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- Real Assets bracket broader equities
Market index returns
Week to date since June 19, 2024 as of June 26, 2024
Index definitions: Global Real Estate = FTSE EPRA/NAREIT Developed Index; Global Infrastructure = Dow Jones Brookfield Global Infrastructure Index; Natural Resource Equities = S&P Global Natural Resources Index; Commodity Futures = Bloomberg Commodity Index; TIPS = Barclays US TIPS Index; Global Equities = MSCI World Index; Real Assets Index = 30% FTSE EPRA/NAREIT Developed Index, 30% Dow Jones Brookfield Global Infrastructure Index; 15% S&P Global Natural Resources Index; 15% Bloomberg Commodity Index, 10% Barclays TIPS Index. Source: Bloomberg, DWS. Past performance is not indicative of future results. It is not possible to invest directly in an index.
Market commentary:
Global equity performance landed in modestly negative territory at the end of our review period as markets attempted to find direction. The performance of our Real Asset Index[1] was essentially in line with global equities, as the underlying components bracketed broader equities. Natural Resource equities and Listed Infrastructure outperformed broader equities while Commodities and Listed Real Estate underperformed during the period.
The market’s listless action can be partially explained by generally weaker growth signals of late. The Citi U.S. Economic Surprise Indicator has firmly established itself in the red, while the Bloomberg U.S. Surprise Indicator has even marked its lowest level since 2019. The weakness was particularly pronounced in many of the economic indicators that relate to private consumption. Construction activity indicators, such as housing starts, continued to weaken, although not falling off a cliff.
Why it matters: There are signs that economic growth is slowing in the U.S., and while inflation has been slowing as well, it’s perhaps not slowing fast enough for the Fed’s FOMC members to embrace the start of an easing cycle just yet. Recent Fed speak hasn’t helped clarify matters either. Quoting the FT: “Michelle Bowman, one of the Fed’s governors and a voter on its rate-setting Federal Open Market Committee, said she remained ‘willing to raise’ borrowing costs again should progress on inflation stall or even reverse. Another Fed governor, Lisa Cook, said that she believed that inflation was likely to fall ‘more sharply’ next year and that ‘at some point’ it would be necessary to cut rates to maintain a healthy balance in the economy.” Thanks so much for that clarification.[2]
Macro Dive: We’ll first look at revisions to the U.S.’ first quarter economic data, as well as May’s most recent data releases, which includes a print of PCE (core personal consumption expenditures price index), followed by a selective check on global inflation.
- Revisionist History: The economic weight of higher-for-longer rates pressed on U.S. data in the first half of the year with both personal consumption and core capital goods orders lower in the first quarter of 2024 versus the fourth quarter of 2023. Personal consumption was marked 50bps lower, to +1.5% from +2.0%,[3] as was the Atlanta Fed’s GDP Now[4] forecast, which estimates second-quarter growth at 2.7%, down from 3%. Personal income, inflation-adjusted, only rose 1.5% year-over-year for the first quarter, one of its slowest annual advances in years.
- The Fed’s dueling mandate: More recently, continuing jobless claims also hit their highest level since 2021, indicating a harder environment for those out-of-work to find another job. The Conference Board Consumer Confidence came in at 100.4 (vs. estimate of 100.0) – a decrease compared to 101.3 from the month prior.[5] The Richmond Fed’s Manufacturing Index came in at -10 (vs. estimate of -3) – a decrease compared to 0 from the month before.[6] The Fed’s preferred measure of price change, the core personal consumption expenditures price index (which excludes food and energy…wouldn’t that be nice?), increased 0.1% month-over-month, 0.08% unrounded, the least since November of 2020. Year-over-year the measure rose 2.6%, the slowest since 2021.[2]This latest report, coupled with first quarter revisions, lends support to Fed officials looking to cut rates in the coming months if upcoming reports follow suit.
