IEUR - iShares MSCI Ireland ETF: Important Themes

2023-06-15 05:53:30 ET

Summary

• Irish GDP could slow relative to FY22 but will still be better than most other options across the Eurozone.
• EIRL is susceptible to idiosyncratic risk.
• We close with some thoughts on the technicals and the valuations.

Introduction And Track Record

The iShares MSCI Ireland ETF ( EIRL ), a financial product with less than $100m of AUM, tracks the MSCI All Ireland Capped Index. One curious facet of this ETF is that its tracking index doesn't just cover stocks that are classified as Irish stocks (by MSCI Global), or headquartered or listed in Ireland. Rather they've also opened the door to companies that have economic exposure of just over 10% to Ireland (that degree of economic exposure is determined by MSCI Global). All in all, it's fair to say that this isn't quite a pure-play Irish ETF.

Nonetheless, as far as the return track record goes, EIRL has proven to be quite rewarding so far. In addition to the flagship Eurozone-focussed ETF ( IEUR ), we may also draw comparisons with ETFs based in European economies with a similar threshold of GDP to Ireland's GDP (we're referring to the likes of Austria and Belgium). Since EIRL began listing in 2010, it has delivered compelling returns of ~166%, trouncing the iShares MSCI Belgium ETF by ~3x, and doing an even better job of crushing the iShares MSCI Austria ETF (~12x).

Key Considerations

Last year, Ireland was one of the shining lights in Europe, reporting double-digit real GDP growth of 12% (the highest amongst OECD nations), which was also instrumental in ensuring that the Eurozone did not stagnate in Q4 at least.

In light of such a strong base year, investors would do well to expect a much lower pace of growth this year. Indeed, the European Commission believes growth will slow to 5.5% this year which is still quite commendable in the grand scheme of things. Even in FY24, Ireland is expected to maintain a similar cadence of mid-single-digit real GDP growth which would represent one of the highest GDP readings across Europe.

However, investors should also note that a large chunk of Irish GDP movements tends to be driven by US multinationals' desire to capitalize on low tax rates in the country (the corporation tax rate in Ireland is 12.5%). Last year investments in Ireland grew by a whopping 26% , even as these multinationals beefed up their large machinery infrastructure.

The export theme too has been a vital contributor to Irish GDP (a whopping 134% of GDP); last year it hit an all-time high of over EUR 207bn so that share is likely to have increased even further. However, investors also need to consider that a lot of these exports will also be linked to the multinationals' activities, which will eventually benefit from those profits and not the Irish economy.

In addition to that, when you look at EIRL more closely, you will see that this is a product that could be susceptible to idiosyncratic risk. Basically, two stocks account for 44% of the total portfolio, and EIRL's top stock- CRH plc ( CRH ) is not really an Irish play. In fact it is more of a North American play as 75% of group EBITDA comes from there.

Fortunately, CRH has some structural operating advantages over its peers and looks like it could be a key beneficiary of US federal highway funding which is poised to increase by 50% over the next 5 years. For a capital-intensive firm, it's also heartening to note that it is not overly financially geared with a net debt/EBITDA of less than 1x.

Closing Thoughts

All things considered, we don't believe the pursuit of a long position in EIRL would be too conducive at this point. Here are a few additional reasons why we think so.

Firstly, it's hard to get too excited about the risk-reward on EIRL's long-term chart, after a steep uptrend since September last year. Basically, over the years, this ETF has been trending up in the shape of an ascending channel, and you ideally want to get in when its closer to the lower boundary of the channel, just above the $40 levels; not at the current levels where it also appears that the ETF may face some resistance around the sub $60 levels, something it faced in Q1-22. We think EIRL may either spend some time consolidating at these levels or pull back to lower levels.

EIRL is also unlikely to benefit from any rotation momentum from those looking for suitable mean-reversion opportunities within the Eurozone. The image below highlights how Irish equities are positioned relative to equities from the broader Eurozone; sure, the relative strength ratio may not look overextended to the upside but it is still positioned quite far away from the mid-point of the life-long range.

Then there's the unappealing valuation facet; despite offering slightly lower long-term earnings growth potential (as per YCharts) than the Austrian ETF, and a diversified ETF of Eurozone equities, EIRL is priced at a premium forward P/E multiple to those options. What dampens the buy case even further is the bland income angle. At these levels, EIRL offers a yield of just 0.81%, a long way off the corresponding figures of other alternatives from Belgium, Austria, and the Eurozone.

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