Exchange must broaden horizons to prosper

Since July, the four biggest and most liquid stocks on the Irish market - AIB, Bank of Ireland, CRH and Eircom - have been included in the London Stock Exchange's SETS electronic trading system. This, notes consultant Dr Peter Bacon, has resulted in a significant shift in trading away from the Dublin market to London and is a shift in business that can only send shivers down the spines of all those earning a living from the Irish stock market.

The 130-page Bacon report on the future of the market does not pull its punches. While not directly stated, there is a clear inference that, unless fundamental changes are introduced to the way the Dublin market does its business, that business will increasingly move overseas, with London the most likely beneficiary.

The problems of the Irish stock market, evidenced by the dismal performance of most of the leading shares in the past year, are a paradox, says Bacon, considering that the economy is one of the fastest growing in Europe. Part of that underperformance is down to a belief, particularly in the UK, that the Irish economy is a bubble waiting to burst.

That belief may have been pooh-poohed regularly by Irish economic commentators, but the stark fact is that stockbrokers' marketing of Irish equities as an exposure to the strongest-growing economy in Europe has come up against a brick wall.

"There have been fears expressed internationally that the Irish economy may be heading for a crash landing. Whatever the validity of these concerns, they only serve to accelerate the trend towards diversification outside Ireland and withdrawal of non-Irish investors," says the report.

At the publication of the report yesterday, Dr Bacon said there was an openness in continental Europe to the Irish economic success story, but that was not matched by similar openness in Britain. "There is so little belief or credibility attaching to the Irish economic performance that it is difficult to attract interest. And, until that cloud is lifted, it is difficult to market what the Irish market has to offer." he stated.

That poor performance has been accentuated by the post-euro reallocation of assets by domestic institutions, the poor performance by AIB following its removal from the Eurostoxx-50 index, the heavy bias of the Irish market towards five large companies, the general dominance of the index by the two big banks and the once-off effect of the Eircom privatisation.

The Bacon report identified various barriers that are preventing the development of a more integrated capital market, particularly as regards equity finance. The most important of these, says Bacon, are:

fragmentation - the EU has 33 regulated stock markets and 18 regulatory organisations, compared with three national markets and a single regulator in the US;

institutional and regulatory constraints;

taxation - the Republic has a 1 per cent stamp duty on share dealing compared with 0.5 per cent in the UK (and even that is likely to disappear), 0.25 per cent in Paris and nominal tax rates in other European stock markets;

the shortage of high-technology small and medium-sized companies and the desire of those high-technology companies to list on the US Nasdaq market, rather than domestic stock markets.

These barriers have serious consequences and a resultant over-dependence on debt finance can led to over-indebtedness by small and medium-sized enterprises. "This in turn results in the underdevelopment of Europe's fledgling risk capital markets for small listed companies, which want to take the step of being listed on exchanges.

A result is an increasing trend towards escaping the funding constraints within Europe by raising capital on international and particularly US markets," states Bacon.

"Unless effective steps are taken urgently, it is likely that capital markets activities in Dublin will falter and move elsewhere, probably to London," he adds.

While not understating the problems identified in the Bacon report, Irish Stock Exchange managing director Mr Tom Healy said that, by the end of next year, a number of measures will have been taken to improve Dublin's competitive position.

"By the end of next year, we will be a member of the biggest alliance of European stock markets - the one dominated by London, Paris and Frankfurt, but which also includes some of the smaller stock markets."

Membership of this alliance will mean that, while Irish stockbroking firms will be able to become members of overseas stock exchanges, so will overseas banks and brokerages have membership rights in Dublin. Market sources believe that, in this situation, Irish brokers will have to develop relationships with overseas brokers to be able to offer the pannational service that investors will increasingly demand.

The stock exchange went close to agreeing a deal this year with the Paris Bourse on an electronic trading system only to see the deal collapse, a collapse that Mr Healy admits seriously delayed the exchange's plans to have an electronic trading system in place.

"We will have electronic trading in place by the end of 2000. We will do a deal with another stock exchange to use their system," he said.

Mr Healy said that harmonising listing rules across European exchanges was not a major problem, but he accepted that making the Irish market attractive to high-technology companies had been a problem in the past.

He said the exchange would introduce an initiative within the next six months "to make the market more friendly to these companies". He declined to elaborate but stressed: "It's important for us for Dublin to be the primary market for listing these companies and having the Irish financial community involved."

Mr Healy accepted that the 1 per cent stamp duty on dealings in Irish shares remained a problem. The exchange does not seem to be getting much sympathy from the Minister for Finance, Mr McCreevy. At yesterday's publication of the Bacon report, Mr McCreevy gave no indication of reducing the level of duty, a tax that raises around £180 million (€229 million) a year for the Exchequer.

Dr Bacon's report identifies many major challenges for the Irish Stock Exchange. It's now for the exchange and its member firms to respond. If it doesn't, more and more business will flow overseas and the Irish stock market will contract. That is not an attractive prospect for Europe's fastest growing economy.