectors of technology and pharmaceuticals. This would seem to reflect a return to conservatism among investors in their approach to stock selection and continued scepticism regarding the growth prospects of technology and telecom companies in particular.