Celtic Phoenix, intrinsic value, Ireland, Irish shares, Irish Stock Exchange, Irish value investing, ISEQ, stock valuation, TGISVP, The Great Irish Share Valuation Project
A picture’s worth a thousand words – here’s a 5 year chart of the ISEQ:
Truly, a thing of beauty…
And over the life of the blog, the Irish market has delivered four consecutive years of gains:
Cumulative Gain: +134%
[And yes, the title of the post’s correct…the ISEQ also managed to eke out a small gain in 2011: +0.6%.]
And here’s the cumulative gains (over the same period) of the other major indices I use as portfolio benchmarks:
S&P 500: +63%
FTSE 100: +12%
Bloomberg European 500: +46%
Wow, even the S&P’s performance looks positively pedestrian…
But believe it or not, the ISEQ’s block-buster performance has been exquisite torture for me. Sure, I’ve obviously enjoyed significant gains from my Irish stock holdings, but the compelling logic of portfolio diversification actually limited my overall exposure to the Irish market. Which, intellectually, continues to make perfect sense to me…but emotionally, it’s sheer insanity!?
So why on earth wasn’t my portfolio bursting at the seams with Irish stocks all along?! Especially when you look back, and actually note I was consistently & vociferously bullish on the Irish market & economy throughout this entire blog adventure. My only answer is both insipid & academic:
In terms of my mandate (a diversified/global portfolio), I actually maintained a consistent & massively overweight Irish stock allocation!
Yeah, cold comfort indeed…
And no doubt, some of my readers feel much the same. But for most, the Irish market still remains a merely academic, albeit intriguing, investment proposition. And for my penance, once again I should try change that… Because I think every single reader/investor out there (no matter their location, or investment style) should be involved in the Irish market. Regardless of size, why would you want to actively ignore a market (& an economy) that can boast a 15%+ gain in each of the last four years?!
Of course, for each & every investor keen to pile into a market displaying this kind of momentum, there’s another investor who instinctively wants to bet against such a winning streak. Doubtless, they’d cite the ISEQ’s current 18.7 P/E (based on FY-2015 earnings estimates). But is this ratio really out of the ordinary? After all, the ISEQ’s been priced at an average 19.1 P/E over the last 10 years. And it’s not like the US market offers a cheaper P/E ratio (not to mention the average FANG valuation!). In reality, the two markets are worlds apart, in terms of potential earning growth…despite its out-sized gains to date, the ISEQ still looks damn compelling when you realise it’s now trading on a prospective 15.4 P/E ratio for 2016.
And let’s offer some proper macro perspective here: As I highlighted in the title, the Central Bank’s now pegging 2015 at a +6.6% GDP growth rate (albeit, growth should moderate in 2016). [And yes, that’s real, not nominal growth..! And it’s against the backdrop of Europe which feels like it’s still in semi-recession (sub-2% GDP growth), and a still fragile US recovery (2-3% GDP growth)]. This is the well-deserved fruit of a painful but impressive internal devaluation – a rare phenomenon these days in Europe (if not the developed world), with Greece representing the pathetic & absurd counter-example…
[Right about now, the begrudgers are whinging about Ireland’s low tax rate. Which is, of course, ridiculous: If Ireland can deliver a more balanced budget than America (for example), with a corporate tax rate that’s merely a third of the US rate, it’s obviously fair tax competition! High tax countries have only themselves to blame for falling behind, and frankly deserve the same fate you’d naturally expect for an uncompetitive company…]
[And while we’re at it, the Irish recovery is also a wonderful reminder of how much of a total ass-clown Paul Krugman really is…]
Of course, Ireland’s recovery was amply assisted by a 22% devaluation in the EUR/USD rate over the past two years – notably, this should continue to offer additional gains/tailwinds for quite some time to come. Not surprisingly, the recovery’s also been accompanied by a huge rebound in Irish employment. From a 15.1% peak four years ago, unemployment’s now down to 8.8% & continues to steadily decline. [NB: Irish unemployment was steady at 4-5% for much of the 2000s]. We’ve also seen a blistering recovery in the property market (both residential & commercial).
