Ireland Inc. can overcome the shift in corporation tax rate to 15%, the natural gas price rollercoaster adds to energy crisis concerns for the global economy and lots still to do for government to unlock forestry’s massive potential despite better licencing data in September. All these stories and more are covered in this week’s insights update from BlackBee.
The nervousness about the impact of global energy prices on the world economy simmered again last week. OPEC+’s decision not to increase supply levels again led to an instant hike in oil prices while European natural gas prices went on the rollercoaster of all rollercoasters….hitting over £4 per therm (10 times the price at the beginning of the year!) before settling down at approximately £2.60 as Russia hinted that state owned supplier Gazprom could expand supplies to Europe to help avert a full blown energy crisis.
The bubbling up in energy prices now clearly appears to be causing some disquiet among central banks. The minutes from the ECB’s September meeting showed some governing council members arguing that the impact of persistently rising energy prices was being underestimated and that a larger cut to its bond purchases should have been looked into. This followed on from a warning from the new chief economist at the Bank of England that high inflation rates in the UK could persist for longer than expected. All of this points to the direction of monetary policies around the world representing one of the key themes for investors as we move into 2022.
The other big news story from the world of economics last week was the corporation tax accord agreed across the majority of developed economies which established a minimum rate of 15%. From a foreign direct investment (FDI) standpoint the news that Ireland’s corporate tax rate will rise to 15% is disappointing insofar as it changes a longstanding pillar of Ireland’s efforts to attract inward investment. Will it change the FDI outlook for Ireland over the medium term? It’s difficult to be definitive on the issue at this point but the government remains committed to retaining an attractive corporate tax regime which will certainly resonate with multinationals. In addition, Ireland’s access to the largest economic bloc in the world, education levels and standing as the only English-speaking nation remaining in the EU are clear benefits. And as our chart of the week shows, even at 15% Ireland would retain one of the lowest statutory corporate tax rates in the OECD.
Equity markets were quite jittery again last week but some markets managed to eke out gains despite the ups and downs. US equity markets took heart from more positive vibes from Washington around finalising a compromise on the US debt ceiling (allowing the government to continue to borrow to fund day to day government services across the economy). On the flip side Japanese stock markets were spooked by initial comments from new Prime Minister Fumio Kishida that he might push for an increase in Capital Gains Tax. Asian stock market sentiment also wasn’t helped by more news of another Chinese property developer in trouble, following hot on the heels of Evergrande’s financial distress over the past few weeks.
Government bond markets have been a bit queasy over the past number of weeks and they struggled again last week. The source of the angst again was related to energy prices and how their recent gains are likely to feed into ‘higher for longer’ inflation rates and potentially a swifter approach to reversing central banks’ COVID 19 emergency policies. This has become very visible in breakeven inflation rates (the inflation rates implied by bond prices) which have increased sharply over the past month. The backdrop for credit markets (high yield and emerging market bonds) was also a little unsettled last week, not helped by the ongoing concerns surrounding Chinese property developers.
Commodities again outperformed last week driven by the strong gains across the energy complex with both oil and Commodities again outperformed last week driven by the strong gains across the energy complex with both oil and natural gas prices continuing their strong recent run as we noted above. Persistent strong gains in energy prices could sap the global economic recovery to a certain extent were they to continue so increased supply is needed sooner rather than later in our view. In this context it was interesting that US Energy Secretary Jennifer Granholm admitting last week that the US could tap its strategic petroleum reserve (the largest emergency supply in the world of approximately 700 million barrels).
Forestry – Forestry Licences improve in September but much more to do
In our Sector Insights piece on the forestry sector in July, we flagged the issue of licencing as a bottleneck that needed to be eradicated if the sector was to fulfil the enormous medium term potential it has both as a solution to the climate crisis and as a stable source of positive returns for investors. Over the summer months the numbers of licences issued for both afforestation and felling (particularly felling) have remained depressed. However, there was better news in September with between 100 and 150 licences being issued on a weekly basis. In addition, the Department of Agriculture have increased its numbers of ecologists and forestry inspectors in recent months. While we welcome the increase in licencing in September and the additional resources, much more is needed on this front if the government is to reach anywhere near its 8,000 hectare per annum target and/or reduce local sawmills’ reliance on imported timber.
Real Estate – The industrial sector boom is in full swing
Over the past 20 years it has been incredible to witness the impact the internet, e-commerce and even the legacy of COVID-19 has had on the global economy. Arguably one of the sectors this has had most impact on is that of retail. As more of us have shopped online it has created structural headwinds for retail commercial real estate, many of which the sector is still struggling to adapt to. However, this change has at the same time created boom type demand for the industrial and logistics sector of the commercial real estate market. Last week’s Q3 2021 update on the sector from CBRE put this into sharp focus. For the first nine months of the year the investment spend on the industrial and logistics sector hit a record €442m while prime industrial yields actually reached 4% in the quarter, matching those of the prime office market in Dublin – almost incredible for a sector once viewed as sleepy!
Real Estate – Hibernia REIT disposal highlights prime Dublin office yields remain firm
Another advantage of the Irish economy transitioning into a post COVID phase is that the commercial real estate market is opening up and greater transaction numbers give investors a line of sight on where valuations have settled following the pandemic. A good example of this is Hibernia REIT’s sale of its office assets at One and Two Docklands Place in Dublin city centre which was announced last week. The agreed price was approximately €152m which equated to a net initial yield of 4.75%, highlighting that prime office valuations have changed little compared to pre-pandemic levels.