Celtic Tiger Roars Again?

Money Report

moneyreportAfter a gut wrenching recession, and the collapse of a property bubble that had concentrat ed the small county’s wealth into a highly leveraged real estate sector, Ireland, theCeltic Tiger, was forced to ask for a bailout in 2012, as well as to adopt a painful EU mandat ed austerity budget.

However, there are signs of a turnaround; in 2013 the Irish stock market gained 35.2%, making it the fifth best performing market in the world (the U.S. was ninth.) While it’s still early days, there may be worthwhile opportunity for investors to consider as we celebrate St. Patrick’s Day this month.

Between 1995 and 2000 the Irish economy grew at an astounding average annual rate of 9.4 %. This unprecedented expansion was fueled by a number of factors including foreign investment, a booming tech sector, relatively low labor costs, favorable corporate tax rates, and the trade advantages of EU membership. The country was transformed from one of the poorest, to one of the richest nations in Europe. While growth slowed moderately after the tech crisis in 2000, the economy, fueled by a spectacular run up in property prices, continued to expand at nearly 6% per year. In 2008 it completely collapsed, brought down by the global financial crisis.

In September 2008 Ireland became the first EU country to officially enter recession. GDP fell by 14% through 2011; unemployment rose to over 14.8%. In 2012, in order to stave off total chaos, Ireland had to obtain an $85.7 billion bailout from the International Monetary Fund. Taking the money meant accepting an austerity budget as well; government outlays have been cut by 15 percent over three years, and consumer spending has dropped for six consecutive quarters. There has also been a troubling exodus, as increasing numbers of Ireland’s young productive workforce emigrated to find work elsewhere.

It may be just a flicker, but now there seems to be some light at the end of the tunnel. Domestic demand in 2013 is estimated to grow at close to 1%, the first positive number since the financial crisis. Exports have begun to recover as well, and consensus estimates for GNP growth are approximately 2% for 2013 and 2.7% for 2014. The unemployment rate is expected to decline to around 12%, and estimates for 2014 job growth have been revised upward to 2.5%.

Those who want to participate in the Tiger’s reincarnation have a number of diversified investment choices. The New Ireland fund (IRL) is a closed end fund incorporated in 1989, with an objective of investing at least 80% of its assets in stocks and bonds of Irish companies. IRL is currently selling at a market price of $12.77 per share, a 15.4% discount to the fund’s per share net asset value of $15.09. (This means that the purchasers of the fund shares are obtaining the stocks at a 15% discount to their market prices.) Be aware, though, that there is no guarantee that this discount will disappear, and it will fluctuate with market conditions and performance. IRL is managed by Kleinwort Benson Investors; its largest investments include Ryanair Holdings, Kerry Group, CRH construction and building materials, ARYZTA, and The Kingspan Group. Annual fund expenses are 2.05%.

One particular challenge faced by Investors in Ireland’s markets is the relatively scarcity of public companies that are large enough to be viable opportunities for fund investment. In fact, our second fund, iShares MSCI Ireland Capped, shifted its benchmark from the MSCI Ireland Investable Market 25/50 Index, (which shrunk to only 14 holdings,) to the MSCI All Ireland Capped Index, which includes 24 companies that are either domiciled in, or have significant business in Ireland. EIRL is an exchange traded fund; started in 2011; current assets total about $123 million. Its largest holdings include CRH, Kerry Group, Bank of Ireland, UDG Healthcare and Icon PLC. One difference between the two investments; while the New Ireland fund is actively managed, the Ishares MSCI Ireland Capped is an exchange traded index fund; fund expenses here are about .50%. When considering these be aware that concentrated funds in smaller countries have their own unique risks, and any international investment can be subject to currency risks as well as market and liquidity risks. Slainte!

Steven Weber, Gloria Harris, and Frank Weber are the investment and client services team for The Bedminster Group, providing investment management, estate, and financial planning services. The information contained herein was obtained from sources considered reliable. Their accuracy cannot be guaranteed. The opinions expressed are solely those of the authors and do not necessarily reflect those from any other source. Discussion of individual stocks are informational and do not constitute recommendations to purchase.