Not surprisingly, the advent of Telecom Eireann's launch onto the Irish stock market has dominated activity over the past 10 days. Literally, hundreds of thousands of people who up to now took no interest in the movements of company shares, are avidly following the daily fluctuations in the Telecom share price.
Given the scale of the Telecom issue and the fact that 55 per cent of the issue was allocated to private investors, it is clearly a stock market event that will have many economic reverberations.
The paper gain to private investors amounts to about £450 million (€572 million), at the current share price, equivalent to 1.5 per cent of total consumer spending. In addition, billions of pounds will be coming back to individuals in refunds given the excess demand for the shares. Of course, a significant portion of demand was funded by borrowings, and presumably most investors will seek to repay these loans quickly. Nevertheless, Telecom on its own will act as a catalyst to break the inertia that seems to apply to substantial funds that are left passively on deposit. Not surprisingly, the financial institutions are aware of this and are actively marketing an array of financial products, many of which are offering returns that are linked to the stock market.
The extent to which Telecom creates a new army of private investors investing directly in the stock market is impossible to predict. An important factor likely to encourage smaller investors to maintain an interest in the stock market is the low-cost dealing service being offered by many brokers for Telecom. A number of quoted companies such as Irish life and Permanent and Norwich Union already benefit from special, low-cost dealing services. This trend towards lower dealing costs and ease of dealing will be an important factor in generating a wider culture of share ownership.
Another positive feature of the arrival of Telecom on the market is that at a stroke it has improved the sectoral mix of the Irish market, where it represents just under 15 per cent of the market's total capitalisation. The two main banks together with Irish Life & Permanent still account for one-third of the market, but the overall structure of the market is now much closer to the European norm.
For private investors Telecom fills a large gap by providing exposure to the fast-growing telecoms market. While ESAT Telecom is already listed on the market it is a much higher risk share and would not be suitable for many private client portfolios. Now private clients can get reasonable diversification by investing in as few as half-a-dozen of the largest quoted companies. This of course does beg the question as to the relative attractions of the various companies. An analysis of relative valuations throws up a curious anomaly in that Telecom at its current price is valued at a premium to its international peers, whereas the Irish banks are currently valued at a discount to their international peers. Furthermore, telecom stocks in general are more highly rated then their financial counterparts. This results in Telecom enjoying a price-earnings multiple of 33 compared with Bank of Ireland's multiple of 14.5. Bank of Ireland offers a dividend yield of 2.5 per cent compared with a yield of less than 1 per cent for Telecom.
A premium rating for Telecom is justified on the grounds that it offers exposure to the fast-growing Irish economy. Furthermore, it is argued that Irish institutions will be strong buyers of the stock given that it represents 15 per cent of the overall average market. Yet on the other hand, the share prices of the Irish banks have declined this year and the reasons put forward by analysts include the fact that Irish institutions are reducing their investment in Irish shares as they diversify abroad, and the Irish banks are too exposed to an Irish economy which is in danger of seriously overheating.
Clearly, both sets of arguments can't be right and probably the truth lies somewhere in between. This suggests that new stock market investors who wish to stay in the market would do well to diversify into the Irish banks, which offer exceptional value relative to the rating afforded Telecom.
