Irish Stocks Surge Leaves European Periphery Losing

Irish stocks are climbing three times faster than equities in Spain, Italy, Greece and Portugal as the nation looks to become the first country to exit a European Union-led bailout.

Ireland’s ISEQ Index has more than doubled from a 13-year low in March 2009 as Smurfit Kappa Group Plc led gains with a jump of 889 percent, according to data compiled by Bloomberg. Companies in the gauge are forecast to post the biggest profits since 2008. Italy’s FTSE MIB increased 29 percent in the period, while Spain’s IBEX 35 rose 19 percent and Portugal’s PSI 20 added 2.1 percent. Greek stocks lost 39 percent.

The nation’s shares can pull further away from those in the weakest economies on the euro region’s Mediterranean periphery as Ireland takes steps to bring down its deficit, according to Andy Lynch at Schroder Investment Management Ltd. The ISEQ has recouped just a quarter of the 80 percent plunge that began in February 2007 and culminated in the near-collapse of the nation’s banking system.

“We have to give Ireland credit for actually sticking to the reform program and taking the levels of painful social adjustment that few countries in Europe have come close to,” said Lynch. His firm oversees $369 billion globally, including Grafton Group Plc and Irish Continental Group Plc shares. “There’s been a massive change in sentiment. We’ll probably look back on 2012 as the year when Ireland turned the corner.”

Market Rebound

The ISEQ climbed 15 percent to 3,907.1 this year through yesterday, clawing back 25 percent of the 8,065-point plunge from its peak in 2007, data compiled by Bloomberg show. That compares with a 21 percent recovery in Spain, an equity market more than four times bigger than Ireland. Italy has rebounded 12 percent, Portugal 15 percent and Greece 8.6 percent. The four Mediterranean markets all bottomed in June or July last year.

The Irish gauge slipped 0.7 percent at the close of trading in Dublin trading, having earlier climbed 0.9 percent.

Home prices in Ireland tumbled 51 percent from their 2007 peak, forcing the government to take over five of the six biggest domestic banks. The bailed-out lenders have racked up 93 billion euros ($124 billion) of loan losses in five years, according to data from company filings.

Ireland is looking to leave the EU-led rescue package it negotiated in November 2010 by the end of the year as borrowing costs decline. The yield on Ireland’s 10-year bonds has fallen to 4.22 percent from 13.8 percent in July 2011. That compares with the average 5.8 percent the nation agreed to pay on international bailout loans in its November 2010 aid deal.

Deficit Trimmed

At the end of this year, the government will be about 85 percent of the way through cuts amounting to 33.4 billion euros, or about a fifth of the size of the economy, planned through 2015. That will help Ireland trim its budget deficit to 5 percent of gross domestic product next year from 31 percent in 2010, according to economist forecasts compiled by Bloomberg.

“The Irish government has done a lot for the stability and sustainability of its public finances, and it has been a bit ahead of the other periphery economies in going through that process,” Andrew Arbuthnott, who helps oversee $219 billion as fund manager at Pioneer Investment Management Ltd. in Dublin, said in a May 28 interview. “They’ve been the first in, and first coming out.”

Ireland’s economy will probably expand 1 percent this year, while Portugal, Italy, Greece, and Spain will contract at least 1.5 percent, economists surveyed by Bloomberg predict. The unemployment rate in Ireland has declined to 13.7 percent from a peak of 15 percent last year, according to data from the Central Statistics Office.

Labor Costs

The country’s labor force has also regained some of its competitiveness. A measure of labor costs dropped 8.4 percent between 2008 and 2012, compared with a 1.8 percent increase in the 17-nation euro area on average, Eurostat figures show.

Earnings for companies listed on the ISEQ are projected to be a combined 205.44 euros a share in 2013, up from 65.55 euros last year, according to analyst estimates compiled by Bloomberg. That compares with the 693.92 euros peak in 2007.

The nation still faces many challenges and Irish stocks are no longer cheap, according to Patrick Moonen, who helps oversee about $244 billion as senior strategist at ING Investment Management in The Hague. The ISEQ’s valuation has climbed to 67 times reported profits, up from 4.1 times in December 2008, data compiled by Bloomberg show. The gauge trades at 19 times analysts’ estimated earnings, compared with a multiple of 15.8 at the start of the year.

Banking Weakness

“The biggest problem, which will remain for some time, is the weakness of the banking sector,” Moonen, whose top pick in peripheral Europe is Spain, said on June 5. “Credit growth is weak and banks are reluctant to increase lending, which is unfortunately an important part of the economy that really has to get going. That’s still the dark cloud.”

The Irish central bank may stress test the financial system for further damage in September or October, Governor Patrick Honohan said in May. After their last examination in 2011, lenders were ordered to raise 24 billion euros.

Pioneer’s Arbuthnott is still bullish on Ireland after the ISEQ rallied to the highest since September 2008 last month.

“We’ve been materially overweight in the Irish market,” Arbuthnott said. “In the early stages of the crisis, the idea was to sell all peripheral Europe regardless. A knee-jerk response. Investors that looked into the detail have benefited from these multinational, leading, well-managed companies.”

Ryanair, Kerry

Pioneer’s European equity funds hold shares of Ryanair Holdings Plc, the region’s biggest discount carrier, along with stakes in Paddy Power Plc and Kerry Group Plc. The three stocks have recouped all their declines from the financial crisis to reach records this year.

Kerry Group, the third-heaviest stock on the ISEQ after CRH Plc and Ryanair, rose to a 24-year high in March as its share price tripled from March 2009. The company makes food ingredients and flavors, and counts Nestle SA, Unilever, and McDonald’s Corp. among its customers. Shares of bookmaker Paddy Power rose more than fivefold in the period, reaching the highest since its 2000 initial public offering in April.

Paddy Power will probably post pretax profit of 159.8 million euros this year, according to the average of analyst estimates compiled by Bloomberg. That would be the most since at least 1998 and more than double the profit for 2007, Bloomberg data show.

Grafton Group, a Dublin-based company that sells building materials in Ireland, the U.K. and Belgium, increased more than fourfold since February 2009. It has still tumbled 57 percent from its peak in 2007. Grafton will more than double pretax profit this year to 74.9 million euros, analysts project.

Irish Continental

Shares of Dublin-based Irish Continental have more than doubled since June 2009, trimming the losses from the high in 2007 to 16 percent.

Smurfit Kappa, which makes cardboard boxes for Domino’s Pizza Inc. and Danone SA, is among the 10 best-performing stocks in the Stoxx Europe 600 Index after increasing almost 10-fold since March 2009. The shares are still 45 percent lower than their peak in 2007.

The ISEQ’s performance has benefited from the departure of financial stocks such as Allied Irish Banks Plc, according to Sam Cosh, a fund manager at F&C Asset Management Plc in London. Financials make up 5.8 percent of the ISEQ by weighting, compared with 35 percent for the IBEX 35 in Spain and 20 percent for Portugal’s PSI-20, Bloomberg data show.

“The disaster areas that Ireland had are no longer a big part of the index,” Cosh, who manages about $290 million including Glanbia Plc and C&C Group Plc shares, said in an interview last month. “What is left is a good-quality bunch of stocks that have managed to plow their own furrow in a pretty difficult economic environment.”

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