Finally a good week for government bonds, European Commission upgrades Irish economic growth forecasts and Dalata indicates improving hotel occupancy as we move into a crucial summer season for the sector. All these stories and more are covered in this week’s insights update from BlackBee.
The meeting minutes for the US Federal Reserve’s June meeting were published last week but the main messages (recovery is ongoing, inflation spike is temporary) were merely reiterated and had little impact on markets. On the other side of the pond the highly anticipated review of the European Central Bank’s (ECB’s) monetary policy was unveiled which if anything now makes the likelihood of ‘lower for longer’ interest rates even greater. It formally established its inflation target at 2% whilst also acknowledging that it would tolerate temporary overshoots above 2%. In a nod to the impact housing costs have on people’s personal inflation rates it also agreed to incorporate home ownership costs into its inflation calculations. It also pledged to tackle climate change by tilting bond purchases and collateral rules away from companies with heavy carbon footprints.
The European Commission also published its latest growth forecasts for the Euro zone last week. Growth forecasts for the Euro zone were upgraded slightly to 4.8% and 4.5% respectively in 2021 and 2022 compared with 4.3% and 4.4%. The commission’s forecasts for Ireland were revised up significantly however to 7.2% for this year (5.1% for 2022) mainly on the back of Ireland’s strong export performance in Q1. The good news on the Irish economy also continued last week via the June Purchasing Manager Index (PMI) results which all came in well above 50, the level indicating growth in the economy.
The G20 meeting in Venice also concluded over the weekend. G20 Finance Ministers and central bank governors further endorsed a deal that includes a minimum corporate tax rate of 15%, an increase for Ireland’s current rate of 12.5%. Minister for Finance Paschal Donohue is due to meet US Treasury Secretary Janet Yellen on Tuesday with the reformed international tax deal likely to be discussed. At present Ireland are not one of 131 countries that have already signed up to the proposed new framework.
Global equity markets were mixed last week even though the S&P closed Friday at a record high after a 1.1% climb that day. Equity markets appear to be in a state of indecisiveness with an updward drift and were slightly spooked during the week by the drop in bond yields and whether this move had connotations for the global economic recovery. The rising delta variant COVID case numbers were another reason for equity bulls to flee the sign midweek but investors looked through this in Friday’s trading session. Economically sensitive sectors like energy, materials and industrials bore the brunt of the mid week weakness although they recouped some of their losses towards the end of the week.
Government bonds enjoyed one of their best weeks this year last week and as we can see in this week’s chart of the week, bond yields have generally been trading down since the start of the second quarter. To our mind a few factors have been at play here. The most important one is that investor concerns have eased about inflation. A secondary factor has been that economic data in recent weeks has come in slightly weaker than expected. Does this mean the recovery is under threat? Not in our opinion, the slightly softer tone in economic data over the past few weeks is probably more down to the short term waxing and waning of economic signals than anything else. Finally, rising COVID 19 case numbers and the onset of the delta variant has also given bonds something of a fillip in the past couple of weeks. How the delta variant evolves over the coming months will in our view continue to be a driver of market action over the quieter summer months.
Commodities ended the week lower thanks to weaker oil prices following a very strong last few weeks. The catalyst for the drop in oil prices was the lingering prospect of a split among OPEC+ countries which potentially complicates the short term supply outlook. In short the majority of OPEC+ countries would like to see stable growth in oil supply over the next few months which keeps prices at around current levels. The UAE on the other hand wishes to see supply increase at a faster pace. Disagreements are relatively common amongst OPEC and we believe some agreement can ultimately be hammered out that will help oil prices remain steady. Elsewhere, gold moved higher last week helped by the notable decline in bond yields. As an asset that produces no income, gold tends to move higher when financing costs (i.e. bond yields) move lower.
Hospitality – Dalata points to stronger summer hotel performance
In our May hospitality sector insights piece we forecast that the hotel sector in Ireland could recover back to 2019 performance levels by late 2023. A lot of this recovery (particularly outside Dublin) will occur in 2021 and 2022 as society reopens and leisure travel resumes. In this context it was heartening to see Dalata’s half year trading update published last week which validated our view. For Q2 2021 Dalata announced that occupancy in Dublin and regional Ireland ran at 24% and 32% respectively, no mean achievement considering the restrictions applying through much of the quarter. However, for the month of June occupancy was 37% in Dublin and 60% in regional Ireland – just the improvement in trading that is needed in the second half of the year to kickstart the sector’s recovery.
Housing – Cairn homes portfolio sale highlights demand for private residential asset
The private rented sector has been one of the hottest areas real estate investment activity so far this year. For example, Savills recently noted that €757m was invested in the sector in the first half of 2021. The strong activity continued last week with confirmation that Cairn homes had sold a portfolio of Dublin apartments and houses aimed at the rental market to US firm Greystar for a reported sum of €180m, equating to a price of over €500,000 per unit. Although this could again reopen the debate around the role of investors in the property market (for our part we believe lack of supply is the bigger issue rather than the makeup of who buys housing assets in Ireland) the transaction again highlights the strong demand for yield in an environment where most asset classes are struggling to produce meaningful income for investors.