Five Ways to Bet On Ireland

If fortune favors the brave, is this the time to take a bet on Ireland? And if so, how can you do it?

The idea of investing in Ireland right now isn't as crazy as it sounds. For investors, crisis usually means opportunity. The bailout of the suddenly unlucky Irish, and the arrival of the International Monetary Fund to administer their patented brand of financial emetic, needn't be as bad news for the markets are some might assume. It's hard to remember now, but the "tiger" economies of southeast Asia went through something even more severe back in 1998. Anyone who braved the maelstrom and invested in the Thai, Malaysian or Indonesian markets at the time has made a fortune since.

But if you are a U.S. investor looking to take a gamble on the Irish, watch out. You need to know what you are buying. Here are your five main choices:

1. The iShares MSCI Capped Investable Market Index Fund. In normal circumstances, this kind of low-cost exchange-traded fund would be the way to go, offering cheap access to a country's entire stock market. And it would save you from the problems of having to pick individual stocks–a challenge even in normal times.

But take a look under the hood first. The Irish stock market is unusually small, and heavily skewed towards a few big companies. So is this fund. Some 23% of the fund is invested in CRH, a multinational building supplies and aggregates company and 14% is invested in food ingredients company Kerry Group. These stocks have little relation to the Irish economy. They just happen to have their historical roots there, and their market listing in Dublin. Most of their business is overseas. Their stocks haven't collapsed in the crisis. So you aren't getting a firesale price.

2. The New Ireland Fund. This is a closed-end fund, a mutual fund that issues a fixed number of shares that trade on the stock market like any company stock. Unlike the index fund, it's actively managed, which means the manager can pick individual stocks.

But it's still quite concentrated. And many of its biggest holdings, once again, are international companies that have little connection to the Irish economy, such as CRH, low-cost airline Ryanair (Europe's answer to Southwest), and Kerry Group. Manager Peter O'Donoghue says he's also finding some good opportunities in some niche agribusiness companies such as Glanbia and Origin Enterprises.

But most of these stocks have been doing just fine. They haven't collapsed in panic. The stocks that have are the banks, and this fund doesn't own any. Mr. O'Donoghue plays a conservative hand, and focuses on companies with strong balance sheets.

Ajai Chopra, left, Deputy Director of the European Department of the IMF and a colleague pass a beggar as they make their way to the Central Bank of Ireland for talks with the Irish government in Dublin last week.

This fund has high expenses, north of 2%. But it comes with an advantage: Right now shares are trading at a hefty 15% discount to their underlying net asset value.

3. Bank stocks. If you feel brave you have the chance to stick your head right into the mouth of the Celtic Tiger by buying stocks in Allied Irish Banks or Bank of Ireland. The banks are the ones whose disastrous loan books precipitated the crisis. Both have depositary receipts traded in New York. Both, predictably, have collapsed. Allied Irish, $63 per ADR in early 2007, slumped another 19% Tuesday to 90 cents. Bank of Ireland–the formal name, magnificently, is The Governor and Company of the Bank of Ireland–has collapsed from a peak of $98 to $1.68, down a further 25% on Tuesday.

Mr. O'Donoghue calculates that both may end up nearly worthless. Nobody knows how much extra money they will need, nor the terms they will get. Stockholders are at the bottom of the capital tree. They may get diluted or wiped out altogether. However, a hedge fund manager in London I know is taking wagers on both. Of the two, he prefers Allied Irish. His reasoning? While he accepts investors may yet get wiped out, he thinks there's also a good chance of making a fat profit. And, as we all know, banks get special favors from governments. Cynical, but true.

4. British banks. If you don't like extreme sports, these may be a better bet. Why? Their stocks have been marked down in the worries about the crisis–and yet they're benefiting from it, as alarmed Irish savers withdraw their money from banks in Dublin and send it to banks based in London instead. All banking stocks need warning labels slapped on them–you can wake up one day to find your stake has vanished in the night–but for those willing to take a limited bet both Lloyds and Barclays have American Depositary Receipts. As ever, you pays your money and you takes your chances. No tears.

5. Irish government bonds. Loomis Sayles bond guru Dan Fuss was loading up on Irish bonds at their depths last week, when they were paying about 7 percentage points more per year than German government bonds. He told me: "We have a short term problem that is extremely serious but we think the country will survive just fine. At the 'wides' the bonds were yielding nearly 700 basis points more and similar maturity in bunds. We think both are money good." However, the bonds have rallied since then–the interest rate gap is now below 6%. It can be difficult and costly for an ordinary U.S. investor to buy foreign government bonds. And, bluntly, I'm wary of bonds at any price. I think inflation is coming, sooner or later. I'd want more than the promise of a 7% profit to go to the effort of buying foreign bonds.

Write to Brett Arends at brett.arends@wsj.com

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