Weekly Market Insight

Weekly Market Insight – 3rd August 2021

03rd August 2021

Plenty of good news for the hotel sector, Irish housing completions close in on pre pandemic levels and the US Fed acknowledges it may taper bond purchases sooner rather than later. All these stories and more are covered in this week’s insights update from BlackBee.

Economy

And so, it begins. Following last week’s US Federal Reserve (Fed) monetary policy meeting Chair Jay Powell finally admitted that a decision on rolling back its pandemic emergency bond purchases ($120Bn per month) wasn’t far away. In our view the Fed is likely to signal a slow and steady taper of bond purchases over the next few months given the US economy will probably have recovered back to its pre COVID size by the end of 2021 – a remarkable achievement. Any gradual removal of monetary stimulus will mean that the burden of driving markets higher again next year will fall more squarely on issues like further economic recovery and strengthening fundamentals (such as rising corporate profits and cashflows).

Speaking of economic recovery, the IMF also published its latest World Economic Outlook last week. The key overall message was that the global economy, mirroring the US achievement noted above, should recover back to its pre COVID size by the end of the year. BUT… the fund noted that a significant “fault line” has developed around vaccine access (something we’ve flagged in previous Insights updates) meaning that the emerging economies of the world could lag the recovery in the more developed economies such as those of the US and Europe if their populations can’t be vaccinated quickly. This is important because the economies of the emerging world are forecast to be far and away the biggest contributors to growth across the world economy over the next ten years. So, it is absolutely crucial from an economic perspective that their vaccine needs are met as soon as possible.

Equities

Equity markets gave up some ground last week despite continued good news on second quarter earnings. Data from Refinitiv showed that Q2 profits at US companies were up 86% compared to a year earlier while revenues were up 21%. As the crisis moves further into the rear view mirror, the guidance companies are giving to investors on the outlook for revenues and profits will be important. So far profit guidance for US companies in Q3 and Q4 continues to inch higher which is positive from a sentiment perspective. One notable negative last week was news of a regulatory crackdown by the Chinese government on education and technology companies. For example, one of the largest Chinese tech firms Tencent halted registrations for its WeChat app (think Chinese version of WhatsApp). The move led to falls across Chinese and Hong Kong listed technology companies with the tech heavy Hang Seng Index in Hong Kong suffering as a result (see table opposite).

Bonds

From a returns point of view it was a quieter week last week for bonds compared to recently. The Fed meeting noted above was a key event with sovereign yields drifting slider lower on the back of it, a good sign that policymakers had gotten their message across without necessarily spooking investors. We can see in the performance table that government bonds have had a better time of it compared to credit markets over the past month. Easing inflation concerns have been central to this while a slightly weaker tone to economic data has also helped their cause.

Commodities

Commodities enjoyed another positive week last week with broad based gains across both energy and metals. In the oil market, falling stocks of oil in the US outweighed lingering concerns about the COVID delta variant, helping prices move modestly higher. Metal prices had another good week helped by the combination of strong economic growth, lower bond yields and a slightly weaker US dollar.

Sector News:

Commercial Real Estate (CRE) – Hibernia echoes improving tone in Irish real estate

One common theme from the various Q2 estate agent updates in recent weeks has been the improvement in activity as the economy reopened. Hibernia REIT’s Q2 update last week also provided solid evidence of this, noting that investment volumes rose to €2.8 Billion in the first half of 2021 compared with €1.1 Billion for the same period last year. Rent collection levels also remained strong, another improving sign for the property market. 98% of the commercial rent for the quarter ending in September had either been received or was on an agreed payment plan while 98% of residential rent contracted for July had been received.

Residential Real Estate – Finally some good news on housing supply

For some time now we’ve argued that greater supply is central to cooling down both house prices and rents in the Irish market. Of course COVID has not helped in this respect but what we see now is hopefully the start of a growing house completion trend based on the data released by the CSO last week. 5,000 units were completed in the second quarter of the year which was well up on Q2 2020 but interestingly was also even higher than in Q2 2019. Our chart of the week this week shows that completions on a rolling 12 month basis are now back to close to pre pandemic levels. Economic commentators (including ourselves) are generally agreed that completion levels now need to push on to meet housing demand as the economy grows.

Hospitality – Busy week in the sector

Last week brought the successful reopening of indoor dining in the economy which should boost the recovery outlook for the sector more broadly. Elsewhere the June data on Irish hotel performances showed a big improvement in occupancy and RevPAR (Revenue per available room), two key barometers for hotel performance. If this continues for the rest of the key summer season, in our view it would mark an excellent start to the recovery for the sector, particularly for hotels outside Dublin which are more exposed to domestic economic activity and ‘staycationing’. Finally, Air France/KLM and IAG also had some interesting and positive things to say about the recovery in air travel last week. IAG (British Airways’ parent) said it planned to fly around 45% of normal capacity in Q3 (up from 20%) while Air France/KLM said it planned to fly 70% of normal capacity this summer. A swift recovery in inbound leisure travel into Ireland would represent a massive boost to the hotel sector in Ireland.

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