the doldrums during the earlier in the year. Mark Melvin, an analyst with Bermuda Investment Advisory Services, looks at what sparked its growth and what's in store.

Last month, the Bermuda Stock Exchange saw the index rise to break through the 1200 barrier for the first time since November 1993.

It has not been smooth sailing, however, as the major constituents of the index (Bank of Bermuda, Bank of Butterfield, BELCO and Telco) have all seen volatility. This volatility in local shares does not appear to have been caused by the sell-offs in global bond and equity markets but rather from Bermuda's pattern of economic activity, largely guided by domestic monetary cycles. This is something we have commented upon before and is worthy of a closer scrutiny.

International business' contribution to the US dollar earnings of the country runs around 50 percent of GNP and comes in a reasonably steady flow. The other 50 percent of GNP, derived largely from Tourism, is earned in a much shorter timeframe. Industry observers suggest that Bermuda's main tourist season is either five or six months from the end of April each year, and that there is little that can be done to change this. Tourist arrival figures, and the growth of competition from other destinations, appear to support this.

Therefore, for six months from October each year, a large part of the local economy has to live off its fat derived during the summer season. The cyclical nature of these earnings dries up much of the economy's liquidity during the first quarter of the calendar year. This dearth in liquidity ripples through into savings and ultimately the BSE. The most recent winter's trading pattern supports this. The index at the end of October 1993 was 1202.87. The index last Friday (22 April 1994) was 1202.77. The index has not been above 1200 in the interim.

Looking forward through 1994, we believe the Independence debate, the likelihood of exchange control abolition, and the effects of the withdrawal of the bases, could hold back the usual summer cyclical surge in share prices, although the Index is nearing all time highs again and in all likelihood will break through that barrier in the not too distant future.

Based solely on Price to Book value calculations, the three bank stocks look expensive relative to other shares on the local market. This ratio for each bank exceeds 1; a good indication that such shares are selling at a premium.

On a relative basis, BNTB is less over-priced than the other (Price to BV 1.25), showing Price/Earnings below 9, earnings per share at $3.96, a comparable return on equity of 14.29 percent, but with a dividend yield of 3.48 percent -- comparably the lowest in terms of payout ratio, 30.32 percent). BNTB also has a higher concentration of capital to assets (7.87 percent) than its main competitor BOB (5.85 percent).

Bank of Bermuda senior staff have recently mentioned $40 million net income for 1994 as being a possibility. This looks to have already been factored into its near all-time high price and fundamentals (Price to BV 1.53, P/E 10.51, EPS $2.21, ROE 14.59 percent, dividend yield 3.78 percent). Bank of Bermuda is now trading ex-dividend (1 for 10 stock dividend resulting from merger/spin off of Bermuda Home/LPG) and should be trading at around $1 lower than its previous value. As senior components of the exchange, however, these stocks cannot be ignored in a balanced portfolio.

Considering utilities, both Telco and BELCO look sound fundamentally: BELCO having a Price to BV of 0.73, P/E of 7.86, ROE of 9.30 percent, and a dividend yield of five percent. Telco has a Price to BV of 0.94 making it a little more expensive, explained by its ROE, higher at 11.78 percent, and its dividend yield at 5.73 percent. However, both shares are being influenced by factors which could limit further price appreciation. BELCO's problem is that there is realistically no way to grow the business. Improved earnings performance can only come from improved efficiencies. Added to this is the loss of revenues from Base closures, tourist industry slow downs, and the need to replace an ageing plant in light of as yet unfully discussed and disclosed environment protection laws. Thus BELCO is unlikely to provide startling returns for investors, but should provide solidity and a reasonable dividend yield.

Competition from other energy providers is unlikely, a luxury Telco does not enjoy in the telecom industry. As a long established, universal provider of services, Telco has a dominant place in the industry but appears vulnerable in niche areas. Its connection with Cable & Wireless has served the Island well but the recent hearings have exposed how well C&W has profited from the venture. The submissions from a new license applicants have underbid the alliance in many areas, which in turn provoked a response from Telco (heard on Tuesday) to run international lines differently, effectively cutting out C&W from many links. This should reduce revenues (and costs) but hopefully will generate increased volumes of traffic. Amid this uncertainty, Telco is unlikely to gain much support from the market. However, it is still a stable company paying a reasonable dividend to its investors.

Within the insurance sector, much depends on two things: 1) What will happen when Bermuda Fire & Marine's court case is finally be heard, and how will it effect BF&M, and 2) What will Argus' 1994 financial statements look like? BF&M's stock price at present is totally driven by market perception of the outcome of the Bermuda Fire & Marine court hearing. The common stock price at just over $6 valued solely on fundamentals looks a good buying opportunity (Price to BV 0.52, P/E 7.86, ROE 20.52 percent, dividend yield at a payout level of 16 percent of earnings is 6.27 percent). But beware. If the hearing seeks to overturn BF&M's split from Bermuda Fire & Marine, there is a range of possibilities that could then occur. In this environment, BF&M common stock is unlikely to provide other than speculative interest. The 9 percent preferred stock, however, is another matter, for should the hearing not prove cataclysmic for BF&M, the preferred stock might not receive the same shocks as the common.

Argus' CEO recently was quoted as saying that Argus had sorted out its health insurance problems in the current fiscal year. This could be good news for Argus as 1993 results showed broadly a break even on its core insurance business with the bulk of its earnings coming from investments. If the investment portfolio prospered in 1993, as did most investment portfolios, and if it did not give back all its gains in the market sell-offs in early 1994, then the investment earnings could remain solidly underpinning the group's performance. Any contribution from the health side would boost earnings over 1993 and more ROE from 1993's 13.4 percent towards the levels from several years ago. Fundamentally, Argus looks sound; its price to BV is 0.96, P/E is 7.19, and its dividend thanks to a recent stock split is a reasonable 5.3 percent, with a payout ratio of 38.1 percent. In 1993, a book value adjusted for investments valued at current market prices (as opposed to historical or amortised cost) would have added 30 percent to the BV.

Within the smaller and lesser traded stocks, liquidity is much lower, making investors' ability to switch into and out of such stocks that much harder.

Such stocks should mostly be bought as an investment, rather than with trading in mind. In such instances, the stock's value (solid asset base) or ability to generate consistent dividends are key criteria.