Market index returns

Week to date since October 16, 2024 as of October 23, 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 declined during our review period as longer-term interest rates continued to move higher. A bear steepener was evident in the U.S. Treasury yield curve as the 10-year moved up 23 basis points (bps) during our review period and briefly topped 4.25% for the first since July. Robust economic data in the U.S. and slightly higher inflation expectations (evidenced in inflation breakevens) called into question exactly how willing the U.S. Federal Reserve (Fed) might be to reduce rates further and if the pace of cuts might be slower than previously expected. Stocks could also be consolidating ahead of the upcoming U.S. election (less than 2 weeks away) amidst uncertainty on which parties will control the executive and legislative branches. Given these unknowns, one area that did find support was precious metals, where gold closed at a new all-time high, just short of $2,750 per ounce on Tuesday October 22nd.^[1]

Against this backdrop, Real Assets declined but slightly outperformed the broader market. Commodities were the clear winners, with prices rising for the week (led by precious metals), but the balance of the Real Asset classes finished in negative territory. Losses in Natural Resource equities were the shallowest, as miners and producers of precious metals helped buoy the group. Treasury Inflation-Protected securities (TIPS) fell a bit more and essentially matched the returns of the broader equity market. Global Infrastructure securities narrowly underperformed the broader market, while Global Real Estate securities were the laggards, dragged down by property stocks in Continental Europe and industrial and hotel real estate investment trusts (REITs) in the U.S.^[2]

Why it matters: While we will (hopefully) know the results of the U.S. election in the next few weeks, this won’t resolve the fiscal spending issues in the U.S., which have no easy solution and are also likely helping to push up the long end of the yield curve. Both presidential candidates are making giveaway promises which would only make the fiscal situation more dire. Luckily, the legislation that provides appropriations and taxation is up to the U.S. Congress and not the President, except the current Congress hasn’t addressed any of these longer-term issues and has just kicked the can down the road. They will, however, need to pass a full fiscal year 2025 budget and address the debt ceiling within the first days of 2025. Geopolitical issues also remain a grave unknown. An Israeli strike on Iran seems imminent, but to what extent and how will this affect the energy markets? North and South Korea both appear to be getting dragged into the Ukraine-Russia conflict, and this development risks unsettling the fragile armistice that has existed on the Korean peninsula for over 70 years. Let’s just take a collective deep breath and hope calmer heads prevail.

Macro Dive:  We’ll first look at the latest Purchasing Managers Index (PMI) data. Next, we’ll review the latest economic growth projections from the International Monetary Fund (IMF). Then, we’ll recap the latest central bank action in China.

• PMIs top estimates: S&P Global released the flash print of October’s U.S. PMIs just after our review period, with the Composite PMI at 54.3, above estimates of 53.8, and expanding from September’s 54.0. They also showed a familiar story with Services in expansionary territory at 55.3 and Manufacturing in contraction at 47.8. However, both figures exceeded forecasts (55.0 and 47.3, respectively), and both were higher than September’s levels. Of concern, employment remained in contractionary territory for the 3rd consecutive month, but at a slighter pace than August and September, and with some noted hesitation on new hiring ahead of the U.S. presidential election. In regard to possible inflation indicators, selling price inflation dropped sharply and manufacturing cost input growth hit a seven-month low. Overall, the report should be viewed favorably as it shows the overall economy continues to grow at a healthy pace while inflation and job growth moderate, giving the Fed room to cut benchmark rates further.^[3]

