Irish equities a standout bet as global uncertainty persists

In a world economy that is struggling to deliver 2% GDP growth in 2016, Irish equities should attract renewed interest as the Irish economy looks set to increase by around 5% in real terms as ‘Brexit’ concerns ease.

We now see the risk/return in Irish equities as much more favourable after a year of consolidation.

The Iseq offers investors a 10% cash flow yield, 11% earnings growth on average and a liquid investment.

These metrics now compare favourably to the Irish real estate market as well as other asset classes such as bonds and bank deposits. Therefore, we think it is time to revisit Irish equities.

Globally, investors sit on high cash levels concerned about a China credit crisis and property market collapse.

They fear too that the US will slip back into a recession led by the manufacturing sector as a result of a strong dollar and falling commodity prices and are avoiding Europe’s constant political and fiscal crisis as the ECB continuously firefights small fires to reduce the risk of a wildfire spreading.

Brexit is the most obvious near-term threat, although it now looks as if this fire is under control.

The bullish arguments are that we see increased co-ordination between monetary policymakers well aware of the risks globally and worried about bursting the recovery.

The Chinese real estate market which was supposed to collapse has in fact regained upward momentum, and new home sales in the US are growing at the fastest pace in eight years, just as inflation rises to the target 2% level, easing deflation concerns.

Meanwhile, European economic data remain in expansionary territory with new ECB tools still to kick in over the coming month.

Weighing up global growth, it is likely to remain between 1.5%-2.5% for the next one to two years as US policymakers fret against being too aggressive on, tightening monetary policy while Chinese and European policymakers continue to be reactive to near-term risks.

Provided that we avoid a contraction in global growth over the next year, we are less concerned about its impact on the Irish economy.

The Irish economy continues to grow robustly with 46,900 jobs added in the first quarter of 2016.

External trade remains strong and investment is expanding led by new build construction. Consumer demand is robust as well with retail sales up almost 8% in volume terms year-on-year in January-April and car sales continuing to increase by an impressive 25% per annum.

Further to this, AIB’s trading update this week reported that new lending grew by 17% year-on- year led by SME, corporate and retail lending. All of this indicates that Ireland should be the strongest growing economy in Europe, if not the world in 2016.

One of our main concerns in recent months was the impact of a hung parliament. Now that we have a new government in place, albeit a minority one, we expect policy changes to be implemented which will be mildly fiscally expansionary.

We expect increased expenditure on social housing, an increase in public-sector numbers led by more Garda and lower taxes which will boost disposable income.

As we head into June and the UK referendum on EU membership on the 23rd of the month, we remain confident that Ireland can achieve 5% GDP growth this year provided that Brexit does not occur.

We expect Britain to stay in but a vote to leave, should it happen, would mean all bets are off as regards the Irish economic outlook going forward and our investment strategy.

Irish companies would be negatively impacted from a currency translation effect, possible increased taxes and levies with border controls possible, at least until a new trade agreement is formed between Ireland and the UK.

Recent polls suggest that the risks of Brexit are increasingly diminishing and this is visible in the strength of sterling over the last two weeks. As this cloud clears, the Irish picture brightens further.

A review of the top 20 Irish companies highlights extremely cash generative firms which are placing more emphasis on rewarding shareholders through higher dividend pay-outs and share buy-backs.

The 13.5 times FY (fiscal year) 2017 earnings multiple is attractive relative to c.11% forecast earnings growth next year.

Provided companies continue to balance capital investment and return on capital to shareholders, Irish equities should trend higher as Irish listed plcs grow. In a world with many challenges for growth, Ireland is likely to become growth leader and attract renewed interest.

• Darren McKinley, CFA is Merrion Capital Group’s Irish Equity Analyst having previous been employed as an Asian Equity Analyst/Fund manager at Zurich Life Assurance and has 10 years experience in capital markets.