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Tuesday Newspaper Review - Irish Business News and International Stories - - April 23, 2013
By Finfacts Team
Apr 23, 2013 - 8:41 AM

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The Irish Independent reports that the European Commission president has admitted austerity is not working and opened the possibility of quantitative easing -- or printing hundreds of billions of euro.

The commission's most senior official has given the strongest signal yet that the Europe-wide policy of spending cuts and tax hikes could be relaxed in an effort to kickstart economic growth.

It comes as the Department of Finance admitted Michael Noonan would have ¿1bn of leeway available to potentially soften the Budget next October.

New figures also show Ireland's budget deficit was better than previously thought and well ahead of the target under the bailout deal.

In a speech in Brussels, Jose Manuel Barroso said the EU should place a greater emphasis on policies that stimulate growth and less on so-called austerity measures, such as cutting government spending.

"While I think this policy (austerity) is fundamentally right, I think it has reached its limits," the commission president said.

"A policy to be successful not only has to be properly designed, it has to have a minimum of political and social support."

But austerity is working in Ireland, he said, adding: "It is a painful programme, but it is working."

Government sources said Mr Barroso's speech was "significant", as it may signal a shift in EU policy.

"In terms of the troika, it moves the commission closer to the IMF," a senior source said.

"That strengthens the hand of the Government in terms of negotiations. The leaders of two of the three elements of the troika are saying there has to be more flexibility."

"But it is also a question of what he is going to do to back it up."

Mr Barroso's speech is being seen as a sign that bigger countries such as France and Spain could now be given longer to get their spending under control.

Currently, all European governments are committed to bringing budget spending deficits to a maximum of 3pc of the size of their economies by 2015.

Lack of popular support means austerity programmes may start to be scaled back.

"We have to have tailor-made solutions for each individual country. We cannot apply a one-size-fits-all programme to the European countries," Mr Barroso said.

However, Mr Barroso's comments on austerity were tempered by those from German Chancellor Angela Merkel in Berlin – who said Eurozone members must be prepared to surrender more authority to European institutions if the continent was to avoid decline.

Europe must have "the last word", Mrs Merkel said, in the latest signal that Berlin backs stricter Europe-wide controls over national budgets.

"We need to be ready to accept that Europe has the last word in certain areas. Otherwise we won't be able to continue to build Europe," she added.

European leaders are due to meet in June to discuss moving towards fiscal union.

In further good news, Ireland's budget deficit was 7.6pc last year, according to new figures released yesterday.

It is down from a peak of 30pc in 2010 and well ahead of the target under the bailout deal to cut the overspending to 8.6pc in 2012. The deficit is expected to fall to 7.4pc this year.

The Department of Finance said it still plans to bring overspending under the 3pc target that was set by Europe within two years. But it conceded yesterday that the Government now has an extra €1bn to play around with when it is putting together the October Budget.

A department spokesman told the Irish Independent that the €1bn saving from the promissory note deal could provide some flexibility, but stressed that it is up to the Government.

"There is €1bn that's sitting out there by way of an adjustment," he said. "It creates a bit of flexibility that could be used.

"That's a matter for the Government. They wouldn't take a decision until later in the year, until closer to the Budget."

The Government must seek approval from the troika for any easing in October's Budget, so a change of heart in Europe could have a direct importance.

The financial situation was boosted by better-than-expected budget figures for 2012 and the latest European deal that will give us more time to repay bailout loans.

Flaws

Mr Barroso's comments are the latest sign that a wider shift in economic thinking is under way.

The International Monetary Fund last week said the UK should ease back on its austerity programme.

A study published last week by three economists at the University of Massachusetts found basic flaws in an influential paper by US economists Carmen Reinhart and Kenneth Rogoff that said high government debt levels hurt economic growth.

Political support is also disappearing quickly.

Spanish finance minister Luis de Guindos said on Sunday that new budget plans to be presented later this week will focus on economic growth and reduce the stress of spending cuts.

New figures show that France and Spain fell short of their budget deficit goals last year.

France's 2012 budget deficit was 4.8pc of economic output, against a 4.5pc target.

The Irish Independent also reports that the country's biggest bank workers' union is to vote on a motion that could set it on a collision course with Finance Minister Michael Noonan's demand for 'Croke Park II' style pay cuts at bailed out lenders.

Delegates from the Irish Bank Officials Association (IBOA) will be asked to vote on a motion that calls on the union to "resist any further attempts to reduce or alter members' terms and conditions", including benefits and pensions, at the union's annual conference that takes place on Friday and Saturday this week.

The motion was submitted to the annual conference by the union's executive committee and by branches in Cork, Dublin, Tralee and Belfast.

It follows Mr Noonan's demand for cuts of between 6pc and 10pc in the wage and pensions bills of the three remaining bailed out banks – AIB, Bank of Ireland and Permanent TSB.

