Maelstrom enveloping main markets as euro makes mark

A maelstrom is enveloping European equity markets. The onset of the euro, and its implied economic system across Europe, has triggered a series of related events in the stock-market.

Cross-border investment is underway in earnest, with fund managers diversifying risk away from their domestic markets and investing in equities across the euro zone. The switch from bonds to equities, especially in continental European markets, is picking up pace, propelled by the continuing long-term out-performance of equities relative to fixed-income products.

The pensions' market is entering an early stage of explosion, as private funds are engineered to fill the pensions' gap that will develop if state-run systems are not augmented by employee-financed funds.

Together, these factors are enough to ensure a healthy rise in activity across European stock-markets. On top of those driving forces, the continuing surge in US equities is fuelling the volume of American money available for investment in Europe. The emergence of a rampant Internet and technology sector in Europe has also boosted activity in equities.

Finally, the initiation of a true single economic market has opened a firestorm of mergers and acquisitions. As a result, the European equity and corporate finance markets have experienced their most profitable year ever.

Despite remaining outside the euro, in another ironic twist of the European experiment, London is thriving as the capital markets centre for the new currency. It has enjoyed a substantial step-change in investment by European and US investment banks in 1999. Its history as one of the three global financial capitals, together with resident support skills (legal, auditing etc) has helped strengthen this position.

An often underestimated advantage is that its financial community is English speaking, the chosen language of the global capital markets industry. This, coupled with labour laws that are considerably more flexible than those in continental Europe, has allowed London thrive.

In this arena, the world's most competitive investment banks are slugging it out for a share of the capital markets bonanza. On one side are the Americans, powerhouses like Goldman Sachs, Merrill Lynch, Morgan Stanley and Salomon Smith Barney with a long tradition in aggressively competing for capital markets business.

On the other are European banks. Institutional behemoths like Deutsche, Dresdner, UBS and ABN AMRO. These have rich histories in Europe's retail and commercial banking markets but are relatively new to global capital markets. All of these organisations are looking to expand, while locking horns on a weekly basis for secondary (share dealing) and primary (equity funding) business. At the heart of this action are those companies that comprise the EuroTop 300 Index. They broadly reflect the breadth of European commerce, and are evolving into a platform that will define corporate Europe. Many of them will be acquired, others will merge and some will engage in voracious acquisition programmes (just consider Vodafone's €130 billion bid for Germany's Mannesmann at present).

How does Ireland engage with all of this action? Many of its companies are already ahead of the curve. Groups like CRH and AIB (both constituents of the EuroTop 300) have sophisticated investor relations programmes to attract cross-border flows of investment funds.

The hectic merger and acquisition market is throwing up opportunities and threats to Irish corporates. CRH acquisitions in the UK and Finland are one example. The Telenor bid for Esat is another. Expect that trend to continue and intensify in 2000.

Asset managers and stockbrokers are the other front-end actors in this play. The Irish asset management community has grown impressively in the past five years. New entrants like Europlus and IG have brought substantial global equity funds into Dublin, complementing the international expansion of groups like BIAM.

Proximity to London and clear tax advantages should help develop this sector further. It would not be surprising if a crop of specialist hedge funds emerge in Ireland over the next five years.

For stockbrokers, the game is also quickly changing. Institutional fund managers are increasingly demanding detailed and comprehensive sectoral analysis of all companies, with the focus on country-based research fading fast. For brokers to thrive, they need connections to global houses.

The retail broking market is also changing quickly. Commission rates are declining and web-based share dealing is mushrooming across Europe. Given the capabilities of today's technology and prevailing tax incentives, there is no reason why a pan-European web-based retail stock-broking service could not be successfully launched out of Ireland. Interesting times ahead.

Joe Gill is Head of Equity Research Marketing - Region Europe with ABN AMRO Equities. ABN AMRO is the third largest Investment Bank in Europe.