Take an Irish punt

With low inflation, growth prospects and independence from UK markets it could be the European Tiger economy.
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The Irish stock exchange finally declares independence from the London stock exchange next week, establishing the Irish market as a separate investment opportunity. Independence could work wonders for the rating of Irish stocks, according to Gervais Williams, who manages the Irish smaller companies investment trust launched six months ago by NatWest Investment Management.

Shares in the trust were placed with institutions at 98p and only a handful have seeped down to ordinary investors, which is just as well because the shares have drifted down to 93p and the fund now stands at a 10 per cent discount to net asset value. But a savings plan channelling anything from pounds 30 a month into the trust is planned next month, which could arouse some interest from investors looking for a punt on the prospect of Ireland emerging as an European Tiger economy.

Irish share prices have moved closely in line with London stocks for the past decade, although the Irish economy has consistently outperformed the UK since 1988, with only a mild slowdown in the recession, and company profits have outgrown UK stocks.

As a result they now look cheap relative to the UK. The average price of the top 10 Irish stocks has fallen to just 10 times annual earnings compared with 14 times for the top 100 shares in the UK. The 67 small Irish companies are averaging 10.4 times this year's earnings compared with 13.1 times for the FT Small Companies index.

Irish stocks have been neglected because overseas funds have not channelled funds into specifically Irish stocks, but following the abolition of controls on outward investment in 1989 Irish institutions neglected their own stocks as they built up their holdings in overseas assets. That outflow has now stabilised and a bigger proportion of Irish investment is being invested at home.

Away from the London stock market the Irish stock market might now attract a separate allocation of external investment funds. Its market capitalisation is tiny but even a modest allocation of capital from overseas institutions would work wonders for the ratings of Irish stocks.

Ireland's growth prospects look good, with the economy expected to grow by 7 per cent this year and 5.5 per cent in 1996, while inflation remains below 3 per cent. For the next five years Ireland is assured of favoured category one EU status for investment incentives and the 10 per cent corporate tax rate for Irish exporters will last well into the next century. nvestment capital is attracted by a cheap, well-educated labour force. The only major weakness, with the UK as Ireland's largest single market, is the relative strength of the currency against sterling. The food manufacturing sector is already mature, but the small company sector is set to benefit from a surge in consumer spending by Ireland's young and increasingly well-off population. NatWest likes the look of smaller companies in manufacturing, leisure, insurance and construction.

The trust's five largest holdings are the department store group Arnotts, Jurys Hotels, the leading insurance company Hibernian, ferry operators Irish Continental, and a finance house, Woodchester Investments, where major stakeholder Credit Lyonnais could sell out and trigger a bid. It also holds 15 per cent stakes in Petroceltic which draws royalties from gas deposits under the Celtic Sea, and Irish Financial Group, a mortgage provider.

Perhaps 10 to 15 per cent of the NatWest fund is invested in Northern Irish stocks. Northern Ireland has a bigger manufacturing base and should also benefit from a surge in inward investment and Peace Grants, although the eight quoted Northern Irish shares have not yet been re-rated since the ceasefire, and might not suffer too severely from a breakdown, according to Gervaise Williams.

The pounds 21m raised by the fund when it was launched is now fully invested in 32 different stocks, but the managers intend to gear up by borrowing to expand the fund by 25 per cent.

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