Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 1/9/11

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I’m pleased to see equities push even higher since my last blog entry. In some cases substantially so, with the likes of Smurfit (+10.5%), Aer Lingus (+9.3%) and CRH (+5.7%) seeing particularly chunky moves yesterday. Some of these big moves may have been due to month-end activity by the buy side, but fundamentally the market was oversold and, as I wrote some days ago, a ‘violent’ rebound was inevitable.

 

(Disclaimer: I’m a shareholder in IL&P plc) In terms of corporate newsflow, yesterday saw solid results from a number of Irish plcs. Grafton reported in-line interim results, but noted tough market conditions in the UK & Ireland, which are no surprise given peer commentary of late. Aer Lingus upped guidance for the full year yesterday, which helped prompt the jolt in its shares noted above. IFG released solid interims and indicated that its protracted takeover talks had taken another step forward. Irish Life & Permanent’s H1 results are largely irrelevant at this stage to investors given the restructuring that is taking place.

 

(Disclaimer: I’m a shareholder in Irish Continental Group plc) I’d an interesting exchange with someone on Twitter about the reasons why Stena reduced its fast ferry services from Dun Laoghaire. Slide 6 on this presentation from ICG highlights just how much more expensive marine diesel – which fast ferries use – is relative to the heavy fuel oil the more traditional ferries use.

 

Keep an eye on the banks today – several of Europe’s biggest names are being deleted from the Stoxx 50, which could put the sector under pressure.

 

Turning to Ireland Inc, I was pleased to see the ESRI call for greater fiscal consolidation than what the government currently plans. Our deficits are unsustainable, and as interest payments continue to soar, the longer the government takes the get the fiscal house in order, the more painful cutbacks to frontline services will be required. One figure that stands out for me in the ESRI’s forecast for 2011 is the figure for the number of people in employment. This year they see it at 1.803m, down 45,000 from year-earlier levels. But of course, it is not just “down 45,000”, as there is a natural increase in the labour market due to our growing population. I can’t find an estimate for the number of people the ESRI sees emigrating this year, but it is safe to say (27,700 Irish people emigrated in the 12 months to April 2010) that it will be in the tens of thousands. And this is not emigration in the traditional sense. The majority of the people I know who have left or are considering going are highly educated – in some cases extremely so – and these are precisely the folk that Ireland should be turning to in order to find a way out of the mess we are in. They can’t help if they’re not here.

 

Finally, just to correct one myth that’s doing the rounds about Ireland’s bond yields. The main driver of the recent slide in our theoretical (as Ireland is out of the markets) ‘interest rate’ is ECB buying of peripheral countries’ bonds in the secondary market. It’s not the case that the world has suddenly become bulled up on Ireland. And as I say, we’re not borrowing in the open markets due to the EU-IMF arrangement, so let’s not read too much into the recent fall in yields.

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Written by Philip O'Sullivan

September 1, 2011 at 6:52 am

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