After soaring 24 percent to record heights in May, the Bermuda Stock Exchange (BSX) index fell back to end 1998 with only an 8.9 percent gain. And that gain only occurred when the index value crossed back into positive territory on December 18.

At least the BSX index gave a consistent return, as the gain was in line with the 7.6 percent appreciation in 1997, a roller coaster year which saw the index drop to a record low of 896.13 points in March to a record high of 1407.44 on December 11.

Investors who played the index were in for a less hair raising experience in 1998. From an opening of 1400.27 on January 2, 1998, the index rose about 326 points to a record 1,733.59 on May 22 before sliding back down.

The gains in the first half of the year were boosted by investor speculation that the Bank of Bermuda Ltd. would get a secondary listing on the Nasdaq. The Bank of Bermuda, which makes up 51 percent of the index's weighting, rose to highs of $40 three times during the year after opening $28. Investors who cashed out then received a 43 percent gain for the year.

But by October the party was over, as the stock fell to $25 when the bank's bid to get necessary exemption from a rule restricting foreign ownership to 40 percent failed in Parliament.

The stock fell to $25 in October and has since crept back up to $34 -- a 21 percent gain for the year -- as investors regained confidence. The stock gained $4.50, or 15 percent, in the last week of the year. Perhaps investors' confidence is shored up by the new PLP Government's promise to look at the issue of giving exemption to all the banks.

The Bank of Butterfield, meanwhile, rose 19 percent from the year's opening price to a record high of $19 in May, then fell to a low of $14.89 in June.

Investors were betting the bank's new chief executive officer Calum Johnston was "cleaning up the balance sheet'', a phrase investors shuddered to hear.

Mr. Johnston took another $32.5 million in charges against profits for the financial year to June 30 for exiting the London operations, and for exceptional items.

The charge was in addition to the $20.1 million taken in the previous year for exiting London and Singapore. Now investors are questioning the bank's direction.

The share closed the year at $16.30, a gain of 1.8 percent on the year. All that gain came on the last trading day of the year, when the stock rose 80 cents on trading of 85,772 shares from what would have been a three percent loss at $15.50. In 1997 Butterfield's share price rose 78 percent to $16 from the closing price 1996.

Randy Somerville, vice president of investment services at First Bermuda Securities Ltd. said investor interest would remain focused on the two banks in the year ahead. The stocks are the most liquid on the exchange. As a rule investors don't like getting into something they can't easily exit.

"Most of the interest going forward will be focused on the Bank of Bermuda and whether it will get exemption from 60/40,'' he said "It does seems to have bottomed out at $25 during the election and worked its way back up to $31. Slowly people are positioning themselves in anticipation of a secondary listing. Bank of Butterfield has cleaned its balance sheet. It's just a question of whether they can show any profits. They seem not to do so bad in the last quarter. It's just a question of whether they can put it together for the next two quarters.'' While he believes, like most, Bermuda Commercial Bank is also hankering after an exemption from local ownership rules, he said the control exerted by John Deuss and lack of liquidity in the stock made it less attractive.

He likes Argus Insurance Co. Ltd. for consistent performance and dividend payments. Argus ended the year with a four percent gain.

"Argus is a pretty solid company and has a good return,'' Mr. Somerville said. "They also hold a fairly large portfolio of local stocks so they're a good proxy if you just want to own the market.'' He is also looking carefully at what Belco Holdings Ltd. is going to do with its investment in Quantum Communications, a local telephone provider set up to compete with the Bermuda Telephone Co. Ltd. (BTC). Quantum can help boost Belco's profits. BTC is an unknown quantity.

"On the Belco side the variable is Quantum if they can get it up and going and contributing to the bottom line,'' he said. "Fundamentally it's an attractive stock. It has a nice dividend yield and it has potential for growth with this Quantum hookup. I don't know what to think about BTC. Everything I read in the paper -- battling Telecommunications, battling Quantum. It's tough to see where they might wind up. They have competition and they are going to be forced to cut their rate. That's going to affect their whole bottom line.

That's going to affect their stock price I think.'' Investors punished BTC, now renamed as KeyTech Ltd., as the stock price fell to $31.50 at year end, a loss of about eight percent in value over the 12 months.

"Management say they have been readjusting internally,'' Mr. Somerville said.

"Whether that costs savings is enough to offset the revenues they are going to lose we're going to have to see. In other markets where deregulation has occurred the good ones survive and the others kind of flounder. Deregulation and open market has seemed to benefit them all. They get a lot more competitive, cut a lot of the costs and downsize.'' Bermuda Aviation Services Ltd. was the best performing stock of the year, rising 44 percent in value to a high of $6.50. Retailer Masters Ltd., which has revamped its store, was the next best performing stock. Masters gained 38 percent on the year to finish at a high of $9. Bank of Bermuda ranked third while Devonshire Industries gained 16 percent on the year.

Bermuda Commercial Bank, Bermuda Press and S.A.L. Ltd all had total returns in the nine percent range.

But the best news of the year was for investors in Bermuda Home Ltd. who will receive $15.25 a share in the Bank of Bermuda takeover of the deposit company.

That's a 70 percent gain on the $9 closing price of 1997.

"Bermuda Home was a pleasant bonus for anyone who has hung in there for four or five years,'' Mr. Somerville said. "That's for sure since they collected a nice dividend along the way.'' Millennium International Ltd. shareholders have also received a good payout for their shares as the company divests itself of operations worth far more than the trade value of the shares. They have so far received $7.50 a share, for stock that was trading at $3.75, with more to come.

The worst performing stock of the year was Kentucky Fried Chicken (Bermuda) Ltd. which plummeted about 17 percent in value to $3.50 after near bankruptcy in 1997. Watlington Waterworks stock price fell off about 14 percent to $5.13, while Belco fell 10 percent in value to $22.

In the coming year Mr. Somerville expects great interest will be taken in the BF&M Ltd. court case in which the liquidators of Bermuda Fire & Marine are attempting to get back the stock in the company. BF&M common shares have been suspended since 1995. "It will be nice to get the shares trading again -- if it ever does,'' he said.

He believes there is still good value for the careful investor in the Bermuda stock market.

"People tend to underestimate the Bermuda market sometimes,'' he said. "The reporting process is not as timely or as on going as in the rest of the world but if you do your homework and take the long term perspective I think some of the companies here still offer pretty good value.'' Overall trading volumes were about the same as last year. Total domestic share volume traded on the BSX was about 4.9 million for the year on a turnover of about $98.5 million.

"Earlier in the year the volume was fairly heavy,'' Mr. Somerville said.

"Some of the overseas mutual funds were attracted to the bank stocks. As far as the locals buying, the volume is still not that great. Now that exchange control has freed up, people have other opportunities. I think a lot of people figure that if their real estate is in Bermuda then it's nice to diversify outside of Bermuda rather than having all of their eggs in one basket. They look overseas to invest rather than locally so that puts a damper on volume.'' However, the upcoming mandatory pension plans companies will have to implement by the end of 1999 could boost volume.

"Pensions are going to be paid in Bermuda dollars so it makes sense to have some of the portfolio tied to Bermuda stocks,'' he said. "Some of the bigger pension funds on the Island have been investing in Bermuda stocks for a number of years. It's a just a question of whether some of the other funds follow suit. That's an unknown that could put a boost in the volume.'' RISE AND FALL -- After soaring to record heights in May, the Bermuda Stock Exchange index fell back to close the year at 1,524 on December 1, a gain of about 8.9 percent for the year. As shown by the graph the index reached its starting point of the year in the third week of December Calum Johnston