The recent half-point rise in interest rates from the European Central Bank (ECB) and the quarter-point increase in the British base rate seems to have acted to calm global stock markets. Long-term yields on government bonds have declined and in general share prices have risen since the central banks raised official interest rates. The consensus seems to be that early action now virtually removes the danger of inflation over the medium term.
Amongst the main sectors of global stock markets there seems to be a perceptible shift in investor sentiment back towards growth stocks. In general, pharmaceutical and telecommunications stocks have risen strongly in the past month and have recovered much of the ground lost earlier in the year.
Investors in the Irish market could be forgiven for being sceptical about this recent strength since the comparable stocks on the Irish exchange have failed to join in this renewed buoyancy. Elan has declined by 20 per cent in the past month as the company continues to suffer from delays in bringing key products to the market.
As regards Eircom, its share price seems to be trapped in a narrow range around the issue price. Esat has been the only major Irish share to participate in the growth stock recovery with a rise of 25 per cent in its share price over the past month.
The table below shows the recent share-price performance of some of the major global pharmaceutical and telecommunications stocks and highlights that most of these shares have risen by 1020 per cent over the past month. Telecommunications stocks are now showing very strong rises in the year-to-date. KPN, which holds a 20 per cent stake in Eircom, has risen by almost 20 per cent over the past month and all the telecom stocks are showing strong rises so far this year.
In contrast, pharmaceutical shares present a more mixed picture with a number of shares still in negative territory year-to-date. For example, Glaxo Wellcome's share price declined sharply earlier in the year as the company failed to meet its very ambitious sales targets.
However, a big factor in the under-performance of growth stocks earlier in the year was due to rises in long-term government bond yields. The fact that these stocks have come back into favour suggests that investors are now taking the view that longterm interest rates may have already peaked.
Another sector that is very sensitive to interest rates, both longterm and short-term, is the financial sector. In most international markets the recent performance of financial shares has been consistent with the view that long-term government bond yields have stabilised. Banking and insurance sectors have seen solid rises over the past four to six weeks.
Again this better tone has not been reflected in the Irish market and even the takeover of Hibernian by CGU has failed to ignite the Irish financial sector. Nevertheless, if international growth and financial shares hold onto their recent gains, it can only be a matter of time before comparable Irish quoted shares respond to this more positive sentiment.
