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- Real Assets lagged broader equities
Market index returns
Week to date since June 12, 2024 as of June 19, 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 ended our review period marginally in positive territory, but nonetheless the MSCI World Index hit a new all-time high. Positive investor sentiment faded in the days following the latest U.S. Federal Reserve (Fed) meeting but picked up again with strong performance seen from NVIDIA Corp. (which surpassed Microsoft as the world’s largest company) and as waning demand from U.S. consumers raised hopes that the Fed might cut rates earlier than previously expected. A first rate cut in the U.S. in September seems back in play, although far from certain, and investors expecting a second cut this year could be disappointed as numerous Fed speakers reiterated that it may take more time to bring inflation down to their 2% target. Meanwhile, in the U.K., where inflation has fallen to 2% (in May), the Bank of England (BOE) chose to hold policy rates the same (just following our review period), while the National Bank of Switzerland announced their second interest rate cut this cycle. Against this backdrop, Real Assets saw slightly negative performance this week, with only TIPS finishing on positive ground. Global Real Estate Securities lost the least as U.S. property stocks saw gains, but losses in other parts of the world dragged the group down. Commodities and Global Infrastructure securities followed, while Natural Resource equities dropped a bit more, with sharper declines seen from Metals & Mining names.[1]
Why it matters: There are signs that economic growth is slowing in the U.S., and while inflation has been decelerating as well, it’s perhaps not slowing fast enough for Fed members to fully embrace the start of an easing cycle just yet. This begs the question: will easing begin before something breaks, or after the damage has already been done? Accurately forecasting economic growth is challenging enough on a good day, but heightened geopolitical risks can make the task exponentially harder. Elections in France and the U.K. are mere weeks away, and a U.S. presidential election follows a few months later. If any of these countries see a shift in the ruling political party, it could change fiscal policies, global trade dynamics, and relative currency valuations in ways that aren’t fully known. All of which can impact global capital markets. Conflicts remain wildcards as well. Just this week, Hezbollah, an Iranian-backed militant group, is again making threats toward Israel, and now also Cyprus. Russia and North Korea have signed a strategic partnership that could see more ammunition flowing to Russia for its invasion of Ukraine, while North Korea could gain military technology it only once dreamed of. With so many unknowns ahead and the ability of the winds to change quickly, it’s worth remembering to be diligent about the diversification of your assets.
Macro Dive: We’ll first look at the latest U.S. retail sales data, where consumers are feeling the pinch. Next, we’ll review updates to the Purchasing Managers’ Index (PMI), which show the U.S. economy is still expanding. We’ll then consider the latest interest rate decision from the BOE.
Why it matters: There are signs that economic growth is slowing in the U.S., and while inflation has been decelerating as well, it’s perhaps not slowing fast enough for Fed members to fully embrace the start of an easing cycle just yet. This begs the question: will easing begin before something breaks, or after the damage has already been done? Accurately forecasting economic growth is challenging enough on a good day, but heightened geopolitical risks can make the task exponentially harder. Elections in France and the U.K. are mere weeks away, and a U.S. presidential election follows a few months later. If any of these countries see a shift in the ruling political party, it could change fiscal policies, global trade dynamics, and relative currency valuations in ways that aren’t fully known. All of which can impact global capital markets. Conflicts remain wildcards as well. Just this week, Hezbollah, an Iranian-backed militant group, is again making threats toward Israel, and now also Cyprus. Russia and North Korea have signed a strategic partnership that could see more ammunition flowing to Russia for its invasion of Ukraine, while North Korea could gain military technology it only once dreamed of. With so many unknowns ahead and the ability of the winds to change quickly, it’s worth remembering to be diligent about the diversification of your assets.
Macro Dive: We’ll first look at the latest U.S. retail sales data, where consumers are feeling the pinch. Next, we’ll review updates to the Purchasing Managers’ Index (PMI), which show the U.S. economy is still expanding. We’ll then consider the latest interest rate decision from the BOE.
