THE IRISH stock market was the second worst performing equity market in the world in 2007. Last year was not much better. And on Tuesday, the Iseq – an index of Irish shares listed on the exchange – dropped to levels last seen in 1995. All the gains made over 14 years of the Celtic Tiger era have been lost in the last two. Nothing better illustrates this spectacular decline than the financial sector.
Two years ago, the stock market value of our two largest banks – Allied Irish Banks and Bank of Ireland – amounted to €38 billion and represented 30 per cent of the Iseq index. Today they are worth just €741 million and account for 3 per cent of the Iseq.
At the same time, shareholders in the country’s third largest financial institution – Anglo Irish Bank – which was nationalised last month, are awaiting the decision of an independent assessor on whether compensation is due to them. But their shares may be worth nothing.
The performance of the stock market matters. In the case of Government, a collapse in share prices of the scale we have seen results in a huge fall in tax revenue with implications for the future. Investors can offset their past capital losses against future capital gains. So even with a strong stock market recovery, the capital gains tax yield for the exchequer from this revenue source is likely to remain depressed.
Stock market performance also matters to investors. Many have invested in shares to enhance their retirement years. Of these, some were relying on investment returns via capital growth and dividend income to help finance health expenses and pay nursing home fees. These investors have found their capital depleted and their income reduced. Likewise, those who invested in pensions have suffered two years of negative returns.
Because the Iseq index was dominated by financial and property-related companies which have been hit hardest by the global economic downturn, Irish share prices have fallen farther and faster than elsewhere. In addition, recent events at Anglo Irish Bank, as well as breaches of corporate governance evident in some other major Irish companies (such as DCC), have greatly damaged Ireland’s international reputation, making Irish shares less attractive to foreign investors.
Any recovery in the Irish stock market will be dependent on developments abroad such as signs that the US economy has stabilised. However, other contributing factors remain within our own control – notably adherence to high standards of corporate governance. In this regard, corporate Ireland has much to prove.