21% return for investors in the Twelve Hotel Bond, more international investor interest in the Irish nursing home sector and last week’s market volatility highlights the value of forestry as a hedge against inflation. All these stories and more are covered in this week’s insights update from BlackBee.
Rarely does the release of an inflation report capture as much attention as it did last week. For a few weeks investors have been on tenterhooks about the risk of rising inflation changing the course of monetary policy around the world. Well last week’s April inflation report from the US wouldn’t have helped their mood as headline inflation accelerated to 4.2% in April, the highest since 2008 (see our Chart of the Week).
Base effects (comparing prices in April 2021 with April 2020) are having an impact here – oil for example (a key component in the inflation basket) has nearly doubled over the last year. This has pushed headline inflation around the world sharply higher of late, prompting many central bankers to stress that they will be patient with their monetary policies as they believe the current price rises are “transitory”.
However, when we look at inflation rates excluding oil (so called ‘core’ inflation rates), they have also picked up of late so it could be that price gains in the economy are broadening. If that proves to be the case and central bankers have to react, equity and bond markets could face more bouts of short term turbulence similar to last week.
The theme of accelerating inflation was also visible in April Chinese Producer Price Inflation (prices at the factory gate) which hit a near three year high in April. This is important for the rest of the world insofar as China is the manufacturing capital of the world economy. If prices are rising there, it is likely that manufacturers will try to pass them onto consumers, potentially keeping the price rises coming for consumers.
Historically equity markets have shown they can perform reasonably well in moderately inflationary environments. But during episodes where prices move sharply higher and stay there, such as the 1970s, equity markets can struggle. Therefore it wasn’t hugely surprising that the US inflation data noted earlier spooked stock markets, especially considering how central low inflation and interest rates have been to equity market performance in the past few years. The technology sector bore the biggest brunt of declines last week but in truth most markets suffered declines. Japanese equities were also particularly weak with a rapid rise in COVID case numbers there adding to the downbeat sentiment elsewhere.
As with the equity market, bonds also took some pain given that the income generally paid to bond investors is
fixed and is therefore prone to being eaten into by rising inflation. Even inflation linked bonds (bonds that
compensate investors for inflation) weren’t spared in the selloff although this sector has been one of the better
performers in the bond space so far this year.
Commodities tend to be positively correlated to inflation rates so they performed relatively well last week
compared to other risk asset classes like equities. Despite this, some commodities weren’t immune from the
weak backdrop in other markets with oil and silver in particular giving back some of their recent gains.
Hospitality – BlackBee’s Twelve Hotel bond returns 21%!
The past year has no doubt been a difficult year for the hospitality industry with hotels forced to close due to public health restrictions. With this in mind, BlackBee is proud to announce the
maturity of our Twelve Hotel Bond returning 21% for investors over a 4-year term. The success of this refinance (in addition to the Commons Hotel Bond which returned 35% for investors over a
5-year term) demonstrates the strong quality of asset underpinning these investments (as originally identified by BlackBee) and the proactive management of the loans by BlackBee as
Healthcare/Nursing Homes – Orpea deal highlights massive investor interest in nursing home sector
Last week the Irish Times reported yet another deal in the nursing home sector with Orpea acquiring the FirstCare collection of nursing homes. This is yet another in the steady stream of deals in
the sector so far this year following DomusVi’s acquisition of Trinity Healthcare in January and Aedifica’s acquisition of five homes in February and March. Following its latest deal, understood to
be in the region of €100m, Orpea Group will become the largest private operator in Ireland with a total of 1,961 beds. The deal highlights the fast consolidation of the Irish sector and the sheer
scale of continuing investor interest in the space.
Forestry – Inflation scare for markets underlines importance of inflation protection in portfolios
Earlier we flagged how markets struggled last week on the back of rising inflation rates across the world. This is one of the big positives we see in investors allocating to forestry as part of a
diversified portfolio – that the asset is positively correlated with inflation. Given last week’s market action and how nervous equity and bond markets appear around inflation at present, we
believe an allocation to forestry actually represents good short-term protection against any further instability caused inflation.
Residential/Social Housing – Number of households seeking social housing up 33% since 2016!
The continued theme of rising inflation rates in the housing market was reaffirmed by two sources last week. Data from the CSO showed that residential prices rose by 3.7% nationally in the year to end March 2021, the fastest inflation rate since early 2019. At the same time Daft.ie’s quarterly rental report also showed rental inflation nationally came in at 1.7% over the past year. Supply and affordability were the chief reasons why buyers were struggling to find desirable properties according to survey data also released last week, this time by Sherry Fitzgerald. This as yet unmet supply of housing in Ireland was further confirmed in a Social Justice Ireland report showing that the numbers of households seeking social housing has climbed by 33% since 2016.