Investors in the Irish stock market should favour Irish firms that have less exposure to the UK — until the outcome of the British referendum on membership of the EU is known, Merrion Capital has said in a major report.
The stockbroker believes the UK will vote to stay in the trading bloc but that the potential for a further slump in sterling ahead of the June 23 vote will likely cause jitters for Irish stocks that rely on the UK for a large slice of their sales or net profit.
Sterling has slid over 16% since late last year as markets watch for hints from UK opinion polls and attempt to price in the risk of Britain leaving the EU.
Other factors, including a potentially weakening UK economy and the probability that the UK will not start raising interest rates until 2017 at the earliest, have also weighed on the UK currency.
The end result is that Irish exporters into Britain have seen their price competitiveness shrivel from around 70 pence to 81 pence, in a matter of months.
Merrion analysts David Holohan, Alan McQuaid and Darren McKinley, in a wide-ranging Investment Strategy Outlook, said that until the result of the ‘in-out’ vote is known, investors in Irish stock markets and firms trading or relying on the currency need to take heed of the risks.
For Irish stock market companies, the immediate impact will be on the extent that their sales or profits are affected by the slump in sterling — and that in turn depends on the extent of their operations in Britain.
Sterling’s weakness “will have a negative translation impact on Irish companies who sell into the UK market but report in euro,” Mr McKinley, senior equity analyst, said in the report.
Among the Irish stock market companies on its ‘most exposed’ list are Origin Enterprises — which has a UK exposure share of between 50% to 60%; C&C Group with a 40% exposure share; UDG Healthcare on 38%; and forecourt firm Applegreen and Fyffes, with exposure shares of 35% and 30%.
Fyffes; Ryanair; ferry company Irish Continental Group; Kerry Group; hotels firm Dalata; Bank of Ireland — which has a joint venture with the UK post office; recruitment firm CPL Resources; and Total Produce have exposures to the UK economy of between 25% and 15%, the broker estimates.
“Our key picks for the second quarter focus on domestic Irish companies that have limited exposure to the UK.
“We continue to recommend buying (Irish property) Reits and are happy to buy Green Reit and I-Res in the current weakness,” Merrion said.
“We are also happy to buy Cairn Homes given its domestic focus and play on an under-supplied Dublin housing market.
"Furthermore we recommend Smurfit Kappa given their low exposure to the UK and the upcoming catalyst of a potential UK listing in May,” it said.
It said Kingspan, Independent News and Media and IFG are also “less exposed to currency fluctuations”.
Sterling will trade at its current “floor” of around 81 pence against the euro, “unless there is a decision for the country to leave the EU”. The euro will trade between $1.10 and $1.20.
In the US, Donald Trump will secure the Republican presidential nomination and “there may be nervousness in asset markets due to the ‘Trump effect’”.
Merrion also believes oil will rise to $50 a barrel from $42 by the end of the year.
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