The future of the Irish Stock Exchange remains bright despite some negative characteristics such as a low level of trading activity, according to UCD's Dr John Cotter, writes Jane O'Sullivan, Markets Correspondent.

Writing in the latest edition of the Irish Banking Review, Dr Cotter says there are a number of reasons to be confident for the future of Irish equity investments despite some negatives.

On the downside, Dr Cotter says the structure of the market is a cause for some concern, with the top five companies accounting for more than 60 per cent of the value of the ISEQ index and more than 75 per cent of trading on the official list.

Very little trading occurs in the remaining companies, an unattractive feature for investors, says Dr Cotter, who is director of the centre for financial markets at UCD.

He also notes that the ISEQ is dominated by the financial sector, limiting an investor's ability to obtain a truly diversified portfolio from the Irish market alone.

The choice of companies on the exchange has also shrunk in recent years, with 54 companies listed in 2003 compared to 76 in 2000. Dr Cotter notes that last year, no new companies entered the market while 10 companies left it.

But despite the negative picture painted by such factors, Dr Cotter believes the prognosis for the Irish stock market is positive.

In terms of risk and return performance, the ISEQ fares better than the other markets with which it is most closely associated by exhibiting relatively better returns and lower risk.

Measured over a period from 1990 to 2003, overall returns on the ISEQ fare better than Britain's FTSE 100 or Germany's DAX30, while the volatility of the Irish market is lower than its counterparts elsewhere.

"Thus, any indications regarding the ISEQ's demise due to, for instance, a lack of trading should be forcefully challenged given its risk and return performance indicators," he says.

He also notes that the future viability of the Irish market is important for different economic agents including Irish companies, who can raise much-needed finance, financial intermediaries and Irish investors.