Staying local has cost Irish investors an opportunity

While the Iseq languishes, the S&P 500 has erased losses from the Lehman Brothers crash

Tue, Apr 23, 2013, 06:00

Consider this. If you had invested in the US market pre-crash, held tight and decided against crystallising your losses when the market plummeted, by now you would have recovered your money – and even made some gains, thanks to the power of dividends.

If, on the other hand, you had opted for the Irish market back in 2007 and have been content to wait it out and sit on your investments, you will have made little headway and will still be nursing sizeable losses. Indeed, while markets such as the S&P 500 are touching new highs, despite a recent resurgence the Irish market remains far off its high of February 21st, 2007, when it reached 10,041. Peak to trough, the Irish market has collapsed by more than 80 per cent. This means that to recover its former highs, it will need to advance by a staggering 400 per cent.

At least it’s going in the right direction. Last year, the Iseq was one of the bestperforming indices in Europe, posting an annual return of 17.1 per cent and out-performing the FTSE 100 (+5.8 per cent), the S&P 500 (+13.4 per cent) and the FTSE E300 (+13.2 per cent).

So far this year, it has continued its good run. In the first three months of 2013, the Iseq jumped by 16.5 per cent, surpassing the 4,000 mark in early April, the first time it has done so since the collapse of Lehman Brothers in September 2008. Overall, the Iseq is now up by more than 100 per cent since its lows of March 10th, 2009, when it fell back to 1,880.

Who i

s leading the charge?
“The recovery has been led by the food sector,” says Ian Quigley, director of investment strategy at NCB stockbrokers, pointing to names

such as Glanbia and Kerry, which have recently reached new highs.

Other strong contributors to the resurgence include Paddy Power and Ryanair. The latter has been tipped to advance to €7.50 by Davy stockbrokers on the back of its recent aircraft purchase.

Can the Irish market be restored to its former glory?
Strong performances by these stocks alone will not see the Iseq return to its past highs, however, and if you’re content to sit and wait for the market to recover, you might find yourself waiting for quite some time.

The stocks that drove up the market in the boom are still the ones struggling. “If you’re waiting for those to recover, you’ll be a long time waiting,” says Aidan Donnelly, an investment analyst with Davy, adding: “They’re still miles off their highs, and some will never get back to where they were.”

For Quigley, it would be “naive” to think the Iseq could get back to 2007 levels.

CRH peaked at €35, but is currently trading at €16, while Kingspan, which hit its high at about €22, still has a long way to go given it is currently trading at about €9.30. It is a similar story for another construction stock, Grafton, which, at €5, is still far off its previous high of €12.

And that’s not even considering the decimation of banking stocks. “The ones that have suffered the most probably won’t get back to where they were,” says Donnelly.

Is it a

more sustainable index?
In pre-boom times, the Iseq was notable for being over

weight in construction and financial stocks. The lack of diversification did not put investors off.

“People probably had a belief that they knew the companies, so they felt more comfortable with them and wanted to stay where they were,” says Donnelly.

Today, however, “it’s a very, very different market”, according to Donnelly.

So does this mean that the new-look Iseq, which is almost devoid of the banking stocks that precipitated its decline, is a better prospect for new investors looking for a home for their money?

Well, financials may no longer account for a third of the index, but it is still not a well-diversified index.

“Even today, you’re looking at the top four stocks accounting for a little over 50 per cent [of the market] and the top 10 accounting for 80 per cent,” says Donnelly.

In today’s world, this is not enough to entice investors to make a sizeable allocation to the index.

“The last few years have taught people lessons that diversification on a geographic and sectoral basis is absolutely key,” says Donnelly. “If you look at the sectors that are there, there are so many sectors that you don’t get exposure to. There’s no telecoms or utilities, for example.”

“When we look at equity investing, the fact that we’re in Ireland doesn’t have any relevance,” says Quigley.

Of course, this is not to say that there are not some Irish companies that should be worthy of an investor’s attention.

“It’s about making sure that it’s not just solely Ireland, that you’re getting exposure to different markets. Some Irish stocks do have a part to play but it’s literally on a stock-by-stock basis. There are selective opportunities in there for investors to look at,” says Donnelly, pointing to stocks such as Kerry and Glanbia.

Quigley agrees that Irish companies do offer potential – but only as part of a broader investment strategy. “As part of a portfolio it’s legitimate, but you need to be more diversified than that,” he advises.

Are there other opportunities out there?
With markets such as Japan and the US reaching new highs, and the S&P 500 rebounding by 130 per cent since its low in 2009, sitting on your losses in the Irish market could mean a “huge opportunity cost” as other investments pass you by.

“We have seen quite a strong bull market that not a whole lot of people have participated in,” says Quigley.

Analysts believe that despite the recent bullish run by global markets, plenty of upside remains. “Our overriding belief is that as an asset class, equities look the most attractive. I don’t think that valuations look particularly stretched,” says Donnelly, noting that the US market is currently trading on 14 times earnings. Back in 1999-2000, it peaked in the 20s.