Market index returns

Month to date since July 05, 2023 as of July 12, 2023

After rising for the past three weeks, global equity markets took a pause, ending this week essentially flat. In the absence of any major geopolitical events or macro shocks, central bank meetings occupied the bulk of investors’ focus, and volatility in equity markets appears to have gone on an extended summer vacation. All Real Asset classes bested global equities aside from TIPS, which matched the returns of global equities. Natural Resource Equities rose the most – with particular strength from metals & mining names – while Commodities’ returns were bolstered by the energy complex.

Why it matters: The “soft landing” narrative in the U.S. continues to gain traction due to continued supportive data, while the situation abroad appears less favorable. Germany is already in a recession, and the jury is still out as to whether the UK can avoid one. Given the lag between monetary policy decisions and their effects on the economy, the results of central bank tightening today won’t be fully understood until well into 2024. As market sentiment (and, along with it, investors’ returns) can pivot on a dime, we continue to advocate for strategic portfolio diversification via a holistically managed allocation to liquid real assets. Liquid real assets can help hedge against inflation while potentially mitigating broader market downside risk due to their necessity-based nature. Further, they can provide low correlations to other traditional asset classes, improving the efficient frontier, and do so in a wrapper that is highly liquid and transparent.

Digging deeper: This week saw rate hikes from both the U.S. Federal Reserve (Fed) and the European Central Bank (ECB), which we dive into below. We also take a closer look at a massive improvement in consumer confidence and how it supports our views on a particular property type. Finally, we review a large self storage transaction involving both a listed and a non-listed REIT.

• Rematch – Fed vs. Futures Markets: As expected, the Fed increased rates by 25 bps, bringing the Fed Funds Target rate to its highest level since March 2001. Fed Chairman Jerome Powell remained somewhat hawkish, but was careful to leave room for maneuvering, indicating that future decisions will be driven by incoming data while also noting that inflation has moderated, but still “has a long way to go” to reach the Fed’s 2% target. The released policy statement also upgraded economic growth to “moderate” from “modest”, which could indicate increased odds of a soft landing. An upgraded U.S. economic view was reinforced by the advance release of 2Q GDP growth at 2.4%, exceeding expectations of 1.8% and accelerating from 2.0% in 1Q. Ever-optimistic, the futures market was ascribing less than a 50% chance of any more hikes, which has now fallen to below 20% after the release of June’s PCE data—which showed the Fed’s preferred inflation gauge, the PCE core deflator, has continued to moderate.
• An “open mind” from the ECB: The ECB raised rates for the ninth time this cycle, bringing their deposit rate to a multi-decade high of 3.75% with this latest 25 bps increase. President Christine Lagarde promised committee members would “have an open mind as to what the decisions will be in September and in subsequent meetings.” She went on to state that September might be a hike or a pause and that a pause would not necessarily indicate that rate increases are done as consumer inflation has been “too high for too long.” Currently, markets (as measured by overnight index swaps) expect just one more hike (likely in September) before an extended pause, with the first cuts occurring in Spring/Summer 2024. Relatedly, the euro fell versus the U.S. dollar on the news.
• The consumer is always right: July’s U.S. Consumer Confidence data was released this week – it not only exceeded expectations of 112.0 but increased from an upwardly revised 110.1 in June to 117.0, the highest level in two years. Relatedly, the Present Situations Index and Expectations Index both rose from June, with the latter indicating consumers are less convinced that a recession lies ahead, though the Conference Board still expects one to emerge before the end of 2023. The report also noted that “despite rising interest rates, consumers are more upbeat, likely reflecting lower inflation and a tight labor market.” These indicators, coupled with healthy retail sales and a lack of accelerating retailer bankruptcies, support our incrementally positive view on malls.
• To put it “Simply”: This week, Public Storage (PSA), the largest self storage REIT, announced it was buying a portfolio (previously called “Simply Self Storage”) of 127 self-storage properties from Blackstone for $2.2B. Interestingly, listed companies have been the primary purchasers of such assets as of late, while property owners and managers continue to manage the redemption queues for their funds. Public Storage was able to launch a successful $2.2B unsecured debt offering to fund the transaction, demonstrating REITs’ unique ability to access capital in an otherwise restrictive environment for real estate capital. This announced deal follows an even larger self- storage transaction that closed just last week, where publicly traded Extra Space Storage (EXR) acquired another listed REIT, Life Storage (LSI), in an all-stock transaction valuing LSI at ~$12.5B. 

