Irish shares gain on hopes for sterling and Brexit chaos to lift

Irish shares tapped into a cautious upswing in stock markets hopeful that a Brexit deal will get done even if Theresa May fails next week to get her withdrawal deal through the House of Commons, at the third time of asking.

Shares as diverse as Bank of Ireland and Irish Ferries-owner ICG, as well as the Irish stock market-listed housebuilders, have been weighed down by Brexit uncertainty since the UK voted to leave the EU in the summer of 2016.

The main concern of investors has been on the damage to Irish companies that generate a significant part of their earnings in sterling from the UK and which are therefore vulnerable to any slide in the value of the pound against the euro.

The slide in sterling hit many Irish and British shares hard.

The UK currency had tumbled as low as 92 pence over a year ago, as Mrs May set Britain on a course leading to a hard Brexit.

However, in the past week, sterling has jumped by over 1% against the euro as MPs voted to rule out a no-deal Brexit.

It traded at 85.11 pence late Friday on investor hopes the DUP would back her deal next week.

Shares in Bank of Ireland in the past week clawed back lost ground and have pared their losses for the past year to 17%.

ICG shares traded at levels of last November but have lost 13% of their value from March 2018.

With the fortunes of many stocks in Ireland and Britain tied to the value of sterling, analysts are trying to assess the sort of deal that could emerge from Britain’s Brexit political chaos.

It is widely expected the Bank of England would move to raise interest rates if the chaos over Brexit subsided. Rate hikes would likely boost sterling.

Capital Economics in London said if some sort of soft Brexit deal emerged in the coming months that the Bank of England could trigger rate increases earlier than many predict.

It said a “fudge and delay” outcome involving a three-month delay and a softer Brexit would lead to the Bank of England hiking interest rates three times by the end of 2020.

A delay of 12 months or more may prompt some firms to green light projects that the near-term threat of a no deal forced them to postpone. Some rebound in GDP growth could, therefore, happen sooner.

“That and the tight labour market could even prompt the Bank of England to raise interest rates within six months,” it said.

“The market has already shifted significantly to price out a no-deal Brexit,” said BNP Paribas economists.

The bank also noted that the probability of a rate increase this year had risen to 50% from 24% in February, according to money markets.

But a high degree of uncertainty remains for sterling.

All 27 EU member states must agree to a request for a Brexit extension, and it remains unclear when and on what terms Britain will leave.

“Despite the increased risks facing rebel Conservative MPs, we doubt that sufficient numbers will fall back into line to pass her deal given entrenched hardline opposition,” MUFG analysts said on Friday.

Meanwhile, Japanese carmaker Honda said any delay to Brexit must be long enough to give UK businesses stability, while BMW is still preparing for a “worst-case scenario” no-deal Brexit despite MPs backing postponing Britain’s exit from the EU.

Additional reporting by Reuters