BEST IRISH SHARES TO BUY FOR 2022/2023
20th March 2022
The war in Ukraine disrupted the upward trend on stockmarkets worldwide, and the most reliable technical indicator, the 150 day simple moving average, indicates that we are now in a bear market.
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Perhaps we will break out of this bear market very quickly, as happened in 2020. However, it is best to assume the bear market will continue until there are clear technical indications otherwise.
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Bear markets tend to be quite broad, with 90% of stocks entering a downward trend. Bull markets are much less broad - the stats show that approximately 70% of stocks are usually in an upward trend, so a quite significant 30% are money losers!
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The good news, if we remain in a bear market, therefore is that we can expect to find 10% or thereabouts of stocks trading upwards against the trend. These are usually the best stocks to invest in. Why? Because they are displaying impressive resilience in an environment that has turned negative for equities. In a more positive environment, they would probably be performing even better.
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Some of the 10% will be defensive stocks, ie companies supplying essential services such as utilities, food etc, so I would rule those out (although holding some of these does give your portfolio some protection when the market gets roughed up). However, it is the non-defensive stocks which are rising in this new bear market, that are very much worth investigating.
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My recent review of the charts for all of the Irish shares, highlighted one stand out factor. There is one non-defensive sector that has retained its upward trend, despite the market trend turning downwards due to the madman in the Kremlin.
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That sector is the banking sector. There are just three banking stocks on the Irish market, AIB, Bank of Ireland and PermanentTSB currently trading at €2, €5.80 and €1.63 respectively.
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Of these, AIB has the weakest chart, meriting only a moderately bullish rating, whereas both Bank of Ireland and PermanentTSB look stronger and have retained their upward trend to date, and these latter two are therefore preferred.
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There are three probable reasons why the bank stocks are so strong:-
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(i) Interest rates appear to have finally started to rise, after a long period of extraordinarily low rates. These extraordinarily low interest rates, caused by intervention in the bond markets by the European Central Bank (ECB) and the Federal Reserve, have adversely affected banking profit margins. However, if interest rates rise in the short to medium term, then this will have a very positive impact on bank earnings.
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(ii) There is less competition in the Irish bank sector, following the recent departure of KBC and Ulster Bank. Less competition usually means higher profits for the remaining incumbents.
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Why have KBC and Ulster Bank pulled out? Most probably because of the burden caused by the deluge of new regulation imposed on the sector, following the financial crash of 2008.
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(iii) Under pressure from the ECB, the Irish banks may have finally cleaned up their balance sheets by selling off their remaining impared loans to vulture funds.
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Elsewhere on the Irish market, it is encouraging to note that all of the other large cap stocks have mostly managed to retain their upward trend. CRH, Kerry and Smurfit Kappa all remain in an upward trend despite the recent turbulence on the market. I have raised some issues regarding aggressive accounting policies at Smurfit Kappa in a recent Market Topics article, whereas my fundamental reviews of CRH and Kerry were more favourable, therefore these latter two are preferred at this time - trading at €41.17 and €103.65 respectively.
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The other large cap, Ryanair, is something of a mixed bag. It has lost its upward trend, and I have raised issues regarding aggressive accounting policies in a previous article on Market Topics. However, given the negative impact of, first, the covid crisis and then the Ukraine war, it could be argued that its performance has actually been quite resilient in the face of these two very negative factors for air travel (albeit the former now appears to be coming to an end).
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Most the smaller cap stocks on the Irish market have been hit pretty hard by the recent downturn in the market trend. This is often a problem with the small caps. There is not much liquidity in them, so a small number of big sellers can have a very significant advese impact on the share price.
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In the medium cap sector, Grafton Group, currently trading at £10.44 on the London market, failed to retain its upward trend and the outlook is moderately bearish per the recent technical review. However, a significant support level was noted at £10, and the fundamentals of the company are very stong (particularly the cash rich / underleveraged balance sheet - see the Market Topics article on this stock). Therefore I am satisfied that a buy recommendation continues to be appropriate for this one.