EMU may lead to a fall off in investments
FOLLOWING the success of the Dublin summit of EU ministers, the momentum towards a single European currency remains intact.
In the context of the European Union, the creation of a single currency is undoubtedly a momentous event. It will have an impact on all our lives, from the micro level of learning to deal with day to day transactions using a different currency to the macro level of affecting the relationships between countries.
It is worth looking at the likely impact it will have on the Irish based investments of Irish Pension Funds.
In the most recent survey carried out by the Irish Association of Pension Funds, the asset mix of Irish Pension Funds as at December 31st, 1995, was as follows:
So, what are the likely changes in the percentage of assets held in Ireland? When considering this it is that there would be no significant shift in the current balance between real assets i.e. equities and property, and monetary assets i.e. fixed interest and cash. The changes, if any, would therefore emerge within the specific asset sectors and these are reviewed below.
1. Fixed Interest Holdings
Current average fixed interest holdings represent approximately 30 per cent of total assets of which 90 per cent is in Irish Bonds and the remainder overseas, primarily in the US and Germany.
Investment in overseas Bonds really began towards the end of 1992 prior to the devaluation of the Irish pound The move was essentially a protection against what was perceived as a likely devaluation. Investment Managers have, since then, continued to hold a percentage of their fixed interest holdings overseas but have retained the large proportion in Irish government bonds.
The introduction of the euro will lead to a central Euro Bond Market. The Government would, therefore, like any other government within the EMU, raise funds by issuing fixed interest securities in this Euro Bond Market. In these circumstances there would seem to be little advantage (or disadvantage) in purchasing Irish government bonds rather than any of the bonds offered by the other EMU countries.
It would be expected that there would be some differences in the yields on the various bonds taking into account both the relative certainty of repayment and the possibility of a country, in extreme circumstances, pulling out of the EMU. However the differences are likely to be small. This could mean that the amount invested in Irish Government fixed interest securities by Irish Pension Funds may fall considerably.
With the removal of currency considerations it would seem inevitable that we will move towards a single European stock market. The current high holdings in Irish Equities by Irish pension funds (i.e. based on the relative size of the Irish Stock Market) will almost certainly diminish with the increased options to buy equities with no currency risk in a common European Market. I would not expect the reduction to be as significant as under the Fixed Interest Sector as "local knowledge" may continue to influence managers to hold Irish stocks.
Property is the least liquid of the major Pension Fund assets. Approximately 90 per cent of the total property holdings of Irish Pension Funds is invested in Ireland. The removal of currency considerations should lead to the expansion of opportunities to invest in property within the EMU area and, again, result in an increase in the overseas investments of Irish Pension Funds; although the local knowledge factor and the practical difficulties of managing overseas properties will mitigate against any change.
In overall terms it is almost certain that if the EMU is established, with Ireland as one of the initial entrants, then the amount of Irish investment by Irish Pension Funds will decrease, perhaps quite sharply. This will not, however, necessarily translate into difficulties for sellers of Irish Bonds or Irish Equities as they will be part of a wider European market where other investors should, hopefully, take up the slack vacated by Irish Pension Funds.