The chief executives of the banks are each due to present the minister with their plans on how the savings can be achieved by the end of this month.

The minister is understood to be insisting that the cuts include some direct cuts to wages and allowances as well as changes to the funding of pensions and pension entitlement for those at the banks.

Conflict

If it is passed this week, the IBOA motion on pay would put the union in direct conflict with that plan, though a general motion would stop well short of direct industrial action at any single bank.

According to the wording of the motion that delegates will consider is that there is a double standard in operation at the banks. Pay and pensions of senior bankers is protected, while contracts of ordinary staff are ignored, it says.

Mr Noonan's call for cuts in the wage bills at bailed-out banks has come on top of talks between management and unions at AIB and Bank of Ireland over gaping deficits in the big banks' pension pots.

Mr Noonan has said that he will abstain when shareholders at Bank of Ireland vote on the pay packages of chief executive Richie Boucher and other directors at the bank's annual general meeting tomorrow.

The Irish Times reports that

The Government will have to raise the future retirement age past 68 with mandatory enrolment in private pension schemes if it is to ensure sustainable, equitable cover into the future, the Organisation for Economic Co-operation and Development (OECD) has said.

Launching its review of Irish pension provision yesterday, the most radical to date, the organisation said Ireland’s position on the pensionable age may not go far enough.

It is currently 66, and is due to rise to 67 by 2021 and to 68 by 2028. “The good news is that financial sustainability isn’t, or doesn’t, seem to be an insurmountable challenge for Ireland,” said the principal author and director of employment, labour and social affairs at the OECD, John Martin.

“But we do point out in the report that it may be necessary to envisage further increases in the State pension age beyond 68 if we are to really bed in financial sustainability.”

“Courageous” moves had already been taken in raising the age, he said. He did not specify what further increase might prove necessary.

Ireland’s situation compares well to other OECD countries but today just 51 per cent of workers between the ages of 20 and 60 have pension coverage.

“We believe that mandatory enrolment of workers in private pension schemes would be preferable to auto-enrolment in order to increase coverage significantly and we believe that equity requires greater alignment of the pensions of public and private sector workers,” said Mr Martin.

Minister for Social Protection Joan Burton, who commissioned the report, said the principal goal was to ensure “older people receive a safe and adequate income that will maintain them and their families in retirement”.

The document, titled Review of the Irish Pension System , also recommends that public servants move away from the current final-salary pension scheme and that all private sector workers be forced to invest in private pensions.

The “simplest, less costly and most effective way to increase coverage” is through the introduction of mandatory pension savings. It also suggests that “healthy” employers should not be allowed to walk away from pension liabilities. Ms Burton said no major overhaul could be brought in until the economy is in a greater state of recovery.

The Irish Times says that if you had invested in the US market pre-crash, held tight and decided against crystallising your losses when the market plummeted, by now you would have recovered your money – and even made some gains, thanks to the power of dividends.

If, on the other hand, you had opted for the Irish market back in 2007 and have been content to wait it out and sit on your investments, you will have made little headway and will still be nursing sizeable losses. Indeed, while markets such as the S&P 500 are touching new highs, despite a recent resurgence the Irish market remains far off its high of February 21st, 2007, when it reached 10,041. Peak to trough, the Irish market has collapsed by more than 80 per cent. This means that to recover its former highs, it will need to advance by a staggering 400 per cent.

At least it’s going in the right direction. Last year, the Iseq was one of the bestperforming indices in Europe, posting an annual return of 17.1 per cent and out-performing the FTSE 100 (+5.8 per cent), the S&P 500 (+13.4 per cent) and the FTSE E300 (+13.2 per cent).

So far this year, it has continued its good run. In the first three months of 2013, the Iseq jumped by 16.5 per cent, surpassing the 4,000 mark in early April, the first time it has done so since the collapse of Lehman Brothers in September 2008. Overall, the Iseq is now up by more than 100 per cent since its lows of March 10th, 2009, when it fell back to 1,880.


Who is leading the charge?

“The recovery has been led by the food sector,” says Ian Quigley, director of investment strategy at NCB stockbrokers, pointing to names such as Glanbia and Kerry, which have recently reached new highs.

Other strong contributors to the resurgence include Paddy Power and Ryanair. The latter has been tipped to advance to €7.50 by Davy stockbrokers on the back of its recent aircraft purchase.

Can the Irish market be restored to its former glory?

Strong performances by these stocks alone will not see the Iseq return to its past highs, however, and if you’re content to sit and wait for the market to recover, you might find yourself waiting for quite some time.

The stocks that drove up the market in the boom are still the ones struggling. “If you’re waiting for those to recover, you’ll be a long time waiting,” says Aidan Donnelly, an investment analyst with Davy, adding: “They’re still miles off their highs, and some will never get back to where they were.”

