Good afternoon. Please find attached our new weekly Insights update, reviewing the main themes and news driving international asset markets and key sectors of the Irish investment landscape over the past week. We would welcome any comments or feedback on the piece.
On the economic front, last week’s news was dominated by central bank meetings in the US, UK and Japan. The most common theme emanating from the meetings was a well worn one from our perspective – that of the ‘lower for longer’ scenario for interest rates. Not surprisingly, none of the respective central banks made changes to their monetary policies. In fact Fed Chair Powell reiterated the low rate outlook, stating that US interest rates were unlikely to rise before 2024. Interestingly, this is a full year longer than investors felt in the March Bank of America Merrill Lynch investor survey, published last week (see ‘Chart of the Week’).
The pace of economic recovery was another key takeaway from the central bank meetings. The big upgrade to US economic growth forecasts for this year certainly stood out. The US Fed raised its growth forecast to 6.5% for this year from 4.2% in December, implying that the economy may regain all its COVID-19 lost output by the end of the year. Little wonder then that bond markets, interest rate sensitive equity sectors and even gold were under pressure again over the week. A quicker than expected recovery represents good news for investors although the slower progress on vaccinations outside the US might point to a patchier pace of recovery in some regions.
On the whole equities rallied again last week although there were signs that events in the bond market were having an impact. Rising government bond yields again led to a steepening in yield curves – typically a reliable signal of a recovering economy. Value sectors of the stock market performed relatively well on foot of this as investors felt these sectors could benefit from the economic recovery. However those interest rate sensitive sectors that roared ahead in 2020 because of central bank largesse struggled. The tech sector was a prime example, with the Nasdaq shedding 0.8% over the week.
Bond investors seemed to pay more attention last week to the US economic upgrade rather than Chair Powell’s guidance that interest rates would remain unmoved until 2024. 10 Year bond yields in the US reached their highest levels in a year on foot of the upgrade and an uneasiness that such strong growth might make inflation more of a reality – something which has dogged bond markets over the past few weeks. Our overall view is that broad inflation pressures may take longer to emerge than investors have speculated on of late. Therefore, we believe fears of sharp falls in sovereign and corporate bond markets are overblown. But it’s not much of a surprise to see sovereigns in particular give back some of their recent gains given President Biden’s fiscal splurge and what it might mean for inflation and the economic recovery.
In the commodity space oil was the big loser, shedding 6.4% over the week on the back of greater than expected US stocks of oil and the rejection of the notion of a new oil commodity supercycle by the International Energy Administration which bluntly said “Oil’s sharp rally to near $70 a barrel has spurred talk of a new supercycle and a looming supply shortfall – our data suggests otherwise.” Elsewhere, gold clawed back some of its recent loses but still remains well down so far this year, another example of an asset that has struggled as bond yields have pushed higher.
Residential/Social Housing – House prices look set to remain on front foot in the short term
House prices look likely to stay on the front foot for the time being based on a number of reports published last week. According to a report carried out by EY DKM on behalf of the Construction Industry Federation, the shutdowns caused by the pandemic will result in an estimated decline of close to 5,000 housing completions in 2021. The analysis shows that housing completions are estimated to be in the region of 16,000 for 2021 in comparison to 20,676 completions in 2020. Prior to the onset of the pandemic, 28,000 completions were expected for 2021. These figures assume that the partial shutdown of lockdown will end on 5th April.
As supply issues continue to apply pressure on housing affordability, the Central Bank has also warned that the governments Shared Equity Scheme could push house prices up. The Irish Examiner reported that in a letter to member of the Oireachtas Housing Committee, the Central Bank warned of the price increases and how the scheme would do little to deal with supply issues. The Daft.ie monthly house price report last week showed that property prices in Ireland climbed by 2.6% in the year to January.
The Irish Times reported that two €1 billion Irish residential property portfolios have been offered for sale in recent weeks. The first is Marlet’s forward sale of the Castle portfolio which is Ireland’s largest ever private rented sector (PRS) portfolio to be offered to the market. The portfolio comprises of 2,000 apartments and duplexes distributed across six sites and is due for delivery between July 2021 and March 2024. The forward sale is being handled by sole adviser Cantor Fitzgerald.
The second to be offered to the market is a portfolio of nearly 1,700 rental properties across Dublin, Cork and Galway. European property firm LRC group have instructed Eastdil Secured to handle the disposal of its entire Irish residential rental portfolio who have placed a price tag of over €1 billion on the portfolio of standing stock residential properties. It will be interesting to follow the sale of both portfolios over the coming months as it should further underpin the attractiveness of PRS in not only Dublin but regional Ireland to institutional investors.
Commercial Property – Apple deal shows there’s still room for the office
Although working habits have changed, the office environment remains a key component for employers. Offering reassurance to commercial property investors, it was reported by the Irish Examiner that Apple have agreed to lease over 36,000 square feet of office space in Cork City’s new Horgan’s Quay. The development is a signal of confidence and could be the catalyst for further deals in Cork’s docklands area, although it is of smaller scale than what Apple had initially sought in early 2020. It is understood that the rent quoted was c.€32 per square foot and Apple have the option to add to their floor space in Horgan’s Quay should it be required.
Furthermore, as reported by The Irish Examiner, the Irish government have announced that Cork is to receive funding of €405 million with just over €353 million to be allocated to the regeneration of Cork’s docklands area. The funds are being allocated under the Urban Regeneration and Development Fund (URDF) package. The funding for Cork City is the largest allocation for a single local authority in the country. This proposed significant investment in Cork City further emphasise the attractiveness of Cork to investors.
Hospitality – Early recovery signs for US air travel visible
The short-term fortunes of Ireland’s hospitality sector remain very much inextricably linked to Ireland’s COVID 19 restriction levels over the next few months. However, interestingly we saw some anecdotal evidence of recovery ‘green shoots’ in the international travel segment last week. The US transportation security administration said that about 2.57m passengers went through airport checkpoints of the weekend 12th-14th March – 1.36m went through the checkpoints on Friday of that week marking the biggest day for US air travel since 15th March 2020. This trend will be worth monitoring through the remainder of the year. Should international travel rebounded quicker than expected it could represent a big boost to Ireland’s hospitality sector but particularly those hotel operators that are more exposed to the international tourism market.