INVESTOR: If the risk of losses due to sterling depreciation is viewed as minimal, Irish investors may well begin to refocus some of their overseas investments on British shares.

Until the early to mid-1990s, the British economy had a pivotal influence on developments in the Irish economy. In fact, for many decades, the Irish economy was, to all intents and purposes, a small subset of the larger British marketplace. For decades, the Republic came under the umbrella of the sterling exchange rate and Irish foreign trade was dominated by business with Britain.

The Republic's adoption of the euro as a founding member marked the culmination of a decades long journey towards an Irish refocusing on the broader European economy and the enhanced ability that this provided to attracting US multinationals to set up subsidiaries here.

Although economic and financial news on developments in Britain still receives its fair share of airplay, it is noticeable that coverage of the British economy has moved a little into the background. For example, how many Irish people would know what is the current rate of interest on a standard British variable rate mortgage?

For Irish private investors there has been a commensurate decline in the relative importance of the British stock market. The advent of the single currency means the euro zone provides Irish investors with a wide array of investment choice with no currency risk.

Nevertheless, the size and depth of the British stock market still attracts significant interest from Irish investors, despite the currency risk. However, in recent years, it has been the perceived high level of sterling against the pound and the euro that has served to dissuade many Irish investors from buying British stocks.

In recent years, the British economy has in fact performed better than those of Continental Europe, although, of course, not as well as the booming Irish economy.

Recent economic data point to continued strength in British private consumption. In April, the volume of retail sales rose by 1.7 per cent, which was the sharpest monthly rise since the beginning of 2000. The housing market has surprised many in Britain by its continued buoyancy as it responds to the realisation that British interest rates are likely to stay low for a prolonged period.

In contrast, business sentiment has yet to fully recover from the weakness experienced during the second half of last year. For example, business sentiment declined by 1.1 per cent in the first quarter to leave it 3.4 per cent lower than the same period last year.

The big debate in Britain continues to revolve around whether sterling joins the euro and, if it does join, at what sterling/euro rate this will occur. While there are many who argue that sterling is seriously overvalued against the euro, there is now an increasing body of opinion that believes that sterling is only marginally overvalued.

Opinion in Britain is very divided on whether the advantages of joining the euro outweigh the drawbacks. For the Republic the decision was quite straightforward, given that the option of an independent pound was simply not viable. In contrast, sterling is a viable independent currency and clearly there are significant advantages offered by the flexibility of an independent currency.

For Irish investors contemplating investment in the British market the real issue is whether there is likely to be a significant decline in the sterling exchange rate over their investment time horizon. Until recently, it was generally assumed that the British authorities would only enter the euro at a sterling exchange rate much lower than current levels. More recently, the view that sterling is fairly valued at current levels has gained ground.

If this is valid, there is only limited risk that sterling will depreciate against the euro, irrespective of whether sterling joins the single currency. If the risk of losses due to sterling depreciation is viewed as minimal, Irish investors may well begin to move some of their overseas investments into British shares.

From the Irish perspective, the attractions are many:

Most of the large blue-chip quoted British companies are household names in the Republic and indeed many such as Marks & Spencer and Tesco have Irish subsidiaries;

The historical link with the London Stock Exchange means that transacting and settling deals in British shares is identical with Irish shares;

The easy availability and access to the British media means that it is very easy for Irish investors to keep abreast of developments in the London markets.

If sterling does eventually join the euro, it is likely that there will be a sharp increase in Irish private investor interest in the British stock market. However, interest in Britain from Irish investors could well increase in any event if it becomes apparent that sterling is unlikely to depreciate much from current levels.