Portfolio Manager Commentary

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The New Ireland Fund, Inc. Portfolio Manager Commentary Quarter ending April 30, 2017

Performance Review

The New Ireland Fund Inc.'s ("Fund") returns are summarized in the table below:

  Period to April 30, 2017

Benchmark* Return

IRL NAV Return

IRL NAV Relative to Benchmark





  Fiscal Year to date




  Calendar Year to date




  1 year




  3 years




  5 years




  Since inception




*Benchmark is the ISEQ up to July 30, 2015, combined with MSCI All Ireland Capped Index (“MSCI Ireland”) from August 1, 2015.

The performance of the MSCI Ireland Index compared to peer global indices generally held its own over the quarter with a strong absolute performance. Ireland still lags on a 12-month basis.

Equity markets rose strongly during the quarter. Emerging markets, followed by Europe, were the strongest regional markets, while Japan and the UK were weakest. As noted above, Ireland held its own. In terms of sectoral performance, IT was the best performing sector, while Energy was the weakest. Economic data were particularly strong during the quarter, and this appears to have been one of the primary drivers of the gains in the equity markets. European bonds were weak, affected by the strength of the economy. Irish bonds were equally affected.

Politics continued to dominate investor concerns as President Trump started the year with a series of executive orders, increasing the risk premium in markets. The failure to get a healthcare reform bill through Congress also raised concerns over prospects for Trump’s economic reforms. The UK started formal proceedings to leave the European Union. UK Prime Minister Theresa May plans for a hard ‘Brexit’, and has set the stage for long negotiations with the EU. European elections in Austria and the Netherlands rejected anti-euro politicians, perhaps indicating that the breakup of the Eurozone may not be as imminent as some scaremongers predicted. Similarly, all eyes were on the upcoming French Presidential election.

Irish Market Review

The IRL portfolio started the new calendar year with a stronger quarter. The market was driven mainly by a bottom up eclectic mix of individual stock returns rather than a macro top down driver. Brexit has remained an overhang on the market since last summer and since the US Presidential election a further uncertainty has raised more questions for Ireland’s outlook. However, there are also opportunities and the bottom up strength of earnings growth from Irish companies over the quarter has helped propel stocks higher once again.

Outperforming stocks during the quarter had a more stock specific feel rather than any distinct top down or sectoral leadership to them. On the underperforming side it was similarly more attributable to stock specific underperformance.

Major stock capital moves (US$ returns):

  Quarter ending Apr 30, 2017       (MSCI IRL +9.5%)

  Strongest portfolio returns

  Weakest portfolio returns

  Hostelworld Plc


  Malin Corp


  Amryt Pharma


  Bank of Ireland


  UDG Healthcare


  Greencore Plc


  Kingspan Group


  Applegreen Plc


  Origin Enterprises


  Smurfit Kappa


Irish Economic Review

GDP grew by 6.6% over the year to Q4 of last year, while GNP grew by an even faster rate of 10.1%. However, as discussed in several previous quarterly reports, GDP and GNP are no longer as useful as they once were in measuring the real change of activity in an economy, such as Ireland’s, which is very open to international capital flows. Fortunately, there are a range of other indicators which can be used to give us a good sense of what really is happening in the economy, as below.

Retail Sales
Retail sales continue to show solid growth, but the growth rate fell to much more modest levels in recent months. That is not particularly surprising, however, when we consider the very high rate of growth seen previously, combined with the heightened economic uncertainty experienced since the UK’s decision to leave the European Union.

Consumer Confidence
Consumer confidence is at a high level, but has flattened out recently. As with retail sales, this is most likely not a particular cause for concern, given the very high absolute level of confidence.

Manufacturing and Services Sectors
Business confidence fell quite sharply in the immediate run-up to, and the aftermath of, the UK electorate’s vote to leave the European Union. But, after a trough in July, it has recovered quite well and now is at much the same level as seen in 2015.

Labor Market
There continues to be a steady trend downwards in unemployment. The unemployment rate has declined to 6.2% (April data), down from a peak of 14.9%. Ireland’s unemployment rate is now substantially below the Eurozone average.

Credit Growth
Credit to households and non-financial corporations continued to contract, as repayments exceeded new lending. The annual rate of change in loans to households, excluding mortgages, was -11.6% in March, in a pattern that has been in place for several years now while the economy deleverages. The overall pattern is that while growth remains quite strong, it is certainly not being financed by debt.

Government Finances
The government deficit was about 0.9% GDP in 2016, a one percent of GDP improvement relative to 2015. For 2017, we expect that there will be small deficit of perhaps one quarter of one percent of GDP. The debt/GDP ratio peaked in 2013, at about 120%, and we estimate it stood at 76% by the end of 2016. The government deficit is low by international standards, and the Government forecasts that the deficit will be entirely eliminated by 2019.

The decision of the UK to leave the European Union may have significant ramifications for the Irish economy. The UK is likely to exit the customs union, the Single Market and the European Union itself. This is the least welcome option for Ireland. The scale of the negative impact is likely to be noticeable, but not dramatic. We estimate that growth may be about 0.5% lower per year, which is relatively modest for an economy that is likely growing more than 5% per annum.

Irish Economic Outlook
For 2017, the Central Bank of Ireland is forecasting 3.5% growth as capital spending rebounds somewhat but consumer spending comes under pressure from the uncertainty surrounding Brexit. We believe that these forecasts are somewhat overcautious and expect stronger growth, in the region of 5%, although we recognize that risks remain elevated given the Brexit situation.

Global Market Outlook

We remain constructive on the outlook for global equity markets. After many years where global central banks with their low interest rates and liquidity were the driving force for market returns, we expect that the next stage will see central banks take a step back as market direction will be driven by stronger and more sustained global economic growth and by stronger earnings and dividend growth. While remaining 'glass half full' on the outlook from here, we reiterate that this now eight-year-old bull market is a hurdle race rather than an easy sprint.

Irish Market Outlook
We remain constructive. Despite political clouds from Brexit and US policy, we remain confident that for 2017 corporate earnings growth will be a meaningfully strong driver of the market. More confidence in earnings growth should also help drive the market towards a preference for value oriented stocks and cyclical sectors. Ireland should do well in this scenario.

Ireland’s growth story still is stronger than most and from a stock-market point of view has attractive valuations and earnings growth that is stronger than many. Corporate activity should be stronger during coming quarters and hopefully some new IPO’s such as Allied Irish Banks may come to market. The corporate sector is in good health, with plenty of cash on its balance sheet and relatively little debt. We expect continued M&A activity and if shares become too cheap companies themselves may do more aggressive share buy-backs of their own stock.

For the portfolio, we remain confident and do not at present envisage major changes to the portfolio structure. We continue to favor stocks with strong cash flows, attractive balance sheets and strong and well managed businesses.