Why is the Iseq so weak when the Irish economy is flying?

Investors around the world are smarting from the losses suffered in what has been called Red October, when stock markets gave up their gains for the year and looked set for a correction. Anybody searching for a real bear market, however, should look no further than Dublin.

So far this year, the Iseq overall index has fallen by 12.5 per cent. That is twice the fall seen in London, where the FTSE 100 is down 6.7 per cent, and nearly three times that of European markets, which are down just 4.5 per cent as measured by the EuroStoxx index. Irish share prices are in the throes of a correction in 2018 not seen elsewhere.

The underperformance of the Iseq comes against the backdrop of the exceptional strength of the economy. The Central Bank forecast last month that underlying domestic demand will increase by 5.6 per cent this year and 4.2 per cent in 2019. The economy is at almost full employment, and exports and corporate tax revenues are booming. Yet this is old news. Investors, both domestic and foreign, need new reasons to buy Irish shares, and they are not finding them.

Sell-off

The sell-off last month was driven by fears about the global trade war, the budget dispute between Italy and the European Commission, and unmistakable signs that the technology sector bubble has peaked. Yet those bearish signals do not fully explain the negative outperformance of the Irish market. There are both company-specific and country-specific factors at work here that are the more important drivers of the weakness in Irish shares.

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Some Irish-listed companies are suffering this year from problems in their global industries. At the head of this group is Ryanair, which must now add a rising oil price to the in-house industrial relations problems that have beset it for the past two years. There is also the perennial issue of overcapacity in the European airline sector. Ryanair's shares have suffered a 15 per cent fall so far this year – but its rivals are also down. EasyJet's shares have fallen 13 per cent, Lufthansa is down a third, and Wizz Air is down a quarter.

Self-inflicted wounds

Other Irish companies are suffering from self-inflicted wounds, especially in the convenience food sector. Aryzta has seen its shares tumble 80 per cent as it grapples with the legacy of an acquisition spree and high debt. Greencore’s sale of a US business it bought barely a year ago hardly instils investor confidence in its management.

Smurfit Kappa's shares are unchanged for 2018, but they are trading more than a fifth below the price at which International Paper offered to buy the group earlier this year. Smurfit's refusal to engage with IP rattled investors, and was a big call by Tony Smurfit, the group's chief executive. He must now prove that it was the right thing to do.

Yet the country-specific factors weighing on the Irish stock market are more striking and problematic than any other issue. There are two ways for investors to gain exposure to a rising economy – through property stocks and through banks. Yet both sectors are in a serious slump in Ireland, for reasons unrelated to either the economy or Brexit.

Stock-market watchers say international investor flows into Irish property stocks have dried up in recent months because there was less upside to the sector than they had expected. Despite the commercial-property building boom visible all over Dublin, and a tentative recovery in home-building, neither is really convincing enough to attract institutional investors. Some private developers have attracted significant institutional investor backing outside the stock market. But there is little love for Glenveagh Properties and Cairn Homes, the two main listed property development groups, which are down between 25 and 30 per cent this year.

Irish banks

Irish banks are also unconvincing investment cases at this point in the economic recovery. In the past two months Allied Irish Banks has been hit by the departures of Bernard Byrne and Mark Bourke, respectively its chief executive and chief financial officer. That suggests a dysfunctional management structure inside AIB, which is a significant disincentive for investors.

Bank of Ireland’s shares are down 12.5 per cent this year – in line with the market. But AIB has tumbled by a quarter. When Mr Byrne’s departure was announced last week there was much speculation about whether the salary cap in place at State-backed banks played a role in his move to Davy Stockbrokers.

Perhaps it did, but the focus on money may be unfair to Byrne because it glosses over the fact that running AIB, or any Irish bank, is a political and bureaucratic minefield. It remains the case, a decade after the financial collapse, that Irish banks are wards of the State. There are three constituencies to satisfy: shareholders, the Department of Finance and the chorus of critics who regard all bankers as the enemy. For as long as that is so, it is difficult to see why investors would wish to own shares in Irish banks, and the mountain of political risk attached to them.