Business Analysis: Discovery of 'black gold' makes Cairn Energy top stock of 2004

Some of the Footsie's so-called defensive stocks struggled in an unpredictable year
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The Independent Online

The City's professional fund managers are fond of predicting, at this time of year, that the stock market in the coming 12 months will be a "stock picker's market". They mean that all the likely trends for the coming year have been identified and largely priced into share valuations, so it will be those experts who can spot the value or growth prospects of an individual share who stand to make money. It is the fund managers' annual sales pitch, of course, but in 2004 it was also true.

The most startling conclusion from a look at the winners and losers of the year is the sheer diversity of those who came out at the top of the table. In the FTSE 100 of the UK's biggest companies, no two of the top 15 performers are from the same sector.

The top five span oil and gas, steel, media, mobile telephony and pubs. Just beyond those, property, food, mining, brewing, and support services are represented.

Those investors who spotted Cairn Energy at the start of the year are sitting on a gain of 173 per cent. The oil and gas exploration company has struck "black gold" off the west coast of India and - with the exception of one last drilling report last week - the size of the oil field has been revised up and up. Cairn shares went into the FTSE 100 in September and are up 700 per cent over the past five years.

Other companies to have joined the blue-chip index for the first time this year are: Enterprise Inns, whose shares are up 56 per cent and where the £609m acquisition of Unique almost doubled the number of pubs it owns; Tate & Lyle, up 53 per cent thanks to the invention of sucralose, a zero-calorie sweetener; William Hill, whose betting shops were stuffed with lucrative fixed-odds gambling machines, leading to a 32 per cent share price gain; and Antofagasta, the Chilean mining group, sent 6 per cent higher thanks to the soaring copper price.

One of the major economic themes of the year has been the rising costs of commodities, which in many cases have hit levels not seen for 20 years. As Antofagasta's relatively modest share price gain shows, this has not translated into great gains for UK investors in these sectors, mainly because the sterling value of the dollar - in which commodities are priced - has fallen so steeply.

One exception has been Corus, the former British Steel, which dominates the "steel & other metals" sector and which has been brought back almost from the dead thanks to a doubling in the steel price. Lars Kreckel, a strategist at ABN Amro, says there has been, and will be, continuing high demand for the metal to feed China's industrial revolution.

"Most people were looking for a slowdown this year and it hasn't quite happened yet," Mr Kreckel said. "There will be ups and downs, but China is not a phenomenon that appeared last year or will disappear next year. And trends in commodities are long-term and easy to underestimate. In steel in particular in previous cycles there has quickly been overcapacity but, after consolidation in the industry, this time steel companies have stayed pretty firm on supply and not gotten in each other's way."

Although the FTSE 100 has thrown up some diverse performances this year, that is not to say that that there haven't been themes. The property sector is one where a rising tide has floated all boats. The valuations put on retail property have continued to rise as UK consumers continued to shop. The valuations put on office property have stabilised after a few bad years. Those valuations have been pushed up further because commercial property has enticed institutional investors disillusioned with the potential of equities and bonds. And all the while, the Government has edged towards introducing a "real estate investment trust" structure that could reduce the sector's tax bills. The three FTSE 100 property companies' shares closed yesterday at record highs.

Meanwhile, investors have sought out companies which generate enough cash to pay chunky dividends or conduct large share buy-back programmes. Established industries such as aerospace, which has the added bonus of a recovering civil aviation market, have been in vogue, as has the water industry, which came through its twice-a-decade regulatory review relatively unscathed. Another cash-generating sector has been tobacco which has hit record highs in recent days.

Five years after the UK stock market peaked, one-quarter of the members of the current FTSE 100 are within 3.5 per cent of their all-time high. Seven of them hit record levels yesterday, as the index reached its best level for the year. Yet the FTSE 100 remains 30 per cent below its level on millennium eve. And this from an index which has a built-in upward bias because it is renewed every quarter to replace those companies which have dropped substantially in size. Don't even ask what sort of loss you would be sitting on if you actually owned the individual stocks which made up the millennium FTSE 100, and included soon-to-be disaster stories such as Marconi, Railtrack, Energis, Telewest and Invensys.

Why so disappointing? The problem is that the underperformance of the past five years, and indeed of the past year, has been concentrated in the largest companies. The telecoms sector, dominated by Vodafone, has been plagued by overcapacity and has lost the stratospheric stock market rating it was accorded five years ago. Vodafone shares are still 54 per cent from their level then. Despite the recent oil price spike, the oil and gas sector is off 11 per cent, and the banks - almost one-fifth of the FTSE 100 index - have made a lacklustre gain of 8 per cent over five years.

And in pharmaceuticals, once seen as the safest of safe havens for your pension money, problems have multiplied. Drug prices in the US have been under sustained downward pressure that only looks like accelerating next year, the industry has suffered a collapse in research productivity, major products have lost patent protection, and it has become tougher to convince regulators that new drugs are useful enough to justify the risk of side effects.

GlaxoSmithKline shares have lost 30 per cent of their value in five years, AstraZeneca 25 per cent. And AstraZeneca comes out as one of 2004's biggest losers, down 30 per cent after the failure of two promising new drugs, and doubts over a third.

With profit warnings, too, from the support services giant Rentokil Initial and Compass, the catering group, sending these companies down 23 per cent and 35 per cent respectively this year, it goes to show there is never really any such thing as a defensive stock. Fund managers need as much skill in avoiding the losers as they must have in picking winners.