Brexit bedlam leaves Irish shares on course for biggest drop since crash

If there is a disorderly Brexit it will not be pretty for European assets or the euro

The Irish market dropped €3.3bn in value as Westminster went into meltdown on Thursday

The Irish market dropped €3.3bn in value as Westminster went into meltdown on Thursday

 

Theresa May’s keep-calm-and-carry-on stance, even as her EU withdrawal plan continued to unravel on Friday, tempted some bargain hunters into the most exposed European stock market index to Brexit: the Iseq.

They may not stick around for long. Many analysts see the Irish market – which dropped €3.3 billion in value as Westminster went into meltdown on Thursday – succumbing to more choppiness amid Brexit headlines in the coming weeks. This leaves it on track for its biggest slump since the 2008 financial crash.

The Iseq, down 15 per cent so far this year, is lagging most national equity benchmarks across Europe, even Italy’s FTSE MIB, where the local populist government is at loggerheads with Brussels over its EU rule-defying budget.

London’s FTSE 100 has outperformed – falling just 9 per cent in 2018 – as any drop in sterling on the back of Brexit jitters serves to buttress its big dollar earners.

As May’s chances of getting the draft deal through parliament dwindle, a series of ministerial resignations leave her facing almost immediately the prospect of a no-confidence vote. Thereafter you’re into scenarios from a snap general election to a second referendum, or the UK crashing out of the EU without a deal. It’s anyone’s guess.

Polarised

“Despite increasingly polarised UK political views the market still believes that somehow there will be a deal before March 31st, 2019, and a disorderly Brexit will be avoided,” Ryan McGrath, head of fixed-income strategy at Cantor Fitzgerald in Ireland, said in a note on Friday.

Investors have not even begun to price in a no deal. Irish stocks will be at the coalface if they have to.

Ryanair – the Iseq’s third-biggest member which has lost more than a fifth of its value so far this year amid rising labour , volatile fuel prices and weaker fares – is one of the most exposed European airlines to a no deal.

Goodbody Stockbrokers analysts Mark Simpson and Nuala McMahon estimate 33 per cent of Ryanair’s network is point-to-point routes between the UK and EU, second only to EasyJet among major carriers.

Still, the analysts hold out that the European Commission’s contingency action plan, published during the week, laid out a number of measures that should ensure uninterrupted flights even in the event of a no-deal Brexit.

Top 10 Iseq member Bank of Ireland, led by London-born banker Francesca McDonagh, is the most directly exposed lender in the Irish market to Brexit with about 40 per cent of its loan book based in the UK. McDonagh outlined a plan in June to double the UK division’s profitability – or what’s known as a return on tangible equity – by 2021 as it refocuses its mortgages offering and potentially seeks to sell its €700 million UK credit cards loan book.

Strategy

“As a nation, as an economy and as a banking sector, we can’t currently decide on a single clear unchanging strategy for Brexit and go for it,” McDonagh told a conference on Wednesday. “We have to plan on all fronts. Simultaneously.”

The International Monetary Fund warned during the week that the UK economy could contract by as much as 8 per cent if there is no Brexit accord.

The National Treasury Management Agency has estimated that for every 1 per cent drop in UK gross domestic product (GDP), Ireland’s output may fall anywhere between 0.3-0.8 per cent.

The extent of the drag on Ireland depends on where the big hit to UK GDP would come from – trade, consumer or business investment, according to Alan McQuaid, an economist with Merrion Capital.

AIB, pitched by the Government as a proxy for the Irish economy as it sold a 28.8 per cent stake in the lender last year for €3.4 billion, is, therefore, highly exposed to gales coming from UK.

Its stock has fallen almost a third so far this year, not helped by emerging competition from non-bank lenders in the slow-growing mortgage market and the recent resignations of its top two executives. AIB shares are currently changing hands at a 15 per cent discount to its initial public offering (IPO) price.

Pipeline

Dalata Hotel Group, which has almost 2,000 rooms in the UK and a pipeline to more than double that within the next three years, highlighted in September in its first-half report that the performance of the UK business had been mixed with “challenging market conditions in some cities” as revenue per room in Dublin surged 11 per cent. A hard Brexit may hit business on both sides of the Irish Sea, according to analysts.

Insulation manufacturer Kingspan, with the UK home to a quarter of its business in 2017; cider and beer group C&C; ferries operator Irish Continental Group (ICG); and others are vulnerable to any negative movements in sterling.

The UK currency has fallen 2 per cent against the euro over the past two days to 88.8p. (It was trading at 76.6p just before the Brexit referendum in June 2016). But if there’s a disorderly Brexit it won’t be pretty for European assets or the euro.

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