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Irish equities - early to fall, but they may be early to rise - Barrett back

At a time when all international asset classes are under the cosh, the value of a deep understanding of the Irish economy and its stocks has never been greater, says Roy Barrett, head of this year’s top rated firm, Goodbodys.
The future of Irish stockbroking depends, more than anything, else on how the current bear market in Irish equities plays out. There are three differences between the current bear market in Irish equities and all others -

• root causes
• ferocity
• timing

Each of these has implications for the stockbroking industry and the challenge for us is how we structure our firms to meet the demands of a dramatically changed environment, and how we are regulated.
Roy Barrett

The root causes of previous bear markets in Irish equities have tended to be internationally driven. The Irish equity market started its bull run in the 1980s years before the structural changes in the economy were achieved. It was driven by global equity market trends, international growth by Irish companies and demand from Irish investors who were restricted by exchange controls. It is common cause that the current global crisis grew out of US subprime mortgages, or more generically, excess liquidity provision to certain asset classes. While some felt that the relative absence of exotic financial products from the balance sheets of Irish banks would provide some insulation, the markets’ early view that problems in Ireland would arise from excess domestic lending has been proved right by the provisions now being applied. To achieve a turnaround in Ireland, we therefore require both domestic action to release finance back into the system, while at the same time knowing that, as a small open economy, we also need global recovery to provide sustainable recovery.

Learning lessons the hard way
From an equity market perspective, this demands that international investors believe that the banks are adequately capitalised, and that the problems of the property sector are being fully acknowledged, and it may well be that such moves can spark the first leg of a market recovery. On the other hand, for the many companies with a substantial international exposure, growth will inevitably be delayed until the global gloom lifts. And for stockbroking companies such as our own, the implications for our institutional and corporate service offering are clear – an even deeper understanding of the dynamics of the Irish economy is required, and a knowledge of the unique drivers of each of the Irish companies - companies of differing quality and with diverse prospects have been tarred with the same broad brush of ISEQ membership. And parts of the private client base have been hit hard – particularly those who were actively involved in trading Irish stocks, and long-term holders of the Irish banks. The lessons of diversification have been learnt the hard way, and in response we continue to develop our broadly-based, risk-averse wealth management offering, focusing on a geographic spread of assets.

The ferocity of the ISEQ’s fall is without precedent, and has been greater than that of its peers. Buoyed by the strength of the Irish economy in recent years, and with demand swollen by Irish retail investors, the market has seen heavy international selling, with domestic buyers both limited in scale and burned by prior bravery. This created an environment supportive of the controversial practice of short selling, which, as in other markets, was restricted after the “St Patrick’s Day Massacre”. There was undoubtedly a global issue in relation to the fact that short sellers could target the stock of financial institutions one by one, creating uncertainty and arguably accelerating the demise of some. It is notable, however, that despite the restrictions (and, indeed, despite the subsequent unprecedented Government guarantee) shares in Irish banks saw dramatic further percentage falls since the initial exuberance which followed the introduction of the guarantee. The extent of the ISEQ’s fall has been driven by the collapse in bank stocks, and compounded by the cyclical nature of market leaders such as CRH, Ryanair and Smurfit. The very contraction of the market has forced further sellers who have mandates only to hold large companies.

The savage volatility in markets has caused investment banks everywhere to greatly reduce their market-making operations, and Ireland has been no exception. At Goodbody, we have retained our commitment to making a market in Irish equities, and regard it as a core offering to our institutional and corporate clients. In response to market conditions, spreads are wider, and transactions smaller, but our objective is to ensure that even as international houses exit the market, our presence strengthens, and this is proving to be the case. For the private client, yet again the extent of the Irish market’s decline makes ever clearer the need for the diversified wealth management offering which we have been building.

Timing is everything
Considering finally the issue of timing, the Irish economy, with the equity market in its wake, has traditionally responded late to international trends. Recovery from the 1980s recession came well after the rest of the western world had made the changes necessary to get its fiscal position in order. The currency crisis of the early 1990s (well, it seemed like a crisis at the time) was caused by sterling’s problems. The Irish equity market, however, having been an outperformer for much of the early part of this decade, began its descent before global markets turned bearish in a serious way. We have seen in the Government’s necessary early moves to guarantee liabilities of the Irish banks, for example, that we are early victims of this downwave, and we do not have the luxury of copying other countries’ solutions. Appropriate responses as we move forward will be the key to ensuring that Ireland is one of the first markets to recover, rather than resuming its traditional role as a laggard.

As regards the stockbroking sector, the need is to reshape our business rapidly to reflect the new world. Our corporate finance business is working actively with businesses who are addressing the requirements and opportunities of change, and we expect that some transformative transactions will take place in 2009. We are fortunate in that we streamlined our business earlier in the decade, outsourcing our administration and IT functions. Current trends demand that we focus on our core businesses of wealth management. Having spent many years steadily building up the core advisory business, while supporting actively trading clients with a specialised service, we are structurally well positioned to deliver the change of emphasis the market requires. The challenge for our institutional services is to continue to commit the necessary resources to ensure that there is comprehensive coverage of the Irish equity market available at a time when others, particularly outside Ireland, have cut their commitment. Ironically, therefore, at a time when all international asset classes are under the cosh, the value of a deep understanding of the Irish economy and its stocks will never be greater, and we are determined to realise that value for our clients in coming years.
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