Share prices across the globe enjoyed favourable trading conditions in September so that most equity indices rose modestly over the course of the month. However, such gains were not sufficiently strong to erode the losses sustained in July and August, so that returns for the third quarter as a whole were weak.

For example, the FTSE E300 of European shares declined by 1.1 per cent during the quarter.

In contrast, the ISEQ Overall index outperformed significantly in that period, with a rise of 2.6 per cent.

The first few days of trading in October have seen a continuation of positive investor sentiment and, as a result, the ISEQ Overall index is currently up by approximately 15 per cent so far this year. This is far better than the returns from US and European indices, which are displaying year-to-date gains ranging between 2 per cent and 5 per cent.

Even when the large positive impact from Elan's share price is excluded, the Irish index still outperforms overseas markets, albeit by a smaller margin. The ISEQ (ex-Elan) has returned 6 per cent this year to date, which is still double the 3 per cent return from the FTSE E300 index of leading European shares.

The strong performance of the Irish economy is a factor underpinning the Irish equity market. According to recently released National Accounts data, real GNP (gross national product) grew by 4.2 per cent year-on-year in the second quarter of 2004 and by 4.7 per cent for the first six months of this year.

Within the growth components, investment continued to grow rapidly, due in no small part to the ongoing buoyancy of the construction sector.

For the second quarter, investment spending grew at an annual pace of 14 per cent, whilst exports of goods and services increased by 6.6 per cent. Consumption lagged a little with growth of 2.2 per cent.

Most forecasters now expect the Irish economy to grow by more than 5 per cent in real terms this year. Furthermore, as long as global conditions remain steady, another year of 5 per cent growth is expected for 2005.

Although many quoted Irish companies have large overseas operations, most still have substantial Irish businesses. In the case of the financial sector, the Republic generates the lion's share of profits.

The dependence on the domestic market is much lower for companies that have successfully diversified internationally, such as CRH and Kerry Group. CRH generates approximately 15 per cent of operating profits in the Republic, whereas Kerry generates more than one-third of its profits domestically.

The buoyant Irish economy is clearly having a positive impact on the profit growth of Irish quoted companies. Financial reports covering the first half of 2004 have been generally better than analysts' forecasts and have often been accompanied by generous hikes in dividends paid to shareholders.

While the domestic economic background has had a generally favourable influence on Irish companies, analysis of individual stock performance shows that 2004 has been dominated by special situations.

Warner Chilcott (formerly known as Galen) has recently jumped up the performance league table as it is the subject of a take-over approach from no less than three interested parties.

Taken together with the earlier rise in the Elan share price means that the pharmaceutical sector has played a dominant part in the performance of the ISEQ Overall index this year. Elan, Warner Chilcott and United Drug now have a combined market capitalisation of €10 billion, which accounts for 14 per cent of total market capitalisation.

Outside of the pharmaceutical sector, the top-performing shares so far this year consist mainly of mid-capitalisation industrial stocks.

Kingspan, Grafton and DCC have all enjoyed year-to-date share price gains in the region of 40 per cent. Heiton, which has recently been taken over by Grafton, has done even better with a rise of more than 60 per cent and sector minnow Unidare has staged a sharp recovery and is now up 80 per cent since the start of the year.

The financial sector, which accounts for more than 40 per cent of market capitalisation, has been a disappointment in 2004. The share prices of AIB, Bank of Ireland and Irish Life & Permanent have barely advanced. Anglo Irish Bank is the only one that has delivered an above-par return of more than 20 per cent.

Although business is booming across the banking sector, profit growth has been capped due to intense competition.

Ryanair and Waterford Wedgwood are at the other end of the performance spectrum.

A fierce fare price war has stalled the low-cost airlines profit growth and its high-flying share price has fallen sharply this year. However, the company is still generating healthy profits and has a strong balance sheet so it should be able to weather the current storm.

Waterford Wedgwood's problems seem to be more intractable as the company struggles to simultaneously increase sales and repair its stretched balance sheet.

For the ISEQ Overall index, a gain for the full year of approximately 20 per cent is a real prospect. This would be a very strong return - although it would be heavily influenced by the more than trebling of the Elan share price in 2004.

Nevertheless, a solid outturn in the final quarter would be enough to ensure a return in the order of 10 per cent from the ISEQ Overall index (excluding Elan) in 2004. If achieved, this would be the second year of recovery from the bear market and would do much to reinstate belief in equity investing.