Shares: Emerald jewels: A booming economy is helping Irish shares to shine
Sunday 11 September 1994
The balance of payments is in massive surplus; the budget deficit is a mere 2 per cent of GDP, enabling the government, uniquely among Europe's economies, to indulge in modest fiscal reflation; and inflation is subdued and has not been over 4 per cent since 1985.
The rock-solid economy is reflected in an equally impressive performance by shares. Last year prices rose by 53 per cent. They reacted in the first half of 1994 - hit by the global bond meltdown - but have already recovered to within 3 per cent of the level at which they began the year. But share prices are hardly being carried away. At 1,943, the ISEQ Overall index compares with an earlier peak of 1,890 in 1990, and 1,750 just before the 1987 crash. Calculations by the Irish stockbroker Davy put the market on a prospective p/e of around 12 for 1994, falling to 10.5 for 1995. This assumes that growth will be 17 per cent in each year.
That Ireland is doing so well, with GDP growth expected to be around 5 per cent this year and next, is partly because it was doing so badly in the early 1980s. It reacted to the oil crises of the 1970s by boosting public spending, sending inflation through the roof and wrecking the government's finances. The need to sort this mess out meant that the Irish largely missed out on the asset bubble and lending explosion which has left the UK economy with such a painful hangover.
Another bonus of the relative strength of the Irish economy is that the punt is a strong currency. Since 1985 the punt / sterling exchange rate has gone from a peak Ir pounds 1.30 to pounds 1 to near parity. Investors in Irish stocks could make gains from further exchange rate moves, though the authorities are unlikely to want the currency to rise too high.
Last but not least of the Irish attractions for direct investors is its tax haven status, with a corporation tax rate of just 10 per cent. This has been a powerful magnet attracting US multinationals, in particular, to locate manufacturing facilities and service centres in the Republic to address UK and mainland European markets.
It is easy to put together a DIY portfolio which, in effect, is an indexed fund. The top 10 companies account for more than 70 per cent of the market capitalisation of the whole market - around pounds 13bn at latest values. Cut out one of the two banks and investors can build a portfolio to track the index by buying: Bank of Ireland at 285p; the recently privatised Irish Life at 198p; paper and packaging giant Jefferson Smurfit at 434p; building materials group CRH at 387p; drug- delivery superstock Elan at pounds 22.50; crystal and china business Waterford Wedgwood at 62p; Independent Newspapers, also led by Tony O'Reilly, at 303p; and the two food companies Fyffes and Kerry at 102p and 345p respectively. All these stocks are quoted on the back pages of the Financial Times and readily dealt in London.
One possible drawback of this portfolio is that it does not offer particularly direct exposure to the booming Irish economy. Companies like Smurfit, CRH, Elan, Waterford Wedgwood, Fyffes and Kerry are international businesses that, in some cases, make virtually all their profits outside Ireland. That is not too great a negative. These are superbly managed businesses and, in large part, it is their international success that is driving the Irish share indices higher.
Investors who want to place a more direct bet on the Irish economy should stick to CRH, with its overwhelmingly dominant position at the heavy end of the Irish building materials market; Independent Newspapers, which owns 60 per cent of the Irish newspaper industry (and also holds a stake in this newspaper); and Bank of Ireland and Irish Life. The latter is not facing the commission-disclosure problems which are making investors wary of UK life companies.
For the investor who wants to buy just two Irish shares, I would go for Jefferson Smurfit and CRH. Both shares have been spectacular performers in recent decades as they have exploited their Irish bases to build world-ranking but still tightly focused businesses. If there is inflation in the global economy, it seems to be mainly concentrated on paper and building material prices which are recovering from bombed out levels. These trends have put both companies on course for strong profit growth over the next two or three years.
Smurfit has also excited analysts with its brilliantly timed acquisition of a paper and board business in Europe, which has trebled its continental European operations just as the cycle is turning higher. Both shares are highly rated in the short term as a reflection of these prospects. But sparkling growth could take their p/e ratios down into single figures by the middle years of the decade.
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