We’ve been fans of the ‘dodgy’ bits of the eurozone since the middle of 2012, when it became clear that European Central Bank boss Mario Draghi was determined to keep the show on the road.
I last looked at Ireland in October, and suggested it was still worth buying. The country is hardly out of the woods, but the market was cheap and the economy is moving in the right direction.
Since then, the market is up by nearly 15%. And last year as a whole, Ireland was one of the best performing stock markets in the world.
Yet – even after this performance – it’s still one of the cheapest markets in the world.
So where are the biggest bargains to be had?
They aren’t dancing in the streets of Dublin – but things are getting better
The Irish recovery story doesn’t exactly have the people of Ireland dancing in the streets yet.
There are still plenty of problems. As an excellent piece in The New York Times recently pointed out, things are still pretty grim for most people.
But as investors it’s important to look at the overall direction, not just the absolute figures. Markets anticipate change – if you buy when everything looks fine and dandy, chances are you’ve missed the best gains and are getting in just in time for a fall.
And the overall direction seems pretty clear for Ireland. One of the most visible signs of a recovery is that property prices are continuing to rise after five consecutive years of falls.
As you might expect, the most dramatic rise has been in Dublin, where prices have surged more than 15% in the past year. Of course, the situation outside the capital is much bleaker. But even then, national prices are up by more than 6% – and that’s in ‘real’ (after inflation) terms.
The construction industry is recovering along with house prices. The latest GDP data shows that the sector grew by 2.2% in the last quarter alone. There is even talk of a potential labour shortage – this is following a period in which the size of the construction labour force more than halved. Confidence among managers in the sector is high, too.
And it’s not just the construction business. Firms in other industries are also optimistic. At a time when pundits in Britain and the US are complaining bitterly about the lack of investment by companies, Irish capital investment shot up by 10.9% in the past quarter.
That’s a good sign. It shows that companies feel bold enough to put their cash to use.
Ireland is regaining control of its own purse strings
Ireland is also slowly regaining control over its national finances. Last month it formally exited the bailout that saved it from national bankruptcy.
This means it doesn’t have to rely on support from the ‘Troika’ (the big bailout committee) anymore. In turn, it doesn’t have to follow their economic diktats. This gives it leeway to take modest measures to boost the economy, such as targeted tax cuts.
The country still has a big deficit (it still spends more than it gets in tax). And Capital Economics reckons that its national debt could rise to as much as 140% of GDP by 2016, if there aren’t any changes.
However, Dublin expects to run a ‘primary surplus’ as early this year. This means the government will take in more money than it spends on everything excluding interest payments.
This means that, in theory, it could default on its debt, leave the euro and still pay its bills. Now, an exit from the euro is not on the cards. There isn’t a strong anti-euro movement in Ireland, as there is in Greece, Italy or even France.
But the government is eager to get agreement on further debt restructuring – the same type of ‘voluntary’ haircuts by bondholders that we’ve seen in Greece. While Brussels isn’t exactly thrilled about this idea, having a primary surplus will give the Irish government a lot more leverage.
How to profit from Ireland’s recovery
Clearly Ireland still has big problems. GDP is still well below the 2007 peak, deflation is a threat, and unemployment is still high. There are also still huge problems with mortgages.
The number of accounts in long-term (more than 90 days) arrears continues to rise – it now stands at 12.9% of all accounts. So there is still a risk that a wave of forced selling could push house prices down again.
However, the downside risks are still in the price. According to Mebane Faber, the Irish market trades on a cyclically-adjusted price/earnings ratio of about 7.3. That makes it the third cheapest of 55 markets (sitting alongside the likes of Argentina and Russia). The US – the second-most expensive market – is roughly three times more expensive than Ireland.
The easiest way to buy in is via an exchange-traded fund (ETF) tracking the Irish market. But if you feel like taking a more aggressive punt, another share we’ve tipped recently is ferry owner Irish Continental Group (LSE: ICGC).
The company owns key time slots in several of Ireland’s busiest ports, so it should benefit from rising container exports. Irish exports would also be boosted if the European Central Bank acts to weaken the euro. It trades on a 2015 price/earnings ratio of 16 with a dividend of 3.5%, but given that profits are already surging, growing at 20% a year, the valuation looks very reasonable.
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