Apple targets $200m forestry investment as part of its drive towards carbon neutrality, supply of second hand homes in Ireland falls to its lowest level in a decade and China reports blowout Q1 GDP growth. All these stories are covered in this week’s insights update from Blackbee.
China’s first quarter GDP report issued last week highlighted just how different the global economic vista looks now versus last year. The report showed that the second largest global economy grew by a whopping 18% year on year, reflecting a massive rebound across consumer spending and industry compared to its lockdown low 12 months ago.
Although the recovery narrative from the US last week wasn’t as dramatic as that of China, it continued to build which kept investors in good spirits over the week. The Beige Book, the US Federal Reserve’s (Fed’s) regular commentary on economic conditions, was published last week. The tone of this update was positive with the Fed commenting that the economy was helped by further progress on vaccinations as well as stimulus payments to US households.
The regular flow of US economic data last week also helped investors sentiment; March retail sales for example showed a big jump while business and housing market sentiment picked up as seen in improved readings from the March Philly Fed and National Homebuilder sentiment indicators.
In Ireland, the CSO reported that Irish property prices inched higher again in February with prices up 3% over the past year. We’ve regularly noted lack of supply as a key issue here, something which hasn’t been helped by construction lockdowns. While the sector is only emerging from another lockdown now, it was interesting to see that in the March Construction Purchasing Managers Index published last week, that the index of future activity came in at a two and a half year high with 60% of firms expecting strong activity over the next 12 months.
On the whole global equities again pushed higher last week although the asset class’s progress was temporarily checked by pauses in the use of the Johnson and Johnson and Astra Zeneca COVID vaccines due to concerns related to blood clots in recipients. The economic news last week supported prices pushing higher and has generally been a big factor in the equity rally so far this year. If this rally is to continue we think corporate fundamentals will have to play their part in showing investors that company profits and cashflows are climbing as the global economy recovers. Our chart of the week shows that the Q1 earnings are forecast to rise strongly this quarter – in our view this will have to continue in forthcoming quarters to keep the equity market’s momentum going.
The recent ‘risk on’ tone in markets again favoured credit markets as emerging market and high yield bonds change outperformed last week. European sovereign bonds lagged US Treasuries with the latter being helped by comments from US Fed Chairman Jay Powell that it would maintain its asset purchase program until “substantial progress” was made towards full employment in the US.
Last week was a better one for commodities and oil in particular which has been on the back foot of late. Crude sentiment was buoyed by a double whammy of generally upbeat updates from OPEC and the International Energy Agency (IEA) which both upgraded their forecasts for 2021 oil demand, with the IEA noting that “fundamentals look decidedly stronger” compared to this time last year. Copper also strengthened, helped by stronger Chinese imports last month as well as the blowout GDP report on Friday.
Residential/Social Housing – Second-hand home supplies fall to lowest level in over a decade!
So far this year we have been inundated with data showing the effect the pandemic has had on an already low housing supply and in turn the increasing upward pressure on house prices. Sherry Fitzgerald’s latest Irish Residential Market Review reiterated this common theme highlighting the “severe deterioration in housing stock for sale”. The report showed that the number of secondhand homes for sale hit its lowest level for over a decade in January. As expected, the tighter restrictions were an influence on the lower levels of stock available to purchase with Sherry Fitzgerald noting that potential owners were discouraged from putting their homes up for sale. The average value of second hand homes in Ireland climbed by 1.5% in Q1 2021 and 2.5% over the last 12 months according to the report.
Hospitality – Beige Book shows US tourism eagerness.
In the Economy section above we noted the positive tone to the Fed’s Beige Book update last week. However, it was interesting that the Fed specifically called out the improving environment for tourism. Across the various Fed districts, an improvement in tourism was noted in the New York, Boston and Atlanta regions. In our view the coronavirus pandemic has created significant pent up demand for both domestic and international travel and we believe this will feed into a full recovery by the Irish hotel sector by late 2024 or early 2025.
Forestry – Renewable forestry sector provides both the ESG exposure and return investors are looking for.
The current investment landscape is one of unprecedented low yields. The landscape of late has also seen a shift as investor demand for environmental, social and governance (ESG) investments has surged. Bloomberg reported in February that governments, corporations and other groups raised a record $490bn in 2020 selling green bonds with a further $347bn poured into ESG focused investment funds. ESG investments provide investors with the environmentally conscious investment they are demanding while also providing the yield they are searching for in this unprecedented low yield environment. The forestry industry has continued to gain momentum attracting institutional investors and last week we got further confirmation of the demand as Apple launched the $200mn “Restore Fund” – a fund that will make investments in forestry projects to remove carbon from the atmosphere while generating return for investors.