- Retail Sales hit a rough patch: Consumers are continuing to feel the effects of higher interest rates, and with much of their excess savings depleted and housing costs rising, they are pulling back on spending. This was evident in Retail Sales figures reported this week for May, where growth was only 0.1% from the month prior and declined by 0.1% when excluding automobile purchases; both were lower than expectations of 0.3% and 0.2%. Not only was May a tough month, but April’s sales were revised lower to -0.2% (from flat) and -0.1% excluding autos (from 0.2%). Digging deeper into May’s details, the fastest-growing categories on a month-on-month basis were sporting goods/hobbies/musical instruments/ bookstores at 2.8%, followed by clothing & accessories at 0.9%, and then automobiles at 0.8%. On the other hand, furniture & home furnishings declined by 1.1%, and building materials & garden equipment fell by 0.8%. While ordinarily slowing (or declining) Retail Sales would be a troublesome sign for the economy, this is a case where investors took the weakening data as a sign that the Fed might cut rates earlier than previously expected. Both U.S. equities (S&P 500 Index) and Global equities (MSCI World Index) finished higher on the day of release, and expectations for the first Fed rate cut were pulled forward to a 75% chance (via Fed funds futures) for a cut in September and a greater than 90% chance of a second cut by December.[2]
- Jumpin’ Jack Flash PMIs: Flash Purchasing Managers’ Index (PMI) data for June, released after our review period, showed the U.S. economy still has some gas in the tank. Composite PMI at 54.6 beat estimates of 53.5 and was greater than May’s 54.5. Much of the expansion came from services, as the Services PMI printed at 55.1, its highest level in over two years and the 17th consecutive month of expansion. However, Manufacturing PMI accelerated as well, reaching 51.7 versus expectations of 51.0 and April’s 51.3. In another positive point, it was noted that both input price inflation and selling price inflation slowed in June. The Atlanta Fed’s GDP Now Forecast currently sits at 3.0% growth for 2Q, but we could see revisions higher given the overall strength in the PMI data, with Chris Williamson, the Chief Business Economist at S&P Global Market Intelligence, even stating, “The early PMI data signal the fastest economic expansion for over two years in June, hinting at an encouragingly robust end to the second quarter while at the same time inflation pressures have cooled.”[3]
- 2%, but still no cut: Headline CPI in the U.K. was reported this week at 2.0% year-on-year, and yet the BOE left their benchmark policy rate unchanged at 5.25%. To be fair, core CPI (which excludes energy, food, alcohol, and tobacco) ran a bit higher in May at 3.5% but did ease from the 3.9% reported for April, while CPI for Services is still running much too high for the central bank’s liking at 5.7% in May (down from 5.9% in April). At the meeting, 2 of the 9 voting members were ready to enact the first rate cut this cycle, while the other 7 preferred to stand pat. In its prepared statement, the bank acknowledged hitting its 2% inflation target; it also noted that CPI “is expected to rise slightly in the second half of this year, as declines in energy prices last year fall out of the annual comparison.” The BOE will need to walk a fine line as the country just exited a recession at the start of the year and economic growth is still less than robust, but they are also likely taking care not to interfere with the political process as the central bank meeting was held exactly 2 weeks ahead of their general election.[4]
Real Assets, Real Insights: We’ll start with a look at the latest addition to the listed U.S. Real Estate Healthcare space. Next, we’ll look at the growing demand for natural resources and the role they play in the global economy. Finally, we’ll take trip to the Southern Hemisphere and look at specifics for Australia on how natural resources and commodities play an important role in its economy.
- New kid in town (Real Estate): Within the listed U.S. real estate market, Sila Realty Trust, a Tampa-based non-traded REIT, completed a direct listing on the NYSE (SILA). This was the second new healthcare REIT to come to market this year. Sila invests in assets across the health care spectrum, including acute/post-acute care and outpatient facilities. The $1.3B market cap ($2B enterprise value) net lease REIT focuses on healthcare markets in the U.S. where there are favorable economies, demographics, and demand for healthcare. At the end of March, Sila held 137 properties, which according to the company, showed relatively “longer lease terms, lower leverage profiles, and higher portfolio occupancy.” The company, founded in 2014, opted for a direct listing instead of an IPO because it didn’t need to raise capital at this time and is holding enough dry powder to execute its strategic objectives for the next 12 to 18 months, according to Michael Seton, Sila’s founder, president, and CEO. The company also notes that they have strength and flexibility with their balance sheet and have established strong relationships with operators, healthcare systems, developers, and brokers—all of which puts the REIT in a strong position to be selective with acquisitions.[5]
- Where “stuff” comes from (Natural Resources & Commodities): A recent short piece from the DWS Global CIO’s office highlights the growing demand for natural resources and specific commodities, both of which are found within the Real Asset classes. One statistic quoted is from the United Nations (UN) and states that human consumption of natural resources is estimated to reach 140 billion tons per year by 2050. Prices of these materials can vary widely; if we compare rhodium (a rare earth metal and one of the Platinum Group Metals) which cost almost $30,000/oz in March 2021 (although it will only cost you around $5,000/oz today), to iron ore, which costs around $830/ton today. The research also demonstrates that non-metallic minerals have been and will be the fastest-growing segment of natural resources when compared to metal ores, fossil fuels, and biomass. These resources can also be widely abundant or located in specific geographic areas. When a country’s economy is highly tied to natural resource production or extraction, the price of these materials can make or break their economy. Below, we’ll take a closer look at Australia, a country whose growth prospects are heavily tied to natural resources and commodity prices. To see the piece in its entirety and the related infographic, click here.[6]
- Unearthing Australia’s Natural Resource Riches (Commodities): Australia is a vast, natural resource-rich continent and one of the world’s leading producers of iron ore, bauxite (aluminum ore), coal, natural gas, lithium, copper, uranium, and zinc. Australia’s relatively flat terrain and sparse population (outside the coastal regions) benefit exploration and mine development. In fact, Australia produces 19 useful minerals and metals in significant quantities from over 350 operating mines across the country. Commodities are therefore a significant part of Australia’s economy, as a major producer and exporter of natural resources. According to the latest data from the Reserve Bank of Australia, mining and resources constitute 14.3% of Australia’s GDP and 62.5% of overall exports (led by coal, iron ore, and gas). The most resource-rich states are Western Australia and Queensland. Of Australia’s roughly 350 mines, almost half are in Western Australia, the iron ore capital of the world. Iron ore (which is primarily cast into steel, the most widely used metal on Earth) is largely mined from the Pilbara region of Western Australia. Despite a global focus on renewable energy, coal and natural gas continue to remain crucial to Australia’s economy, with the latter being one of the cheapest fuel sources for generating electricity. Australia’s resources, as part of critical trading relationships, are primarily exported to China, Japan, South Korea, India, and Chinese Taipei. Australia is thereby well poised to capitalize on the expected demand growth in natural resources highlighted above.[7]
