The June 30th half-way stage to the year duly arrived allowing investors to heave a huge sigh of relief.

The returns produced by equity indices over the second quarter proved to be sufficiently strong to more than compensate for the very weak returns of the first quarter.

As a result virtually all the major equity indices produced a positive return over the first half of the year, led by the Nasdaq in the US, which rose by a remarkable 21.5 per cent (see table). Despite this good news, investors and financial analysts remain stubbornly cautious regarding future prospects.

One reason for continued caution lies in the extremely volatile pattern of returns during the first half of 2003.

As the table shows, the positive returns achieved for the period were due to a very sharp bounce in the second quarter that followed a very weak first quarter.

This is typified by the Eurotop300 index, which declined by 13.2 per cent in quarter one and then regained all of these losses to finish flat at mid-year.

In the US the pattern was similar, except that the quarter one fall was smaller and the quarter two bounce-back was much stronger to give a half-year return of 10.8 per cent from the S&P500 index.

Although the champagne corks may not be popping there is growing confidence that the worst of the three-year equity bear market may now be over.

An important factor underpinning this mood of cautious optimism is that the current monetary regimes of very low interest rates are beginning to stimulate economic activity.

Official interest rates have declined across the board this year and in particular the European Central Bank (ECB) has reduced its repo rate to 2.0 per cent from 2.75 per cent in two policy moves during 2003.

Despite being regularly criticised as being too slow to act, the ECB has in fact decisively eased euro-zone monetary policy in recent months.

Perhaps of even greater significance than actual interest rate cuts has been indications from central bankers that they intend to keep interest rates low for a prolonged period.

Central bankers are now saying that the inflation bogeyman is well and truly dead.

Therefore, central banks are prepared to risk keeping interest rates low until they are confident that a sustained economic recovery has become established.

From the perspective of Irish investors, the out-performance of European markets by the ISEQ index is the key positive feature of these half-year statistics.

Irish shares were not hit as hard as European shares during quarter one, and even though they bounced less sharply than international shares in quarter two, the return of 7.1 per cent for the six months to end-June was a very creditable performance.

This return was not as strong as the returns from US shares, as measured by the 10.8 per cent return from the broad-based S&P500 index.

However, the sharp appreciation of the euro in 2003 means that the euro return from US and UK shares was in fact much lower than the dollar and sterling returns respectively.

The euro appreciated by approximately 8 per cent against the US dollar and 6 per cent against sterling during the first half of 2003. As a result the euro return of the S&P500 was less than 2 per cent while the euro return from the FTSE100 was a negative return of just over -3.5 per cent.

Looked at in this light it can be seen that the Irish market was the best equity market for Irish-based investors over the first half of the year.

Within the Irish market the top performing stocks include several companies whose shares have fallen precipitously in recent years.

Companies such as Elan Corporation, Horizon Technology and Trintech recorded strong share price gains, albeit from very low levels. Despite these gains most shareholders in these companies will still be nursing very large losses.

However, some of the market's more stable stocks such as DCC (19.4 per cent) and Irish Continental Group (17.3 per cent) stood out with some very respectable share price gains.

Among the larger capitalisation stocks CRH (16.2 per cent) and Bank of Ireland (8.2 per cent) also out-performed the Overall ISEQ index return of 7.1 per cent.

Therefore, after a very shaky start to the year, 2003 is now shaping up to be the first year of the new millennium that produces across the board positive returns to investors in equities.