You really have to wonder why investors are spending so much time agonising over whether they should embrace or avoid the Chinese economy, stock market & yuan…when Ireland presents what seems like a far superior (& clearly, a far less terrifying) risk/reward proposition.
And in the current (nervous) market environment, it’s worth remembering the ISEQ continues to trade almost 40% below its all-time high, which is close to 9 years ago now. And the far smaller (on average) 8% index reversal we’ve seen since its recent Dec-2015 high is also encouraging, which might seem somewhat counter-intuitive…but a supremely important bear market lesson, which investors tend to forget, is to actually bet on (relative) strength (not weakness). [Most of all, don’t forget Draghi’s WIT Strategy. He still stands ready, if truly necessary, to unleash ‘whatever it takes..!’] And arguably, it’s not an over-crowded market – we’ve seen some of the biggest (alternative) funds in the world show up to bid for & buy Irish property loans/assets (and, famously, the bond market), but the overseas institutions investing in the Irish equity market haven’t actually changed all that much from those I recall over the past decade.
But at the end of the day, I should highlight Ireland is definitely a stock pickers’ market. Which explains why I’ve always been prepared to avoid a substantial percentage of the Irish stocks on offer, and/or been comfortable identifying certain stocks as potential short-selling candidates…
[And it’s worth noting brokers often segment the Irish market into very different sector/exposures. And so, accordingly, it tends to attract pretty dissimilar investor constituencies, who may only focus on: i) a handful of the largest caps, regardless of valuation & exposure, ii) stocks which (may) offer cheap/alternative access to overseas growth (a surprisingly large number of Irish companies are UK/Europe/globally focused), iii) stocks offering domestic exposure (notably, economic pure-plays are actually pretty rare), iv) a listed commercial & residential property sector that’s only emerged in the past couple of years, and finally (& perhaps most notoriously) v) a (junior) resource stock sector that’s been decimated in the last few years.]
Fortunately, The Great Irish Share Valuation Project is the ideal way of celebrating this new Celtic Phoenix…and also an ideal approach for such a unique market, as Ireland’s one of the few markets globally that’s small enough (in its entirety) to permit the Luddite process I prefer (actual stock-by-stock analysis, rather than some glorified screening exercise).
And now, apologies – after all that build-up – it’s time I end my post here!
But please…stay tuned for my new/upcoming 2016 TGISVP series – where, once again, I plan to mount up & bravely tilt at more than a few windmills, i.e. tackle every single Irish stock out there & put a
ring new price target on it…
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The great article. You have drawn my attention to the Irish market. Can you point me out any interesting stock, which is traded both on the ISE and LSE?
Sorry, been busy with the market & some individual stock situations…I will be kicking off my TGISVP series soon. Meanwhile, you may find the file in this post useful:
Obviously, be aware my intrinsic value estimates are now out of date, but the file should still provide interesting food for thought. Not sure if you’re interested in an Irish fund, or individual companies…note there’s one ETF listed in Dublin & London (http://www.wisdomtree.eu/product/9/equities/wisdomtree-iseq-20-ucits-etf), and two other funds listed in NY. As for individual stocks, many Irish stocks have a dual Dublin/London listing.
fyi The Central Bank’s latest Quarterly Bulletin offers some useful/interesting forecasts & commentary:
Click to access Quarterly%20Bulletin%20No.%201%202016.pdf
The only minor dark point is that Irish farmers seem to overextend themselves (20% increase in price of land http://www.independent.ie/business/farming/rented-land-hits-550ac-as-experts-warn-of-bubble-34394963.html ) while at the same time milk prices follow oil while coops have to support members who are obviously doing not that well at the moment http://www.farmersjournal.ie/glanbia-co-op-announces-35-6m-member-support-package-for-2016-199137/ .
On the property front, it’s good that the Central bank limited mortgages. Banks should instead lend to developers (not the ones from before the crisis hopefully). Unfortunately, they don’t want to limit the recovery of existing stock. Therefore market is stuck and there won’t be enough housing to accommodate growth. This could cap FDI.
