Weak Chinese data and risk of bankruptcy at Evergrande spooks Asian equity markets, OPEC forecasts oil demand will surpass pre pandemic levels next year and global house prices rise at their fastest pace since 2005 in Q2. All these stories and more are covered in this week’s insights update from BlackBee.
Investor sentiment last week continued to be dominated by the outlook for monetary policy around the world. August US inflation data gave investors some hope that the push higher in prices over the past few months was beginning to dissipate and that this would take pressure off the US Fed to tighten monetary policy swiftly. Overall inflation came in at 5.3%, slightly lower versus the previous month while the same trend was visible for core inflation (excluding food and energy) which rose 4% over the past year. All eyes will now turn to this week’s US Fed monetary policy meeting to see if Chair Powell gives any further hints about the central bank’s next steps.
Whereas the August US inflation data was seen as a modest positive for investor sentiment, the same couldn’t be said for the data emerging out of China last week. On the whole the data was on the softer side of expectations (a pattern we’ve seen for a while now), best exemplified by the August retail sales growth number which came in at an anaemic 2.5% versus expectations of 7%. The news tended to dampen Asian markets late in the week although it appeared to have little impact elsewhere. In our view any further weakening in China’s growth impulse may well force policymakers there to provide more monetary policy support. In fact, investors now seem certain of this based on their response to this question in August’s Bank of America Merrill Lynch investor survey which was published last week (see our Chart of the Week).
From an Irish economic point of view, last week’s highlights included the August property price report from the CSO and the Ulster Bank Construction Purchasing Managers Index (PMI). The Construction PMI again showed strong momentum in the sector (57.5, well over the 50-level indicating growth), albeit slightly weaker than the previous month. On the property prices front, prices rose again in August and were 8.6% higher in July versus a year previously.
Equities put in a weaker performance last week although the developed economy markets certainly outperformed Asian and emerging markets which shuddered a little on foot of the continued softness in Chinese economic data we noted above. Chinese and Asian equities also suffered as speculation mounted that Evergrande, the Chinese property developer, was at risk of bankruptcy as a result of a combination of huge debts and slowing property sales. As the week progressed the nervousness contaminated other real estate firms, banks and insurance companies as investors wondered what other firms could be negatively affected by Evergrande.
Sovereign bond yields somewhat surprisingly rose a touch last week despite the ‘relief’ provided by the US August inflation data. However, one economic release that seemed to prompt higher US government borrowing costs was the August retail sales report which showed sales growth of 0.7% in the month versus an expected decline of 0.7%. In the credit space performances were mixed with high yield bonds inching higher but emerging market credits suffering modest losses.
Commodities pushed higher last week led again by a big bounce in oil prices. The stronger tone in oil prices was driven primarily by the publication of OPEC’s latest month oil report which showed sizeable upgrades to its forecasts for oil demand for 2022. Oil demand next year was upgraded by almost 1 million barrels per day, amounting to forecast growth of over 4 million barrels per day compared to 2021. This 2022 forecast of over 100 million barrels also indicates oil demand next year will exceed pre pandemic levels, a positive signal for the global economy as we move into 2022.
Real Estate – Knight Frank report shows global house prices continued to rise in Q2
Housing markets around the world began to recover in late 2020 when it became apparent that the vaccination effort could overcome the COVID 19 pandemic. Since then it’s been a case of rising house prices around the world including Ireland. Last week’s Global House Price report from Knight Frank showed that the strong momentum in price gains continued in the second quarter of the year. Overall global house prices across its sample of 55 countries rose by an average of 9.2% in the year to the end of Q2, the fastest rate of house price appreciation since March 2005. This 9.2% gain compared with the 8.6% gain in property prices for the year to the end of July, published last week by the CSO. So rather than being an outlier, the Irish housing market is behaving very much like its international peers at present.
Real Estate – Busy H1 for residential investment in Ireland
Hooke and McDonald’s review of the residential real estate market in Ireland published last week showed that it was a busy first half despite COVID lockdowns affecting the sector for a significant period. Overall, €1.5 Billion was invested in the multifamily/Private Rental sectors in the first half of 2021, underpinning low yields for high quality assets in this space. Based on its database of transactions yields for forward multifamily housing held very firm at 3.75%. On the outlook for the housing market, the report also interestingly questioned whether the government’s housing targets of 30-40,000 units per annum are achievable on the basis of the fourfold increase in international capital it estimates would be needed to be attracted into Ireland.
Forestry – Investors central to fighting climate change
We’ve long believed that the marriage of investors and forestry assets can not only produce good returns for low to medium risk portfolios but can also help the fight against climate change. So, we were interested to see the publication of survey research last week from Global Impact Solutions Today (GIST) in collaboration with Barclays Private Bank. What really struck us was the response from investors that 70% of them saw climate change as “the greatest commercial opportunity of our age”, strong validation indeed that investments like forestry can play a key role in portfolios over the next few years.