Aug 28, 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

Global Real Estate led Real Assets higher

Weekly Edition

Market index returns



Week to date since August 21, 2024 as of August 28, 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 traded sideways this week, with all eyes eagerly awaiting NVIDIA’s earnings release and key reports on U.S. GDP and inflation. NVIDIA’s report, released after the market close on the final day of our review period, showed strong revenue growth and solid demand for their chips used in artificial intelligence (AI) processing, but their stock faltered the following day as the release failed to live up to the lofty expectations anticipated from a stock that is up over 600% in the last two years. Despite the large weighting of NVIDIA in many stock indices, broader markets were able to brush this disappointment aside and end the day about flat on encouraging news of robust economic growth in the U.S. during the second quarter. Two days after the end of our review period, more good news came in the form of Personal Consumption Expenditure (PCE) data, which showed inflation moving towards the U.S. Federal Reserve’s (Fed’s) 2% inflation target, giving markets an upwards bias and cementing views that the Fed should have no qualms about beginning an interest rate-cutting cycle in September.[1]

Against this backdrop, all Real Assets classes saw positive returns this week, and all outperformed the broader equity market. Global Real Estate securities gained the most with strong returns from property stocks in Canada and Japan. Global Infrastructure securities followed, while gains were more muted from Natural Resource equities and Commodities, and Treasury Inflation-Protected securities (TIPS) were once again the relative laggards.[2]

Why it matters: A single stock shouldn’t exert so much influence over the direction of equity markets, and the market’s movement over the last week and heading into the extended U.S. holiday weekend proved that other stocks and asset classes still matter. After all, people still need a place to live, food to eat, reliable transportation, reliable sources of energy, and easy access to data (all of which can be found in the Real Assets classes). What does absolutely matter for the stock markets is macroeconomic conditions, which can vary greatly across regions and can have varying effects on different industries and asset classes. Political policies can help shape these key macro factors. For instance, a nation can ask its citizens to make more guns or more butter, but not both if resources are limited. Political parties can create policies to open up global trade or become more isolationist, but not both. We remind readers to review their portfolios to align for the conditions and challenges that are to come, not for what has already occurred.

