Irish vote triggers risk premia hikes

Jonathan Boyd
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Irish vote triggers risk premia hikes

Noel O'Halloran, CIO at KBI Global Investors in Dublin, has said the key impact of the unexpected gains made by Sinn Féin (SF) in the general election in Ireland could be felt by domestic banks and property related businesses, suggesting that the market reacted rationally when it sold down shares in such companies through Monday 10 February.

Speaking later on that Monday, while the final count for seats in the country's Dáil Éireann, the lower house of Parliament, were still ongoing according to the single transferable vote system of proportional representation, O'Halloran noted that while it looked like the Fianna Fáil (FF) party would be the largest by seats,  SF looked set to be "all but as big as FF" .

This was confirmed later, with FF on 38 seats, SF on 37, and Fine Gael (FG), the incumbent governing party, on 35 seats.

Noting that dominance in the Parliament for the past century had effectively been carved up by FF and FG, the numbers now attained by SF meant that  "any combination of those two [FF & FG] would not make a majority of 80 [the number of seats required to form a majority]," O'Halloran said.

"We don't know the arithmetic of what forms the next government, but it will be dogged by uncertainty. FG and FF have ruled out being in power with SF, but populism has spoken, so how can they form a government excluding them - that may be the moral debate in either party right now."

Another question will be whether SF itself tries to form a government, and if so, with which other party.

Brexit query

Given the role of the Republic of Ireland in the first phase of Brexit, it might be thought that this significant change in the Irish Parliament could impact on the country's approach going forward. 

However, O'Halloran does not believe so.

"In terms of Brexit, that's the easiest one to answer. There has been a view across all parties in common regarding Brexit, so wouldn't expect any change in attitude to that."

"Within that, the heavily lifting Ireland had to do was in phase one. Arguably, phase two is about other issues, eg, fisheries access, and in this the Irish role could be materially less."

Irish investors

While Brexit may not be affected by the election outcome, this is less the case regarding Irish investors and/or investments in Ireland.

Given the relatively small market at home, Irish investors are pretty diversified globally, when it comes to equities; for example, Irish pension funds have less than 1% in Irish equities, O'Halloran notes.

"Withing the Irish equity market, and we have seen this today [Monday, 10 February], sectors that have reacted are banks and property - with five to high single digits down - affecting banks, home builders, some commercial Reits. This reflects the market rightly putting some risk premium on those two sectors in particular."

"When you get to the three parties, particularly SF versus FF and FG, there is chasm in policies in terms of what each side deems red lines. Generally, Irish politicians have been good at forming coalitions over the decades, but this will be most difficult ever. If look at the more left-wing policies of SF, there is a chasm to the others. It may be a matter of weeks or months before a government is formed."

Key differences noted by O'Halloran include SF's pledges on capping mortgage rates, increasing bank levies, interfering with central bank process in terms of maximum mortgage rates that a bank can charge, as well as the issue of deferred tax assets. This latter point is left over from the time of the global financial crisis, and SF has said in its manifesto that it would abolish this, which would hit banks.

In the property sector, SF has spoken about increasing stamp duty to 12.5%, as well as a rent freeze. This is notable because rental growth has been driving the residential and other property sub-sectors, O'Halloran suggests. This is also notable because as distinct from equities or fixed income, the one area people tend to have domestic exposure rather than international is in property, he adds.

In terms of positives, there remains unanimity across the political spectrum on the 12.5% corporate tax rate, which is a positive for foreign direct investments, which are a "lifeblood of the economy".

"That said, any foreigners may sit back and wait a bit until the uncertainty dies down."

"The election is of historical significance it's fair to say. We've had government dominated by two parties for the past century, and it is the first time a third party has really had an impact."

 

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Jonathan Boyd
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Jonathan Boyd

Editorial Director of Open Door Media Publishing Ltd, and Editor of InvestmentEurope.