The Weekly JMP Report

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What are we reading

Papua New Guinea’s Economy expected to grow in 2022

Papua New Guinea’s economy is expected to grow by 5.4% in real term in 2022 following a muted recovery of 1.5% in 2021, according to National Budget estimates.

According to BSP’s 2021 Quarter 4 Pacific Economic and Market Insight, the 2022 National Budget and the Asian Development Bank (ADB) estimate real GDP growth in 2021 at 1.5% and 1.3%, respectively. In 2022, the PNG Government forecasts 5.4% growth underpinned by large public infrastructure spending. There is potential for further upside from election-related spending, while the resurgence of COVID and low vaccination rates in the country pose significant downside risk.

BSP Group Chief Executive Officer Robin Fleming says that, “despite a challenging 2021, BSP continues to maintain its efforts to meet the evolving financial needs of our customers.”

He said, “We have maintained funding momentum with our successful SME Credit Enhancement Scheme Loan facility, and total loans funded under the scheme now total in excess of K125m with a firm commitment from Government to provide the next tranche of K100m in coming weeks to further support this important sector.”

Mr Fleming further added that, BSP reduced the Loan equity requirement from 30% to 10%, and increased maximum loan amount from K3m to K5m to support SMEs. For Personal Loans, BSP also recently increased the maximum borrowing limit for our unsecured Personal Loan product from K50, 000 to K75, 000.”, which hopefully will result in an outcome more beneficial to BSP’s shareholders.

In relation to the Market Concentration Tax Levy introduced in the 2022 budget, Fleming noted that BSP had participated in a consultation meeting with Department of Treasury in January and looks forward to further consultation on this with Government.

“Meanwhile, with BSP branches across the Pacific, border restrictions have adversely affected GDP growth and increased public debt in tourism dependent economies. Resuming travel, safeguarding health, promoting fiscal sustainability and strengthening economic management is key to developing a resilient Pacific.  Further, increasing international travel and commodity prices in 2022 bode well for economies in the Pacific region.  However, the pandemic and its variants loom large over economic forecasts in the Pacific, concluded Mr Fleming.

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Will Interest Rates Derail the Market?

By Dianna Mousina, Economist – Investment Strategy and Dynamic Markets

What happens to interest rates locally and globally is always important for investors, but particularly so at turning points in the economy.

And notwithstanding the recent Omicron outbreak, the world’s most influential central bank, the US Federal Reserve, looks likely to lift interest rates as early as March. It would be the first increase in more than three years and marks a significant turning point in the global economic cycle. Higher rates in the United States will impact equity, bond and currency markets around the world.

Prices in the United States are still rising well above comfortable levels.

Last month, core inflation in the world’s largest economy rose 5.5 per cent, year on year. That was the highest annual rate in 30 years. Headline inflation was at 7 per cent, a 40 year high. Some of the biggest jumps were in energy, transport and rents.

The data shows that Omicron is set to further disrupt supply chains and continue to show up in inflation this year. Goods prices remain under pressure as quarantine rules and sick leave result in lower staff levels and inventory levels. And services prices are likely to rise in 2022 as demand increases back to pre-COVID levels.

Federal Reserve chair Jerome Powell isn’t shying away from higher interest rates, recently saying the Fed was prepared to do what was necessary to contain the current inflation surge. “We will use our tools to prevent higher inflation from becoming entrenched,” he said.

Notably Chair Powell said many inflationary issues stemmed from pandemic related supply chain and labour force shortages and the risks are lingering, potentially for longer. He said: “It’s a long road to normal from where we are now.”

The Fed is likely to lift interest rates as early as its March meeting, from the current interest rate target of 0-0.25 per cent, to 0.25-0.50 per cent. It’s likely to lift interest rates three or four times this year.

So, will the rest of the world follow the lead of the Fed?

Rate rises in the world’s largest economy will contribute to a more volatile ride for Wall Street and global shares. But it’s unlikely to be enough to end the economic recovery and cyclical bull market as monetary policy will still be relatively easy.

Other major central banks, including the Reserve Bank of Australia (RBA) will lag the US, with China’s central bank actually easing monetary policy this year.

In Australia, the breadth of inflation pressures is far narrower than in the US with 75 per cent of US CPI components rising more than 3 per cent during December, compared to only 35 per cent in Australia.

Nevertheless, the recent December quarter inflation data was much stronger than the RBA expected.

Australian core inflation was running at 2.6 per cent over the year to December, which is the strongest pace of growth since 2014 and firmly within the RBA’s 2-3 per cent target range for inflation. The quick acceleration in domestic inflation and the strong conditions in the employment market that should see a lift in wages growth mean a quicker start to RBA interest rate hikes. We expect the first rate hike in August, taking the cash rate to 0.25 per cent (from 0.1 per cent currently).

For global equity markets, inflation will continue to be a dominating force in 2022.

Global shares are expected to return around 8 per cent this year but expect to see the long-awaited rotation away from growth and tech heavy US shares to more cyclical markets in Europe, Japan and emerging countries.

Inflation, the start of Fed rate hikes, the US mid-term elections and China/Russia/Iran tensions are likely to result in a more volatile ride than 2021. Mid-term election years normally see below average returns in US shares and since 1950, have seen an average top-to-bottom drawdown of 17 per cent, usually followed by a stronger rebound.

Australian shares are likely to outperform, helped by stronger economic growth than in other developed countries, leverage to the global cyclical recovery, and as investors continue to search for yield in the face of near zero deposit rates but a grossed-up dividend yield of around 5 per cent. Expect the S&P/ASX 200 to finish 2022 around 7,800.

Although the Australian dollar could fall further in response to coronavirus and Fed tightening, a rising trend is likely over the next 12 months helped by still strong commodity prices and a decline in the $US, probably taking it to around $US0.80.

