Market Report: Five pillars of the FTSE 100 are defying the bears' marauding

"IT'S A market of stocks, not a stock market." So said a broker last week after another tiresome day spent chasing the same few shares higher.

His statement describes the past few months on the London equity market better than any weighty analyst's note. The recent strength in the FTSE 100 and in the overall market has been driven by a handful of stocks and by an even more limited number of sectors.

The risers and fallers in the various indices suggests that the FTSE 100 building has been propped up by just five pillars - telecoms, pharmaceuticals, oil, banks and hi-tech - while almost everything else around it crumbled.

The reason why the building is still standing despite its lop-sided construction is that the cornerstones of the recent rally are solid. The first four of the five winning sectors are the largest in the market while the fifth - hi-tech - has experienced a self-feeding buying frenzy which triggered astronomical rises in some of its constituents.

The upshot of all of this is that investors in the London equity market are split into two factions. On one side, the happy campers who had the foresight, or luck, to pile into the fabulous five sectors. For them, life is a long party and the bull run shows no sign of abating.

However, ask anyone with exposure to wretched sectors such as retail or transport about the state of the market and all you will get in return is a torrent of doom and gloom and a prediction that the end of the bull era is nigh.

For the average investor the bull/bear macro debate is not that important. The real issue is whether the current split between "have" and "have-nots" sectors will continue or we are set for a reversal of fortunes? In other words: should punters switch from a bargain-basement Marks & Spencer to the highly valued Energis, or is worth waiting for a recovery in the out- of-favour stocks?

A glance at the five soaring sectors shows that their rise has mostly been due to a number of special situations rather than fundamental undervaluations. Take telecoms, which contributed some 40 per cent to the market's overall increase.

Here, valuations have been frothy for some time and yet the likes of Energis, Colt and BT have all been rising on speculation of consolidation. Friday's mega-bid by the mobile phone giant Vodafone AirTouch for the German rival Mannesmann could kick start a domino-like merger frenzy and the outperformance of the sector is probably linked to how this consolidation wave shapes up.

The same can be said for the banks and drugs. Oils are even more straightforward. BP Amoco, Shell and the smaller explorers have been boosted by a rally in the oil price. Their future will be determined by whether crude oil can maintain these levels or falls back to the previous years' lows.

These four rising sectors all seem to display a similar pattern: they are going up because of special situations and as long as those conditions persist the rally is likely to continue. Most market watchers seem to believe that this trend will continue for a while yet as the consolidation stories and the rising oil price will take some time to unravel.

The hi-tech sector poses more of a problem. The recent soaraway rise in anything with a vague link to the Internet has all the hallmarks of a bubble, as investors seem to make very little distinction between the sector's dogs and stars.

When the bubble will burst is anyone's guess, but investors seeking an hi-tech presence should stick to safer, if expensive, bets such as chip designer ARM Holdings and palm-top computer Psion.

One of the winners of the recent passion for phone stocks, Energis, reports interim results tomorrow. The figures should show a loss of around pounds 11m compared with pounds 16.1m last year. Turnover is set to have soared by over 50 per cent to around pounds 190m as the booming Internet boosted the number of calls carried on Energis' network. The company could even break with its past and announce the first-ever operating profit.

But not even a shock move to the black will divert dealers' attention from the burning question of the past few weeks: will Energis be taken over? There are endless rumours of interest from a large European or US operator and the signs are that the generator National Grid, its largest shareholder, will sell at the right price.

The music group EMI will try to dispel the market's fears of slow trading when it unveils interims tomorrow.

Pre-tax profits should rise some 20 per cent to pounds 60m on flat turnover of around pounds 1bn. However, underlying growth in CD sales is expected to have been sluggish due to a weak release schedule. The launch of albums from the dance group Chemical Brothers, US groover Lenny Kravitz and former Ginger Spice Gerri Halliwell was not enough to match the competition and EMI is likely to have lost market share in the US and Europe.

Granada's finals on Wednesday should wrap up a strong year for the media and leisure group. Mark Finnie at Deutsche Bank is shooting for a 14 per cent rise in profit to pounds 836m before the costs of digital-TV venture OnDigital. Granada appears to be firing on all of its three cylinders with good performances expected in the TV, hotels and restaurants divisions.

Corporate issues set to feature in the post-results meeting will concern the much-mooted acquisition of a rival, possibly Whitbread or TV group Scottish Media. The timing of the long-rumoured split between the hotels and media side is also set to entertain analysts' minds.

The interims statement from two struggling supermarkets, J Sainsbury and Safeway should contain few surprises. Sainsbury's, on the block tomorrow, has already reported depressing second-quarter sales. Interim profits should follow that trend and slump to around pounds 280m from pounds 461m in 1998. Any comment on current trading, which is expected to be extremely tough, and margins will be gratefully received.

On Thursday, Safeway should unveil an equally-disappointing 20-per-cent fall in profits to some pounds 120m. The chain's trading difficulties and competition threat from Wal-Mart/Asda have been well documented so the market's attention will concentrate on what the new chief executive, former Wal-Mart man Carlo Criado-Perez , has to say about Safeway's strategy and future as an independent company.

f.guerrera@independent.co.uk