Noel O'Halloran is worried about Brexit, but maybe not as much as a few months ago. The chief investment officer of Dublin-based KBI Global Investors, manager of the New Ireland Fund, is committed to an Irish stock market and economy that was likely to get hit hard as events in London and Brussels tumbled toward the United Kingdom leaving the European Union without a deal to keep nearly-free trade flowing.
What a difference a few months makes.
With prospects for a no-deal Brexit seemingly fading, Irish markets are recovering, and assessments of the Emerald Isle's Brexit hit are moderating. The Irish Stock Market ISEQ Index is up 16% since Aug. 20, after a 13% drop from the springtime. Assessments of the risk Ireland faces from a hard Brexit are still dire — Oxford Economics says it could reach as much as 2.5% of the nation's output. But odds that will happen are dropping, said Martin Beck, lead economist at London-based Oxford.
"It will be a hit, in very specific sectors," said O'Halloran, who noted that over the last 12 to 18 months investors have shied away from Ireland due to the political uncertainty. "But most of those sectors are not listed on the stock market so it shouldn't affect the stock market as much as it has."
The U.K. has close political and economic ties with its former Irish colony. Independent since 1922, Ireland still sends 15% of its exports to the U.K., trailing only its exports to the United States, where the 35 million Americans of Irish descent dwarf the Irish population of 4.8 million. About 40% of Ireland's food and drink exports go to the U.K., and one of its largest publicly traded companies, Kerry-based Kerry Group, is a major meat producer. And more than half of other Irish exports pass through Britain on the way to Europe or other destinations, according to Oxford.
That leaves Ireland, an EU member with no plans to exit, subject to a host of potential problems that Brexit could bring. Some are obvious, like new tariff barriers. Others are less so: The delays that come with having to do customs searches at the border of Ireland and Northern Ireland, which is part of the U.K., could add hours to shipping times and keep agricultural products from getting to end markets while they're as fresh as they could be.
Ireland is also vulnerable because it's so small. Its population of 4.8 million is about equal to that of Alabama, and its gross national product, adjusted for purchasing power, is about the size of Missouri's, which is 1.5% of the U.S. economy.
The country's biggest exports to Britain are agricultural products, said Thomas Sgouralis, who follows Ireland's economy for Moody's Analytics.
"The no-deal Brexit will hit exports hard,'' he said.
But the Irish market and the Irish economy are not really the same thing, O'Halloran said. Most of the market's value is tied up in a relative handful of shares, many in construction, banking and building products that are not expected to suffer much. Domestic Irish service businesses will feel less impact from Brexit if and when it happens.
For example, more than 23% of the $62 million iShares MSCI Ireland exchange-traded fund is invested in one company, CRH plc, which sells asphalt, cement and construction "aggregates" such as granite and limestone. CRH is also more than 20% of O'Halloran's fund. iShares' second-biggest holding is Kerry Group, a $7.4 billion-a-year multinational maker of food products including Naked Glory meat substitutes and a range of sausages and food additives. Kerry gets 52% of its sales from the Americas, according to the company's annual report. The top 10 stocks, including RyanAir and banking leaders AIB and Bank of Ireland, comprise 79% of iShares' portfolio.
Meanwhile, a hard Brexit is looking less and less likely, Beck said.
British Prime Minister Boris Johnson was close to a deal with the EU before deciding to call for a Dec. 12 election to demonstrate support for his Conservative Party, Beck said. If Conservatives win in December, remaining disagreements within the party are likely to be swallowed up in the party's fresh mandate. And if the rival Labour Party prevails, it is likely to call for a new referendum on Brexit, Beck added.
The tentative deal Johnson is backing includes a year-long period for Britain to transition out of the EU, and extends the free trade relationship between EU members like Ireland and the U.K. for even longer. That should give the parties time to work out post-Brexit rules that limit the damage. "You'll get a deal or no Brexit,'' Beck said.
The Irish market's rally means that the pessimism about Brexit is going away, said O'Halloran, whose fund is up 12% since Aug. 11. Indeed, it may even end up a positive, since 300 financial-services companies including Barclays and JPMorgan Chase are seeking, or recently received, licenses to operate in Ireland in case they want to relocate English-speaking bankers there. "The unemployment rate will not tank drastically,'' Sgouralis said.
That's slightly different than saying Irish stocks are a screaming buy, according to Beck. Many of the businesses in Ireland's index never stood to be Brexit victims, so their fundamentals are little changed. And, he said, some perspective is needed. Ireland's economy is set to grow about 28% by 2030 if Brexit does happen, or happens on easy terms: a number adjusted to subtract the way reported sales of U.S. companies that base European divisions in Ireland for accounting purposes, but do little business there, inflate its reported economic growth. On that basis, it's likely to grow about 26% if talks fall apart and a hard Brexit happens after all.
"There are still going to be barriers [with a soft Brexit deal] but not as big," Beck said. "They'll be pretty trivial in the long run."