Jul 17, 2024 Equities
John Vojticek

John Vojticek

Head and Chief Investment Officer of Liquid Real Assets
Geoffrey Shaver, CFA

Geoffrey Shaver, CFA

Portfolio Management Specialist – Liquid Real Assets
Edward O'Donnell

Edward O'Donnell

Senior Product Specialist, Liquid Real Assets

Real Assets outperformed

Weekly Edition

Market index returns



Week to date since July 10, 2024 as of July 17, 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 equities finally took a breather, posting a marginal decline this week, although the MSCI World Index did touch a new all-time high during our review period. Perhaps more interesting, during this period, value outperformed growth in large caps by over 8% (comparing the Russell 1000 Growth vs. Russell 1000 Value), and small caps beat large caps by an even wider margin of almost 10% (comparing the Russell 1000 vs. Russell 2000). Investors must now assess whether the recent shift in market complexion is durable or merely mean-reverting. Multiple U.S. Federal Reserve (Fed) speakers indicated conditions were ripening to begin easing rates in the U.S., although they remained uncommitted on the timing of a first rate cut. This uncertainty also helped fuel the nascent bond rally (where prices rose and yields fell), reinvigorated interest in gold (spot prices touched an all-time high), and weakened the U.S. dollar. Against this backdrop, Real Assets outperformed global equities by almost 3%, led by exceptional, broad-based strength from Global Real Estate securities. Global Infrastructure securities and Natural Resource equities also finished solidly in positive territory, helped by strength from Americas communication names and agricultural equities. Treasury Inflation-Protected securities (TIPS) saw slighter but still positive returns, while Commodities declined, lagging global equities as natural gas and industrial metals pulled back.[1]

Why it matters: Equity market volatility (per the VIX Index) has made a notable move higher in recent days while bond market volatility remains elevated (per the MOVE Index) but has come off the highs of 2022 and 2023. The equity market rotation over the last week has been historic in its magnitude and seems to be driven (at least partly) by the recent assassination attempt on former President Trump and increasing odds that he will win the U.S. presidential election in November. But with a change of control in any branch of U.S. government comes increased risk of dramatic changes in policy. How these could impact the relative attractiveness of certain asset classes or sectors is still not fully understood by the capital markets, but some ideas are starting to surface. Will tax policy drive further concern about US deficits? Will new tariffs protect U.S. interests, or will they reignite inflation and irk China? It’s too early to tell, but well worth watching closely.[2]

