The introduction of the euro has transformed the way that Irish private and institutional investors view the equity investment process. For institutional investors, the new currency regime acted as the catalyst for a period of intense portfolio diversification involving aggressive selling of a significant proportion of their very large holdings in Irish shares and subsequent re-investment in European companies.
Not surprisingly, this had the effect of depressing the Irish equity market for a time. From the index performance statistics in the accompanying table it can be seen that, during 1999, the Irish index barely moved compared with rises of 31 per cent and 15 per cent for the broad-based European index (Eurotop300) and the FTSE100 respectively.
Over this period, the portion of domestic institutional portfolios invested in Irish equities declined from more than 30 per cent to less than 20 per cent. Given that domestic institutional investors were the mainstay of the Irish market, it is not surprising that this portfolio shift had such an impact on the ISEQ index.
In contrast, the aggregate holdings in Irish equities of Irish private investors have typically represented a relatively small proportion of the total market.
Indeed, throughout the 1990s many Irish private clients were quick to invest in Nasdaq stocks in the US. This seemed to be, in part, because so many Nasdaq-quoted companies of US origin have operations in the Republic. A further important factor that generated Irish investment interest in the Nasdaq was the decision by so many indigenous software companies, such as Iona Technologies, to establish their prime stock market listing on the Nasdaq.
The introduction of the euro means Irish investors now face no currency risk when investing across the euro zone. Nevertheless, investment in euro-zone stocks by private investors does not seem to have taken off, for several reasons. Possibly the most important is that Europe is still a long way from having a unified stock exchange and settlement system.
The wide variety of national exchanges with different trading, settlement and banking systems means that the costs of trading euro-zone equities is prohibitively high, particularly for the smaller private investor. Until progress is made in streamlining trading and settlement, interest from private investors in euro-zone equities is likely to remain modest.
By contrast, the British equity market has maintained its position as a large and efficient stock market. Prior to the technology boom of the 1990s, the majority of domestic private investors looked to the British stock market as a key investment outlet.
Although investing in Britain does involve a currency risk, dealing costs are low and there is a wide array of well-known companies to choose from. Compared with the ISEQ and the Eurotop300 index, the British market, as represented by the FTSE100, has produced some lacklustre returns in recent years (see table).
From the viewpoint of a euro-based investor, the strong sterling exchange rate would have augmented these returns from a British equity portfolio. Since the end of 1998, the currency gain on a sterling portfolio when translated into euros would have amounted to approximately 15 per cent.
Despite the risk that sterling may weaken versus the euro, there are many British shares that now offer attractive long-term value. Across most sectors, there are British-quoted shares that either have operations in the Republic or are household names. In the banking sector, the two Scottish banks - Bank of Scotland and Royal Bank of Scotland - have established themselves as major players and, in insurance, the merger of Commercial Union and Norwich Union has created a global company in the form of CGNU.
Compared to the Irish equity market, the investment choice in Britain is enormous and, at current levels, serious investors should certainly devote some time to analysis of investment opportunities in that market.
