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It is time for the Irish Stock Exchange to reinvent its flagship Iseq index, writes Fearghal O'Connor.

The Iseq index may have enjoyed something of a resurgence since its dismal 2008 lows, but to critics it is a market listing that has long since ceased to have much relevance. One company, CRH, accounts for about one third of its market capitalisation, with a total of just five companies making up about two thirds of its value.

For years, the index was dominated by the financial-services sector but banks now account for less than 10% of the index. Although the Irish Stock Exchange has had great success in listing funds, given the lack of balance in the equity listings, it is little wonder that critics suggest it needs to take a long hard look at its flagship index.

"Because of the success the exchange has had with funds, it may be that this helps people overlook other things that are slipping away. There is an element of ‘forget about the embarrassing cousin and hide him away in the attic' about the Iseq," says one market analyst.

Nama, he points out, is much bigger than the Iseq and has not much more than 20 employees. "But you have 1,300 people working for broking houses in Dublin covering a market that is no bigger than Tesco in terms of value. Last time I checked, there were 10 or 15 analysts in the UK covering Tesco," he says.

"The Iseq is not irrelevant to Ireland because it is something that is still followed and benchmarked by a number of domestic institutions etc, but because it is concentrated in so few names in terms of the weighting, it is possible for people to buy three companies and effectively replicate Ireland."

The success of an exchange is ultimately its ability to provide liquidity. Dublin has never been an exchange famed for this. But it is now very dependent on a handful of names to provide this liquidity and the crisis that has so damaged the banks has dealt this a blow.

"If one or two of the remaining big players were to negatively shift their positions with regard to an Iseq listing, it would have a big impact on the index," says the analyst.

While Professor Brian Lucey of the school of business at Trinity College Dublin acknowledges that the Irish stock market has done a very good job in becoming a player in terms of listing funds, he agrees that the relevancy of the Iseq is dwindling.

"The funds really have been the saviour of the market in many respects," he says. "Volume hasn't been enormous and it certainly is not being used as a vehicle for primary financial raising. One major part of what you would think a stock market does, to be a channel for surplus funds into deficit areas, is not being used. Irish corporates are raising funds elsewhere in other manners."

Lucey says that for decades, the Iseq was dominated by the banks. "It never managed to grow a significant new market, tech market or small firms market and it is hard to see why a company would list on the Irish market. Funds, yes absolutely - they have to have a listing for transparency and European purposes. But companies can list elsewhere. This is the same thing as we see worldwide - a drift towards larger more concentrated markets where there is liquidity and specialisation."

Without doubt, there is a move towards sector specialisation in markets. Resource companies look towards Toronto, London, Melbourne or Sydney, for example. One UK and Ireland market analyst points out that, to its detriment, the Iseq became something of a property specialised market with Anglo, the other Irish banks, Grafton, CRH and the housebuilders. 

"Unfortunately this was the wrong asset class to be so deeply involved in," he says. "But why doesn't the stock exchange here look to really specialise in other sectors in which Ireland is strong? We are strong in technology, we are strong in the food sector and with companies like Ryanair, Aer Lingus and ICG, we are strong in transport."

Ailish Byrne, head of public affairs and communications at the Irish Stock Exchange, argues that change is happening but that the market tends to reflect the economy.

"A market changes over time," she says. The Irish market is no different to any other. If you look at the companies that were on the Irish market in the 1970s, they were very different to the companies that are listed at other times. In the 1970s, they tended to be more heavy-industry based companies.

"More recently it was construction and financials and it has changed now again. The market is effectively a reflection of economic development.  It is true to say that bank financing played a very significant role for Irish companies during the Celtic Tiger years, it will be interesting to see what role the market can play in providing funding solutions to enterprise in the coming years." 

She says that the stock exchange is currently engaging with corporate issuers to see what they are looking for and what sort of services it could offer them in the future.

"We expect to have some announcements on specific initiatives later in the year. We are always looking at opportunities where we can facilitate the Irish market and enterprise in general. That is a given," she says.

But there is one factor that it will be difficult for any such initiatives to overcome just yet. Right now the Iseq's Irishness is probably its weakest selling point. Given our recent economic history and the fact that country denominated risk in the bond markets has hit the headlines, Irish equities are a tough sell.

