Weekly Market Insight

Weekly Market Insight - 4th May 2021

04th May 2021

Divergence in economic performance around the world, confidence within Irish economy rising rapidly and further evidence that small nursing homes will become a thing of the past. All these stories are covered in this week’s insights update from BlackBee.

Economy

Two key global economic themes were reinforced last week. The first of these is that the global economic recovery is continuing, but the differing speed of COVID 19 vaccination progress means growth around the world is a little unbalanced for the time being. The GDP reports from the US and Euro zone last week clearly showed this. In the US where vaccine progress has been impressive the economy powered ahead by 1.6% in Q1 (6.4% annualised) boosted by huge strength in consumer spending (see our Chart of the Week). However, in the Euro zone which has been dogged by slow vaccine progress and a resurgence of COVID restrictions, the region fell back into recession in Q1 with Germany contracting by 1.7%.

The second theme was that there is a long way to go before global central banks change their monetary policies. US Federal Reserve President Jay Powell summed this up best, saying that “We’re a long way from our goals” while Bank of Japan Governor Kuroda admitted that he didn’t see Japan hitting its inflation targets now until 2024. What does this mean? Again, lower for longer interest rates with a big negative knock on impact for savers in particular.

Closer to home, Bank of Ireland’s April economic pulse survey showed that confidence within the Irish economy is climbing rapidly. The results of the survey showed business confidence at its highest level since before the first coronavirus outbreak with consumer confidence also registering a sharp rise. Altogether this gives a great future signal for the performance of the Irish economy in the second half of 2021 as society reopens.

Equities

Equites were mixed last week with major indices pairing gains on Friday due to the divergence in economic performances around the world with Europe tending to lag the US. The NASDAQ Composite had been on track to enjoy another buoyant week with tech heavyweights like Amazon leading the charge thanks to stellar Q1 earnings which beat Wall Street forecasts by around 70%! However following the release of mixed economic data, tech shares led the decline on Friday with the Nasdaq closing the week 1% lower. Generally Q1 earnings have tended to beat investor expectations – by late April around 25% of companies in the S&P 500 Index had reported first quarter profits with 84% of those beating earnings expectations.

Bonds

Government bond markets headed lower last week, mainly taking their direction from the strong US GDP report and also from a stronger than expected core PCE inflation reading (an indicator of US consumer inflation closely watched by the US Fed) which rose by 2.3%. Credit markets unsurprisingly performed better, again helped by the more positive tone from equities.

Commodities

‘Doctor Copper’ (a term often used for the base metal to indicate its status as a barometer for the world economy) was the star of the commodity space last week, running up another strong gain during the week to hit $10,000 a tonne for the first time in 10 years. The metal has now doubled in price from its COVID lows, fuelled by a growing belief that the metal will benefit from post pandemic stimulus spending as well as a worldwide push for decarbonisation. Oil has also been a beneficiary of the strengthening global economic narrative this year and it enjoyed another good week last week with prices rising by 4-5%.

Sector News:

Residential/Social Housing – High level of housing demand evident as mortgage drawdowns reach highest levels since 2007.

Mortgage drawdowns in Q1 2021 reached their strongest levels since 2007 according to data from the Banking and Payments Federation published last week. This strength of demand, together with the depleted outlook for 2021 housing completions is likely to keep the upward pressure on house prices in place, shining even more light on the need for social housing projects to meet overall housing demand. The impact of COVID restrictions on construction was also noticeable in that new builds accounted for the smallest share of property purchase mortgages since Q4 2016.

On the issue of housing supply, Goodbody Stockbrokers’ housing tracker data for Q1 estimated that 4,000 residential units were completed in the first quarter. Although this was down 20% compared to last year, the numbers were better than could be expected given the construction sector restrictions in place so far this year.

Hospitality – Scene is set for rapid summer improvement in trading for hoteliers. 

Last week the government announced that hotels in Ireland can open again on 2nd June as COVID restrictions are rolled back. The big improvement in Irish economic confidence noted earlier is a timely boost for the Irish hotel sector as we enter the key leisure travel period of the year. In our view, improved levels of consumer confidence and pent up savings and demand for travel across Irish households should translate into a positive trading environment for hoteliers and particularly those targeting the ‘staycation’ segment this year.

Interestingly, STR (a data and insights specialist in the global hospitality sector) noted during a European hotel performance presentation last week that improving forward bookings for hotels in Ireland in June and July indicated that Irish people were already ‘betting’ on hotels reopening for the summer season in advance of last week’s government announcement

Healthcare – Smaller nursing homes to become a thing of the past. 

BDO and Nursing Homes Ireland (NHI) released the results of their 2020 Annual Private & Voluntary Nursing Home Survey last week. The report noted that in recent times, smaller nursing homes around the country have made the voluntary decision to close due to financial headwinds, the financial implications of achieving regulatory compliance, the absence of a successor in a family run home and more recent the implications of Covid-19. These are all issues we’ve stressed previously in the context of the economies of scale in the nursing home sector. The demise of these smaller nursing homes was also highlighted as a challenge ahead for the nursing home sector insofar as it will have a knock on impact on residents and their choice of home.

The report stressed a number of important changes across the sector over the past number of years. Since the initial 2014 survey, there has been an increase of 4% in the number of homes (437 in 2014 to 453 in Sept 2020). There has also been a 17.4% increase in the number of beds with the average size of homes increasing from 51 to 58 beds, underlining the trend towards more financially viable “bigger” nursing homes that benefit from economies of scale. The report highlighted that the population of over 65s (currently estimated to be 720,200) is expected to grow to over one million by 2031. This combination of the closure of smaller nursing homes and an ageing population will no doubt drive increasing demand for nursing home facilities.

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