Economic cracks starting to appear as US dollar hits 20 year high, Q1 timberland returns illustrate forestry’s value as a diversifier and an inflation hedge and Dalata provides further evidence of the hotel sector recovery in Ireland. All these stories and more are covered in this week’s insights update from BlackBee.
Last week saw some sobering economic news out of the US and Chinese economies. In the US the preliminary estimate of Q1 GDP came out weaker than expected at -1.4%, the first decline in quarterly GDP since the COVID crisis in 2020. At first glance the result was disappointing, but on closer inspection the underlying picture of the US economy still remains strong in our view.
Consumer spending (the key driver of US economic activity) grew by 2.7% and actually accelerated compared to the previous quarter. What dragged the economy down in Q1 was weaker exports which could actually hold more of a signal about weaker growth and demand across the rest of the global economy rather than in the US. The other thing weaker US exports indicates is the negative impact the stronger US dollar could have on US trade. This week’s chart of the week shows that the US dollar in trade weighted terms is hovering at close to 20-year highs which could also have negative repercussions for many emerging market economies given their sizeable US dollar denominated debt. At the end of 2021 the Bank of International Settlements estimated emerging market borrowings in US dollars at $4.2 Trillion! So, a rising dollar and rising US interest rates can create pain for emerging market economies.
Weaker economic patterns are also visible in China right now, latterly because of its zero COVID policy as lockdowns become more common. One indication of this came last week when China devalued its currency by 3% versus the US dollar. Interestingly the last time it did this was in 2015 at a time when the economy was also under pressure and the move then sparked a spike in market volatility as spooked investors feared this was the start of a wave of competitive currency devaluations in order to help struggling Asian economies. In our view China’s economy is in need of additional stimulus so any statements to this effect (following on from recent comments from the PBoC Governor) are welcome in the context of the broader global macro picture.
Equity markets were slightly higher last week although again investors saw a fair bit of daily volatility over the period. Eyes were firmly focused on the technology sector; particularly given Elon Musk’s agreed all cash $44 Billion deal for Twitter which emerged early in the week. Following this the quarterly results of heavyweights Apple, Amazon and Meta were also closely watched. Overall, they were a little mixed with some negatives thrown in, particularly for Apple which flagged continued negative supply chain issues in Q2 and Amazon where profits lagged investor forecasts on the back of slowing revenues in Q1. On the whole US first quarter results have come in ahead of expectations although the results from the financial sector and certain parts of the technology sector have disappointed.
Bond markets were marginally lower in the week as concerns about elevated inflation and hawkish central banks lingered in both sovereign and credit markets. US yields softened a touch as US first quarter GDP came in behind expectations as did GDP from a number of Euro area economies. Gathering evidence of slowing momentum in economies may provide some support to bonds in the short term even in spite of the negative inflation and interest rate backdrop.
Commodity markets held up well last week considering the continued strength in the US dollar which we flagged earlier. Much of this was down to energy prices remaining firm, with sentiment on the sector staying strong as news emerged that Russia would stop gas supplies to Poland and Bulgaria because of their refusal to pay in roubles.
NCREIF Timberland returns illustrate forestry’s value as a diversifier and an inflation hedge
Last week the Q1 2022 results of the US NCREIF Timberland Index were published. In contrast to many other conventional asset classes like equities and bonds, the index was actually positive in Q1 to the tune of 3.2% while over the past twelve months the index rose by 11.8%. This past year has marked a period where investment markets have come under some pressure either as a result of rising inflation or concerns about its knock-on impact on central bank monetary policies. In the midst of this, these results indicate that forestry has provided much needed inflation protection and portfolio diversification and we believe that the asset class can continue to provide these benefits to investors over the medium term.
Dalata trading statement validates our views on Irish hotel recovery
In last week’s edition of our insights we commented on the strong first quarter performance of Irish hotels, suggesting that the sector could recover quicker than we thought in our initial sector review last year. Further evidence of the growing likelihood of a faster recovery came via last week’s trading statement from Dalata covering recent months. Group RevPAR (Revenue per available room) in March and April was 109% of 2019 levels (ahead of investor expectations) while Dalata also struck a more optimistic note on the prospects for summer trading given increased international travel and a busy events calendar. Although there are some risks at present around the impact of higher inflation and slower economic growth (thanks mainly to the impact of the war in Ukraine), we believe the latest updates bode well for continued resurgence across the sector over the next 12 months.
Retail rebound helps Irish Q1 commercial real estate returns
Last week the first quarter results of the MSCI/SCSI Ireland Property Index were published which showed another solid quarterly return of 1.5%. What was most encouraging was the contribution of the retail sector to returns. The retail sector generated a return of 1.6% in the period (with office and industrial returns coming in at 1.3% and 3.2% respectively), the first positive return in some time and some much needed evidence that the sector is stabilising following a traumatic past couple of years arising from the pandemic.