Rare JPMorgan Brexit Trade Backs Irish Stocks Over British

(Bloomberg) -- The future of the Irish border has been a focal point of Brexit ever since the U.K. voted to leave the European Union almost 28 months ago. What’s garnered less attention is the impact the event will have on stocks traded in Dublin.

But a new position taken by analysts at JPMorgan Chase & Co. is speculating Ireland will outshine Britain after the divorce.

JPMorgan moved to “overweight” on small- and mid-caps in Ireland versus the U.K., betting the equities will outperform similarly-sized British companies, according to a report published Wednesday. While many commentators suggest Brexit will have a negative impact on the Irish economy overall, the bank’s strategy will pay as long as the nation’s stocks fare relatively better.

Ratings on the Irish stock market are unusual among tier-1 investment banks -- of five surveyed for this article, none had one on Ireland.

Coverage of individual Irish stocks is better, but still relatively low compared to the U.K. An average of six analysts cover each stock listed on the Irish Stock Exchange Overall Index versus 11 for the U.K.’s FTSE All-Share Index, excluding listed investment trusts and funds, according to data compiled by Bloomberg.

The Irish Stock Exchange Overall Index (ISEQ) was heading for its biggest gain since April on Friday, up 1.4 percent at 15:49 in Dublin, while the Stoxx Europe 600 Index was little changed. Ireland’s benchmark had fallen 2.2 percent in the global sell-off on Thursday.

Cheap, Growing

The stocks listed on Dublin’s main market had a combined value of about 104 billion euros ($120 billion) as of Oct. 10, according to daily summary from Euronext. That compares with about 2.5 trillion pounds ($3.3 trillion) for companies on London’s FTSE All-Share gauge, data compiled by Bloomberg show.

“The Irish market is both cheap and growing in value,” JPMorgan’s Eduardo Lecubarri, the bank’s head of SMid strategy, said in a phone interview. “But it’s also small.”

Yet, the Irish market’s size may work in its favor as some investors are attracted to the greater volatility of a smaller exchange, according to JPMorgan. “It takes very little to make the stocks move,” Lecubarri added.

It hasn’t been plain sailing so far. The 45-member ISEQ index has fallen about 4 percent since the June 2016 referendum, while the STOXX 600 has gained about 4 percent and the FTSE All-Share gauge around 11 percent.

A February report prepared for the Irish government by Copenhagen Economics estimated that Irish gross domestic product will be 2.8 percent to 7 percent lower than the consultancy’s “non-Brexit baseline level” in 2030, depending on the outcome of negotiations and the future trade deals brokered by the U.K.

But, on a marginal basis, Ireland’s strength as an EU member and the bloc’s relationships with emerging markets will outweigh any loss of trading with the U.K., according to Lecubarri. “In any economy, it’s more about opening up to the world, and opening up to the east, than it is about strengthening ties with developed countries,” he said.

Meanwhile, Lecubarri said the level of progress being made on a deal by U.K. and EU negotiators will have little impact on his Ireland mid- and small-cap call.

“The reality is better growth, and cheaper and better balance sheets, with a kicker,” he said. “Whatever happens, it’s going to be better on the margin for Ireland than it is the U.K.”

To contact the reporter on this story: Joe Easton in London at jeaston7@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Jon Menon, Dara Doyle

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