Overview: A guide to investing in the PIIGS nations (Part 9 of 15)
Ireland was the first Eurozone nation to come out of the three-year bailout program in December, 2013. Rising consumer sentiment and upbeat manufacturing sector data are factors that led to the handsome returns from investments in this country.
The strength in Irish growth performance was confirmed in 1Q14 when the gross domestic product (or GDP) increased by 2.7% quarter-over-quarter. Although the growth was primarily driven by increasing net exports, domestic demand also made a positive contribution. Both private consumption and gross fixed capital formation increased in year-over-year (or YoY) terms.
Economic activity remained strong during the second quarter as well. Danske Bank Periphery Research expects Ireland’s GDP growth to be 4% in 2014. This will be the strongest rate since 2007.
Signs of rebounding growth
The rebound in growth can be seen in:
- The Irish recovery increasing despite deflation in 2009–2011
- Leading indicators increasing—suggesting that growth remains strong
- Consumer confidence improving significantly
- Retail sales trending upwards and car sales surging
- Industrial production is above the level it was at during the boom in 2005
- The government budget deficit reducing to 4.8% on a year-to-date (or YTD) basis this year. It’s expected to reach 3% in 2015, from 7.3% of GDP in 2013
- Fiscal headwinds continuing to fade in Ireland
- Gross public debt decreasing quicker on the back of the improved macro economic situation and a stabilization in the debt ratio
- Credit rating upgrades supporting lower rates
Ireland has undergone comprehensive labor market reforms. This has resulted in a significant adjustment in labor costs. Irish unit labor costs dropped more than 20% from its peak. The European average has increased in the same period.
The current account deficit was ~5% of GDP when the financial crisis started. It has been turned into a surplus. The improvement from 2007–2013 followed as real exports grew faster than GDP. Ireland has benefited from improved export performance.
The improving economic situation should also support credit rating upgrades by rating agencies such as Moody’s (MCO) and Standard & Poor’s (MHFI). This will lead to lower sovereign yields. It should result in a virtuous cycle where debt declines more. For exchange-traded funds (or ETFs) investors, ETFs like the iShares MSCI Ireland Capped ETF (EIRL) invest in Ireland’s growth story. The fund holds a small basket of 24 of Ireland’s top stocks with majority holdings in CRH PLC (CRHCF) and Kerry Group PLC (KRYAF).
In the next part of the series, we’ll discuss Ireland’s credit upgrade more.
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