Theresa May

24 Jul 2019

Irish Banks: downgrading mortgage market forecasts

Irish residential mortgage market data for Q219 continued to run below both our and consensus forecasts for FY19, with drawdowns of €2.25bn in Q2, +19.4% q/q vs Q119 and +11.7% y/y vs Q218.

It brings the year-to-date drawdown total to €4.13bn, and the 12-month running total to €9.14bn. As such, this is some way below our 2019 forecast for c.€10.1bn in new residential mortgage drawdowns. 

Additionally, mortgage approvals do not suggest the pipeline of fresh demand is accelerating, with June’s approvals of €1.032bn 9% lower m/m vs May, and 7% higher y/y vs June 2018. The H119 total of €5.45bn is 10% higher than the same period last year, while the 12-month running total is now at €10.6bn. Similarly, this suggests that the 2019 total will struggle to meet our forecasts for total approvals this year of almost €11.5bn.

The mortgage market data comes amid a significant deceleration in property price inflation (nationally +2.8% y/y in May 2019 vs +12.4% y/y in May 2018), particularly in Dublin (+0.6% y/y in May 2019 vs +10.9% y/y in May 2018), while planning applications (Q119 +18% y/y vs +37% y/y in Q118) and new home completions (Q119 +25% y/y vs +40% y/y in Q118) also suggest a slowdown in current or future construction activity vs prior activity levels. 

As a result of the softening mortgage and housing market data noted above, we revise slightly lower our expectations for FY19 mortgage drawdown and approvals. We now expect to see €9.75bn (-3% vs prior) in new mortgage drawdowns and just over €11.0bn (-4% vs prior) in approvals this year. For 2020, we expect to see just over €11.0bn in new drawdowns (previously €11.65bn) and between €12.0-12.5bn in approvals (previously c.€13bn). 

Glenveagh Properties: Progress at odds with price 

We publish a note on Glenveagh this morning in which we assess the group’s progress since its IPO 21 months ago, examine the issues weighing on its share price and refresh our estimates. 

From an operational perspective, the group has done all that it set out to do at this stage of its multi-year scaling journey. It has assembled a significant land portfolio in good locations at a reasonable cost. It has cultivated a deep network of subcontractors to build its product and exceeded its first annual unit completion target of 250 by 10%. It is also well set to meet its FY19 target of 725 units. Nevertheless, concerns about slowing HPI, costs and Brexit have been weighing on the share price of late. 

While headline HPI has slowed significantly over the past 12 months (from double-digits to the most recent reading of 2.8%), a range of indicators suggest that the affordable/first-time buyer market segment (where Glenveagh is focussed) continues to show robust demand and modest upward momentum in pricing. Regarding costs, we have not yet seen compelling evidence of either labour shortages or significant labour cost inflation despite investor concerns and the advantages of large, efficient players building a standardised product at scale in a fragmented market are real. Furthermore, the long-term fundamentals remain sound. The latest demographic projections underscore the long-term demand for a larger housing stock, particularly in the Greater Dublin Area (GDA). Although housing supply is responding to demand and steadily increasing, the latest data hint at a slowing rate of output growth.

While we retain our unit completion forecasts and make minor adjustments to our gross margins, our revenue and profitability forecasts move modestly lower to reflect a greater focus on lower-priced market segments and lower HPI assumptions. 

Givaudan - Acquires German perfume house, incremental impact

Givaudan has announced the acquisition of Munich-based Drom, a perfume house creating fragrances for consumer products and fine fragrance customers across the world. 

The acquisition remains subject to formal approval from the relevant regulatory authorities but is expected to close in Q319. No financial details were provided other than that the business would have represented €110m of incremental sales to Givaudan’s results in 2018 on a pro forma basis. 

BoJo is a go

As widely expected, the UK Conservative Party today announced that Boris Johnson was the victor in its leadership contest, defeating Foreign Secretary Jeremy Hunt by 66% to 34% in the run off among its 160,000 or so members. Mr. Johnson is set to officially become Prime Minister later today after current PM Theresa May conducts her final Prime Minister’s Questions in parliament, makes a farewell speech and sees the Queen to announce her resignation. Afterwards, ‘BoJo’ looks set to be formally appointed, following a trip to Buckingham Palace.

Cabinet crucial

The precise time that Mr. Johnson will name his Cabinet is unclear. Of course, he cannot appoint his team formally, until he is officially Prime Minister, which means that the official process may start late this evening. Financial markets will be keen to see who is Chancellor, particularly given the tax and spending promises made during the leadership race. 

In addition, the new Chancellor will be responsible for replacing Bank of England Governor Mark Carney, whose term at the helm of the central bank ends in January next year. 

Another key (arguably lower profile) appointment will be the Chief Whip. This is a critical role, bearing in mind the parliamentary arithmetic and that every vote might be critical. 

Deliver, unite & defeat

In his (short) acceptance speech, Mr. Johnson stated that his aims were to deliver Brexit, unite the country and defeat Jeremy Corbyn. He will undoubtedly face similar constraints to Mrs. May, especially with the parliamentary numbers. Our baseline case is that a deal emerges that is based on Mrs. May’s agreement, perhaps with changes to the backstop. We expect the new PM will initially have some political capital to push this through parliament, perhaps with a delay into the early months of next year. 

In the meantime, uncertainty is likely to pervade through markets, including further downward pressure on sterling. Indeed, we could see the UK currency testing $1.20 and 93p against the euro in the short term.

US trade talks optimism

There is more positive sentiment in markets this morning after White House Economic Adviser Larry Kudlow said it “it looks like there will be a trip to China” for face-to-face US-China trade talks next week. Bloomberg is reporting that US Trade Representative Robert Lighthizer will travel to Shanghai on Monday, though this has not been confirmed by the US Trade Representative’s office. The hope amongst administration officials is that China will “soon start buying agricultural products”, as Mr Kudlow put it. 

This morning Asian equity markets are positive, with the Shanghai composite 0.8% higher whilst US stock futures are flat. However, US sentiment looks also to be weighed down this morning by news that the US Justice Department is opening an anti-trust investigation of major digital tech firms.

IMF downgrades global growth forecasts

Global trade tensions, continued uncertainty and rising prospects for a no-deal Brexit are sapping the strength of the world economy, which faces a “precarious” 2020, the International Monetary Fund warned yesterday. 

The IMF trimmed the global forecast issued in April by 0.1 percentage point this year and next, with growth expected to hit 3.2 percent in 2019 and 3.5 percent in 2020. Risks to the global outlook are mainly to the downside with the IMF suggesting that policy “missteps” on trade and Brexit could derail a projected rebound. Slower growth will most likely embolden central banks to ease monetary policy.

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