The key data release last week was the minutes from the US Federal Reserve’s March meeting. The most interesting aspect was the debate around the inflation outlook, a theme which has spooked the government bond market in particular this year. Our chart of the week highlights just how much US inflation expectations have risen in a short space of time. Overall the Fed saw inflation risks as “broadly balanced” but there were more mixed views on the future path for inflation. We believe investors are likely to see higher short term inflation although much of this is down to temporary supply bottlenecks created by the coronavirus pandemic. Longer term the outlook is more uncertain but if other large economies follow President Biden’s lead in undertaking large scale infrastructure spending then this could have a longer lasting positive impact on inflation. The other big news was President Biden’s opening gambit on the area of a global minimum corporate tax rate. His proposals included doubling the tax rate on multinationals’ overseas profits to 21% and appear part of a ‘grand bargain’ on OECD tax reform – in exchange for broad agreement on a new minimum corporate tax rate of 21%, countries would be allowed levy so called ‘digital taxes’ on US technology companies operating in their jurisdictions.
In our view there is a way to go in these tax proposals. Firstly they have to make it through US Congress and will probably face resistance from Republicans who masterminded the cut to US corporate tax rates under President Trump in 2017. Secondly the proposal needs to be accepted internationally although it’s notable that initial comments from world leaders were constructive. In the meantime, the progress on this issue will be very closely watched in Ireland where the 12.5% corporate tax rate has been a central element of Ireland’s attractiveness from a foreign direct investment perspective.
The equity market completely brushed off concerns about the potential for increased corporate tax rates last week, powering ahead helped by strong gains in the technology sector. This also helped the S&P 500 Index in the US push through a new all time high of 4,000. The Federal Reserve March minutes were instrumental in equities’ gains, with their broad narrative of ‘no change to policy’ supporting and also helping government bond yields retrace some of their recent climb – a factor which also pushed indices higher. Last week’s positivity around US stimulus spending also lingered into this week with investors perhaps judging that this could outweigh any negatives on the corporate tax front.
Last week was a better one for bonds with lower US bond yields in particular providing some relief for the asset change class following the challenging first quarter. European government bonds bucked the US trend a little however with slightly higher yields on the week. However in general the strong ‘risk on’ trade flowed freely from equities into the bond market with emerging market and higher yielding bonds pushing noticeably higher.
On the whole the commodity sector was higher last week with weaker oil prices more than offset by gains in other sectors, particularly in metals. Oil’s recent weaker tone continued thanks to greater than expected US oil stocks last week but elsewhere the drop in US bond yields in particular helped the precious metals of gold and silver while sentiment towards copper remained strong on the back of continued talk of US infrastructure spending.
Residential/Social Housing – Lack of supply leads to housing reaching ‘sale agreed’ in as little as two weeks!
Last week Real Estate Alliance (REA) published its quarterly national house price index showing an increase of nearly 2% in house prices during Q1 2021. As well as higher prices during Q1, the lack of supply of properties for sale manifested itself in other ways. REA noted that the time taken for houses to go ‘sale agreed’ also accelerated as a result of supply constraints. For example, the average three bed semi-detached home reached ‘sale agreed’ after approximately five weeks in Q1 2021 compared to nine weeks a year earlier. In fact, properties in some parts of the country were reaching ‘sale agreed’ status in as little as two weeks this year, something which REA put down to a trend towards more ‘virtual viewings’ which sped up the process. It also noted that fears around mortgage approvals expiring were a motivating factor for buyers to move quickly.
Elsewhere, in its new homes construction survey published last week, Knight Frank uncovered what it felt was a notable obstacle to the delivery of more homes at present – construction finance. The survey found that 69% of respondents believed sourcing development finance was more difficult as a result of the COVID 19 pandemic while 65% of respondents felt that construction sector lockdowns have added 4-6 months onto house completion times. On a more positive note, although the survey voiced serious concerns about the impact COVID restrictions would have on housing supply, 59% of respondents still felt construction activity would be stronger in 2021 compared to 2020.
Commercial Property – Evidence Building of Increasing Demand for Offices.
In last week’s Insights we noted that the commercial property sector in Ireland saw a strong Q1 in terms of investment spend, despite the economy being in lockdown. Although the takeup of office space was weak in Q1 (only 3,752 sq. metres in Dublin) CBRE noted last week that office demand indicators are improving pointing to a notable increase in activity once COVID 19 restrictions are eased. Marie Hunt, Executive Director at CBRE said that the firm has “witnessed a discernible increase in enquiries for office accommodation in the capital” with total demand increasing by over 15% from Q4 2020. Ms Hunt also noted that 50,000 sq. metres of office accommodation is also reserved in Dublin boding well for transactional activity later in 2021.
Hospitality – Debit Card Spending Shows Signs of Pent Up Demand for Travel.
There has been growing evidence this year that Irish consumers are having an increasingly brighter outlook on the economy as vaccines are rolled out and restrictions begin to ease. Last week, RTÉ reported the findings of Bank of Ireland’s and Revolut’s debit card spending during the month of March which provided futher evidence of the growing optimism. The BOI data showed spending rose 28% in March in comparison to February while Revolut experienced a 20% increase during the same period. Most noticeably, both showed a large increase in airline spending (BOI: +45%, Revolut: +57%). The increase in spending reinforces the view of growing optimism among Irish consumers and suggests the potential of a move away from the saving orientated focus that comes with uncertainty around the economy. The potential of consumer spending combined with pent-up demand could provide a strong potential boost for the hospitality sector when restrictions are eased.
Forestry – A great asset in the fight against inflation.
In this week’s Chart of the Week we highlighted how quickly inflation expectations have turned sharply higher. Inflation is always something investors have to guard against as over time it can significantly eat into the spending power of their money. This week we’re delighted to announce the launch of our first Forestry portfolio, the first such offering in the Irish retail market. We believe this portfolio has the potential to generate stable returns of 4.5% per annum and crucially, has the potential to defend investors’ capital against the corrosive impact of inflation. For further information on the portfolio please contact your Business Development Manager.