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The Scramble for Cargo Aircraft as Shipping Costs Soar

By Chris Baraniuk – Technology of Business reporter

IMAGE SOURCE,GETTY IMAGES

Companies have turned to air freight due to the shortage of shipping capacity

Last summer, as the shipping supply crisis worsened, a cargo aircraft in Italy was rapidly loaded with thousands of lipsticks. They were bound for the US, on a tight deadline.

Mehir Sethi, chief executive and founder of California-based beauty brand True + Luscious, says she had relied on sea freight for years. It had always been reliable.

But to get those 15,000 lipsticks to her customers on time, her only option was to pay to send them by air.

“At great pain to myself, we had to do it for two time-sensitive shipments. These were goods that were already committed to retailers.”

The lipsticks were flown-in at a slight loss to the business, but she says it was worth it to keep the clients.

Mehir Sethi had to take a loss to make sure orders were fulfilled

Firms have been making thousands of decisions like this in recent months. And there is no sign of let-up yet.

“We have used a lot of air freight, which we’re not excited about, but it’s a necessary thing with the challenges we’re all being faced with,” explained David Bergman, chief financial officer for sportswear brand, Under Armour, on an earnings call in November.

The Eastman Chemical Company similarly reported resorting to air freight to ship specialty plastics.

A US Census Bureau service called USA Trade Online, that tracks cargo flows in and out of the country, notes in the first 10 months of 2021, 78.9 million kg of car parts were sent by air from Asia to the US – a staggering increase from the 3 million kg shipped during the same period in 2020.

Sending goods by air has always been expensive. But now it is more expensive than ever.

Air freight costs from Asia to North America “have hit levels I’ve never seen before, $15 (£11) per kg which is just insanely high,” says Greg Knowler, senior Europe editor at IHS Markit’s Journal of Commerce.

Delays affecting sea freight are partly to blame for this but so is the huge fall in passenger flights since the start of the pandemic.

More than half of all the air freight in the world usually travels via ‘belly cargo’ in the holds of passenger planes. But with far less of that space available, airlines have been scrambling to convert passenger aircraft into freighters, and bring older models out of retirement.

AirBridgeCargo Airlines, a subsidiary of Russian air freight specialist, Volga-Dnepr, is boosting its fleet with an additional six aircraft, after what Alexey Zotov, commercial director, says has been a “peak season we never had before”.

Backlogs at airports have “rolled over like [a] snowball since early autumn,” he adds.

Some carriers, such as Air Canada, have also rushed cargo aircraft into service sooner than planned – before they’ve even had a chance to finish their paintwork, in some cases.

Manufacturers, including Airbus, have been inundated with requests to convert former passenger aircraft to carry more cargo, just to get additional capacity into the sky. The process includes removing the passenger seats and installing larger doors

Orders for Airbus passenger aircraft converted for freight are sold out for the next two or three years, says Crawford Hamilton

“We’re seeing a lot of people buying these conversions, they’re sold out for the next two to three years,” says Crawford Hamilton, head of marketing for freighter marketing at Airbus.

“That’s something that we were not in a position two years ago to say.”

While air freight only represents roughly 1% of the entire freight market in terms of volume, it accounts for about 35% of the value. Sometimes, expensive products such as consumer electronics and fashion goods that have a short market life are sent by air. Plus, during the pandemic, planes have carried countless loads of vaccines and personal protective equipment.

Airbus has also launched a new air-cargo service using its five-strong fleet of BelugaST aircraft, also known as flying whales thanks to their huge fuselage.

The question is whether demand for air freight will remain strong, even if the pandemic subsides. With lots of aircraft permanently converted to carry freight, and belly cargo capacity rising once again, Robert Mayer at Cranfield University questions whether there might be too much capacity in the market half a decade from now.

IMAGE SOURCE,AIRBUS

Airbus has just launched the A350F to meet anticipated demand for cargo carriers

Yet aircraft manufacturers seem confident. Airbus expects rising demand for dedicated cargo carriers in the coming years – and it has just launched the A350F aircraft in anticipation of that.

It can carry as much cargo, in terms of volume, as a Boeing 747 but is 40% more fuel efficient. This is achieved partly through the use of lighter materials, composites and titanium in the body of the aircraft.

Boeing, too, is bullish. It forecasts that the number of air freighters will grow globally by 60% between now and 2039. If correct, manufacturers will need to build 2,400 new cargo carriers by then.

Tom Sanderson, director of product marketing at Boeing, says it may introduce a freighter variant of its latest wide-bodied passenger jet, the 777X, but it would be “multiple years” before it came into service.

More freight might move by air in the coming years but that could lead to an unwelcome rise in emissions unless aviation gets greener.

Both Boeing and Airbus are currently testing “sustainable aviation fuels”, including biofuels from renewable sources that can be used on existing aircraft instead of fossil fuel-based propellants.

DHL has ordered 12 electric aircraft from Eviation

Small electric planes will are also likely to become more common. DHL Express has ordered 12 fully electric aircraft from Eviation, for example.

Besides the prohibitive cost, one thing that puts Ms Sethi off using air freight more often to fly in her beauty product is the environmental impact.

“It would definitely bother me, just the sheer increase in our carbon footprint as a company if we were to rely on air freight,” she says.

Like many others, she is reconsidering her reliance on global supply chains. She has decided to source some of her products from suppliers closer to home, to avoid shipping problems in the future.

“Some of the orders we were placing to our Italian manufacturer will now go to our New Jersey manufacturer,” she says.

“I just can’t cut it too close any more.”

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We hope you have enjoyed this week’s read, a thank you also to Ashurst for their Publication, Low Carbon Pulse, thank you.

We forward to assisting you with your investment journey throughout 2022.

Regards

Chris Hagan,