- To Hike or not to Hike, that is the question: Inflation in the U.S. has been cooling, as shown by BEA’s inflation measure, the PCE (Personal Consumption Expenditure) which came in at 3.7% for the first quarter, and more recently 2.6% year-over-year for May.[1] Meanwhile, similar measures picked up in Australia and Canada, slightly spooking global markets with the specter of inflation. Continued inflationary pressure could put rate hikes on the table for the Royal Bank of Australia as noted by Bank officials. The Bank of Japan (BoJ) is one central bank going against the grain by hiking interest rates, given inflation expectations that recently hit their highest measure since 2004. The BoJ could hike rates for the second time this year with a weaker yen which, if it continues to weaken, could also bring the reduction of JGB purchases (slowing quantitative easing) into play as well.[7] Higher global inflation could make it harder for central banks to ease monetary conditions if growth weakens. Meanwhile, markets are expecting two additional rate cuts by the European Central Bank, which Finnish central bank Governor Olli Rehn was quoted as being “fair.” Sweden’s Riksbank held rates steady in their last meeting but foreshadowed two or three cuts in the second half due to subsiding inflation and a weak economy, according to Riksbank Governor Erik Thedeen.[8]
Real Assets, Real Insights: We’ll start with a look at DWS’ recently released mid-year regional real estate strategic outlook, followed by an accretive addition to a Canadian REIT, and finally a takeover offer to harness the power of the atom.
- DWS recently released its mid-year regional real estate strategic outlooks. While the news around inflation and interest rate cuts has disappointed (relative to expectations at the beginning of 2024), there are grounds for optimism. In the Americas, our Research team believe real estate prices have bottomed. Appraisal-based values are lagging, but expectations are they will return to growth in the second half of 2024. The ingredients for a rewarding recovery are in place. Construction starts have dropped 67% from their 2022 peak (on a sector-weighted basis), pointing to a sharp reduction in deliveries in 2025. As demand revives from its post-COVID hiatus into an emerging supply void, fundamentals are expected to strengthen materially. In Europe, reduced transaction activity is not expected to hold back prime recovery. Higher entry yields, falling interest rates, strong fundamentals, and a diminished supply pipeline all point towards a period of recovery and elevated returns. Lastly, in Asia Pacific, while current economic conditions remain soft, bright spots persist including signs of turnaround in global trade and easing inflationary pressures. The Real Estate Research team believe the real estate repricing cycle in Asia Pacific could reach its bottom by the end of 2024, coinciding with an easing of financing conditions by year-end.[9]
- Bonjour les nouveaux voisins (Hello new neighbors): Chartwell Retirement Residences (ticker CSH-U),[10] one of the largest Canadian Senior Housing REIT operators with approximately 25,000 suites, announced the acquisition of 10 communities with a total of 3,233 suites in Quebec to expand their portfolio, at a price of $511 million, as well as a $300m follow-on offering of Trust Units. The company operates in a segment that we believe to be experiencing favorable demographic tailwinds and located in property markets with attractive underlying fundamentals. The company expects the acquired properties to enhance the quality of its portfolio and fit with its strategic growth profile. The acquireds properties are in two of Chartwell’s most favored cities in Quebec, GMA and Quebec City. The properties boast apartments representing over 91% of total suites with a majority offering independent supportive living services. The properties have historically offered strong operating and financial performance and, if executed, are being purchased at below replacement cost value.[11]
- A Fusion of interests: Australia’s Paladin Energy Ltd. made an offer of C$1.14 billion ($833 million) to purchase Canadian mining firm Fission Uranium Corp. The all-stock deal would give operational control of an advanced mining project in western Canada. Located in the Athabasca Basin, a remote area in Saskatchewan, the site is expected to open in 2029 and produce annually an average of 9.1 million pounds of high-grade uranium over a decade. Fission is one of several companies rushing to develop projects in the region as the world revisits the benefits of nuclear power to decrease reliance on fossil fuels. The World Nuclear Association sees the potential for Canada to surpass Kazakhstan as the world’s largest producer of Uranium. More deals are expected in the near future, with the price of the metal having more than tripled over the past five years, especially after new sources are being sought out after Russia’s invasion of Ukraine.[12]
