Ireland – the first Euro Zone nation to have exited the three-year bailout program last December – is gradually seeing things turn in its favor.
While the Irish economy suffered from downgrades by rating agencies during the height of the financial turmoil in 2011, the nation is now seeing an improvement in its future outlook.
This is especially true given the fact that the rating agency Standard & Poor's has recently upgraded its rating on Ireland's long-term foreign and local currency credit rating to A-minus from BBB+ on the back of an improving global economy and positive signs of recovery in their domestic economy.
Thanks to restructuring solutions, the nation’s beleaguered banks are showing signs of life and improving financial health. A recovery in the Irish property market has helped banks to offload some of its bad loan portfolios and properties causing a reduction in government contingent liabilities. The rating agency now views risks from these damaged banks to be “limited”.
Last month another rating agency – Moody’s – upgraded Ireland’s credit rating on government bonds by two notches to Baa1 citing improved outlook for Irish debt (read: Play the PIIGS Recovery with These European ETFs).
The two back to back upgrades have sent Irish 10-year bond yields to record lows. In fact, Irish borrowing costs are now below that of the U.S. for the first time in more than five years. Moreover, the recent stimulus measures announced by the European Central Bank have added to the already buoyant mood.
The Road Ahead
The recent upgrade comes despite the fact that the Irish economy contracted at a pace of 2.3% during the last quarter of 2013. The nation is suffering from high levels of debts and the government’s gross debts now stand at around 123% of GDP, one of the highest in the world. Moreover, unemployment is still in double digits and has become sticky in the 11.8% to 12% band.
Ireland will thus need its economy to grow speedily in the upcoming years to reduce its mounting debt. A recovery in the overall Euro zone is likely to bolster the country’s exports, enabling it to grow its GDP faster (read: Hot Euro Zone ETFs for Summer).
Standard & Poor's expects the Irish economy to be on track for the upcoming quarters and believes inflows of foreign direct investments are likely to shore up the nation’s real GDP. In fact, S&P has upgraded its real GDP growth projection for the period 2014-2016 and now expects growth to average 2.7% against its earlier projection of 2%.
Moreover, this rating agency has reaffirmed Ireland’s rating as positive, believing in the fact that it might raise its rating if the Irish economy manages to reduce its debt burden.
Also, as per the European Commission, Irish GDP growth will likely expand 1.7% this year, well above the Euro zone growth prediction of 1.2%.
Backed by favorable ratings and recent upgrades, the Ireland ETF – iShares MSCI Ireland Capped ETF (EIRL) – is expected to be in focus and outperform in the coming months (see: all the European ETFs here).
EIRL in Focus
The fund seeks to match the performance and yield of MSCI All Ireland Capped Index by holding a small basket of 24 stocks.
The product is heavily concentrated in its top three holdings – CRH, Kerry Group plc and Bank of Ireland – which together form 44.1% of total fund assets. CRH plc alone occupies more than one-fifth share in the basket and is the main reason for such a tilt.
Sector-wise, Materials, Consumer Staples and Industrials combine to make up 70% of the total fund assets. However, the fund is light on Consumer Discretionary and Information Technology.
The fund charges 50 basis points as fees and has a dividend yield of 1.54% (read: Beat the Market with Fundamentally Strong ETFs).
The ETF has returned 6% this year, while returning 39% in 2013. The fund currently has a Zacks ETF Rank #2 or Buy rating, indicating that it is expected to outperform the broader markets in the near term.
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- Bank of Ireland