A tale of two markets as industrials thrive in meltdown

Fri, Dec 31, 2010, 00:00

The Irish stock market ends 2010 as it began – as a small, peripheral market with low levels of trading activity, writes CAROLINE MADDEN

ONE COULD be forgiven for thinking that 2010 has not been kind to the Irish stock market.

The overall index of Irish shares, the Iseq, looks set to finish the year down 5 per cent. This compares to a 10 per cent rise in the SP 500, a jump of almost 9 per cent in the FTSE 100 and an 8 per cent gain delivered by the main European index, the FTSE Eurofirst 300.

However, the drop in the value of the Iseq masks a twin-track performance: while a struggling CRH and decimated banks grabbed the headlines, industrial stocks with limited exposure to the Irish economy quietly thrived.

In the opening months of the year, the Iseq index showed signs of continuing its 2009 rally (which lifted it 27 per cent). Between January and April 2010, it moved from just below the psychologically important 3,000 level to almost 3,500.

In May, however, increasing fears of contagion from Greece’s debt crisis triggered a stock market sell-off globally and the Iseq lost its earlier gains.

By August, it had fallen to an annual low of 2,607.97, some 25 per cent off its April peak. After the summer slump, however, international markets began to pick up again. The Iseq followed this upward trend and, in the run- up to Christmas, it was trading above 2,800.

“The Irish stock market participated in the global equity rally this year; it’s just not obvious,” says Rory Gillen, founder of investRcentre.com. “The poor performance of the Irish economy really didn’t hold back the Irish stock market.”

If the constituent stocks on the Iseq were equally weighted, the index would be well up on the year, he adds. In reality, the Irish market is increasingly lopsided, with the top six stocks now accounting for 61.5 per cent of the index’s total market capitalisation.

The Iseq, once dominated by financial stocks, is now driven largely by the international building materials giant CRH, which has an index weighting of 27.4 per cent, and to a lesser extent by Ryanair, which has a weighting of 13.6 per cent.

This represents a dramatic shift from the situation in 2007, when the four listed banking stocks still represented 44 per cent of the market.

In January 2009, Anglo Irish Bank’s shares were suspended after it was nationalised, however, and by the end of 2009 the three remaining names – AIB, Bank of Ireland and Irish Life Permanent – had a joint share of just 8.4 per cent. Over the course of 2010, this shrank even further to an insignificant 5 per cent.

Because of the structure of the index, CRH tends to dictate the Iseq’s direction. Therefore, when the company issued profit warnings in May and in August, not only did this lead to significant weakness in its share price but it depressed the overall index as well.

Only a minuscule 3 per cent of CRH’s revenues are derived from the Irish market, but its lack of exposure to emerging markets has been its biggest issue, says Oliver Gilvarry, head of research at Dolmen stockbrokers.

Gillen notes that in the developed markets where CRH operates, such as the US, the construction sector continues to struggle. Construction normally leads economic recoveries, but this time around it isn’t picking up as usual, he says, because construction capacity levels were so overinflated before the downturn. Against this backdrop, CRH’s share price has come under severe pressure, falling 19 per cent over the year.

Meanwhile, the financial sub- index – which comprises AIB, Bank of Ireland, Irish Life Permanent, FBD and IFG – has declined far more sharply than the overall index, dropping more than 60 per cent in the year to about 433.7.

It was a calamitous year for the two main banks, AIB and Bank of Ireland. Their stocks opened the year at about €1.20 and €1.30 respectively and held fairly steady for the first quarter of the year. However, things started to unravel over the summer.

A combination of increasing Nama haircuts, ratings downgrades and rapidly escalating recapitalisation costs saw both stocks plummet. Then came the final, ignominious nail in the coffin – the EU-IMF-backed bank bailout in late November – which will lead to the effective nationalisation of AIB and will push Bank of Ireland into majority State control.

AIB is now languishing in the region of 45 cents, down 62.5 per cent on the year, while Bank of Ireland is down 72 per cent at about 37 cents. Both stocks are now 98 per cent off their all-time highs, recorded early in 2007. Irish Life Permanent lost 70 per cent of its value this year, tumbling from €3.30 to just below €1.

Outside of CRH and the banks, what Gillen describes as “non- Irish economy” stocks – those of companies that generate a significant portion of their revenue overseas – did well. Food stocks such as Origin Enterprises, Glanbia and Kerry had a very good year, gaining about 16 per cent, 45 per cent and 24 per cent respectively.

Paddy Power, which has a sizeable exposure to the UK market, was up almost 17 per cent.

In the airline sector, former flag carrier Aer Lingus was not far off doubling its share price to about €1.10, while Ryanair rose roughly 14 per cent.

Overall, though, the Irish stock market ends 2010 as it began – as a small, peripheral market with low levels of trading activity. With a total market capitalisation of €46.6 billion, the Iseq index remains a drop in the ocean of international equity markets. For instance, the market capitalisation of the Dow Jones currently stands at €3.6 trillion.

Looking to 2011, Gillen expects the Iseq to take its cue from the recovery demonstrated by international stocks markets over the last few months. “The recovery may be built on shaky foundations but nonetheless it has gathered steam to the extent that the outlook for markets must be reasonably good,” he says.

Kevin McConnell of Bloxham says a large portion of the damage that the banks could potentially inflict on the Iseq has already been done, so 2011 “will probably be more of an international story”.

Gilvarry predicts that companies that do not rely on the Irish market will continue to do well next year.

Given that most of the stocks on the Iseq have limited exposure to the domestic market, 2011 could be a positive year for the market, regardless of Ireland’s grim economic outlook.