Irish markets - No time for boredom

Those who think that covering a small market like Ireland must be rather mundane in comparison to the bigger, more ‘glamorous’ global markets would be very wrong. If anything, I’d welcome an interlude now and again! Companies listed in Ireland are, by definition, global in nature, and whilst this quarters multiple topical issues are dominating Irish stocks, none of them are particularly Irish in origin. The phrase I used in our last edition of MarketWatch, ‘no stock is an island’ is certainly currently holding true.

Banking: this time it’s different?

Let’s begin with the current big topic – the banking sector. Others can discuss ad infinitum banks in a global context, but my role is as a purveyor of Irish Equities. Firstly, I’m always wary of those that claim that “this time it’s different” when generally speaking about markets. In my experience, it’s usually used to explain why markets or profits won’t fall this time, when in reality cyclicality is an inherent part of investment markets – hence the warnings on every financial product.

However, in the particular instance of banks, in an Irish context at least, I do believe that this time, Irish banks are positioned well. That’s not to say that global banking sentiment can’t, and won’t impact banking share prices – clearly, it can, and it has. However, there are several factors in relation to Irish banks that are different from the last credit cycle:

1. European banking regulations are amongst the strictest globally

This impacts banks’ liquidity coverage and capital ratios. In addition, the prioritisation of how bondholders are viewed versus equity holders (which has been an issue for Credit Suisse), is clearer in the EU. 

2. The average bond duration held at Irish banks is relatively short term (c. 3.5 years); mostly sovereign in nature; and the majority of liquidity is held with the ECB

There is limited exposure to longer-term, riskier debt such as that held by Silicon Valley Bank and others.

3. The Irish banking market is concentrated

After the exit of KBC and Ulster bank from the market, only three banks remain in Ireland: Bank of Ireland, AIB and Permanent TSB.

4. Irish banks are retail-oriented franchises with strong deposit ratios

With a minimum of 50% of deposits covered by the €100k European Central Bank guarantee.

5. >50% of lending in Ireland is mortgage lending

This is strictly governed by the Central Bank Macro-Prudential rules in Ireland. In other words, even if Irish banks had wanted to get carried away with riskier mortgage lending, they would have been unable to do so.

Hence, whilst short-term market volatility cannot be ruled out for the Irish or indeed any other bank, structurally speaking, it does appear that Irish banks are well positioned to weather the storm.

Bills, Bills, Bills

Having recently met numerous Irish corporates in succession following year-end results, there were, as always, several themes that cropped up repeatedly. It seems natural to assume these themes may be Irish or at least European in nature, but actually, the US was the region mentioned by many a corporate lip this quarter.

Why is this? Well, in some ways it should be no surprise that in the new global world order in which we find ourselves, investment in Asia or other regions may seem less attractive – at least in the short term. However, the US has made itself an increasingly attractive place to invest on a couple of fronts.

Firstly, the US has introduced several initiatives/bills that are attracting growth. The first bill is of course the US Infrastructure bill, which whilst in planning for some time, is really only beginning to come to fruition now. In addition, but less relevant in an Irish context, the US Chips act is encouraging the onshoring of semiconductors back to the US and hence further tech investment.

However, the third and arguably most relevant bill is the Inflation Reduction Act (somewhat worryingly also referred to as the ‘IRA’ by many US investors). In essence, this is an environmental policy that encourages investment in renewable energy, air pollution, clean water supply, improving green transport, etc. Whilst it’s clear that the finer details of the act have not yet been fully worked out, it would seem there will be plenty of opportunity in many areas, including Food and Farming, Infrastructure, Energy, and so on. This plays into sectors that many of the Irish corporates are exposed to and see as good long-term opportunities (some details to follow).

US: Go big or go home

Overall, it seems clear that several bills are encouraging investment in the US. Furthermore, it appears that geopolitically speaking, the US is currently seen as a safer region to invest in for growth, at least in the short term. These are undoubtedly two of the factors in the recent announcements from no less than two large Irish corporates (CRH and Flutter) to consider moving from the ISEQ towards making their main share price listing the US.

What’s the big attraction?

Strategically speaking, in the case of both CRH and Flutter, the main market for the underlying businesses is or is swiftly becoming the US. Additional factors include beneficial tax treatment in Merger and Acquisition (M&A) negotiations for US listed companies; favourable considerations in the attraction and retention of US employees (who have a preference for an element of stock compensation); and likely additional liquidity considerations.

The bigger picture is hence emerging of many factors influencing companies with a large proportion of profitability and growth that are dependent on the US to move their listing there. Whilst this could result in disappointment from an ISEQ perspective, the companies in question seem likely to remain domiciled in Ireland, and of course, investors can continue to buy and sell shares regardless of the region. Finally, whilst the US is attractive, it is far from the sole source of growth for listed Irish companies, and new stories will always evolve – such is the nature of markets.

The global vs the local

2023 is demonstrating that markets are cyclical, and trends emerge over time. Those trends may be financial in nature, or influenced by policy, and some trends even appear to repeat if we wait long enough. Importantly, whilst global trends can and do influence local, companies can still differentiate themselves. Concerns around banks in a global context can bring us straight back to some scars of the past. However, thankfully in a local context, much has evolved to help prevent similar fates as some global counterparts.

When it comes to opportunity, companies will inevitably look globally for long-term growth. As an investor, whether investing globally or locally, one of the key things to look out for is quality of management, because a good management team will weather short-term storms successfully and seek out the best long-term opportunities wherever they present themselves.