Higher bond yields keep the pressure on risk assets, removal of COVID restrictions a big positive for the Irish economy and the stars are beginning to align for the tourism and hospitality sectors in Ireland. All these stories and more are covered in this week’s insights update from BlackBee.
One theme that we dealt with in our recently published 2022 outlook was that recovery patterns around the world differed and as a result, investors are likely to see different approaches to monetary policies this year. Although we’re only in January we can already see some evidence of this playing out. In the US economic growth continues to be robust as evidenced by stronger than expected housing starts and building permits in December and an improving January Philly Fed reading (all announced last week). In light of this (alongside elevated inflation readings), in our view the US Fed should be increasing interest rates this year and rolling back on its emergency COVID monetary policies.
Contrast this however with the experience in China. Its Q4 GDP report released last week showed that momentum in the economy remains at a low ebb. Although activity accelerated in Q4 compared to Q3, on an annual basis the economy only grew by 4% – probably 1-1.5% below its potential. In our view looser monetary policy is required to arrest this slowdown so we were encouraged to see Chinese authorities cut two key lending rates last week. This gives us confidence that policymakers there stand ready to support the economy in China, something which should support the overall global economic recovery over the medium term.
Last week we also published our Q1 2022 Irish economic outlook indicating that we believe another strong year of economic performance is in the offing. In the short term however, we expect economic data to be a little softer as the impact of omicron washes through. We saw some of this in last week’s construction PMI reading which although relatively healthy (53.7, well above the 50-level indicating growth) was down from November’s 56.3 level. Our overriding view on omicron though is that its economic impact will be temporary and, in that context, the recent news of the removal of most COVID restrictions is very welcome indeed.
Last week was another uncomfortable one for equity investors, with continued advances in bond yields a headwind for stocks. Again, the technology sector struggled visibly last week as sovereign bond yields climbed and as quarterly earnings at pandemic ‘darlings’ like Netflix and Peloton disappointed. On the whole so far, the earnings season has been positive however and if 2022 earnings expectations are delivered upon we believe this can be a source of support for stocks this year. Another factor which may support equities early this year is merger and acquisition (M&A) activity, particularly if dealmakers move in fear the era of super cheap US money is coming to an end. As our chart of the week this week shows, M&A activity reached an all time high in 2021 and Microsoft’s $75 Billion deal for gamer Activision Blizzard last week got activity off to a bang in 2022.
As noted earlier sovereign bond yields again trended higher as investors increasingly adjusted to the reality that higher interest rates are on the way in certain parts of the world. Interestingly rising bond yields have also been visible in the Euro area in the past few weeks and German 10-year yields actually turned positive for the first time since 2019 last week! This has led some investors to speculate that interest rates, as in the US, will also move higher in the Euro zone in 2022. However, we still firmly believe that the ECB will not go down this road this year.
Commodity markets were one of very few bright spots last week for investors. Oil prices again pushed higher, as the lack of any new news on supply again helped support prices as did broader instability (particularly surrounding Russia and Ukraine) in energy markets. The geopolitical instability involving Russia also helped the precious metals like silver and gold which were firmer as a result.
Forestry – Major climate change dividends available if forestry sector can scale up
Coillte released a report last week highlighting how the Irish forestry industry if scaled up, can produce enough timber to displace the emissions equivalent to those produced by 1.35 million cars, that’s 3.7m tonnes of Co2 per year, and represents 6% of our total emissions. However, the ability of the industry to achieve this depends on the substitution of more carbon intensive products for timber products in areas of construction, packaging, and energy. To do this, we must first have a reliable supply of Irish timber. The Department of Agriculture’s release of their Forestry dashboard last week didn’t provide much encouragement. The data displayed a reduced conversion rate between hectares licensed for planting (4,255ha) and hectares actually planted (2,016ha), down from 2,435ha planted in 2020 and 3,549ha in 2019. Over the last 3 years 13,000ha have been approved for planting but only 8,000ha have been planted, a conversion rate of 61.5%, something that will need much improvement if the sector is to reach potential.
Hospitality – The stars are beginning to align for Tourism and Hospitality
The pandemic era has been extremely challenging for the tourism and hospitality sectors, but light is starting to appear at the end of the tunnel. Last week Ryanair announced its summer 2022 flight schedule out of Dublin during which it will operate 900 flights a week to 120 destinations, an increase of 22 routes when compared to 2019. Dublin Airport Authority, which operates Dublin and Cork Airport attributes the recovery to the Travel Recovery Support Scheme (TRSS), providing €160m in government funding (€90m to Dublin, €70m to Cork) to incentivize capacity restoration, which it hopes will be extended to winter 2022.
The latest hotel performance data from STR also highlights the improvement in RevPAR which increased from an average of €32.3 in 2020 to €46.8 in 2021, and in occupancy levels from 31.6% to 38.7% across 2020 and 2021respectively. While this was still significantly less than 2019, 2021 was also fraught with lockdowns so a year of trading free from restrictions should boost performance further, especially as the government looks set to remove the existing restrictions as omicron moves into the rear view mirror. Overall, the increased number of flights, improving hotel performance, and likely relaxation of restrictions indicates demand and subsequently performance looks set to drastically improve in 2022, although we still expect it will be 2024 before the industry has fully recovered.