Why forestry investing just makes sense, leveraged equity investors reduce their borrowing for the first time since the pandemic began and all eyes on Jay Powell at Jackson Hole. All these stories and more are covered in this week’s insights update from BlackBee.
This weekend gone marks the staging of the annual Jackson Hole economic symposium in Wyoming, noteworthy given that central bankers have often used the symposium to signal any changes in monetary policy. This year’s session will be particularly closely watched for any indications from Fed President Jay Powell of when the US central bank is likely to begin to taper its bond purchases. In addition Treasury Secretary Yellen will also speak and could provide some guidance around the short term direction for US fiscal policy, again important since this has been such a support to the US economy in its recovery.
Speaking of tapering, we saw more evidence last week that the pace of economic momentum around the world may have ‘rolled over’. Flash service Purchasing Manager Index (PMI) data for August, an important barometer of consumer spending, eased lower compared to July in a number of key economies while some confidence indicators also slipped lower. We think a combination of supply bottlenecks, rising inflation (putting a short term squeeze on consumer confidence and spending) and concerns around the delta variant are most likely behind the slightly weaker economic signals.
In our view the breakneck economic momentum of the first half of the year was always going to normalise at some point. However, from an investor point of view the vital thing is that this easing in economic momentum is not having a visible impact on growth forecasts in 2021 or 2022. Our chart of the week this week shows the evolution of economic growth forecasts around the world over the past six months. As we can see, the 2021 growth forecast for the global economy has been stable at 6% for the past few months while 2022 forecasts suggest the world economy is set to grow by a healthy 4.5%.
Equities powered ahead last week, sweeping aside the previous week’s nervousness around the US Fed’s minutes and when the central bank’s bond taper would start. Comments from US Fed policymakers are likely to be a key short term driver for the stock market from these levels. In the background we also feel there’s a couple of other factors which suggest the momentum which has driven equities significantly higher this year could shift. The first of these revolves around the high yield bond market – this has struggled a bit more of late with more chat around tighter US monetary policy. Generally high yield bonds and equities are positively correlated so it’s slightly unusual to see equities and high yield bonds go in opposite directions. The second factor is investor leverage – data from both FINRA and Goldman Sachs last week showed that US investors had cut their levels of borrowing against their portfolios for the first time since the pandemic began. In our view both factors are worth monitoring for equity investors given the strong gains this year!
Sovereign bond markets struggled last week with yields apparently moving higher in expectation that US monetary policy will tighten sooner rather than later. This seemed to overpower a couple of other developments that one would have felt would have been bond friendly – the slightly softer tone to world economic data (noted earlier) and the geopolitical uncertainty in Afghanistan, heightened even further by last week’s attack on Kabul airport.
Commodity markets posted a very strong performance last week, taking their cue from equities. Oil was the big winner, helped by the geopolitical uncertainty in Afghanistan together with growing hurricane risks in the Gulf of Mexico region, a key area for US oil output. Copper along with other industrial metals also enjoyed a strong performance with some suggestion that waning concerns about Chinese commodity demand could be a factor in pushing prices higher.
Forestry – CO2 Emissions still rising, forestry a key part of the climate change solution
Last week Gas Network Ireland published data showing that approximately 25% of Irish power output in July was generated by coal which adds to carbon emissions. In the same week a piece written by Stephen Kinsella (Associate Professor of Economics at the University of Limerick) showed that despite the good intentions and political rhetoric, global carbon emissions continue to rise leaving mankind with very limited scope to avoid the widely recognised climate change temperature tipping point of 1.5 degrees Celsius above pre industrialised levels. We firmly believe that forestry as an asset class not alone offers a solution to the climate change problem (by sequestering carbon from the atmosphere) but also attractive returns in a world increasingly starved of investment income. Following the successful launch of our first Forestry bond earlier this summer, we are working on a follow-up bond which we hope can represent a small step in turning the tide (excuse the pun!) in the climate change crisis.
Housing – Signals still very supportive for Irish housing demand
Numerous economic reports this year have confirmed that medium term housing demand in Ireland is likely to be very strong. We got more confirmation of that picture last week from two sources. Firstly, ISEQ listed Glenveagh Properties announced that not alone had it already secured buyers for the 1,150 homes it was hoping to deliver into the market this year but it had also secured buyers for 300 units in 2022. In its investor update it also noted that it would look to increase output to 3,000 units by 2024 which should help the supply demand dynamic in the housing market. Elsewhere the Banking and Payments Federation published its data for July which showed the highest volume and value of approvals since the series began ten years ago! Given that lending is a factor central to housing markets, the strong backdrop here should in our view mean housing demand stays robust and prices are on balance likely to slowly grind higher.