Macro Dive: This week saw new second quarter economic growth estimates for the U.S. and Germany, which we’ll review. Next, we’ll look at the latest inflation data out of the U.S. and Europe. Then we’ll peek at the latest jobless claims numbers in the U.S. and give a preview of next week’s nonfarm payroll data.
  • U.S. economy grew in 2Q, Germany’s didn’t: The second release of U.S. GDP growth for 2Q 2024 showed the economy grew more than expected and initially reported. U.S. GDP grew by an annualized 3.0%, which was more than the 2.8% expectation of an unchanged print from the first read. Most of the lift came from consumer spending, which increased to 2.9% from the initial read of 2.3%, although other areas such as residential investment and nonresidential fixed investment were revised lower. Still, the higher-than-expected growth was enough to put soft-landing expectations in the U.S. back in the forefront of investors’ minds, and markets were almost able to overcome the weakness in NVIDIA following their earnings release. Meanwhile, the final read of Germany’s 2Q GDP showed their economy contracted by 0.1% from the first quarter on a seasonally-adjusted basis and unchanged from the year ago period when adjusted for price and calendar days. Gross capital formation, which has been negative for several quarters in a row in Germany, was one of the primary contributors to the weakness in the 2Q GDP print, while government spending seems to be almost the only thing keeping the contraction from being worse.[3]
  • The inflation situation: PCE data for July in the U.S., released on August 30, was inline to maybe a bit better than expected. Headline PCE met expectations at 0.2% month-on-month and 2.5% year-on-year, not too dissimilar from June’s levels. Core PCE, which excludes volatile food and energy and is the Fed’s preferred inflation gauge, registered inline at 0.2% month-on-month and 0.1% better than expected on a year-on-year basis at 2.6%. It should also be noted that personal spending accelerated in July from June in both real and nominal terms, indicating American consumers remain resilient. With inflation tracking the Fed’s expected path, investors believe we should see the equivalent of four 25 basis point (bps) rate cuts this year (per Fed Funds futures), which would have to include at least one 50 bps rate cut as there are only three meetings left this year. This prediction is a bit out of step with some Fed members, who have indicated there is little reason to enact the larger size cut. Meanwhile in Europe, the flash print of CPI for August registered just 2.2%, down from 2.6% in July and the lowest read in over three years, leaving the European Central Bank (ECB) in an easy position to cut rates at their September meeting and likely a few more times before the end of the year.[4]
  • U.S. jobless claims not getting worse: Initial jobless claims in the U.S. of 250k for the week ended July 26 (released on August 1) helped send markets into a short-lived nosedive, but initial claims have held up better since. This week, initial jobless claims were reported for the week ended August 23 at 231k (just below expectations of 232k), which merits watching closely but is not quite in the danger zone. Continuing jobless claims of 1,868k were just below expectations of 1,870k, while the prior week was revised lower by 8k to 1,855k. In fact, every week reported to date in 2024 of continuing claims has been revised lower from the initial release, with the last upward adjustment not seen since December 2023, giving hope that this week’s continuing claims could be reduced too. More important than jobless claims will be next week’s nonfarm payroll data and unemployment numbers for August. Current expectations are for 165k jobs to have been added in August, a step up from the 114k seen in July, but it would represent the second softest print this year. Meanwhile, the unemployment rate is expected to drop to 4.2% for August, a slight decrease from 4.3% in July, which would be a welcome sign for those with soft-landing expectations.[5]
Real Assets, Real Insights: We’ll first review an infrastructure pipeline deal in the Permian Basin and then look at what’s set the price of Sugar ablaze. Finally, we’ll highlight a few recent papers from our DWS direct real estate peers that should be on your reading list.
  • Two deals ok’d by ONEOK (Infrastructure): This week, ONEOK, Inc. (NYSE: OKE) announced it was buying ownership interests in EnLink Midstream, LLC (NYSE: ENLC) and Medallion Midstream, LLC in an all-cash transaction valued at $5.9B with Global Infrastructure Partners (GIP), a private equity infrastructure firm. ONEOK, a diversified energy and pipeline company based in Tulsa, OK, with an equity cap of $53B, will receive 43% of the common equity of ENLC and 100% of the managing member for $3.3B, and 100% of the equity interest in Medallion for $2.6B. This deal will meaningfully increase ONEOK’s presence in the Permian Basin while expanding their operations in North Texas and Oklahoma, and also give them a new foothold in Louisiana. The additional capacity in the Permian alone should equate to around 1.6M barrels of crude oil gathering capacity and 1.7B cubic feet of natural gas processing. ONEOK expects the deal to close in the 4th quarter of this year and has firm debt financing commitments (up to $6.0B) from two major U.S. banks to fully fund the cash consideration and other expenses needed to close the deal.[6]
  • Possibly the world’s largest crème brûlée (Commodities): Sugar was the top-performing commodity during our review period this week, with the prompt-month futures price rising almost 11%. Brazil, the top sugar exporting country in the world, is seeing fires in the key growing state of São Paulo. These fires have impacted 80k hectares (~309 square miles) and have been estimated to have created 500M Brazilian Real (~$88M USD) in losses for the sugar mills. Brazil has been experiencing a heatwave with many wildfires breaking out, although there is also speculation that criminal activity may have been behind some of the recent fires affecting the key sugarcane-growing area. While an early estimate that 5M metric tons of sugar may have been lost, these fires are particularly worrisome given that many of the burned fields contained cane that had just started to sprout, meaning the fields may need to be replanted when the fires are under control or see less harvested cane next year, indicating potential lower future yields under either circumstance.[7]
  • A trio from our real estate partners (Real Estate): 
    • Last week we highlighted the return discrepancy between U.S. listed and private real estate in the second quarter of this year. Our DWS private real estate team is out with their U.S. Property Performance Monitor for the second quarter this week which reviews private property returns in much more detail. It is definitely worth a read and can be found here.[8]
    • We have previously noted the abundant supply of new developments of apartments in the U.S. and how this was affecting apartment stock returns, but also that we see that supply pipeline abating. Our DWS private real estate team released a paper on the rental residential market. We share their views and find the results just as applicable to listed real estate as they are for private real estate. It can be viewed here.8
    • Meanwhile, in Europe, some real estate markets are supply-constrained, and this is especially true for residential properties. Our DWS private real estate team recently released a paper titled Scarcity: Navigating Supply-Constrained European Markets, which again is just as applicable to global real estate securities as it is for private real estate market investors. It can be found here.[8]

From the archives

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1.  Source: Bloomberg as of August 30, 2024

2. Source: Bloomberg as of August 28, 2024

3. Sources: Bloomberg, Statistisches Bundesamt as of August 28, 2024

4. Source: Bloomberg as of August 30, 2024

5.  Source: Bloomberg as of August 28, 2024

6. Sources: Bloomberg, ONEOK press release as of August 28, 2024

7. Sources: Bloomberg, DWS Group as of August 28, 2024

8. Source: DWS Group as of August 2024

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