This article is from our April 2020 edition of MarketWatch.
22nd April, 2020
It’s only spring and yet 2020 already will go down in history for a number of reasons. The speed and depth of market falls, including that of the Irish market, is one of many facets that will unquestionably be remembered for many years to come. So how should we think about the Irish market now and are there any opportunities?
For long-term investors I believe the answer is a resounding yes. For many years my specialty was Japanese equities, and I covered this market after the 2011 tsunami and subsequent nuclear meltdown, when an estimated 16,000 Japanese people lost their lives. To many Japanese people it must have seemed like the world was ending. And yet after an initial hard fall, equities rebounded strong and fast. In the depths of despair there is always hope, people and companies are surprising in their resilience. Whilst we can’t know the duration of the current coronavirus outbreak, the timing of the market bottom, or exactly which economies will be hit the hardest or for how long, what we do know is that economic shocks often provide opportunity for high quality companies to shine. And the good news is that when it comes to quality companies, Ireland is remarkably strong.
In valuation terms, the ISEQ index is heavily dominated by just a few names, with currently just four names (Kerry, CRH, Ryanair, and Kingspan) making up more than 65% of the market cap of the index overall. This makes looking at market valuations for the overall index difficult when looking for guidance. However, in the current environment, one could argue that it is difficult to look at valuations anyway, as an increasing number of companies withdraw guidance or state that coronavirus will have a ‘material’ impact to earnings. The knock-on effect is that earnings are becoming generally very difficult to forecast, making the ‘earnings’ component of the price/earnings ratio questionable. In addition, we have seen an increasing number of companies cancel dividends as a reaction to the uncertainty surrounding the outbreak, and in order to preserve cash resources.
Quality of management is key. Ireland stacks up well in this regard with a number of global industry leaders domiciled in Ireland. Secondly, liquidity of equities is crucial, as we want to ensure that companies do not run out of cash in the downturn. The promising news here is that the majority of Irish companies have healthy cash positions and balance sheets. Thirdly, supply chain is paramount, as various regions going into lockdown, it is important that businesses can continue to operate. Ireland is in a good position in this regard, with a number of Irish companies operating in the food and healthcare space, which logically should be prioritised as ‘key functions’ in any economy.
Finally, it is important to note that whilst there are undeniably significant headwinds for Irish and global companies at present, there is also one very important tailwind for many organisations in the form of a falling oil price. Compared with a year ago, crude oil prices have more than halved, and with it many other oil related input costs will fall. This represents a significant cost saving for a number of Irish listed companies, most notably in the travel sector, but also construction and other sectors.
In conclusion, the current market is undoubtedly tumultuous, and there is a lot of uncertainty surrounding the duration of the coronavirus outbreak and knock-on effects for companies and earnings. However, I believe for long-term investors we may reflect back on this period as an opportunity to buy high quality names at a good price. Please contact your private client adviser if you wish to discuss any of this further.
WARNING: Forecasts are not a reliable indicator of future results.
WARNING: Past performance is not a reliable guide to future performance. The value of your investment may go down as well as up. These products may be affected by changes in currency exchange rates.