One billion COVID vaccinations passed globally last week, further activity in the social housing sector and equity markets get a fright from President Biden’s tax proposals to target the wealthy. All these stories are covered in this week’s insights update from BlackBee.
Last week was a little quieter in terms of economic news around the world but what investors did see still confirmed that the global economy is very much in recovery mode. Across the main developed economies the big release last week was the provisional or ‘flash’ purchasing managers’ indices (PMIs) which are closely watched barometers of future economic activity. From the UK to Germany and the US we saw the same signal, one of economies very much in recovery mode.
Our chart of the week this week also validates this theme – here we see how economic growth forecasts for 2021 have changed in recent months. As we can see the general trend has been one of growth forecasts being upgraded. Within this trend though we can see that the economies that have seen the strongest upgrades are those where vaccine rollout has been faster, thereby enabling a swifter return to economic normality – the US is a perfect example of this.
As the year has progressed, the strong economic rebound has caused some investors to question whether central banks might change their loose monetary policies. The answer provided by the ECB last week was an emphatic no! “Simply premature” was how ECB President Christine Lagarde described suggestions that the ECB might make changes to its bond purchase programme in the short term. In our view it will be some time before global central banks consider changes to their ultra loose monetary policies. The global economy returning to pre COVID 19 levels is the first signpost back on the road to monetary policy normality and to our mind that probably wont occur until at least the second half of 2022.
A couple of weeks ago we expressed surprise that equity markets didn’t react to news that President Biden was planning on overhauling US corporate taxes. Well we saw a more negative reaction last week on proposed changes to income and capital gains taxes which would hit wealthier groups. This was balanced up however by the good economic news noted above as well as some good Q1 earnings reports. The financials sector was the main focus this week with a number of sector heavyweights handsomely beating Wall Street forecasts thanks to stronger trading performances and a sharp fall in provisions for loan losses as the economy has recovered.
Bonds struggled for a little bit of direction last week. Euro area sovereign yields were mixed despite the ECB change confirming that it was unlikely to shift its stance on monetary policy while US yields moved slightly lower as investors digested President Biden’s tax plans. The credit markets were a little softer also, taking their cue from the quieter week for equities.
On the whole commodities moved a little high last week with strength in metals offsetting weaker oil prices. Close Rising COVID cases in the developing world seemed to weigh on oil price sentiment. News stories suggesting that the Biden administration could ease Iranian sanctions (potentially allowing the country to start supplying world markets again) also appeared a factor in the softer oil price backdrop.
Residential/Social Housing – Risk that the construction sector could be ill-equipped to meet the pent-up demand.
Last month Minister for Housing, Darragh O’Brien TD published data on government housing output for 2020 showing that housing delivery reached just over 70% of its original target for the year. By the end of June 2020, only 13% of the overall 2020 target had been reached which shows the strong rebound in the final 7 months of 2020 following the easing of restrictions.
The level 5 restrictions reinstated from early this year is again likely to have a severe impact on the delivery of housing in 2021. In addition to the hurdles of public health restrictions, the Think Tank for Action on Social Change (TASC) along with the Chartered Institute of Building (CIOB) last week published a report highlighting another concern that faces the delivery of housing. The report warned that due to skill shortages, the sector may be ill-equipped to meet the pent-up demand, potentially putting further upward pressure on house prices.
The Irish Times also reported last week that Clúid, one of the largest Approved Housing Bodies in Ireland has partnered with UK based insurance company Legal & General to acquire a 40-unit apartment scheme in Raheny Dublin. Housing more than 100 tenants, the €18.8m scheme will form part of a wider collaboration. In December, they stated that over the next two years they plan to jointly invest €54m in various social projects. The acquisition marks the first large-scale investment in social housing in the Republic of Ireland by a big international player and also the arrival of long-term pension fund capital to the AHB sector.
Hospitality – Pace of vaccines rollout will drive international travel.
The pace of vaccination across the world will no doubt be a big determining factor in when international travel resumes. Bloomberg reported a milestone last week in that over 1 billion people globally have now been vaccinated. Although there have been some concerns of late around rising COVID cases in some parts of the world, these have tended to occur in countries with lower levels of vaccination thus far.
In the US, vaccinations have been progressing at a rapid pace with over 27% of the population vaccinated already and this is already having a positive impact on travel. Following its earnings report last week, American Airlines’ CEO noted that the company sees signs of continued recovery thanks to US vaccine progress. As the pace of vaccination accelerates globally, we believe that international travel growth forecasts will strengthen, boosting the outlook for the hospitality sector in Ireland.
Commercial Property – Majority of business leaders believe there will be a return to the workplace in Q4 20201.
The Institute of Directors in Ireland’s latest Director Sentiment Monitor shows that the majority of business leaders (53%) believe that the vaccination programme will allow the economy to fully reopen in Q4 2021. 22% of business leaders believe it will be Q3 2021 while 17% believe it will be Q1 2022. The role of the office looks to continue as an important feature of the workplace with 48% of business leaders thinking that most staff will return to the workplace in Q4 2021.