The long summer lull in stock markets has been replaced in recent weeks with increases activity and sharply rising share prices in the technology, media and telecom (TMT) sectors of the market.
Old Economy stocks have also seen improving share prices and this has been reflected in new peaks being achieved in several of Europe's broader stock market indices. The FTSE 100, CAC-40 and DAX have hit new all-time peaks in the past week.
There would seem to be several reasons for this return to confidence in the markets. Possibly the most important is that a majority of analysts now take the view that the US Federal Reserve is unlikely to increase US interest rates until after the November presidential election.
Recent US economic data have confirmed that the torrid pace of US economic growth is finally slowing down. Inflation remains under control, and the odds have shortened considerably that Fed chairman Mr Alan Greenspan will succeed in engineering a soft landing for the US economy.
In Europe, the ECB has further increased euro interest rates but this time the rise was only 0.25 per cent to bring the central rate up to 4.5 per cent. Some commentators feared that the ECB would be more aggressive with a 50-basis point rise.
While the ECB is clearly concerned about rising euro inflation, there is growing evidence that Europe's economic recovery may not be as strong as previously thought. If this is the case, then the ECB will be slow to raise euro interest rates sharply from current levels for fear of aborting the economic recovery.
In Britain, there is a growing consensus that sterling interest rates have already peaked and this has been reflected in the recent weakening of the sterling exchange rate. In tandem, the British stock market has broken out of its summer trading range and the FTSE 100 is now expected soon to break through the 7,000 level.
It now seems that investors returning from their summer holidays could well find that the current return to bullish conditions is sustained through the autumn. However, deciding on what sectors and individual stocks to invest in will be crucial. The early evidence suggests that the markets will be led higher yet again by stocks in the TMT sectors.
A comparison of the Irish-based TMT stocks and the ISEQ index epitomises this trend. While the Old Economy ISEQ index has, in fact, performed reasonably well in recent weeks, it has been put in the shade by companies such as Baltimore and Parthus Technologies. Because the majority of Irish high-tech companies have their primary listing overseas, they do not qualify for inclusion in the ISEQ index.
After being ejected from the FTSE 100 three months after its initial inclusion, Baltimore now looks set to re-enter the premier index. Baltimore's share price has jumped by more than one-third in recent weeks and its market capitalisation has reached a level that virtually assures it of inclusion in the FTSE 100 index (see table).
Several other Irish high-tech companies have also benefited from the return to favour of TMT stocks. In particular, Parthus and Iona Technologies have seen sharp rises in their share prices and are now capitalised at €2.7 billion and €1.9 billion respectively.
Overall, the early post-summer stock market action indicates that investors are prepared to pay a big premium for companies that offer the prospects a high rate of sales and profits growth.
