The end of summer is traditionally a busy time for Irish corporate news as companies with December year-ends announce their interim results. A string of reports from Irish corporates have highlighted just how well Irish quoted plcs are performing.
Interim results from companies such as Irish Life & Permanent, CRH and Grafton Group, among others, have been well received by investors and future prospects remain very positive in most cases. It is almost certainly no coincidence that the current strong reporting season has been accompanied by a much steadier tone to the performance of Irish share prices.
In particular, financial shares have recovered quite sharply from their low points of earlier this year. The profits of Irish financial stocks are heavily dependent on the Irish economy and are clearly benefiting from the ongoing strength in domestic demand.
In this regard, the recent Quarterly Household Survey produced by the Cental Statistics Office provides further support for a continuation of strong economic growth. The survey provides a snapshot of the Irish labour market over the March-May period. Employment in the 12 months grew to 1.67 million. This represents a rise of 5 per cent in total employment and is made up of a decline in unemployment of 22,000; the natural rise in the labour force accounted for 28,000 people; 30,000 is due to an increase in the participation rate and the balance of 20,000 is down to net immigration.
It is also interesting to note that the proportion of non-EU immigrants rose to 23 per cent from 14.3 per cent.
The trends contained in the survey gives little indication that this rapid growth in the numbers at work is about to suddenly reverse.
Continued strong growth in the rate of investment and in the labour force is critical to maintain rapid economic growth. Whille worries regarding overheating and accelerating inflation are likely to persist, some of these fears should be allayed by the continued expansion of the supply-side of the economy.
The two main banks and Irish Life & Permanent would be particularly exposed to rising cost pressures if the current upward pressure on inflation were to develop into a self-feeding wages/prices spiral. However, if the labour force continues to grow strongly through increased participation and inward migration it will serve to keep a lid on wage pressures.
Current broker profit forecasts for the financials already assume that wages and salaries will rise to reflect the current high rate of consumer price inflation and the tight conditions in the labour market. Despite this, the fruits of heavy investment in technology and continued strong growth in business volumes should enable the banks and insurers to continue to reduce their cost/income ratios.
For investors it is still too early to say whether the recent bounce in the share prices of Irish financial shares represents a return to sustained bullish conditions. However, it does seem as if the markets are finally beginning to take a more balanced view of the risks and opportunities facing the Irish financial sector.