Merrion Stockbrokers' markets analyst Aisling Vaughan says that this perception of Ireland Inc certainly exists. But, she points out, there are a lot of good-quality companies on the Irish exchange that have good balance sheets, are profitable and are generating significant cash.

"When you put that all together, they make for decent investment propositions and if, for example, they were looking to acquire somebody else in their sector to drive growth down the line, then I think shareholders would be behind it in many cases," she says.

But another analyst, who did not wish to be named, says the Irish label can, too often, negate a good performance.

"There are plenty of people that I would know who would say, ‘I really like the look of Grafton but I have enough Irish as it is'," says the analyst. "That was not previously an issue because of the euro but now even the euro itself is in question. For many people in the US, for example, their biggest play on Ireland was one of the banks, maybe Anglo Irish Bank. That can take a long time to get over.

"Obviously anyone now looking to put money into an Irish bank is going to be very impressed with what the new financial regulator Matthew Elderfield has to say. But a lot of investors can't afford to have a mistake in the next two years so there will certainly be a reticence no matter how positive the noises now coming out of Ireland."

But Brian Lucey believes that such problems go beyond the current sentiment towards this or any other country. He says that it is increasingly difficult to see a viable future for small regional markets, in Ireland or elsewhere.

He believes that the only small markets that are growing are in emerging countries where they are providing previously family-run companies an opportunity to raise funds in an environment where, for the first time, there is surplus capital.

"But it is difficult to know why you would list in Ireland when you could list in Germany, the UK or the US," he says.

And there is very little that a smaller market can do about this trend, save making itself as attractive and easy to use as possible.

Ailish Byrne argues that the Iseq presents unique advantages for Irish companies, for example a euro quotation, competitive pricing and a higher visibility and profile domestically. "There is no doubt that an Irish company gets better coverage from a research and analysis point of view by being listed here in Ireland," she says. "It's a function of the size of the market. If you are trying to attract domestic investors and your market is here, then there is a value to being on the Irish Stock Exchange."

But Lucey argues that capital is international and that Irish companies really need to look to raise funds internationally. Indeed, Aisling Vaughan believes that the Irish market is being driven now by global sectoral themes rather than the Irish economic theme.

"When paper stocks are doing well, then Smurfit Kappa will perform well," she says. "The stocks are more aligned to what sector they are in, in a European context, than to the fact that they are an Irish company. There are obviously a few exceptions but that now seems to be what is largely driving stocks in Ireland."

And neither does she see it as a major issue where an Irish company happens to have its listing. What counts, she believes, is that a company is listed in a regulated market on a regulated exchange where there is full transparency.

"If you are an institutional investor who is interested in CRH, whether it is listed in Ireland or Paris or Frankfurt is not necessarily going to be a major factor. Liquidity is a big issue and so people, for example, might buy it through the London listing where there is more liquidity than the Dublin listing. But that sort of dynamic goes on all the time - where you get liquidity in one and not in the other."

But the other analyst quoted earlier believes that it is time that the Irish Stock Exchange tried to implement some visionary and radical ideas to protect the Iseq from complete irrelevance. 

"Nothing at the moment tells me that anything radical will be done," he says. "In fairness, as an exchange it did do something different and really successful when it went after the funds. But they now need a new story and it is not happening quick enough. More urgency is required."

For example, he sees huge possibilities stemming from the euro and would like to see collaborations with other markets across Europe, for example in Scandinavia or southern Europe.

He also believes there could be an opportunity for the Irish Stock Exchange to look to regions such as China and the Far East and offer the equivalent of what the New York Stock Exchange does for foreign companies. Just as New York lists American Depository Receipts (ADRs), he believes Dublin could provide listings of Euro Depository Receipts. As European investors look to diversify their exposures to emerging markets, this could provide them with a way of doing this in their own currency.

He also thinks that there is an opportunity for the Irish Stock Exchange to look to

mid-market UK companies as well as Irish companies, even if this means competing to an even greater extent with AIM.

"In five year's time, I think Dublin will be a specialised exchange that will have found its niche," he says. "It has shown that it can be an innovator when it comes to funds but it must move beyond that now. It obviously will always make sense, for tax reasons and the fact that a large percentage of their investor base are Irish etc, for Irish companies to have an Irish listing.

"I wouldn't write this side of it off - it has a relevancy to Irish people and institutions - but over time, its emphasis has to shift to niches where it can be really relevant on a wider scale."

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