20th February, 2020
Although early days, recent events suggest that Fianna Fáil and Fine Gael are moving closer to forming a coalition government. Formal negotiations are expected to begin this week. Choreography will be required to overcome opposition within their own parties, so Leo Varadkar and Micheál Martin are seen to be taking the least worst option – avoiding a second election or a coalition with Sinn Féin. This should leave Ireland with another centrist government, albeit with political pressure and fiscal resources channelled towards housing – the key issue in the election campaign.
Formal negotiations between Fianna Fáil and Fine Gael are expected to start this week after the Dail reopens today, Thursday, February 20th. To secure an overall majority, the Green Party is expected to participate, securing 85 seats (in excess of the 80 required). To ensure stability and provide political cover, the coalition could also include six Social Democrat TDs and a block of Independent TDs focused on rural issues – making it easier to present the new government as representing change.
Agreeing a programme for government is not expected to be a stumbling block given the similarities in the two parties’ manifestos, close to the status quo. What is certain is that the new government will channel resources towards housing, perhaps the key issue in the 2020 election campaign.
However, the parties may have more difficulty pushing any coalition deal past their membership. A Red C poll found that only 49% of Fine Gael supporters and 46% of Fianna Fáil supporters would support a coalition between the two parties. Fine Gael requires approval for any deal from a weighted vote (50% by TDs, Senators and MEPs, 10% from the party’s National Executive and 40% from the membership). Fianna Fail may be in a more difficult position, requiring a straight vote from its membership.
So organising the new coalition will require some choreography, with Fianna Fáil and Fine Gael seen to have exhausted other options and allowing time for the political context to change. One anonymous senior source said a deal is likely in weeks rather than months.
Leo Varadkar and Micheál Martin will most likely present a Fianna Fáil/Fine Gael coalition as the least worst option, with the only alternatives being a second general election or, worse, a coalition with Sinn Féin, against which there is more visceral opposition among grass roots. On that point, over the weekend, Micheál Martin was reported to have had a 15-minute phone call with Mary Lou McDonald, in which he again ruled out a coalition due to (a) economic incompatibility and (b) question marks regarding Sinn Fein’s democratic credentials.
It’s been a rollercoaster ride for Irish equities, with share prices oscillating up to +/-8% on a given day following the surprise election result last week. As the market familiarised itself with Sinn Féin policies, the banks, housing and Real Estate Investment Trust (REIT) sector share prices were particularly volatile.
But what policies are the markets flustered actually about? Well, there are three key areas of investment that Sinn Féin policies would impact directly:
Banks: Sinn Féin has a number of policies that could affect the banking sector, including a bank levy, the power to cap mortgage rates, and the maintenance of the government 71% stake in AIB. Of these policies, the most straightforward one to be implemented would probably be a bank levy, and to put it into context this would likely impact banks profitability by c.1-2%. Remember the issue on the capping of mortgage rates has been brought to the Dail before and rejected.
Housebuilders: Again, whilst there are a number of Sinn Féin policies that could affect the housebuilders, the two policies that could potentially have the biggest impact are the removal of the Help-to-Buy scheme, and increasing the Part V requirement of social housing on sites from 10% to 25%. Whilst either of these policies could potentially have an impact on the sector, it should be remembered that the most likely way to implement the Part V increase would appear to be via the planning system. This would likely take time to implement and shouldn’t impact those sites that already have planning permission.
REIT Sector: Again, whilst there are a number of policies, the most pertinent ones would appear to be Sinn Féin’s desire for a rent freeze (which would impact any REITs and/or housebuilders exposed to the housing sector) and their ambition to increase the level of stamp duty on commercial real estate from 7.5% to 12.5% (to encourage the reallocation of resources from offices and hotels towards the residential sector). However, given these policies were written before Sinn Fein realised it may actually be in government, it will be interesting to see if either of these policies get watered down in the future.
As with any short-term volatility in the market, our advice would be not to panic. If your view is long term, often short-term share price moves provide opportunities for long term investment. Furthermore, whilst some of the Sinn Féin policies, if implemented could undoubtedly be negative for some sectors, the reality is that electioneering policies and actual policies on the ground are often very different, quite diluted, and not what they set out to be. This is likely the case with Sinn Féin, who considering the number of candidates they put forward most likely didn’t really expect to potentially be in government.
Warning: Past performance is not a reliable guide to future performance. The value of your investment may go down as well as up.
