Market scrambles to reassure investors AIB and Elan share slides are not related

Market insiders fear it will take a lot of hard work for confidence in Irish stocks to be restored, writes Brendan McGrath, Markets Editor

Within the space of two weeks, the reputation of the Irish stock market has suffered a series of body blows, and many involved in the market believe it will be some considerable time before confidence in the Irish market recovers.

Market sources said yesterday they had fielded hundreds of calls from international media and overseas investors wanting to know if there were fundamental problems with the Irish stock market.

First came the revelation that two Irish public companies, Fyffes and its former shareholder DCC, were embroiled in a civil action over alleged insider dealing in Fyffes shares. This case expanded dramatically when two of the State's big institutional investors, Eagle Star and Hibernian, took action against DCC, paving the way for them to seek compensation if Fyffes' claim is successful.

Next came the extraordinary collapse in the value of shares in Elan, then the biggest company on the Irish market and a company which had enjoyed extraordinary growth over recent years.

Elan's denouement began when it had to suspend testing on a revolutionary new treatment for Alzheimer's Disease and was compounded by reaction in the market to Elan's accounting policies. But the real damage came when Elan shocked the market with a profits warning for the current year.

Elan's shares may have bounced back somewhat yesterday, but the credibility of Elan's top management has taken a beating and some fund managers are calling for changes at the top.

But the DCC/Fyffes and Elan developments paled into relative insignificance after the extraordinary announcement by AIB yesterday that it had been defrauded of over €860 million by a middle-ranking currency trader in its Allfirst subsidiary in the US.

While the DCC/Fyffes alleged insider dealing affair and the collapse in the Elan share price were issues that could be explained coherently to overseas investors, market sources said these investors found the developments at AIB inexplicable.

"We could explain the Elan situation to them, they weren't particularly concerned about DCC and Fyffes, but these people simply could not fathom how a bank like AIB, the biggest company on the market, could let this sort of situation develop. There's no doubt that confidence in Irish companies as an investment opportunity has taken an awful knock," said one dealer, who added: "We're all going to have to work bloody hard to retrieve the situation."

Irish Stock Exchange managing director Mr Tom Healy said he had impressed on international media that the various events of the past two weeks were totally unrelated and that the fraud at AIB's Allfirst operation was nothing like the Barings situation. "From an international point of view, Elan and AIB coming so close together is not good, but we have emphasised that they are totally unrelated situations."

Irish Association of Investment Managers secretary-general Ms Ann Fitzgerald was in broad agreement. "We have had a coincidence of events over a short period of time but there is no common denominator. It is, however, an awful pity they have all happened together," she said.

Ms Fitzgerald added that the fall in the Elan and AIB share prices emphasised the value of people investing in a pooled fund where the risk was diversified.

But dealers at the market's coal face were not so sure that the DCC/Fyffes, Elan and AIB events would be forgotten by investors, both domestic and international. One broker whose client list is largely composed of wealthy Irish investors said that recent events had terrified his clients.

"They're not too bothered about DCC and Fyffes, but what's happened with Elan and AIB is scary and some investors are saying why not put their money into property. They're just not reassured any more by the old argument that in the long term equities will outperform other asset classes."

For pension funds, which have traditionally allocated a large portion of their assets to equities, there will be questions as to whether that investment strategy is still appropriate. Already there have been moves by some large British-defined benefits pension funds - where the fund's liabilities are known - to shift their assets into the security of government bonds.

In the UK, the Boots Pension Fund has already decided to get out of equities altogether, and some in the market believe the Elan and AIB situation might be a major factor in Irish pension funds.

If Irish pension funds do decide to further reduce their positions in Irish equities, it would severely undermine the domestic market. Worse for the market would be a takeover bid for either Elan or AIB.

"What this market needs is more companies, not two big ones being taken over," was the rueful comment from one trader who said that yesterday's development was probably the first chink in AIB's defence against a takeover bid.