Irish shares, which have fallen by 12 per cent so far this year, risk further losses as they remain highly valued despite rising international concerns around Brexit and Deutsche Bank's financial health, according to Merrion Capital.
“We think it would be prudent to reduce exposure to Irish equities until the outlook becomes clearer,” said Darren McKinley, an analyst with Merrion Capital.
Uncertainty around the impact of Brexit on the Irish economy and earnings growth could see Iseq’s valuation fall from a current level of trading at 17 times 2016 earnings estimates for companies across the market, he said. The index is trading at up to a 10 per cent premium to its historical average.
Sterling weakness
In recent months, ferry operator Irish Continental Group has reported slowing passenger growth amid sterling weakness against the euro, while Ryanair said Brexit will weigh on profits for the next few years, and Dalata Hotel Group reported a slowing pace of expansion in revenue per room in the UK, Merrion noted.
“Having met with most management of Irish plcs, we see Brexit having a negative impact, with great uncertainty around the extent,” Mr McKinley said.
“Consumer confidence has been a bright spot in global economics, but concerns will grow about the sustainability of this, given the news flow surrounding German banks who are short of capital, cutting dividends and reducing staff numbers,” he said.
Rallied
Deutsche Bank, Europe's largest investment bank, rattled financial markets globally in the past week, with its stock hitting a record low on Friday, amid concerns over whether it can absorb a multi-billion-dollar financial settlement with the US Department of Justice in a probe tied to residential mortgage-backed securities.
While US authorities requested a $14 billion (€12.5 billion) settlement earlier this month, Deutsche Bank’s stock rallied in late trading on Friday on reports that the beleaguered lender is nearing a much lower accord, at $5.4 billion.
Meanwhile, rival Frankfurt-based bank Commerzbank announced plans on Thursday to cut about a fifth of its workforce, suspend dividends and scale back its securities trading business.