Macro Dive: To start, we’ll review the outcome of the latest European Central Bank (ECB) meeting. Next, we’ll look at the latest retail sales data in the U.S. and how it might support economic growth. Then, we’ll take a wider look at potential global economic growth as presented by the International Monetary Fund (IMF). 
  • Summer holiday: The ECB held key benchmark interest rates unchanged at its meeting this week. President Christine Lagarde stated that the rate-setting council will take its time to ensure sticky inflation is firmly under control before adjusting rates again. The deposit rate was cut by 25bps to 3.75% at the previous meeting on June 6. Eurozone inflation fell to 2.5% in June, getting closer to the ECB’s 2% goal, but has been stuck in the 2% to 3% range for some months. These levels are much below the recent peak of 11.6% in October 2022. The market is pricing in an 80% chance of another rate cut by the end of the year. Central banks in Sweden, Canada, Switzerland, and New Zealand are also expected by the market to cut rates in the second half of the year, as is the Fed. In Japan, the market is roughly split on the possibility of a rate hike at the Bank of Japan’s meeting at the end of July. Real rates, which reflect the nominal rate minus inflation, are generally positive across major developed markets, apart from Japan, which is still in deeply negative territory at -2.7%, while the highest rates are in the U.K. and the U.S. at 3.25% and 2.5%, respectively.[3]
  • American consumers bounce back:  The U.S. Census Bureau released retail sales data for June this week, which showed surprising resilience among U.S. consumers. At first glance, it appeared to be another month of lackluster spending with no growth month-on-month in the advanced read, although consensus estimates called for a decline of 0.3%. However, most of May’s data points were revised higher, and excluding certain items, spending in June was quite robust. For instance, sales excluding automobiles grew by 0.4% in June compared to estimates of 0.1% and up from May’s 0.1% (which was revised up from -0.1%), and when excluding both automobiles and gasoline June’s sales grew by 0.8% compared to estimates of 0.2% and up from May’s 0.3% (which was revised up from 0.1%). Sales at gas stations fell 3.0% month-on-month given lower gasoline prices (which few people will complain about), allowing consumers to spend more in other areas. While no segment showed exceptional strength, the fastest growing categories for the month included non-store retailers (up 1.9%) and building materials & garden equipment (up 1.4%). Given better-than-expected retail sales in June (and other positive economic news), GDP growth estimates for the 2nd quarter of 2024 were lifted 70 bps this week alone with the Atlanta Fed’s GDP Now 2Q24 forecast now standing at 2.73%, a considerable improvement from 1.55% just two weeks ago.[4]
  • Global Economy in a Sticky Spot:  That was the title of the most recent World Economic Outlook report from the IMF, which left global GDP growth forecasts unchanged from their prior report, but noted upside risks to inflation, especially in the services area. Global GDP growth for this year was left at 3.2% and for 2025 at 3.3%. In specific countries and regions, the U.S. was tilted down 10bps to 2.6% growth this year and left at 1.9% for next year, while the Euro area was lifted 10bps this year to 0.9% and unchanged at 1.5% next year. Emerging markets were lifted 10bps for this year and next at 4.3% for both, with China seeing a notable lift of 40 bps for both years to 5.0% in 2024 and 4.5% in 2025. On the topics of inflation and monetary policy, the IMF noted that the pace of global disinflation had slowed and called out the U.S. for an uptick in inflation during the first quarter. It also mentioned that global “nominal wage growth remains brisk” and “above price inflation in some countries.” This sticky inflation is complicating normalization of monetary policy in many countries and could lead to “higher-for-even-longer” interest rates.[5]
Real Assets, Real Insights: We’ll first look at some potential optimism surrounding the New York office market. Next, we will broaden our real estate view with a look at DWS’s mid-year Global Real Estate Strategic Outlook. We’ll conclude with a review of a few of the comments from the King’s Speech as they relate to regulated utilities in the UK.
  • Green shoots grow from the concrete (Real Estate): In an encouraging sign for the Manhattan office market, which has struggled since the pandemic, SL Green Realty Corp. (SLG), Manhattan's largest office landlord, reported positive 2Q results, signing 421k SF of office leases in its Manhattan office portfolio with a 15.5% mark-to-market increase in rents on replacement leases, and another 367k SF signed in July. Year to date, SLG has signed 1.4mm SF of Manhattan office leases, on track to surpass its 2mm SF leasing goal and 91.5% leased goal for 2024, with a current 1.2mm SF leasing pipeline. Additionally, the company reported closing $691mm in asset sales, helping to bolster its balance sheet, and expects to announce the partial sale of One Vanderbilt Avenue in 3Q.  SLG’s same store office occupancy for Manhattan hit 89.6% and exceeded estimates of 86.9%. Steven Durels, Executive Vice President and Director of Leasing and Real Property at SL Green commented, “Leasing momentum has maintained a healthy pace throughout the first half of the year with tenant demand focused on buildings that have been upgraded, amenitized and are located near mass transit.” Notwithstanding the improved leasing by SL Green, the strength in Manhattan leasing has been primarily visible on Park Avenue in Midtown, where vacancy has fallen to below 9% while overall NYC market availability is still 18%.[6]
  • Global real estate mid-year outlook (Real Estate):  Our DWS peers in direct real estate were out with their global mid-year outlook this week. In summary, they noted a stabilization in global property prices as interest rates have plateaued, a sentiment we shared earlier this year, with prices now rising in the U.S. and UK by some measures. Transaction volumes in the first quarter were muted, which can limit pricing discovery, but have been picking up more recently. Their current investment strategy favors industrial (logistics) and residential properties. They are less sanguine on office and retail properties, though their outlook can also vary by region as fundamentals can differ widely. For instance, office vacancies in Los Angeles are currently above 20% as compared to less than 3% in Seoul, Korea. They also mention that the decline in new construction activity should be supportive of prices, noting a 67% decline in starts (weighted by property type) in the U.S. as compared to their recent peak in 2022. You can read their full mid-year outlook piece by clicking here.[7] 
  • UK utilities get the royal treatment (Infrastructure):  Following the general election in the UK, the King’s Speech was given on July 17th to mark the opening session of the new parliament. Two items stood out to us related to local utilities. First, there was a commitment to a clean energy transition and to lower energy bills for consumers. This would partly occur through the creation of a publicly-owned clean power company dubbed Great British Energy, which would be headquartered in Scotland and set up to advance investments in the generation of renewable energy through offshore wind. The second item related to UK water utilities, where King Charles III stated, “My government recognises the need to improve water quality and a Bill will be introduced to strengthen the powers of the water regulator.” This bill could help accelerate private sector investment into water infrastructure, but it also places additional scrutiny on water utilities and could even hold utility executives criminally liable for lawbreaking. On a related note, Ofwat (the UK water services regulator) recently announced that it is opening enforcement cases against four water and wastewater companies (including two listed utilities) as part of its ongoing investigation. Ofwat highlights that the opening of these enforcement cases follows detailed analysis on companies’ environmental performance and data on how often these companies spill storm overflows into public waterways.[8]

From the archives

Click here to view more

1. Source: Bloomberg as of 7/17/24

2. Source: Bloomberg as of 7/19/24

3. Source: Bloomberg, ECB as of 7/18/24

4. Source: Bloomberg, U.S. Census Bureau as of 7/16/24

5.  Sources: International Monetary Fund (IMF) as of July 2024

6. Source: SL Green Realty Corp. as of 7/17/24

7. Sources: DWS Group as of July 2024

8. Sources: UK Government, UK Water Services Regulation Authority as of 7/17/24

CIO View