Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 14/11/11

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Concerns around the Eurozone show no signs of abating. Writing in last weekend’s FT, Merryn Somerset Webb perfectly captured the options policymakers are considering when she wrote: “Europe will get one of three things: a break-up leading to a systemic banking crisis and a global recession; or a commitment to an impossible level of austerity followed by recession and civil unrest; or a round of ECB-driven money creation and sovereign bond-buying that will make the UK’s extraordinary QE programme look like my children’s pocket money“.


Like Merryn, I suspect that the third option will be the one chosen by Europe’s political leadership. You only have to look at our main trading partners to see what will happen when the Eurozone’s monetary sluice is fully opened – as I note in the current issue of Business & Finance, inflation in both the US and UK stands at a three year high. This inflation tax will disproportionately affect people on lower incomes, and people need to move to protect themselves against it. My advice remains that you should increase your exposure to both gold and equities (at least, the ones with strong balance sheets) and reduce holdings of cash (whose value will be eroded by inflation) and government debt (given the state of public finances across much of the world).


Speaking of public finances, we recently got an overview of the Irish government’s medium-term fiscal strategy. Have a look at Table 3.2 (on page 28) in it – cutbacks in day-to-day spending between now and 2015 are expected to be mostly offset by ever-increasing debt service costs. This is the inevitable consequence of the dithering by the present government – and its predecessor – when it comes to right-sizing public spending.


Silvio Berlusconi stepped down as Italy’s Prime Minister, leaving behind a dismal track record. As this article notes, it’s easier to do business in Albania than in Italy.


I was not surprised to read that 2011 is likely to be the third highest year for S&P buybacks on record. We’ve seen a lot of share buybacks in Ireland too (e.g. Ryanair, Abbey, United Drug, Dragon Oil) this year, which partly reflects companies’ reluctance to invest capital in M&A and development at a time of such economic uncertainty.


(Disclaimer: I am a shareholder in Irish Continental Group plc) Turning to corporate newsflow, today brought trading updates from both Kingspan and ICG. Kingspan reported that it rate of increase in sales is slowing, but falling input cost pressures are giving a boost to margins. I am a long-term admirer of Kingspan for its structural growth qualities and excellent management (CEO Gene Murtagh is one of the most impressive executives I’ve met) but given the weak macro outlook it’s one that will struggle to reach the valuation it deserves in the near term. ICG released a trading update earlier this afternoon which revealed that 9 month EBITDA has declined by €5m yoy (from €45m to €40m) as fuel costs have increased by €8m over the same period. While, as ICG says, “the economic backdrop remains challenging”, I note that its strong balance sheet (net debt was only €13m at the end of Q3 – and the company paid a dividend of €8.2m during that quarter) gives ICG the staying power to consolidate its position while weaker competitors such as DFDS and Fastnet take capacity out of the market.


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