Have you been reading my tweets over the last couple of years?!
I felt like a voice in the wilderness a year or two ago, crying out that increased milk supply (everywhere, not just Ireland) would inevitably mean lower milk prices. And since Irish (& European) dairy farmers haven’t a bull’s notion about competing in terms of actual international milk costs & prices, seeing nearly every dairy farmer ploughing money into bigger herds, farms, new milking parlours, etc. was actually pretty terrifying. But when have farmers ever grasped simple economics..?! I also predicted the government & taxpayer would, of course, be called on for subsidies, assistance & bailouts eventually…
As for housing, there’s very few countries in the world which can genuinely claim to be too densely populated…and the same’s true for housing. If you want to target real inequality, affordable housing for everybody is obviously entirely possible…as is new & disruptive innovation to lower building time & costs, to increase energy efficiency, etc. But absolutely everybody who has any kind of political clout – government, business & existing home-owners – has a vested interest in maintaining the status quo & ensuring property values escalate relentlessly over time. And that’s not going to change…another case of ‘Screw those Millennials’!
Its Yvonne Dolan here and follow your Blog, do you mind if I asked your take on the recent San Leon move ? I am a small share holder & dont really understand what happened ?
Well, usually I value companies in TGISVP in random order, but I’ll try include San Leon in my first batch of companies (i.e. in my forthcoming TGISVP post).
But I will note the newly announced deal (presuming it actually goes ahead, I’m amazed San Leon can organise $100 million of debt in this environment!?) is unlikely to improve my valuation…a company can’t just buy an asset for a $1 (esp. with leverage) & suddenly it’s worth $2 the next morning, despite what junior resource stock promoters would have investors believe!
a new TGISVP! That is a wonderful New Year’s resolution!!
Looking forward to it
Many thanks Max,
If I publicly announce it, now I have to follow through… 😉
Should be an interesting catch-up though, and hopefully some pretty interesting new valuations & surprises!
Eh…Because your style bias is micro cap value and low quality businesses. what drove the performance of the iseq was large cap quality and growth. Ryanair, Paddy Power, Kerry, Glanbia etc.
Easy to describe in 2 sentences. In addition I would say that if you considered international revenue versus domestic revenue (on an index weighted basis) versus global peers the ISEQ is hardly a domestic index. I don’t see the necessary relevance of domestic gdp. Furthermore the relationship between gdp and stock market returns is dubious at best. Markets will always lead data.
Think I covered much of this in one of my last paras (re the segmentation of the Irish market & its investors):
Actually, I’d specifically characterise my Irish investments as special situation stocks (as evidenced by two value-realisation events last year in my portfolio…and hopefully I’ll see another this year). But anyway, there’s obviously only a handful of high quality/growth stocks in the Irish market…so as far as I’m concerned, they’re pretty much bought regardless of price!? And their record doesn’t always stand up to closer scrutiny either, particularly the food stocks:
As for domestic vs. overseas exposure, that’s a long-standing feature of the Irish market. Like I said, all-in-all the Irish market’s definitely a stock pickers’ market!
People often cite the lack of correlation between GDP & (increased) growth in studies. I’d respectfully disagree: i) I suspect the reduced absolute level & dispersion in major market GDP growth rates doesn’t much lend itself to such studies, and ii) naturally the major/large-cap indices are priced pretty efficiently, so any advantage to be gained from (as I said) a marginally better growth rate is probably illusory.
But my main objection comes from a stock picking perspective & is perhaps better served with an example: Let us presume you find two VERY SIMILAR & CHEAP high quality/growth stocks (regardless of market cap) in two different markets – one growing at 2% real GDP, and the other at 7% real GDP – which stock would you buy?! Yes, we all know the actual outcome will be dependent on a huge number of factors…but every single time, I’d choose the stock which enjoys a 7% GDP tail-wind!
[And a market with a much faster growing population might be similarly attractive, albeit it would be somewhat more dependent on the type of company].