Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 7/10/11

with 3 comments

It’s been an extremely busy couple of days in terms of college work, so I’ve been reluctantly neglecting this blog. Hopefully this “catch-up” post will bring me up to speed with all the major newsflow! In this blog I focus on Ireland’s public finances, downgrades (both corporate and sovereign) and some interesting company pointers.


We saw the latest set of Exchequer Returns from the Department of Finance earlier this week, providing a snapshop of Ireland’s public finances to the end of Q3. At first glance, my initial reaction was: “Austerity? What austerity?” Total voted expenditure by the Irish government in the first 9 months of 2011 was €33.4bn versus €33.2bn in the same period last year. And no, this does not include the €10.7bn paid to recapitalise Irish financial institutions in the year to date. Ireland borrowed €20bn in the first 9 months of the year, which will cost a ballpark €1bn a year in interest payments annually, or roughly double the year-to-date spend on the Department of Jobs, Enterprise and Innovation. The longer we delay the necessary fiscal consolidation the more of our budget will be eaten up by interest payments at the expense of frontline services. Seamus Coffey offers some good insights on the Exchequer Returns here.


Staying with Ireland Inc, I was delighted to provide some insights to Portugal’s leading weekly newspaper, Expresso, on Ireland’s economy and the recent move in our bond yields. Speaking of the Irish economy, I note that Dolmen sees a pick up in our GDP growth rate (2011: 0.5%, 2012: 1.1%, 2013: 1.75%) over the medium term. To put our changed fortunes into context, if Dolmen’s growth estimates are correct, by 2013 our GDP will have ‘recovered’ to 2005 levels. They do make the point that ECB rate cuts will help the beleaguered consumer sector, an argument that met with some derision on some social media sites. However, I think that this derision is a little misplaced. Assuming there are 200k tracker mortgages in Ireland and 50bps of ECB easing next year, this will save households nearly €400m in a full year, which is not to be sniffed at, but obviously it’s only an incremental positive when compared to the size of the Irish economy.


We also saw a host of downgrades this week. Moody’s added to Mr. Berlusconi’s problems with a three-notch downgrade of Italy’s credit rating. I smiled at this reaction from IG Index’s David Jones. Moody’s shocked the markets earlier today by downgrading a further 21 banks across the UK and Portugal, which surely has investors wondering about who’s next for the chop.


(Disclaimer: I’m a shareholder in Smurfit Kappa Group plc). On the corporate side, we had a lot of broker activity in the packaging sector. Goodbody’s Donal O’Neill initiated coverage on DS Smith, arguing that its recent price decline creates “an excellent opportunity to buy one of the highest quality names in the sector”. Today his colleague David O’Brien took an axe to DS Smith peer Smurfit Kappa’s numbers, but he softened the blow for this SKG shareholder by noting that there is “a lot [of the negatives] already in the share price”. On this note, Davy offered some interesting valuation perspectives on SKG in its morning wrap yesterday.


(Disclaimer: I’m a shareholder in Datong plc, Abbey plc and Trinity Mirror plc) Turning to UK companies, grim updates from Flybe and Mothercare served up further reminders of Britain’s difficult consumer backdrop, which is a theme I’ve noted throughout the year. I was aghast to see another disappointing update from spy gadget maker Datong, which hockeyed the share price. Mercifully it makes up less than 0.5% of my portfolio! On a more encouraging note, Panmure Gordon had a very interesting observation in their morning note today about Trinity Mirror. Panmure’s well-regarded media analyst Alex DeGroote speculates that, given recent movements in commodity prices, “there may be good news down the road on newsprint cost pressures”, adding that “for 18 months at least, publishers have had to contend with sharp increases in newsprint prices. Going into FY12, we imagine most analysts/investors have again priced in double-digit growth. This may prove over aggressive”. I’m hoping he’s right, but then, regular readers of this blog will be fully aware of my positive bias towards the stock. The last UK stock, albeit one with material Irish operations, I’ll refer to today is housebuilder Abbey, which provided a solid update to the market at its AGM earlier today.


Central Bankers were also in the news this week. The Bank of England is engaging in more quantitative easing, a tactic which Omid Melakan memorably describes as “The last refuge of failed economic empires and banana republics“. The BoE’s measures come to roughly £1,000 for every man, woman and child in the UK. Hardly a sustainable policy, or one that is sterling-friendly (something that Irish people considering moving money out of the euro need to think about).


To finish on a positive note, I see that strategists still foresee the best Q4 performance by stocks since 1998.


3 Responses

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  1. […] called for deeper cuts than what the government is currently targeting. This is an argument that I’ve been pushing for some time, given that the huge deficits the State is running up means that we are going to experience a […]

  2. […] written about the myth that is austerity in Ireland before. Now you can read of the myth that is austerity in Greece. But moving from myths into […]

  3. […] ECB’s 25bps rate cut is a small positive for Ireland. I’ve previously done up some back of the envelope calculations on how positive this is, if any of my readers have better data please send it […]

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