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What does the summer have in store for markets?

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By Michael O’Connor

Markets in May

US equities ended in May on a modest note as inflation concerns dominated the headlines. The S&P 500 secured its fourth consecutive month of positive returns with a gain of 0.6%.

Value-oriented strategies led the way with both Growth and Momentum, last year's big winners, declining. Most factors posted positive gains, with financial and industrial leading the way as expected. Surprising to many, the Tech sector has now underperformed the S&P 500 Index for the past year.

Confidence continued to grow as economies reopened. Jobless claims in the US have fallen to a new pandemic low. Travel continues to rebound, with 1.9 million US travellers taking to the skies on Saturday, May 29, marking the busiest weekend of air travel since the pandemic began. Most importantly, successful vaccine rollouts continued in May, with the UK recording its first day of zero daily COVID deaths since the pandemic began.

What lies ahead

Despite multiple reasons for economic optimism, the expected inflation that comes with a global reopening is likely to result in some short-term market fragility over the coming months.

The most recent inflation figures saw YOY consumer prices increase 4.2% in April, the biggest 12-month increase since September 2008, the height of the financial crisis. Core PCE climbed to an annual figure of 3.1% in April, far exceeding the Fed's nominal target of 2%.

Inflation is likely to continue this run higher over the coming months. Rising commodity prices, a falling dollar, and wage growth resulting from severe labour shortages are likely to result in inflation figures of between 3% to 4% over the summer.

While short-term inflation moves suggest a continuation of the rotation into value stocks, it's important to note that the current inflationary environment is unlikely to persist over the longer term. The combination of transient inflation drivers and long-term deflationary factors should see inflation fall back to around 2.5% later this year.

So what does this mean for your portfolio?

Now is an opportune time to recalibrate your portfolios to avoid obvious interest rate risks. In my view it is a time to be underweight with long-duration assets, whether they be 20 Year Treasuries or disruptive tech stocks with no free-cash-flow. High volatility and small-caps and lower quality names should be avoided. Companies with superior cash-flow generation will continue to anchor portfolios as the current gusts of inflation takes hold.

I remain positive towards equities, with a bias to cyclical stocks and "value" names as earnings remain solid and monetary stimulus remains supportive.

With all that said, don't blindly presume that all stocks set to benefit from an economic reopening will be guaranteed "value" winners. Strong free-cash-flow is the focal point here.

Take booking.com as an example. At first glance, nations full of holiday-deprived travel enthusiasts would suggest that the near-term future is bright for the travel conglomerate. However, the market already appears to have jumped the gun on this one. 'Booking's' current valuation is now above its pre-pandemic levels despite the company's 2021 revenue projections being roughly half the revenue earned in 2019. Now I'm not saying that booking.com is a bad long-term investment, but as a forward-looking machine, the stock market has already priced in much of the expected near-term optimism, and then some, for these better-known reopening stocks.

Search for strong free-cash-flow, not just a compelling storyline.

For more investment insights, visit www.theislandinvestor.com.

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Cost of agricultural land set to increase by 8% this year

By Ted Healy of DNG TED HEALY The results of a survey on agricultural land values conducted by the Society of Chartered Surveyors Ireland (SCSI) was published earlier this week. […]

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By Ted Healy of DNG TED HEALY

The results of a survey on agricultural land values conducted by the Society of Chartered Surveyors Ireland (SCSI) was published earlier this week.

It predicts an increase in land values by an average of 8% this year and an increase of 14% on average in rental values.

The report titled, ‘SCSI/Teagasc Agricultural Land Market Review & Outlook Report 2023’, analyses the agri sector performance over the past year and projects how it will perform over the next 12 months.

In all 134 agri professionals and valuers were surveyed, who expect the outlook for dairy farmers to ease and a challenging future for sheep and tillage farming.

Rental Land values in Munster increased by an average of 13% in the last year with a 9% increase experienced in Leinster.

The report indicates that the average non-residential farmland prices in 2022 ranged from €5,564 per acre for poor quality land – up five percent from €5,308 in 2021 – to €11,172 per acre for good quality land – up two percent from €10,962 the previous year. Strong demand from dairy farmers for good quality land is driving the market.

The majority of those surveyed believe there is likely to be an increase in demand from dairy farmers to purchase farmland in 2023.

One point to note however, is that changes to the European Nitrates Directive, particularly measures aimed at protecting water quality, may have an impact on land prices, especially rental prices.

In order to maintain current levels of milk production – and to comply with the directive – many dairy farms will need to either increase their land area or reduce milk production.

The Residential Zoned Land Tax (RZLT) is also coming down the line at an alarming rate, farmers have until May 1 to make a written appeal. Under the new legislation farmers owning currently zoned land face an annual tax bill of 3% of the market value of their zoned land.

This will result in countless numbers of landowners facing crippling tax bills from next year on. It is expected that this new tax may bring forward extra land sales later this year before the tax takes hold.

The IFA (Irish Farmers Association) have this week sought a senior counsel review of the legislation governing the Residential Zoned Land Tax.

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What is a Fire Safety Certificate?

By John Healy of Healy Insurances A Fire Safety Certificate is an official document that verifies if a building design submitted as part of an application will, if constructed in […]

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By John Healy of Healy Insurances

A Fire Safety Certificate is an official document that verifies if a building design submitted as part of an application will, if constructed in accordance with the plans and specifications approved by the Building Control Authority, comply with the requirements of the Building Regulations.

Fire Safety Certificates are issued by a Building Control Authority. The certificate confirms that the building has adequate escape facilities and that the building is designed in a way that prevents and limits the spread of fire. While all buildings must comply with the fire regulations, not all buildings will need a Fire Safety Certificate.

Which developments require a Fire Safety Certificate?

The Building Control Act (1990 & 2007) specifies the development types that require Fire Safety Certificates:

· Works in connection with the design and construction of a new building
· Works in connection with the material alteration of a day centre, a building containing a flat, a hotel, hostel or guest building, an institutional building, a place of assembly, a shopping centre
· Works in connection with the material alteration of a shop, office or industrial building where additional floor area is being provided within the existing building or where the building is being sub-divided into a number of units for separate occupancy
· Works in connection with the extension of a building by more than 25 square metres
· A building as regards which a material change of use takes place.

Some developments are exempted from requiring a Fire Certificate and can include:

· Certain single storey agricultural buildings
· A building used as a dwelling (other than a flat)
· A single storey domestic garage
· A single storey building ancillary to a dwelling which is used exclusively for recreational or storage purposes or the keeping of plants, birds or animals for domestic purposes and is not used for any trade or business or for human habitation
· Works in connection with a Garda station, a courthouse, a barracks and certain government buildings.

If a building is inspected by a member of the building control authority and it transpired that no Fire Safety Certificate is in place, the building could be subject to closure. For more information see www.kerrycoco.ie/home3/building-control/firesafetycerts.

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