Shifting the focus
In spite of its position as one of Europe’s older exchanges, founded in 1793, Dublin still lives in the shadow of its counterpart in London. With just 75 companies listed, it accounts for barely 2% of the market capitalisation of the Euro-zone, and so is some way down the list of potential targets for the larger exchanges with merger and acquisition aspirations. Nonetheless, the management at the exchange has managed to keep up with their wealthier neighbours when it comes to technological advances.
The exchange’s Brian Healy says it has been an innovative 18 months to date. “I suppose the most important issue has been the development of the Xetra dealing system which we acquired from Deutsche Börse. This has enabled us to develop from being an essentially local market; that is to say, our members were based in Dublin, to one where 30% of the membership are now based overseas. We are almost a virtual exchange at the back of this platform, and it has proved to be the most cost-effective solution for our customers.”
Like many exchanges, Dublin has become more “customer-focused”, and, to a certain extent, led by their requirements. “Certainly that influenced the trading platform selection, and is a factor in our decision not to go with a central counterparty at the moment. We have researched the technical details for any future development, but at the moment, there is no demand for it,” says Healy.
The launch of the tech index ITEQ was inauspicious, but Healy believes this will pick up. “Although the timing of the launch could have been better, we believe we have created a market which will be attractive to Nasdaq-listed companies. There is a great deal of synergy between the US and Ireland, given the large number of software companies based here. We think that a European listing based in Ireland will make sense to a lot of companies. Now we are simply waiting for the market to turn.”
Securities lending is also a feature which has appeared over the past year. “We did have some taxation problems in this area, but negotiations with the revenue have alleviated those difficulties. Although activity is at a relatively low level, it is definitely in an upward curve. In the last six months a specialist provider has emerged, and the groundwork has been done for this activity to develop,” Healy adds.
With a market capitalisation of around E80bn, Dublin is a relatively small market, and more to the point, the top ten companies dominate liquidity. Even within that small group, there is a significant imbalance. Elan Pharmaceutical accounts for 21.7% of capitalisation, and the heavy weighting in financials means that two banks account for a further 27%. Virtually all the liquidity in the market is found in these top 10 shares, and the further down the list the less the impact on daily trading.
This can be a problem for investors, says David Walsh of Appleton Capital Management in Dublin. “The large companies dominate, and frankly there is simply not enough diversification, and the market has a regional feel to it. The upside is that it does not need a great deal of specialisation to trade on the market. Last year was fairly typical, opening at 5761 the index soared a thousand points, plunged on September 11 but recovered at the year end.”
Michael Phelan, investment manager at Aberdeen Asset Management in Dublin says that despite this, the market has outperformed many of its rivals. “Dublin is a very defensive market, and significantly, technology accounts for only 2% of the market. Banking, pharmaceutical and construction are typical defensive stocks and the Irish market is dominated by these sectors. At the time of the technological boom few companies could get a high enough rating to float on the Irish market and so opted for Nasdaq. It is only recently that they have listed in Dublin. This naturally meant that we were not affected quite as dramatically as some markets when the tech bubble burst.”
Most companies listed in Dublin also have a quote on the London market, and many have a further listing on Nasdaq. The strong link between London and Dublin is explained by the fact that most overseas investors on the Irish exchange are either from the UK or the US. “The Irish Brokers Association have done a great deal of marketing across continental Europe, but to date we have seen few new investors from the Euro-zone,” says Phelan. “The reverse is not true, however. Irish trustees now see the larger picture, and with the advent of the euro are diversifying and selling Irish holdings. These have halved from 36% of a typical portfolio to just 18% today. If actuaries are asked to speculate, they will tell you that this will eventually bottom out at around 5% in the next few years. This can be explained in a number of ways, but the main reasons are the exaggerated exposure due to the influence of the aforementioned ‘top ten’, and also the removal of the currency risk.”
Standard Life investment manager Colette Convoy, based in Edinburgh confirms the health of the exchange. “Last year showed a positive, albeit low return of 1.56%, one of the very few markets to do so.”
Convoy believes, however, that growth – whilst remaining positive in the Irish economy – is likely to fall from its double-digit heights. “Obviously, previous levels of growth are unsustainable, but companies are attracted by the tax regime and the educated workforce,” she says. “Whether these companies list in Ireland is another matter. Mainly tech companies in search of liquidity are more likely to go to London or Nasdaq. Recent trends have suggested, however, that Ireland can now attract a second or third listing as a Euro-zone exchange.
“The main attraction of Dublin is that it is a “safe” market. Although it underperformed in the year to 2000, overseas investors have returned in the past year. This is the key, since Irish investors probably hold as much as they need, given the narrowness of the market that can lead to over exposure. In such a tight market, significant investment in any one stock can lead to a sharp move.”
Looking ahead, Convoy thinks a general economic slowdown worldwide will take its toll. “Exports are already suffering and this will affect the market. Also, as the general standard of living increases, the inflow of EU funds will slow down, we also anticipate a fall in US investment that is important to Dublin. Again, however, given the safe nature of the sectors, the market should prosper again, albeit not dramatically.”
Despite its size, Dublin has kept pace with technological developments, mainly by shadowing London. “The settlement system is identical to London,” says Phelan. “Consequently we operate on T3 but if London moved to T2 or T1, then Dublin would have to follow suit.”
Although not seriously courted by other exchanges to date, Dublin has taken the decision to move in parallel with the various alliances emerging in Europe, rather than commit to any one in particular. Healy confirms that there has also been substantial investment on internal IT structures and is determined not to be left behind in the technology stakes.
If the European economies are not hit too hard over the next six months, the Irish exchange should find itself well placed to expand its business.