Irish equities - Every cloud has a silver opportunity

As another year rolls on and we head into 2022, unfortunately, the spectre of COVID-19 and new variants still looms large. Markets, however, tend to look out several months in advance, and experience would tell us that equilibrium is likely to be found eventually. As for 2021, whilst at the time of writing, Ireland may have lagged its US and European peers somewhat in performance terms, the index overall still does not look cheap relative to it’s history. However, when we dig behind the headlines and look at the individual stock and sector data, we can see that earnings and valuations can vary greatly.

As in life, the pandemic has not been fair to all companies in Ireland or indeed elsewhere. It’s well known that certain sectors globally have been benefiting in earnings terms as demand for construction and housing amongst others has been exceptionally strong this year. For other companies that are more exposed to a resumption of a more "normalised life" (travel, tourism, the restaurant sector), earnings have not yet fully started to recover.

Naturally, Irish companies are not immune to the same supply chain and cost inflation issues that are being experienced globally at the moment. In some cases, this may be particularly acute as businesses have the double whammy of a Brexit impact , which may further influence shortages or indeed the ability to procure staff. However, as a broad statement, it’s probably fair to say that, overall, Irish management teams are coping remarkably well so far in the ability to pass on costs and cope with other issues.

The imbalance in experiences for sectors has a corollary in earnings terms. Certain companies in the Irish market are expecting earnings to roll over from a very high base in 2022.

However, for the Index overall, earnings growth is actually set to accelerate into 2022, with overall index earnings growth slightly more than two times that for 2021 and higher again in 2023.

So where is the accelerated earnings growth coming from? Undoubtedly, the pandemic has led to significant disruption across the board. But this disruption can also lead to opportunity, and it is fair to say that a number of Irish companies are entering into a period of transformation. Long-term strategic thinking has come to the fore, and many companies have been positioning themselves accordingly. This transformation is coming in a number of forms:

1. Expansion. Whether this is geographic expansion into newer regions with further opportunities, long-considered coveted expansion, or opportunistic business expansion as competitors exit, there is no doubt we are evidencing plenty of both organic and acquisition development in the marketplace. In general, the strength of Irish balance sheets has afforded the ability for development as and when the opportunity presented itself.

2. A refocusing and divestment of businesses that are no longer seen as core. We have seen a number of announced divestments this year as Irish companies generally consider where they would like to be positioned in the long-term.

3. Buybacks. In the absence of large scale Mergers and Acquisition (M&A) opportunities, or sometimes in conjunction with M&A, a significant proportion of Irish companies are turning to Buybacks or partial tender offers as a means of enhancing shareholder returns.

4. Return to dividends. A number of companies, namely in the financial sector, have been precluded from paying dividends in 2021. We expect a resolution in 2022.

5. Sustainability. It can be argued that sustainability is actually at the heart of much of the long-term thinking that we are currently witnessing, as companies can no longer solely focus on the next quarter or next year. With climate change dominating the headlines, investor and employee pressures ramping up, not to mention numerous legal requirements, the trend for Irish companies to embrace sustainability in real, concrete, measurable metrics is increasingly evident.

Overall, looking out to 2022, it seems likely that we may continue to experience some market volatility. However, for both investors and companies, a long term pragmatic approach will undoubtedly bring opportunity.