John Cotter, the director of UCD’s Centre for Financial Markets said the outlook for the future of the exchange was positive and that Irish and international investors should be confident about Irish stocks and shares.
Writing in the summer edition of the Irish Banking Review, Dr Cotter said that investing
in Dublin-quoted companies delivered a better risk/reward pay-off than other exchanges.
“In terms of risk and return performance, the ISEQ fares better than the other markets with which it is most closely associated by exhibiting better returns and lower risk,” Dr Cotter wrote.
Turnover on the Irish exchange had continued to grow despite difficult conditions in recent years, according to Dr Cotter, who added that investing in Irish equities gave shareholders the benefits of spreading their risk and improved returns.
Investors could also use information gained from other markets to predict price movements in Dublin, due to what Dr Cotter called “spillover effects”.
His analysis found that investors who bought Irish stocks when other exchanges were performing well, or selling Irish stocks when other exchanges were falling, brought higher returns.
But Dublin also had a number of unattractive features that had the potential to turn away investors. Dr Cotter said 60% of the value of the ISEQ index was accounted for by just five companies.
“Investors face a degree of uncertainty caused by prices that lack transparency, with little movement for long periods followed by strong movements not necessarily related to company fundamentals,” he warned.
The dominance of the two main banks, AIB and Bank of Ireland, who between them account for in the region of 50% of the ISEQ index, was also bad news for investors seeking to diversify their risks.
But Dr Cotter said a takeover of either bank by a foreign buyer would have a neutral effect on the Irish exchange. He did not expect either AIB or Bank of Ireland shares to disappear in the event of a takeover.
The number of companies quoted on the Irish exchange fell from 76 in 200 to 54 in 2003. The exchange suffered from a series of take-private deals during the period, such as those involving Smurfit, Riverdeep and Dunloe Ewart. These had not been replaced by new companies although new listings such as those involving Eircom and C&C, repaired some of the damage.
Dr Cotter said the fundraising ability of the exchange had also fallen, with just E721 million raised in new capital in 2003, compared with E5.2 billion in 2000. “Overall, this paints a somewhat unpromising picture for the viability of the Irish equity market, with reduced choice for potential investors, and would have serious consequences for the investment industry in Ireland,” Dr Cotter added.