What we are watching: First up, we check in with the International Monetary Fund (IMF) on its expectations for the global economy. We balance this muted optimism with a reality check on yield curves, which remain deeply inverted, and leading economic indicators which have been in recessionary territory for some time. We also continue to watch commodity prices (especially crude oil) for signs that inflation could reaccelerate—and lead to additional tightening by central banks beyond what is now expected. Finally, we review the outlook for infrastructure assets as written by our direct infrastructure research team peers.

• A global growth revival?: In a positive sign, the IMF raised its global economic growth forecast for 2023 to 3.0% from 2.8% in April, though still down from 3.5% in 2022. They noted the slowdown was concentrated in “advanced economies” where aggregate growth of 1.5% is expected this year (down from 2.7% last year), falling to 1.4% in 2024. Conversely, they anticipate emerging and developing markets should grow by 4.0% this year (matching 2022) and accelerate slightly to 4.1% in 2024. The IMF also sees global inflation subsiding, notching down their 2023 estimate by 20 bps to 6.8% (from 8.7% in 2022) and falling further to 5.2% in 2024, though upside risks to inflation remain and current levels are still too high for comfort. The IMF also issued a warning remark to Japan over its controversial yield curve controls. Subsequently, the Bank of Japan (BOJ), at its latest policy meeting, pledged “greater flexibility” to yield control, and will now buy bonds up to 1% away from their target, effectively widening their tolerance by 50 bps.
• Economic omens: Much has been written about a potential “soft landing” scenario in the U.S., but odds of a recession remain uncomfortably high. For one, the yield curve remains deeply inverted, with the 2s-to-10s spread touching -105 bps this week and the 3mo-to-10s hitting -167 bps. An inversion of the 2s-to-10s has often preceded a recession by 12-18 months, and this point on the curve has now been inverted for just over a year. Additionally, the Conference Board’s Leading Economic Index (LEI) peaked in December 2021 and has been trending downward since, with year-on-year declines for twelve consecutive months and a recent acceleration in the rate of decline. 
• Crude also giving us the creeps: Crude oil prices have headed steadily higher over the past month, with near-term contracts for WTI crude topping $80/bbl as we write and Brent crude now around $84/bbl. Falling inventories, continued voluntary production cuts from Saudi Arabia and Russia, and potentially higher demand from China could drive prices north from here. Rising oil prices could also lead to a reacceleration in inflation and give way to additional rate hikes from central banks as year-over-year base effects are no longer a tailwind in the back half of 2023. While the Fed prefers to use core inflation measures (excluding more volatile components such as food and energy), a higher cost of oil could creep into the prices of many finished goods as an input material (e.g. plastics) or part of transportation costs.
• Let’s be “Direct” about infrastructure: Liquid Real Assets share a lot in common with their private counterparts (they are the liquid equivalent of these long-dated, capital-intensive real assets). After all, listed real estate companies own real estate assets, and listed infrastructure companies own infrastructure assets. So, when our direct infrastructure team publishes new research, we pay attention. In their Strategic Outlook for the 2nd half of 2023, they make the case that fundraising and transaction activity should be picking up, potentially driving valuations higher, and that assets with the ability to capitalize quickly on the inflationary environment but also exhibit strong downside protection characteristics are best placed to outperform. The full paper can be viewed here.