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- Real Assets outperformance continued
Market index returns
Week to date since July 17, 2024 as of July 24, 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 pulled back during our review period as the equity rotation continued with value names and small cap stocks holding up better than growth and large caps. Earnings season is well underway, and some disappointing reports from megacap tech (including some of the Great 8) drove the NASDAQ Composite Index down over 3.6% this week and led to a further increase in equity market volatility (per the VIX Index). A steepening of the yield curve in the U.S. was also seen this week (primarily from higher long-term rates), leaving the 2s-to-10s inversion at only 15 basis points (bps), its least inverted level since July 2022. Investors still believe the U.S. Federal Reserve (Fed) is on track to begin cutting rates at their September meeting, and inline Personal Consumption Expenditure (PCE) data (released after our review period) could give them reason to do so. Cooling inflation, coupled with strong 2Q GDP growth (also released after our review period), might see the Fed successfully navigate a soft landing. Against this backdrop, all Real Asset classes, aside from Natural Resource equities, outperformed the broader markets this week, although all posted negative nominal performance. Global Infrastructure securities were most resilient, shedding only a few basis points as positive performance from Americas utilities bolstered the group. Treasury Inflation-Protected securities (TIPS) followed, while slightly larger losses were seen in Global Real Estate securities and Commodities. Natural Resource equities were the laggards, falling short of the broader market’s return as metals & mining names saw particular weakness.[1]
Why it matters: A soft landing in the U.S., ongoing recovery in Europe. What could possibly go wrong? Well, China remains a wildcard for starters. Lackluster retail sales in June, 2Q GDP growth of 4.7% (below their ~5% estimate for 2024), and a Third Plenum that was more of a whimper than showing any major reforms demonstrate an economy that is not living up to its full potential, which even weighed on metals pricing this week (which we discuss below). Geopolitical conflicts in Ukraine and the Middle East remain ongoing. Israel continues to defy an almost global consensus to end the war against Hamas, which risks drawing Iran into the conflict, while the economic costs and body counts in the Ukraine-Russia war continue to grow by the day. We finally know who the candidates will be for the upcoming U.S. presidential election, which will feature former President Trump running against current Vice President Harris, but just whom the winner will be and what it means for U.S. policy won’t be known until November at the earliest. With these unknowns in mind, we continue to maintain our preference for a diversified, all-weather portfolio which could include a strategic allocation to Real Assets.
Macro Dive: First, we’ll examine what drove growth in the U.S. economy during the second quarter of this year. Next, we’ll look at the latest inflation data in the U.S. and how it might influence decisions at the upcoming Fed meeting. Then, we’ll review outcomes from the recent Bank of Canada (BoC) meeting and preview other upcoming central bank meetings.
Why it matters: A soft landing in the U.S., ongoing recovery in Europe. What could possibly go wrong? Well, China remains a wildcard for starters. Lackluster retail sales in June, 2Q GDP growth of 4.7% (below their ~5% estimate for 2024), and a Third Plenum that was more of a whimper than showing any major reforms demonstrate an economy that is not living up to its full potential, which even weighed on metals pricing this week (which we discuss below). Geopolitical conflicts in Ukraine and the Middle East remain ongoing. Israel continues to defy an almost global consensus to end the war against Hamas, which risks drawing Iran into the conflict, while the economic costs and body counts in the Ukraine-Russia war continue to grow by the day. We finally know who the candidates will be for the upcoming U.S. presidential election, which will feature former President Trump running against current Vice President Harris, but just whom the winner will be and what it means for U.S. policy won’t be known until November at the earliest. With these unknowns in mind, we continue to maintain our preference for a diversified, all-weather portfolio which could include a strategic allocation to Real Assets.
Macro Dive: First, we’ll examine what drove growth in the U.S. economy during the second quarter of this year. Next, we’ll look at the latest inflation data in the U.S. and how it might influence decisions at the upcoming Fed meeting. Then, we’ll review outcomes from the recent Bank of Canada (BoC) meeting and preview other upcoming central bank meetings.
