Stagflation concerns rise as China barely grows in Q3 and inflation readings remain elevated, the Irish hotel sector welcomes further easing of COVID 19 restrictions and Aedifica deal highlights that institutional interest in the Irish care sector remains strong. All these stories and more are covered in this week’s insights update from BlackBee.
Over the past couple of months two key economic themes for investors have been the slowing of the world economy and the persistence of higher inflation. Unfortunately, we saw more evidence of both last week.
On the economic growth front Q3 Chinese GDP told a tale of an economy that had slowed markedly in the past few months. GDP was up 4.9% compared to Q3 2020 but that implied that the economy only inched ahead by 0.2% in Q3 compared to Q2, a stall speed almost unheard of in the recent history of China’s economy. This slowdown narrative was then validated further by the release of the Beige Book in the US (a review of anecdotal information on the US economy released 8 times a year by the US Federal Reserve). Within the review the comment that the “pace of growth slowed…. constrained by supply chain disruptions, labour shortages and uncertainty around the Delta variant of COVID 19” certainly stood out. It does appear that investors are acknowledging the slowdown – our chart of the week shows that investors are turning more cautious on the economic recovery based on the responses from the October Bank of America Merrill Lynch
On the inflation side of things, elevated readings remained the norm. UK inflation in September came in at 3.1%, a slight easing on the August rate but small comfort for consumers given rapidly rising energy prices which will add to inflation rates over the next few months. Furthermore, the 10 year US breakeven inflation rate (the inflation rate implied by the difference between nominal and inflation adjusted bonds) hit 2.6% last week, the highest since 2012 in yet another sign that higher inflation could be more persistent than initially thought.
The gathering economic clouds over the two largest economies in the world didn’t appear to matter a jot to the equity market which again made decent progress last week. The positive earnings season is certainly a distraction from the slower economy – over 80% of companies that have reported Q3 earnings so far have beaten earnings expectations while the year on year growth rate for Q3 earnings has climbed to 30% over the past couple of weeks, up from about 25% before the start of earnings season. Although momentum in the stock market has recovered of late, one can’t help but feel that 2022 will represent a tougher challenge for equity markets as they face dual headwinds of slower economic growth and the removal of central banks’ COVID 19 emergency monetary policies.
Government bonds again came under renewed pressure last week with yields rising in the face of upward pressure as the ‘transitory’ inflation narrative showed signs of melting, best illustrated by the rise in breakeven inflation rates that we noted earlier. Corporate bonds also came under pressure with only high yield bonds managing to resist most of the negativity, helped by the strong risk sentiment in equities. Not surprisingly, inflation linked bonds continued to make good progress and have been one of the best performers in the bond space so far this year.
The price action was a little less frothy in the commodity sector last week. Although oil prices continued to move higher, the energy gains here were offset elsewhere – particularly in the base metals space. The oil price action was again driven by the themes of firming economically driven demand and modest supply increase commitments. In the metals space copper was the main loser, giving back much of its outsized gains in recent sessions.
Hospitality – Government relax restrictions further, spending eases as holiday season ends
The Irish hotel sector last week welcomed the government announcement of a return to normal operating hours, as well as scrapping the limit on indoor and outdoor events meaning that wedding numbers are no longer restricted as of October 22nd. Vaccine boosters are reportedly being rolled out to over 60s with hotels continuing to host vaccine centers – with this additional rental income expected to continue over the next quarter. Vaccine passports will continue to be required to enter indoor events until February 2022 at the earliest, putting hotels under further pressure as the Employment Wage Subsidy Scheme (EWSS) comes to an end in December. In other news, AIB’s spend trend data showed a decline in consumer spending across the hospitality sector for September, with spending on hotels down 25% from August as we come off the highs of the summer months.
Forestry – Minister for Agriculture, Food and the Marine, Charlie McConalogue T.D., announces overall CAP Strategic Plan Funding
Minister Charlie McConalogue announced that the CAP Strategic Plan would have funding of €9.8bn across the 2023-2027 period. Of this €9.8bn forestry measures will be financed by Eco-Schemes under pillar 1 of the CAP strategic Plan (direct payments and social interventions) and the new Agri-Environmental climate measure under pillar 2 (rural development), both of which have been allocated €1.5bn (or €297m per annum). This funding should help boost the government’s ambition to meet growing climate and environmental needs, and their renewed intention to meet their 8,000 hectare per annum planting target for Irish forests. Under the new CAP plan farmers with existing forestry or farmers who begin reforesting their land will continue to be entitled to basic income support for sustainability (BISS), which should continue to incentivise farmers to engage in forestry.
Real Estate and Healthcare – IMF cautious but hopeful about rising house prices and Aedifica to invest €43.5m in 3 Irish care homes
In an interview last week with the Examiner, the IMF attributed the surge in Irish house prices to low mortgage rates and high costs of building materials such as steel, timber, and insulation products which are currently in short supply due to supply chain issues. Like us it expects that over the medium-term inflation rates will slow as interest rates slowly rise. However, in the short term demand is expected to remain strong as people look to lock in mortgages at lower rates, especially with banks offering attractive rates for ‘green mortgages’ (last week Bank of Ireland introduced a green mortgage rates of 2% for newly built homes with a BER rating above B3). Aedifica this week announced a €45.5m investment in the development of 3 care homes in the south-east of the country (2 in Waterford, 1 in Kilkenny) comprising of 273 units in total, bringing their total Irish Healthcare portfolio value to €180m, highlighting that institutional interest in the Irish care sector remains strong.