Next year will be a momentous one for the Irish stock market, and the most challenging period yet faced by Irish public companies and by Irish fund managers, as the radical changes that the euro will bring to the investment industry take root.
The theory is that, with a single currency, investment managers no longer need to plough funds into individual European stock markets and instead will invest on a sectoral basis. There is no doubt there has been steady flow of investment funds out of the Irish market, as investment managers have rebalanced portfolios to take account of the new environment, but so far the "Big Bang" that many feared would devastate the Irish stock market has not transpired.
Irish institutional investors are natural sellers of the market but not forced sellers, and as Goodbody Stockbrokers stated, this distinction is important. Natural sellers sell stock into a rising market and this means that theIrish stock market can outperform international markets even as domestic institutions unload stock.
The strength of the Irish economy, and the likelihood that Irish GDP will remain well ahead of most euro states, has been a strong draw for international fund managers, and the movement of domestic investment funds out of the market has been largely matched by an influx of overseas money. If that had not happened, the market would simply not have performed as well as it has down during 1998.
Irish stockbrokers have been pretty sanguine about the impact of the euro and the switch from a national to a sector-driven market and many believe that at most about £4 billion of domestic funds - less than 10 per cent of the value of the market - will leave the State and that this disengagement will take place gradually.
That said, Irish plcs will in future have to compete an awful lot more aggressively for investment interest, as Irish funds will no longer automatically take a stake in a company simply because it is part of the ISEQ index. Investor relations, given a low priority by many Irish corporates in recent years, will assume a new importance.
A fund manager in Frankfurt will probably include CRH in his building materials sector investments, but will he necessarily include Heiton, Grafton or Kingspan? Will the same fund manager be interested in having two Irish banks in his portfolio or will he simply opt for AIB or Bank of Ireland. And if he does opt for AIB or Bank of Ireland, where does that leave Irish Life/Irish Permanent or Anglo Irish?
Most of the bigger plcs will be relatively unaffected by the switch in investment strategy. The likes of Kerry will always be included in a European food ingredients sector; since the merger, Avonmore Waterford is of a scale that warrants inclusion in a food sector. CRH, Elan, Smurfit and some others are all big enough within their respective sectors to attract investment funds. But many companies are too small and there is a likelihood that many will either be forced into mergers to create the scale to attract fund managers or will simply be taken private.
Already over the past year, Fitzwilton has gone private and seems likely to be followed by Jones. Others will undoubtedly follow, especially those who have performed poorly in recent years and whose inclusion in any investment portfolio - domestic or international - makes little investment sense.
Even the better-performing small and medium-capitalisation stocks will not be immune to the movement towards scale. The Frankfurt or Paris fund manager might find well-run print/packaging companies like Adare and Clondalkin interesting but too small to be of much use. Would he find a merged Adare/Clondalkin more interesting as an investment opportunity? Probably.
Bigger will be better and more attractive in the investment sense, and there is little doubt that fund managers will find a merged Irish Life-Irish Permanent in financial services and Jurys-Doyle in hotels more attractive propositions than the unmerged entities.
But one factor that may insulate part of the Irish market from the worst rigours of the post-euro investment climate is the strength of the Irish economy. Economic growth on the Irish scale should translate into corporate earnings growth well ahead of the EU average, although it is debatable whether the 15-20 per cent earnings growth of the past couple of years can be maintained.
Exposure to the Irish economic success story will be a major factor in attracting investment in particular stocks, and that is why the major financial, property, hotel and telecom shares will undoubtedly receive a disproportionate amount of attention from investors.
Early next year, a group of European exchanges, including Dublin, will announce plans for a pan-European exchange which is expected to list 300 or more large blue-chip companies in tandem with their listings on their own domestic markets.
It has been suggested that a market capitalisation of £1 billion will be a qualifier for membership of this exclusive club. If this is the case, then Irish representation in such a pan-European market will be small, with only AIB, Bank of Ireland, Elan, CRH, Smurfit, Kerry, Irish Life/Irish Permanent and a privatised Telecom Eireann likely to get a listing in an index which will be used by index funds for their European equity exposure.
While on the subject of telecom stocks, 1999 will also see the biggest flotation on the Irish stock market when the Government sells at least 25 per cent and possibly substantially more of Telecom Eireann. That flotation will value Telecom at between £3 billion and £4 billion, with shares worth possibly £1 billion being sold. As an exercise in shareholder democracy, the Telecom IPO will dwarf the flotation of the likes of Irish Life, Irish Permanent and First Active.
It is difficult to overstate the scale of the Telecom share offering, as the Government has made it clear that it wants the highest possible level of private investor involvement in the flotation. Theoretically, every adult in Ireland is a potential investor in Telecom, but even if only one in six adults succumb to what will undoubtedly be a marketing blitz by the Government, Telecom and its assorted advisers, it is perfectly conceivable that Telecom could begin its life as a public company with over a quarter-million shareholders.
This year will also probably see the belated arrival of Esat Telecom on the Irish market, now that Esat has apparently resolved its difficulties with the exchange authorities over the status of its Dublin listing. Esat has had an excellent, if volatile, first 18 months on Nasdaq and it will be interesting to see how the investment community rates the bigger and more established against the young turk, Esat.
Another possible large flotation is Cantrell & Cochrane with a value of £600 million-plus, once Allied Domecq makes up its mind whether it is going to sell C&C or demerge it through a flotation. With markets closing the year in a healthier state than seemed likely three months ago, the odds favour a flotation.
Elsewhere, assuming markets remain in good shape, it is reasonable to assume that companies like Parc, Flexicom, Horizon Computer and Grafton Recruitment, which postponed flotation as a result of the autumn hiatus in the markets, will rekindle their flotation plans. Small companies will still be able to float on the stock market, but they will have to be firms with high growth prospects, and that means that 1999 will probably see the influx of high-tech companies that was expected last year.