- No slowing down: U.S. GDP growth for the second quarter grew 2.8% from the prior quarter on an annualized basis, defying estimates of 2.0% and accelerating from 1.4% in the first quarter of this year. This better-than-expected advance estimate released by the U.S. Bureau of Economic Analysis (BEA) just after our review period “primarily reflected increases in consumer spending, private inventory investment, and nonresidential fixed investment” per the BEA with noted increases in both goods and services, with services contributing to growth (1.02%) at almost twice the pace of goods (0.55%). On the other hand, imports, a perennial drag on GDP growth, detracted by the highest level in a year, mainly from the import of capital goods, shaving 93 bps from GDP growth in the quarter. Other minor drags included nonresidential structures (-10bps), clothing and footwear (-6bps), residential investment (-5bps), and industrial equipment (-4 bps). While GDP growth is expected to slow in the back half of 2024, aggregate growth is expected to remain positive, with the Fed’s latest forecast indicating GDP growth of 2.1% for the full year.[2]
- PCE stays inline (mostly): PCE data for June was released just after our review period, and while failing to show any meaningful surprises, it further supported views that the Fed will cut rates for the first time this cycle at their September meeting. PCE grew 0.1% month-on-month in line with estimates but just ahead of the flat read seen in May, while on a year-on-year basis, PCE grew 2.5%, again in line and decelerating by 10 bps from May. Meanwhile, Core PCE, which excludes volatile food and energy (and is thereby the Fed’s preferred inflation gauge), grew 0.2% from the prior month, also in line with consensus, but 10 bps ahead of May, while growing 2.6% year-on-year, 10 bps ahead of estimates but the same as seen in May. Personal spending grew 0.3% for the month, which met estimates but was a bit slower than May’s upwardly revised 0.4%, while in real terms it grew only 0.2%, 10 bps below estimates and 20 bps below May, which was also upwardly revised to 0.4%. Overall, markets reacted favorably to the benign inflation data, sending major stock indices upward while investors continued to price in a full cut (per Fed Funds futures) at the Fed’s September meeting, another full cut before the end of the year, and a greater than even chance of a third cut before 2025 arrives.[3]
- Canada cuts again: The BoC cut rates for the second time this cycle, with another cut of 25 bps, bringing their overnight deposit rate to 4.5%. Recall that in June, Canada was the first G7 country to cut rates this cycle, and with slowing economic growth and falling inflation, the BoC saw conditions warranted cutting again. Canada’s inflation fell to 2.7% in June and is expected to reach the BoC’s 2% target in the second half of 2025, while GDP growth estimates from the BoC were reduced to 1.2% this year, down from forecasts of 1.5% in April, which is below a population growth that has been running around 3%. In its prepared statement, the BoC also noted weak consumer spending and home sales, along with unemployment rising to 6.4%. In other countries, we’ve already noted the U.S. Fed meeting next week, while the Bank of Japan (BoJ) will announce its rate decision earlier the same day, with a better than even chance of increasing rates for the second time this year. The following day, the Bank of England (BOE) will meet where overnight index swaps indicate a ~52% chance of a rate cut, which would be its first cut this cycle. Last week we mentioned the European Central Bank (ECB) did not cut rates this month and will bring the matter up again at its September meeting, where current swap pricing shows an ~89% of a cut.[4]
Real Assets, Real Insights: We’ll start with a recap of a new entrant in the listed real estate space and then move to the 2024 Strategic Outlook for direct infrastructure from our DWS peers. Finally, we’ll conclude with what’s been hampering the base metal space over the past week.
- Warm reception for a cold storage company (Real Estate): On July 24th, Lineage, Inc. (NASDAQ: LINE), a temperature-controlled warehouse REIT, went public via an IPO. LINE’s initial pricing was $78 per share, which was within the given range of $70-$82 per share. However, the number of shares offered to the public was increased by around 20% from their prior SEC filings, representing an upsized offering. Assuming the underwriters’ overallotments are exercised in full, this would represent gross proceeds in excess of $5B, which would be the largest IPO in REIT history and the largest this year across broader global equities. With an equity capitalization above $17B following the offering, LINE owns and operates over 480 facilities comprised of over 3 billion cubic feet of space located in 18 different countries and employs over 26,000 people. Per the company, their cold storage facilities, supply chain solutions, and partnerships with food and beverage companies “help increase distribution efficiency, advance sustainability, minimize supply chain waste, and, most importantly, feed the world.” The IPO was viewed favorably by the markets as they closed at $80.78, 3.6% above their initial pricing after their first day of trading.[5]
- 2024 Infrastructure Strategic Outlook (Infrastructure): Our DWS peers in private infrastructure released their 2024 global strategic outlook this week. Following strong returns in 2023 (for equity position holders), this year is expected to be a bit more challenging for direct infrastructure given the lukewarm macroeconomic landscape. Higher interest rates, coupled with elevated construction and labor costs, have raised costs of capital, and thus placed pressure on valuations in some areas, which can be seen in a decrease in the average multiples of deals that have recently closed. This has also depressed transaction activity. With global easing of rates expected to occur, along with the normalization of interest rate curves, transaction volumes should pick up, helping increase liquidity and price discovery in the space. Global elections remain an important topic as they can lead to drastic changes in policy and/or regulatory scrutiny. Artificial Intelligence (AI) demand remains an important secular theme and has increased the pipeline for assets such as data centers and the infrastructure needed to support them. To see the full report, including historic returns of private infrastructure indices, click here.[6]
- Base Metals see a batting slump (Commodities and Natural Resources): Base metals, which are the non-ferrous, non-precious industrial metals, struck out this week with both the commodity prices and mining equity names seeing meaningful declines. Copper prices fell the most, with the near-month futures contract falling by almost 7%. Copper’s descent was driven by rising stockpiles at the London Metals Exchange (LME), disappointing policy from China’s Third Plenum, and a stronger U.S. dollar. Zinc prices also declined, with spot prices falling below $2,700/ton, a 5.7% week-on-week decline and the lowest price since early April. Zinc inventories also surged at the LME, while China’s refined zinc output remains robust, with stockpiles in Shanghai remaining elevated and growing. Nickel, Aluminum, Tin, and Lead also saw prices fall this week, although to a lesser extent. These lower commodity prices weighed on the miners and producers of these metals, with our Base Metals & Mining equity group falling about 7% this week, which held down Natural Resource equities overall. In contrast, precious metal commodity prices held up better this week, with Gold’s price falling less than 2% and the Precious Metals & Mining equities making a similar-sized move.[7]