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Ireland: No Longer One of the PIIGS?
05/09/2013 9:00 am EST
The Emerald Isle has improved enough that its economic plan might actually be sustainable, setting up a nice contrarian investment opportunity, writes Nicholas Vardy of The Alpha Investor Letter.
With the headlines focused on the latest flare up of the debt crisis among Europe's "PIIGS" countries—Portugal, Italy, Ireland, Greece, and Spain—and now Cyprus—you may be surprised to learn that one country has now "graduated" from these infamous ranks. And that country is Ireland.
The iShares MSCI Ireland Capped Investable Market Index (EIRL) is not only a bet that the economic recovery in Ireland is sustainable, but it also offers a profitable investment opportunity for dyed-in-the-wool contrarians.
On March 13—for the first time since September 2010—Ireland successfully raised money in international markets through the sale of a new benchmark ten-year bond. It also marked, I believe, the single-biggest turning point in Ireland's financial rehabilitation.
Strong demand increased the size of the offer from €3 billion ($3.92 billion) to €5 billion. Like a red-hot IPQ from the dot-com days, Ireland's reentry into the bond market was four times oversubscribed. And Ireland only had to pay a yield of 4.25%.
In one fell swoop, the bond put Ireland into a different league from the other of Europe's "PIIGS" nations. Ireland had now issued debt more cheaply than Portugal, Spain, or Italy.
Ireland already has raised most of the €10 billion it aimed for in 2013 to meet next year's debt repayments. Once it raises another €1.5 billion to meet its funding requirements to the end of 2014, Ireland will become the first nation to leave a bailout program since the Euro debt crisis started more than three years ago.
Despite signs of improvement, the domestic economy remains lackluster, and growth is expected to remain sluggish—1.1% in 2013 and 2.2% in 2014. Unemployment remains high at 14.1 %.
Critics point to a huge disconnect between investors seeing the Irish government as a "star student" and its reputation on the ground, where it's best known for increasing taxes and cutting wages. Consumer spending has been down for six straight quarters. And those consumers are also voters.
Key export markets in the Eurozone and the United Kingdom look especially weak. The level of the euro is key, since 65% of Irish exports go to non-euro countries. A cheap euro—say, $1.20 per euro—would give the Irish economy a big lift.
Bottom line? A lot of things have to go right for the Irish economy to maintain its positive momentum. That's why, for all of its impressive achievements and willingness to bite the austerity bullet, Ireland remains a contrarian investment. And a successful contrarian investment requires three things:
- The market must be cheap. Under the Shiller cyclically adjusted ten-year price-to-earnings ratio (CAPE), Ireland is one of the cheapest markets in the world.
- The situation must not be as bleak as it seems. That doesn't mean things have to great. It just has to be better than it is generally perceived to be. But it will be a while until most investors catch on.
- The market must have entered a solid uptrend. And I think it already has.
EIRL has had a better run than the already strong S&P 500 over the past six months, having gained 11.08% so far in 2013. And I believe there is plenty of upside left. So buy the iShares MSCI Ireland Capped Investable Market Index Fund at market today.
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