For Quigley, it would be “naive” to think the Iseq could get back to 2007 levels.

CRH peaked at €35, but is currently trading at €16, while Kingspan, which hit its high at about €22, still has a long way to go given it is currently trading at about €9.30. It is a similar story for another construction stock, Grafton, which, at €5, is still far off its previous high of €12.

And that’s not even considering the decimation of banking stocks. “The ones that have suffered the most probably won’t get back to where they were,” says Donnelly.

Is it amore sustainable index?

In pre-boom times, the Iseq was notable for being overweight in construction and financial stocks. The lack of diversification did not put investors off.

“People probably had a belief that they knew the companies, so they felt more comfortable with them and wanted to stay where they were,” says Donnelly.

Today, however, “it’s a very, very different market”, according to Donnelly.

So does this mean that the new-look Iseq, which is almost devoid of the banking stocks that precipitated its decline, is a better prospect for new investors looking for a home for their money?

Well, financials may no longer account for a third of the index, but it is still not a well-diversified index.

“Even today, you’re looking at the top four stocks accounting for a little over 50 per cent [of the market] and the top 10 accounting for 80 per cent,” says Donnelly.

In today’s world, this is not enough to entice investors to make a sizeable allocation to the index.

“The last few years have taught people lessons that diversification on a geographic and sectoral basis is absolutely key,” says Donnelly. “If you look at the sectors that are there, there are so many sectors that you don’t get exposure to. There’s no telecoms or utilities, for example.”

“When we look at equity investing, the fact that we’re in Ireland doesn’t have any relevance,” says Quigley.

Of course, this is not to say that there are not some Irish companies that should be worthy of an investor’s attention.

“It’s about making sure that it’s not just solely Ireland, that you’re getting exposure to different markets. Some Irish stocks do have a part to play but it’s literally on a stock-by-stock basis. There are selective opportunities in there for investors to look at,” says Donnelly, pointing to stocks such as Kerry and Glanbia.

Quigley agrees that Irish companies do offer potential – but only as part of a broader investment strategy. “As part of a portfolio it’s legitimate, but you need to be more diversified than that,” he advises.

Are there other opportunities out there?

With markets such as Japan and the US reaching new highs, and the S&P 500 rebounding by 130 per cent since its low in 2009, sitting on your losses in the Irish market could mean a “huge opportunity cost” as other investments pass you by.

“We have seen quite a strong bull market that not a whole lot of people have participated in,” says Quigley.

Analysts believe that despite the recent bullish run by global markets, plenty of upside remains. “Our overriding belief is that as an asset class, equities look the most attractive. I don’t think that valuations look particularly stretched,” says Donnelly, noting that the US market is currently trading on 14 times earnings.

Back in 1999-2000, it peaked in the 20s.

The Irish Examiner reports that the Irish Stock Exchange has asked the Commercial Court to rule whether or not decisions made by it may be judicially reviewed.

It contends they may not.

Mr Justice Peter Kelly yesterday fixed Jun 25 for determination of that matter as a preliminary issue in an action by the liquidator of Bloxham stockbrokers against the Irish Stock Exchange.

The liquidator claims Bloxham’s €6m value on the exchange was set at nought after its exchange membership was revoked. Mr Justice Kelly had previously queried why two sets of proceedings had been brought by liquidator Kieran Wallace challenging the revocation decision made last December.

The judge suggested the matter might better proceed via one action rather than via both judicial review proceedings and plenary action, as of now, and asked both sides to consider that.

He was told yesterday by Lyndon MacCann, counsel for the liquidator, that his side had written to the ISE solicitors suggesting the public law issues could be addressed in the plenary case.

The ISE was not agreeable to that and wanted the matter struck out on the basis of its argument there was no public law element at all, counsel said.

The judge said he had made the suggestion but it had not met with approval. In the circumstances, he granted an application by Paul Sreenan, counsel for the Exchange, to fix for trial, as a preliminary issue, whether the ISE may be subject to judicial review.

Mr Sreenan also indicated his side may proceed with an application to have the liquidator provide security for the legal costs of the case. That matter will be addressed later.

Bloxham, a limited partnership, was ordered to cease trading by the Central Bank last summer after it was revealed it was undercapitalised.

The partners applied to have it wound up saying they saw no prospect of an improvement in its trading position and the High Court later confirmed Mr Wallace as liquidator.

The firm’s largest creditors included National Irish Bank, owed €8.5m, and the Revenue Commissioners, owed €2.3m. Bloxham’s held membership of the Irish and London stock exchanges.

Last December, the ISE revoked its membership.

Mr Wallace claims the ISE, through its head of regulation, Daryl Byrne, failed to give sufficient regard to the financial impact on the firm of being prevented participating in the surplus that would arise in the proposed re-organisation of the Irish Stock Exchange.

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