• IMF lowers growth outlook: The IMF released its latest world economic outlook this week with a headline that read, “Global growth is expected to remain stable yet underwhelming.” The IMF projects 3.2% growth in 2024, which is the same as its July forecasts, but lowered 2025 growth by 0.1% to 3.2%. Growth in the U.S. was raised 0.2% this year to 2.8% and upped 0.3% to 2.2% next year. Conversely, Euro Area growth expectations were lowered in both periods to 0.8% and 1.2%, with Germany having no growth this year and just 0.8% next year. Emerging and developed market economies were lowered by 0.1% in both years and now stand at 4.2% expected growth in both 2024 and 2025. China’s expected output was lowered 0.2% to 4.8% this year but remained at 4.5% in 2025. The IMF stated the overall downward revision was due to disruptions in production and shipping of commodities (crude oil in particular), geopolitical conflicts, and even extreme weather. However, they also noted AI innovation and the related demand for electronics and computer chips, along with “substantial public investment in China and India,” was helping to lift growth, especially in parts of Asia.^[4]
• The next step:  The People’s Bank of China (PBOC) cut benchmark lending rates by 25 basis points (bps) this week. The one-year loan prime rate (LPR) was eased to 3.1%, while the five-year LPR was lowered to 3.6%. Some sort of cut had been expected given announcements at a forum the week prior (following China’s lackluster 4.6% GDP print), but 25 bps was the upper end of what had been discussed. This is the 6th cut to the 1-year LPR and the 7th for the 5-year since 2021, while additional cuts occurred in 2020 and 2021 during the COVID pandemic. However, these may not be the last steps the PBOC takes as they look to strengthen domestic consumption and invigorate manufacturing activity, but perhaps what’s most needed is stabilizing residential home prices, which have been falling for some time. As the 5-year LPR is frequently used as the benchmark for mortgage rates, this cut is just the next step in a series of more stimulus measures likely to come.^[5]

Real Assets, Real Insights: First, we’ll consider trends in the U.S. warehouse space that are giving landlords a little less negotiating power in leasing. Then we’ll look at the developing situation in changes to UK water utilities. Finally, we’ll look at a precious metal that is outperforming gold this year.

• Recovery delayed? (Real Estate): Recent earnings reports by U.S. industrial REITs, coupled with national brokerage reports, are showing that improvement in warehouse fundamentals might be pushed back. Portfolio occupancies have been trending lower, and leasing spreads (the difference between end-of-lease and new/renewal rate) are shrinking. To be fair, cash releasing spreads from the reported companies are robust and have ranged from 27% to 67% while portfolios generally have occupancies of 95% or better. Nonetheless, both metrics have been receding from the highs seen over the past few years. On a national basis, vacancy ticked up by 10 bps in the third quarter and currently stands at about 5.8%, which is still historically low, but new completions have exceeded net absorption for 9 consecutive quarters. However, this excess supply should abate over the next year as new development slows. One item worth watching closely, which could be holding new leasing in check, is the upcoming U.S. presidential election. If Donald Trump is elected and enacts new tariffs on overseas goods, this may alter the direction in which goods flow across the U.S., leading to changes in supply chains and where warehouses are needed the most.^[6]
• UK: The way of water (Infrastructure): The UK is launching a new independent commission along with changes in regulation to ensure the safety and stability of public water systems. The new commission is expected to produce recommendations within the next year on how to tackle recurring issues in the water sector, including storm runoff and pollution of rivers and lakes, and how to drive new investment into the space to manage the challenges of the future. Ahead of the commission’s report, the UK government has already introduced a new special measures bill “which sets out tough new measures to crack down on water companies failing their customers.” Among the bill’s provisions are the potential for criminal charges, including prison time, for persistent lawbreakers, larger and automatic fines for violations of water regulations, giving the water regulator the ability to ban bonus payments to water utility executives if environmental standards are not met, and a new ‘code of conduct’ for water companies. We expect the upcoming changes in this sector will require both public and private investment and will create both opportunities and challenges to meet the government’s new requirements.^[7]
• Silver bullets just got pricier (Commodities): We’re not talking about metaphors here, but rather physical silver. Silver was the top-performing commodity we track this week, with spot prices rising over 6%. Gold has been getting all the attention this year, setting multiple new all-time highs, but silver prices have actually risen even more on a year-to-date basis. While silver did hit a 52-week high this week, almost touching $35/oz, it still remains below its all-time record price in the high $37’s seen in 2011. We are not surprised to see silver performing well given a number of supportive factors, including interest rates rising again, increasing global money supply, accelerating inflation, and rising gold prices. Other bullish fundamentals include its industrial uses, such as for solar panel manufacturing, which remains in demand, and a multi-year structural deficit of supply. According to the Silver Institute, 2024 will be the 4th consecutive year of supply-demand deficit, with the deficit widening in 2024, and the 6th consecutive year of negative market balance when including investment from exchange-traded products (ETPs). We expect these deficits could last into 2025 and beyond and would not be surprised to see silver make a run towards an all-time high in the not-too-distant future. If you were thinking of buying silver bullets, you might want to seek alternative werewolf protection with Halloween just around the corner.^[8]