On a note continuing yesterday's post - someone (hat tip to Patrick) brought to my attention Dolmen's note on the prospects for 2010, which I personally found to be of an excellent quality. The strategy is backed by serious arguments linked up with fundamentals, unlike the stuff coming out of some other stockbrokers here. The note is available here, but a couple of highlights are below:
"With stronger growth in economies such as the US and Europe compared to Ireland, 2010 will provide a good opportunity for Irish investors to increase the international diversification in their portfolios." You bet. For anyone wearing Green Jersey, my suggestion would be to look no further than IMF forecasts for growth (I plan to publish a comparative note on Ireland v Small Open Economies later this week).
Dolmen guys forecast US economy to grow at 3.5% in terms of GDP, a forecast that - despite having some risks to the downside - is reasonable in my view. Eurozone, held back by 'weaker economies' of Spain and Italy is expected to expand by 1.50%, the UK - by 1.30%, and Ireland, hmmm... Dolmen think +0.25%, my feeling +/-0.5% in GDP and up to -1.25% in GNP terms. Good luck to anyone who believes Irish equities are oversold on these comparatives. To me - they are overbought!
Dolmen predicate their Irish forecast as follows: "Ireland should see a reversal of the two years of negative GDP in 2010. The move away from negative growth will be welcome, but we estimate a slight increase of 0.25% in GDP for next year. The last three budgets have taken 7.4% of GDP out of the economy and with a further 1.8% to follow next year, there remains considerable challenges facing our economy." Correct.
But look beyond the Budget 2011 - Nama will remove some €4-5 billion annually through its operations, stalling the entire property market (due to increased uncertainty concerning supply of commercial and residential properties to the market) and doing nothing to restart credit cycle in the economy (don't take my word on this - look at the banks chiefs' statements).
Unemployment will continue to rise until second half of 2010, when massive scale withdrawals from the labour force and substantial emigration from Ireland will start reducing (artificially) the numbers unemployed. Numbers in employment will not rise, save for the wasteful state-subsidised 'jobs creation'. This means precautionary savings will stay with us, and deleveraging will remain anemic for consumers.
Corporate profitability will remain subdued - Dolmen expect 0.5% deflation in Ireland for 2010, as compared with 2% inflation in the US and the UK and 1.1% inflation for the Eurozone as a whole. Good luck to those stockbrokers who think profitability can be rebuilt with falling prices.
Interest rates gap will close up with US rates expected to rise to 0.75-1% by the end of 2010 from 0% currently, UK rates exected to increase from 0.5% in december 2009 to 1% in 2010, while the Eurozone rates are expected to stagnate at 1%. Now, I personally think the ECB will hike to 1.25-1.50 by the end of 2010. This is significant as far as FX rates for the euro are concerned. If the gap closes, euro will devalue somewhat against the sterling and the USD, implying some boost to exports. But if the gap remains where it is today (roughly), there is little momentum, bar for differences in the growth rates, to devalue the euro.
US and UK bond yields will push away - slightly - from the Eurozone averages, implying that demand for dollar and sterling will be weker (and add to this a bit of the moderation in demand for US Treasuries from China and the BRICs in general). Again, this restricts the scope for euro devaluation.
Dolmen make a call on the USD and sterling vis-a-vis the euro, but I am not that comfortable doing the same.
On Irish property markets: "In Ireland, the problems facing the commercial property sector have not improved. When compared to other Euro-Zone cities, Dublin property yields increased the most in Q3. Vacancy rates are also the highest in the sample of Euro-Zone cities... Any improvement in the sector is dependent on the outcome of NAMA and with the possibility that a number of properties may come to the market in the next year, together with the large level of unoccupied offices, the outlook for Irish commercial property looks bleak for 2010." Dead right!
Lastly, if you want to see what I mean by weaker earnings outlook for Ireland Inc on the back of our weak economy - see the end of Dolmen's note with yeild estimates for Irish equities. Marvelous - this does really support the idea of 10% growth for property markets and 100% increase in banks shares that Bloxham chief has predicted for us. I wouldn't hold my breath for that kind of a ride...
Showing posts with label Irish equity portfolio. Show all posts
Showing posts with label Irish equity portfolio. Show all posts
Monday, January 11, 2010
Saturday, October 31, 2009
Economics 31/10/2009: Latest data on Irish Resident Foreign Assets Holdings
CSO released (yesterday) latest data on Resident Holdings of Foreign Portfolio Securities. Charts below illustrate the trends.
First the aggregate stuff:
Notice that 2006-2007 overall trend implies peaking of foreign assets holdings by Irish residents at 2007, and a decline in asset holdings in 2008 to the levels below those recorded in December 2006. This is clearly reflective of the general external crisis in asset markets and is expected to record even further and more dramatic deterioration in 2009. Holdings of bonds and notes also declined from a peak on 2007, but less dramatically in relative terms - reflective of flight to safety into public debt markets by many investors. Again, similar trend to global. Equity holdings took the most sever beating, in line with global markets.
One interesting point is that Money Markets instruments holdings (not plotted above) have also declined in 2007 and 2008. This suggests two idiosyncratic developments in Ireland:
There is a clear indication here that Irish resident portfolia are heavily geared toward UK and US assets (nothing surprising, as these allocations are only slightly ahead of global diversified portoflia bias toward these two countries). There is also present a relatively heavy allocation bias toward European and EEC securities. However, the real area of geographic diversification imbalance is found amongst the middle income (BRICs) and emerging markets allocations.
Ditto for bonds and Notes:
In terms of Equity allocations:
There is a clear imbalance in Irish resident positions with equity exposure to only a select subset of OECD economies. There is virtually no presence of high growth economies in the overall equity portfolios in Ireland.
First the aggregate stuff:
Notice that 2006-2007 overall trend implies peaking of foreign assets holdings by Irish residents at 2007, and a decline in asset holdings in 2008 to the levels below those recorded in December 2006. This is clearly reflective of the general external crisis in asset markets and is expected to record even further and more dramatic deterioration in 2009. Holdings of bonds and notes also declined from a peak on 2007, but less dramatically in relative terms - reflective of flight to safety into public debt markets by many investors. Again, similar trend to global. Equity holdings took the most sever beating, in line with global markets.One interesting point is that Money Markets instruments holdings (not plotted above) have also declined in 2007 and 2008. This suggests two idiosyncratic developments in Ireland:
- risk reductions took place in 2007, well before the full-blown global crisis of 2008, but in line with a financial markets crunch that began in August 2007;
- both cash and equities were likely to have been used by Irish residents to offset leveraged losses (these are the most liquid instruments that can be used readily to meet margin calls) and this process was on-going in 2007, suggesting serious leveraging exposure to derivatives markets in Irish resident portfolios - a conclusion that would time declines in money markets instruments back to August 2007, when derivatives markets collapse triggered subsequent run on equities).
There is a clear indication here that Irish resident portfolia are heavily geared toward UK and US assets (nothing surprising, as these allocations are only slightly ahead of global diversified portoflia bias toward these two countries). There is also present a relatively heavy allocation bias toward European and EEC securities. However, the real area of geographic diversification imbalance is found amongst the middle income (BRICs) and emerging markets allocations.Ditto for bonds and Notes:
In terms of Equity allocations:
There is a clear imbalance in Irish resident positions with equity exposure to only a select subset of OECD economies. There is virtually no presence of high growth economies in the overall equity portfolios in Ireland.
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