Growing first half signs that the commercial property market is on the way back, house prices are rising everywhere not just in Ireland and equity and commodity markets perform strongly as we say goodbye to the first half of 2021. All these stories and more are covered in this week’s insights update from BlackBee.
Last week provided further evidence that the recovery phase of the global economy is continuing. Purchasing Manager Index (PMI) data for June in the US, Euro zone and China confirmed robust growth in both manufacturing and service sectors. The Euro zone certainly seems to be playing catch up with the other developed economies following the rolling lockdowns of the first half – last week’s June release of the manufacturing PMI showed that hiring in manufacturing was taking place at the fastest pace in the 24 year history of the survey! Elsewhere, the June US employment report released on Friday showed a healthy beat with 850,000 jobs created versus expectations of 720,000 – something of a relief to equity investors given the last few reports have come in behind forecast. However the heat coming from the US economy together with low interest rates does seem to be manifesting itself in the housing market where prices across 20 cities rose by nearly 15% in April compared to a year earlier. While lack of supply is the cause of this (sound familiar?), price inflation at these levels is likely to be of interest to the US Fed as it debates its next monetary policy moves.
In Ireland we saw more evidence of the impact of the reopening of society on the economy with June COVID adjusted unemployment easing again to 18.3% in June compared with highs of 27% in January and February. As the economy reopens further in the second half of the year we expect unemployment to continue to fall.
Last week marked the end of the second quarter of 2021, another bumper one for equity markets (see table for Q2 performances). The technology sector was again one of the leaders with the Nasdaq gaining 13% in H1, allowing US equities to comfortably outperform most regions. Perhaps the surprise performer in the first half of the year was the European stock market which matched US gains, helped by investors rotating from growth stocks to value stocks (sectors like banks, energy and materials) which typically benefit significantly from an improving economic picture. Aside from continued strong performance from technology stocks last week, the other big news came from the banking sector where the largest US banks announced plans to increase their total dividends by approximately $2 Billion next quarter on foot of them ‘passing’ the US Federal Reserve’s latest stress tests.
Bonds was not the asset class to be overexposed to in the first half of the year. Although performance was better in the second quarter, a stronger than expected economic recovery and rapidly rising inflation hit government bond returns in particular over the first six months. Sectors like emerging market and higher yielding bonds were much better performers as they tend to be more correlated with equity markets and followed equities’ lead in the first half.
Commodities were the best performing asset class in the first half of the year, helped by a massive rally in oil prices which rose by half, reflecting rapidly rising demand as the global economy recovered and supplies which were still being carefully managed by the major global oil producing countries. The oil rally continued last week also despite the UAE objecting to an agreed deal to gradually increase supply levels across Russia and the OPEC countries. Elsewhere prices were a little flatter in the metals sector, held in check by further gains in the US dollar although generally industrial metals have performed well in the first half thanks again to the stronger than expected economic recovery.
Housing – House prices rising everywhere, not just in Ireland
Last week saw the publication of Q2 reports on Irish house prices from both daft.ie and myhome.ie. The overarching conclusion was exactly the same – house price inflation has accelerated. Both reports showed that national asking prices rose by 13% year on year with a marked acceleration in inflation in the second quarter in particular. The main reason for the pick up in inflation is one we’ve flagged many times previously – lack of supply. This is best articulated by one statistic from the myhome.ie report that showed the number of houses for sale nationally at the end of June represented just 0.6% of the entire housing stock in Ireland! Although price inflation has accelerated in previous months, our chart of the week shows that Ireland is not alone in this regard. If we look at the year on year change in house prices globally over the past 12 months we can see that house prices are rising across the board and at a much quicker pace in many areas compared to Ireland.
Commercial Real Estate activity on the way back to ‘normal’
Reports from both Savills and CBRE last week showed that the commercial real estate market is normalising, even if COVID restrictions are still holding back activity in certain areas. Savills’ Q2 update noted that €1.5 Billion was invested in real estate in Q2 resulting in €2.7 Billion as a whole for the first half of the year, the second best first half performance on record. Here the industrial and private rental sectors were the strongest in terms of investment flows. Office activity lagged with CBRE flagging that this might remain the case until businesses return to their offices in the Autumn and are in a much better position to assess their office space requirements. From a fundamentals perspective it was heartening to see CBRE comment that prime Dublin office vacancy rates are showing signs of stabilising which should ultimately help prime office rents (which currently stand around 11% lower than their pre pandemic levels) bottom out. Meanwhile hotel activity improved in the first half with €170 million of transactions in the period versus €120 million for the same period in 2020.
Hospitality – Consensus firms around 2023 hotel recovery
Deloitte’s latest European hotel sentiment survey results appear to suggest that the industry consensus about when it could recover back to 2019 performance levels is hardening. 52% of respondents felt that the sector could recover back to 2019 levels by 2023, slightly up compared to the last wave of results in October. This compares to 38% who felt the recovery would be complete by 2024 or later. Our view is that Irish hotels should be capable of recovering back to 2019 levels by 2024 with 2022 representing a key year for the recovery. Furthermore, the return of international travel will be crucial to the medium term recovery prospects for Dublin based hotels in particular.