What future for Iseq after exodus?

A number of non-financials have jumped ship from the Irish Stock Exchange following the collapse of banking stocks

HIDDEN AWAY in Dublin’s Temple Bar behind a striking Victorian facade lies the home of the Irish Stock Exchange, its oak-panelled trading floor a reminder of a bygone, pre-electronic age.

This week will be remembered as one of the most inauspicious in the history of the 200-year-old exchange following the decision by building materials group CRH, its largest constituent, to move its main stock market listing to London.

The announcement took traders by surprise, and sent shockwaves across trading rooms in Dublin. Despite attempts to put a brave face on the move – CRH is still committed to the Irish market through its secondary listing, analysts were repeatedly told – the overriding reaction was unequivocal. As one Dublin broker put it bluntly: “It’s not just a sell on CRH or the construction sector. It’s a sell on Ireland Inc.”

It’s all a far cry from the roaring noughties, when the Irish Stock Exchange, like other institutions connected to the world of high finance, reaped the benefits of Ireland’s economic boom. Profits were up, trades were flowing and the message from Dublin traders was buy, buy, buy. The stock exchange itself made pre-tax profits of €21 million in 2006, while the volume and value of trades reached dizzying heights, buoyed by the apparently relentless rise of the bourse’s banking stocks.

The Iseq index peaked at just over 10,000 in February 2007. Today it stands at just over 2,600. In 2007 about €200 billion worth of equities were traded in Dublin. This compares to €50 billion last year.

A cursory glance at the profile and make-up of the Iseq at the turn of the millennium shows how radically the Iseq membership has changed. On January 1st, 2000, the main market’s top 10 stocks were, in order of size: AIB, Eircom, CRH, Bank of Ireland, Elan, J Smurfit Group, Irish Life Permanent, Kerry Group, Ryanair and Esat Telecom. Today only Kerry, Ryanair and Bank of Ireland have a primary listing on the market – and Bank of Ireland is a long way from top 10 status.

While the economic slowdown goes some way in explaining the fall in value – all equity markets across the world have seen their values collapse as a result of the financial crisis – a more serious worry is the exodus of stocks. CRH is not an anomaly. Following the collapse of the banking stocks, which represented 45 per cent of the index at its peak, a number of non-financials have more recently jumped ship. Greencore and Elan announced in recent months they are to move their primary listings to London and New York respectively, while companies like CC and, particularly, DCC, have said they are monitoring the situation.

The Irish Stock Exchange’s main line of defence when queried about the departure of companies from the main market is that the equity market represents only one part of the exchange’s function. In recent years the exchange has been increasingly moving into the listing of investment funds and specialist debt instruments. These now account for the bulk of its revenues. Investment funds, domiciled in Ireland or overseas (more than 30 per cent of the funds listed on the exchange are domiciled in the Cayman Islands) can apply to the Irish Stock exchange for listings, a reliable source of revenue for the exchange.

The exchange is the number one stock exchange in the world for the listing of hedge funds and alternatives and for the listing of asset-backed securities, with 70 per cent share of this market. It argues that its leading position in the listing of funds contributes to the Irish funds industry as a whole, and is one of the reasons Dublin can attract law firms and fund specialists, such as Walkers, which set up here in the last year.

But the focus on the funds industry has also been criticised, with some pointing out that the number of new funds being listed on the exchange has slowed down in recent years, and questioning a strategy that is so dependent on a single, and relatively new, industry.

More significantly, many in the stockbroking community feel let down by the Irish Stock Exchange, which they believe is shirking its duty to serve the capital markets and, by extension, the industries that support it.

According to one Irish broker, the exchange is now at a crossroads. “The major strategy question is, does Dublin want to have an independent equity-raising community and equity-raising centre or not?” said one broker. He argues that the exchange has taken its eye off the ball in terms of serving Ireland’s capital markets industry and, as a result, Ireland risks becoming a peripheral market in terms of corporate finance.

Dublin has missed the boat when it comes to Irish companies such as PCH International and Avolon, which are reported to be considering flotations in Asia, he says. “These are exactly the kind of companies the Irish Stock Exchange should be targeting.”

The changing nature of the Irish fund management community is also damaging Ireland’s status as a capital markets centre, according to another analyst.

“Essentially a lot of fund managers in Ireland have become index investors and now lack the specialism that is needed if a major Irish company wants to do a rights issue, for example. As a result, these companies will go to centres like London when it comes to corporate finance activity.” Others argue that brokers themselves are to blame. “Everyone knows the industry is completely saturated, and needs major consolidation,” said one fund manager. He defends the investment management industry’s emphasis on index-linked funds and the inclusion of global equities, arguing that Irish stockbrokers’ lack of pan-European research and expertise has discredited them.

“During the boom Irish brokers were constantly talking up Irish stocks, particularly the banks. As a result they lost credibility.”

He also argues that the main reason for the brokers’ resistance to the stock exchange’s focus on funds is that they don’t derive significant income from the industry. While many of the main Irish brokers act as sponsoring brokers to investment funds, and listing agents for asset-backed securities, debt securities and derivative securities on the Irish Stock Exchange, the real fees are still in capital markets.

But if the departure of CRH crystallises confusion about the real function and purpose of the Irish Stock Exchange, it also raises questions about the ownership structure of the bourse. One of the central ironies about the increasingly fractious relationship between the stockbroking community and the exchange is that it is owned by the brokers. The Irish Stock Exchange Limited is a company limited by guarantee of its members – ABN Amro, Bloxham Stockbrokers, Campbell O’Connor, Dolmen Stockbrokers, Goodbody, Davy and NCB Stockbrokers. Each broker has board representation and regular board meetings are held throughout the year. In other words, if the stockbroking community is not happy with the strategy at the ISE they only have themselves to blame.

Secondly, ethical issues have been raised about the close relationship between the exchange and stockbrokers. The exchange itself invests in equities and, up to November 2007, responsibility for supervising the conduct of stockbroking firms rested with the exchange. While the implementation of the EU markets in financial instruments directive (MiFID) saw this responsibility transferred to the Financial Regulator, some of it was outsourced back to the exchange.

As a result of such concerns, some believe that an ownership model such as that adopted by the London Stock Exchange, which is a plc, would be a more suitable structure.

Whatever the arguments about the proper function of the Irish Stock Exchange , the decision by corporate heavyweights such as CRH to withdraw their primary listing from Dublin has major implications for Ireland’s wider corporate finance industry, which is already struggling with reduced revenues as the value (and volume) of trading collapses.

Moving the primary listing from Dublin reduces the likelihood that a domestic broker will be involved in listing, rights issues, MA activity, and has a knock-on effect on supporting industries, particularly the banking and legal professions. On the other hand, many believe that listing on the Irish Stock Exchange will still be the main option for most Irish companies, arguing that an Irish listing and coverage from Irish brokers can give Dublin-listed firms a higher profile than if they were smaller players on a larger European exchange.

The future shape and function of the Irish Stock Exchange is likely to be a topic of discussion over the next few months, with some in the industry calling on the Department of Finance to become involved.

One thing that is indisputable is that the survival of a major equity market is not sacrosanct. As ISE chief executive Deirdre Somers herself warned an Oireachtas committee two years ago, the fate of the small exchange is not good. Pointing out that Lisbon had a similar-sized stock exchange a few years ago, she painted a stark picture of what happened when it became part of the Euronext exchange. “Within three years the tumbleweeds were rolling around the streets where the stock exchange used to be.”

Prescient words, perhaps.

ISEQ MARKET CAP

Jan 2000: €71.05bn

Feb 2007: €127.43bn

Nov 2011: €85.54bn