The Celtic Phoenix: 5 Consecutive Years Of Market Gains And 6.6% GDP Growth

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Includes: EIRL, IRL
by: Wexboy

Summary

The Irish market has now enjoyed 5 consecutive years of gains, with a 30.0% gain in 2015.

The Irish market's 134% cumulative gain in just 4 years blows the US, UK and European markets out of the water.

But the ISEQ still looks compelling, trading on a prospective 15.4 P/E ratio for 2016.

As for the Irish economy, it enjoyed an estimated 6.6% real GDP growth rate in 2015, and will continue to benefit from a 22% EUR/USD devaluation over last 2 years.

New Ireland Fund may be the best listed Irish investment vehicle, but Ireland has always been a real stock picker's market.

A picture is worth a thousand words - here is a 5-year chart of the Irish Stock Exchange (ISEQ):

Click to enlarge

Truly, a thing of beauty...

And over the (approximate) life of my blog, the Irish market has delivered four consecutive years of gains:

2012: +17.1%

2013: +33.6%

2014: +15.1%

2015: +30.0%

Cumulative Gain: +134%

[And yes, the ISEQ also managed to eke out a small gain in 2011: +0.6%.]

And here is 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 is 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 note I was consistently and vociferously bullish on the Irish market and economy throughout my entire blog adventure. My only answer is both insipid and academic:

In terms of my mandate (a diversified/global portfolio), I actually maintained a consistent and 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 (and economy) that can boast a 15%+ gain in each of the last four years?

Of course, for each investor keen to pile into a market displaying this kind of momentum, there is another investor who instinctively wants to bet against such a winning streak. Doubtless, they would 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 has been priced at an average 19.1 P/E over the last 10 years. And it is 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 realize it is now trading on a prospective 15.4 P/E ratio for 2016.

And let us offer some proper macro perspective here: The Central Bank of Ireland is now pegging 2015 at a +6.6% GDP growth rate (albeit, growth should moderate in 2016). And yes, that is real, not nominal growth! And it is against the backdrop of Europe which feels like it is still in semi-recession (with sub-2% GDP growth), and a still fragile US recovery (with 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 and 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 is merely a third of the US rate, it is 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 are at it, the Irish recovery is also a wonderful reminder of what a total buffoon 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 offer additional gains/tailwinds for quite some time to come. Not surprisingly, the recovery has also been accompanied by a huge rebound in Irish employment. From a 15.1% peak four years ago, unemployment is now down to 8.8% and continues to steadily decline. [NB: Irish unemployment was steady at 4-5% for much of the 2000s]. We have also seen a blistering recovery in the property market, both residential and commercial.

You really have to wonder why investors are spending so much time agonizing over whether they should embrace or avoid the Chinese economy, stock market, and yuan...when Ireland presents what seems like a far superior (and clearly, a far less terrifying) risk/reward proposition.

And in the current (nervous) market environment, it is 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 December-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 is not an over-crowded market - we've seen some of the biggest (alternative) funds in the world show up to bid for and 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.

Unfortunately, there are really only three listed Irish investment vehicles available to the average investor (oddly enough, two of them are US-listed!). The best of the bunch, in my opinion, is the New Ireland Fund (NYSE:IRL): It is an actively managed closed-end fund with $74 million in net assets, offering a tasty (at least in the US) 13% discount to NAV. Next, we have the iShares MSCI Ireland Capped ETF (NYSEARCA:EIRL), with $166 million in net assets. And finally, we have the WisdomTree ISEQ 20 UCITS ETF, but it is much smaller with $32 million in net assets, plus it is Dublin/London-listed.

But for me, Ireland has always been a stock picker's 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 brokers often segment the Irish market into very different sector/exposures. Accordingly, it tends to attract pretty dissimilar investor constituencies, who may only focus on: i) a handful of the largest caps, regardless of valuation and 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 and residential property sector that has only emerged in the past couple of years, and finally (and perhaps most notoriously) v) a (junior) resource stock sector that has been decimated in the last few years.

Fortunately, my previous grand endeavor -The Great Irish Share Valuation Project(TGISVP) - is perhaps the ideal stock picking approach for such a unique market. Particularly as Ireland is one of the few markets small enough (77 stocks, by my last count) to accommodate the Luddite process I prefer: Individual stock-by-stock analysis, rather than some glorified screening exercise.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.