This article is from our July 2020 edition of MarketWatch.
28th July, 2020
When we last reflected upon Irish equities in March of this year, global markets including Ireland had crashed and the focus from a company perspective was very much on survival. Roll on a few short months and whilst the Irish market is still down year to date (YTD), there is a whiff of optimism and possibly even exuberance in the air. For many investors, like myself, we’re left scratching our heads wondering if the markets have gone too far too fast.
Within Ireland, we congratulate ourselves that so far, we have done relatively well in battling the pandemic and that the outbreak seems to be if not quenched, somewhat contained for now. However, whist our island status helped in controlling the virus at home, our stock market affords no such luxury. Of the six biggest listed names in Ireland (CRH, Kerry, Flutter, Ryanair, Kingspan, and Smurfit Kappa), which collectively account for more than 80% of the index, the sales and profit origins are multi-national. Exposure to Ireland is minimal, representing no more than 7% revenues for any of the largest listed names, and significantly less in many cases. Arguably some of the domestically exposed names such as banks and real estate have been hardest hit this year in performance terms and are currently under-represented in the index. Perhaps more concerning is that amongst those six largest names, the UK is of more significance than Ireland in sales terms. With dual issues of a stronger prevalence of the virus in the UK and Brexit negotiations ongoing, that may pose a risk in the future.
Amid the crisis, of note is that whilst many Irish companies are international in nature, they haven’t lost their Irish spirit of generosity. Environmental, Social, and Governance (ESG) factors have been an increasing market focus for some time now, and during the height of the pandemic, the social side came to the fore, with examples such as making properties available to frontline workers; to donations towards emergency funding and immunology projects. With the greens now firmly in government, companies will likely continue improving the ‘environmental’ aspect of ESG going forward.
For investors, one recent disconcerting factor has been the high portion of ISEQ dividends that have been cancelled. Many companies cancelled dividends for FY2019 and few still hang in the balance. In this regard the old defensive sector reliables (food, healthcare) and real estate investment trusts (REITs) stand up well. Dividends cuts shouldn’t come as a surprise, upon reflection that many Irish companies are taking advantage of furloughing or other government payment schemes across multiple jurisdictions. We hope to see a return to dividend payments in the future.
The majority of Irish companies have also withdrawn guidance due to the uncertainty of the crisis. However, equity analysts don’t have the same luxury and have to look to their crystal balls to estimate earnings going forward. Currently, there are no surprises in that 2020 is forecast to be the year of the short, sharp, shock, with earnings per share almost halving in year on year terms, before rebounding somewhat in 2021. A lot can change in a short period of time, and we are cognisant of the threat of a second wave. However, so far analysts have probably proved too conservative in their forecasts particularly in regions where the lockdowns have been less severe.
Overall, we appreciate that difficult times are likely ahead for both the economy and the markets. It’s still too early to tell where earnings and valuations will be and dividends may not return for some time. However, we’ve written before about the quality of Irish management teams and have no fear in the ability of the market to do well in the long term.
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.