Rising share prices pave the way for bailout exit

Irish stocks are climbing three times faster than equities in Spain, Italy, Greece and Portugal as the nation looks to become the first country to exit a EU-led bailout.

Rising   share  prices  pave the way  for bailout exit

Ireland’s Iseq Index has more than doubled from a 13-year low in Mar 2009 as Smurfit Kappa Group led gains with a jump of 889%, according to data compiled by Bloomberg.

Companies in the gauge are forecast to post the biggest profits since 2008.

Italy’s FTSE MIB increased 29% in the period, while Spain’s IBEX 35 rose 19% and Portugal’s PSI 20 added 2.1%. Greek stocks lost 39%.

The nation’s shares can pull further away from those in the weakest economies on the euro region’s Mediterranean periphery as Ireland takes steps to bring down its deficit, said Andy Lynch at Schroder Investment Management Ltd.

The Iseq has recouped just a quarter of the 80% plunge that began in Feb 2007 and culminated in the near-collapse of the nation’s banking system.

“We have to give Ireland credit for actually sticking to the reform programme and taking the levels of painful social adjustment that few countries in Europe have come close to,” said Mr Lynch.

His firm oversees $369bn globally, including Grafton Group and Irish Continental Group shares. “There’s been a massive change in sentiment. We’ll probably look back on 2012 as the year when Ireland turned the corner.”

The Iseq climbed 15% to 3,907.1 this year through yesterday, clawing back 25% of the 8,065-point plunge from its peak in 2007, data compiled by Bloomberg shows. That compares with a 21% recovery in Spain, an equity market more than four times bigger than Ireland. Italy has rebounded 12%, Portugal 15% and Greece 8.6%. The four Mediterranean markets all bottomed in June or July last year.

House prices in Ireland tumbled 51% from their 2007 peak, forcing the Government to take over five of the six biggest domestic banks. The bailed-out lenders have racked up €93bn of loan losses in five years, according to data from company filings.

Ireland is looking to leave the EU-led rescue package it negotiated in Nov 2010 by the end of the year as borrowing costs decline. The yield on Ireland’s 10-year bonds has fallen to 4.22% from 13.8% in Jul 2011. That compares with the average 5.8% the nation agreed to pay on international bailout loans in its 2010 aid deal.

The country’s labour force has also regained some of its competitiveness. A measure of labour costs dropped 8.4% between 2008 and 2012, compared with a 1.8% increase in the 17-nation euro area on average, Eurostat figures show.

Earnings for companies listed on the Iseq are projected to be a combined €205.44 a share in 2013, up from €65.55 last year, according to analyst estimates compiled by Bloomberg. That compares with the €693.92 peak in 2007.

The country still faces challenges and Irish stocks are no longer cheap, according to Patrick Moonen, who helps oversee about $244bn as senior strategist at ING Investment Management in The Hague. The Iseq’s valuation has climbed to 67 times reported profits, up from 4.1 times in Dec 2008, data compiled by Bloomberg show. The gauge trades at 19 times analysts’ estimated earnings, compared with a multiple of 15.8 at the start of the year.

“The biggest problem, which will remain for some time, is the weakness of the banking sector,” Mr Moonen, whose top pick in peripheral Europe is Spain, said last week.

“Credit growth is weak and banks are reluctant to increase lending, which is unfortunately an important part of the economy that really has to get going. That’s still the dark cloud.”

Pioneer’s European equity funds hold shares of Ryanair Holdings, the region’s biggest discount carrier, along with stakes in Paddy Power and Kerry Group. The three stocks have recouped all their declines from the financial crisis to reach records this year.

Kerry Group, the third-heaviest stock on the Iseq after CRH and Ryanair, rose to a 24-year high in March as its share price tripled from Mar 2009. The company makes food ingredients and flavours, and counts Nestle, Unilever, and McDonald’s among its customers. Shares of bookmaker Paddy Power rose more than five-fold in the period, reaching the highest since its 2000 initial public offering in April.

Shares of Dublin-based Irish Continental have more than doubled since Jun 2009, trimming the losses from a 16% high in 2007.

Smurfit Kappa, which makes cardboard boxes for Domino’s Pizza and Danone, is among the 10 best-performing stocks in the Stoxx Europe 600 Index after increasing almost ten-fold since Mar 2009. The shares are still 45% lower than their peak in 2007.

The Iseq’s performance has benefited from the departure of financial stocks such as AIB, according to Sam Cosh, a fund manager at F&C Asset Management in London. Financials make up 5.8% of the Iseq by weighting, compared with 35% for the IBEX 35 in Spain and 20% for Portugal’s PSI-20, Bloomberg data show.

— Bloomberg

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