A cursory examination of the Irish stock market shows that the index does not represent the economy, and it has been thus for 20 years. It is surprising, therefore, in reviewing 20 years of stockbroking in Ireland, how the major strategic changes in our industry have reflected fundamental political and macroeconomic developments. Sentimental TV programmes reflecting mid-1987 show an inward-looking and downbeat Dublin, with young people talking of unemployment and emigration. They do not show the small, but much more upbeat, group that was enjoying the last stages of the 1980s bull market. It was a tiny cohort, but in some ways, an equally inward-looking one. Exchange controls meant that the majority of the free float of Irish plcs was held by around 10 investing institutions, who could not invest their cash abroad. Relative performance among this small group of institutions was, in effect, a zero-sum game.  | | David Lowe |
Government initiative
The markets crashed in 1987 and Ireland did not escape the pain. But the new governmnent's start on the path of fiscal rectitude was to have a long-term (and much more profound) effect on the Irish stockbroking industry. The increase in the National Debt had to be funded, and to the extent possible, this was done through Irish pound-denominated government bonds. government debt grew by €4 billion (or 17 per cent) in 1986, while the total capitalisation of the Irish equity market was only €4.5 billion at the start of 1987. The gilt market had therefore been the growth engine of Irish stockbroking in the first half of the 1980s, but this gradually changed over the next decade.
Irish brokers got on planes and told international investors the story of improving government finances, falling interest rates and the alignment of the currency with the Deutschmark. A major bull market in Irish bonds ensued. As this process reached endgame with the introduction of the Euro in 1999, Goodbody staff were preparing for the IPO of Eircom, which raised over €4 billion - equivalent to the increase in the National Debt in 1986, but also - incredibly - equivalent to the growth in the National Debt in the entire two decades between December 1987 and March 2007.
This shift from the dominance of bonds to equities in Irish stockbroking was driven in the first instance by changes in politics, economics and attitudes to business that allowed structural change in financial markets. Removal of exchange controls in 1989 had a dramatic effect on the Irish equity market. Irish institutions were free to build international equity portfolios, and no longer had to invest in Irish shares. The zero-sum game of a closed market turned into a structural need for new buyers. Irish equity brokers followed the example of their bond market colleagues. They got on planes and told the story of Irish corporate successes to the international financial community. In this effort, they had huge support from those plc management teams, and it was needed - steady growth in the economy took a number of years to emerge from sound economic policies, so buyers looked to the quality of company management as much as to the Irish economy to be the engine of growth.
In 1992, sterling came out of the ERM, and left the recovering Irish economy stuck between a rock and a hard place. Interest rates rose and choked off growth; devaluation became inevitable, and as it turned out, the last hurdle on the road to sustained progress. These were dark days, when market turnover fell to under €4m per day. But interest rates fell, and the economic boom started. International demand for Irish equities grew. Membership of the euro copperfastened Irish equities' presence in more and more European portfolios.
Strong management at plcs combined with economic growth to drive the market forward. Where both these factors have played together over the last 20 years, results have been spectacular. At the end of 1987, both Grafton Group and Anglo Irish Bankcorp commenced their development in the UK. Driven by successful growth strategies in the UK, and subsequent expansion in Ireland, their respective market capitalisations have increased from €8.3m and €25.8m to €2.8 billion and €11.6 billion respectively - remarkable success.
For victims of previous cyclical downturns, the scale of opportunity created by fundamental changes in economic policy was not easy to foresee. It was hard to believe in 1999, when our newly-recruited economist, Colin Hunt, wrote a report called Eurovision 2006, predicting that GNP per capita would increase to the third highest in the EU, that he would prove to be pessimistic. Similarly, it was hard to envisage that the government's 1989 decision to liberalise the Dublin-London route (for once ahead of EU competition requirements) would provide the launching pad for Ryanair's attack on the European market.
Structural change in Irish stockbroking has been less dramatic, but no less significant. The rise in personal wealth has led to dramatic growth in our private client services, which now provide investment opportunities not only in Irish and international equities, but also in other asset classes, including property, hedge funds and private equity.
Finance's 20th anniversary coincides with the 10th anniversary of Goodbody Corporate Finance, which we established in response to the need of corporate clients for advisory services that were close to the market, and aligned seamlessly with fundraising capacity. Since 2000, this part of our business has handled M&A transactions to a higher total value than any of our competitors on the island. And the island is our market - Goodbody's new Belfast office will build on the success of our long-term relationship with many Northern Ireland plcs, and again reflects the way in which our business develops in response to fundamental change in Ireland.
Perhaps the biggest disappointment of the last 20 years is the paucity of new issues. The number of Irish quoted stocks is little changed from 20 years ago. Recent trends are more encouraging, with IEX now proving a popular option among smaller companies. The marketing efforts of the post-exchange control period have left a great legacy - Irish brokers have a much wider client reach than the broking community in other small countries, which has typically been supplanted by global investment banks based in London. Irish brokers have the lion's share of trading in Irish equities, and this will continue to be the case; we have reached a critical mass where we have the capacity to provide the levels of support required by global institutions. Our analysts are winning awards in international comparisons. There is a strong platform for continued growth, which will continue to reflect the opportunities that the economy and its entrepreneurs create. Because the economy is much larger, more vibrant and employs twice as many people as it did in 1987, we can expect the emergence of a growing number of candidates for market listing. The next Anglo Irish Bankcorp or Grafton is out there. |
