Irish equities - what key trends are we seeing in the Irish market?

A year on from the first lockdown in Ireland, unfortunately there’s still the bad smell of Covid lingering in the air. Hopefully later this year vaccines will be distributed and we’ll be all looking forward to a brighter future, but in the meantime, what are the key trends that we are seeing in the Irish market?

Shrinking market size

Firstly, the number of names listed on the Irish market is falling. The Irish market as we know it is quite distinct from other markets in that it is very concentrated, with just 10 names making up over 93% of the index. The market is also unique in that there are a relatively small number of listings, at under 40 names. However, those names have been in decline over the last 12 months in particular, with a flurry of announcements such as Applegreen going private, CPL disappearing thanks to an overseas bid, and Total Produce disclosing its intention to move its newly merged Dole PLC entity to the US in the future. We’ve also witnessed the losses of Green REIT (Real Estate Investment Trust), Independent News and Media, and the move of C&C to a UK listing in recent times. It is clear that the Irish listed market is a difficult place to be right now, in particular for stocks of a certain size. Though reasons are individual to each company, it is fair to say that an increased regulatory background for listed companies, whilst undoubtedly the right thing in the long term, is difficult for smaller companies. This is true in particular for those companies with limited numbers of staff. However, like anything else, markets come in and out of fashion, and unquestionably there will be plenty of opportunity in the future.

Future opportunity set

So where is all this opportunity going to come from? Well, with the recently published Climate Action Bill in Ireland, in addition to increased regulation on climate risks from Central Banks, and increased legislation on financial products, I believe there will be particular opportunities in sustainability going forward. The good news here is that Irish companies are most definitely realising the possibilities from this. In the last few months it has been particularly notable the increase in companies reporting to the Carbon Disclosure Project. This comes in addition to an increase in companies publishing very real sustainability targets and plans. Sustainability is undoubtedly a disruptor in Ireland as well as other economies, and it will provide huge opportunities for innovation in the future.

Further Mergers & Acquisitions (M&A)

It seems likely we are going to see increased mergers and acquisitions in the Irish market in the future. What has been truly impressive in the most recent earnings season is the ability of many Irish companies to manage their cashflow and balance sheets incredibly well. This leaves numerous companies very well placed to consider M&A in the future should they wish to do so and it is clear that the appetite is there. However, one of the difficulties of the pandemic has been that companies that normally conduct M&A as part of their strategy have found it difficult to do so with increased travel restrictions. Therefore, it seems likely that when travel does resume there will be plenty of opportunity for companies to put their increased cash balances to good use.

What about inflation?

While companies are seeing an increase in costs, it does seem to be restricted to certain sectors.

Undoubtedly, companies that are exposed to raw materials such as timber, iron, and so on, are noticing an increase in costs. So far, the tone from these companies is that they are reasonably optimistic that costs can be passed on to customers albeit perhaps with a lag. Of course, this may not be the case if costs continue to rise. However, overall, reported inflation from Irish companies does seem to be just confined to one sector, and is not across the board.

To conclude, what struck me when I first moved to assess the Irish market just over two years ago was the quality of Irish names and management. I have no doubt that the Irish market will persevere, and there is plenty of opportunity for those companies that have the risk appetite and determination to flourish.