Investors should be ready for the Celtic Tiger to start roaring again

St Patrick’s Day tomorrow is a source of celebration and a reminder to investors here of the potential and challenge offered by Ireland.

Too often Ireland has been overlooked in balanced portfolios, despite its proximity and rich historical links with the UK which have ensured consistent trade. Last year the UK exported £1.5bn more in goods to neighbouring Ireland than to China.

Ireland – like Greece and Spain – suffered greatly from the recent economic downturn, drastically affecting the housing market and banks. It received 67.5bn euros bailout in 2010 but has shown a more positive recovery than any of the other invalid states, primarily driven by high levels of direct foreign investment.

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It has a relatively low level of corporation tax at 12.5 per cent, which has encouraged development of three key sectors: financial services, healthcare and technology.

The International Monetary Fund is forecasting GDP growth of 1.4 per cent this year. Demand, notably by consumers, remains weak, partly because of the austerity measures and a banking system that has greatly reduced lending in order to shore up balance sheets.

Unemployment is forecast to fall slightly this year but will probably remain above 14 per cent by the end of 2013. However, the European Central Bank recently delivered better news when it eased the terms of the 28bn euros repayment which related to the nationalisation of both the Anglo Irish Bank and Irish Nationwide Building Society.

The loan was costing 3.1bn euros a year in interest. Long-term bonds averaging slightly above three per cent have replaced promissory notes which carried an interest rate over eight per cent. The downside is that this will take Ireland 40 years to repay the debt by comparison with 13 years for the original terms.

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“This is an important step as Ireland leads the way in showing the rest of Europe how to navigate out of a major financial crisis. The change in the terms should enable Ireland to get its banking system back on to a stable footing sooner rather than later,” says Adrian Lowcock of private client brokers Hargreaves Lansdown.

The Irish Government is still trying to disinvest. In February it sold the country’s largest life and pensions company, Irish Life, for 1.3bn euros to the Canadian life insurer, Great-West Lifeco. This was the same amount it had paid last year to take over the former insurance arm of the bailed-out Irish Life & Permanent.

When the sale is completed in July, it should reduce the Irish national debt to below 120 per cent of GDP. The Irish nation is paying heavily for its economic troubles. Income tax and VAT have risen sharply, public sector pay reduced by ten per cent, benefits have been cut and the minimum wage slashed by 12 per cent.

To compound these matters, there is a new property tax, an increase in social insurance and a seven per cent reduction in child benefit.

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There is happier news on the banking side with even troubled ones like NAMA succeeding in making early repayments on borrowed funds.

For investors seeking a broad exposure to the Irish stock market, Martin Payne, Leeds-based director of stockbrokers Brewin Dolphin, suggests the iShares MSCI Ireland Capped exchange traded fund. This acts like a tracker index in replicating the performance of the Irish market as closely as possible but unlike an actual tracker fund can be traded on the stock market.

The ongoing expenses are extremely low at just 0.53 per cent. However, the Irish stock market is quite concentrated with the top 10 companies by market capitalisation representing around three-quarters of the index.

The largest positions are CRH, a building material specialist, Ryanair and the Kerry Group. The latter sells food ingredients such as flavours and seasonings to food processors and the pharmaceutical industry. It is favoured by Chelsea Financial Services.

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The Irish Stock Exchange was founded in 1793, integrated with London 1973-1995, and then became independent again. There are three markets:

n main securities market;

n Enterprise Securities Market (known as ESM) for growth companies;

n Global Exchange Market, which is a specialist debt market for professional investors.

The ESM is comparable with the UK’s Alternative Investment Market (AIM). Fyffes, the banana distributor, is probably its best known member with a quote also on AIM.

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Other key ESM members reflect not only Irish agriculture – Continental Farmers and Donegal Creameries – but global trade: Great Western Mining, Merrion Pharmaceuticals, Ovoca Gold.

With any funds, check the actual proportion invested in Ireland as some titles can be misleading. Henderson’s UK and Irish Smaller Companies, which was formerly a Gartmore fund, now has a very low investment in Ireland but has shown 24.4 per cent growth in the last year.

Payne tips F&C Irish Equity, which was launched in 1981 and has risen 20 per cent in a year although by a more modest 7.3 per cent over three years. It holds assets of 42.2m euros.

This collective is weighted primarily in industrials (40.1 per cent), food (23.5 per cent) and the consumer sector (22.6 per cent). It holds such quality stocks as C&C (the drinks manufacturer which owns Magners cider) and ICG (shipping and transport) and recently added Grafton and Smurfit Kappa (world leader in paper-based packaging).

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Several funds have small but significant holdings in Ireland. Three on the ‘buy list’ of Chelsea Financial Services are Fidelity UK Smaller Companies (10.3 per cent in Ireland), Henderson European Growth (5.3 per cent) and Liontrust European Growth (3.2 per cent). All allow monthly subscriptions, which is a good way to reduce volatility, and can be held in an ISA or SIPP.

Better Capital has many business interests in Ireland and is tipped by private client stockbrokers Killik. Better Capital has acquired such household names as Everest, Jaeger and Reader’s Digest.

It provides equity investment up to £50m for mid-market companies with £25m-£500m turnover which require restructuring operationally and financially.

In January, Better Capital announced it would join the National Pensions Reserve Fund of Ireland to acquire a portfolio of “distressed businesses”.

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They offer two closed-ended funds (like investment trusts), quoted in London; Better Capital 2012 is the one with Irish holdings.

For individual stocks, Payne likes Tullow Oil. Although the company has its primary listing in London, it has a secondary listing on the Irish Stock Exchange in euros.

Austerity may be the current watchword but be prepared for when the Irish economy bounces forward.