Market index returns

Week to date since October 09, 2024 as of October 16, 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 rose mildly during our review period. An initial surge led the MSCI World Index to a new all-time high on Monday October 14th, buoyed by positive earnings results from a few of the largest U.S. banks, but momentum fizzled out the following day on softer sales bookings in the semiconductor space. Gold spot prices in the U.S. also hit new all-time highs during our review period and continue to do so subsequently, looking to close above $2,700 per ounce for the first time ever heading into the weekend. In contrast, crude oil prices declined as Israel indicated they would not strike Iranian energy infrastructure (nor nuclear facilities for that matter), but rather would focus on Iranian military installations. OPEC was also to blame for lower oil prices as it announced cuts to its oil demand growth forecast for this year and next for a third consecutive month.^[1]

Against this backdrop, Real Assets bested the returns of the broader market but saw mixed results at the individual asset class level. Returns from Global Infrastructure securities led the pack, with strong returns from UK infrastructure stocks and Americas Utilities. Global Real Estate securities also outperformed the broader market, with U.S. Office and U.S. Industrial providing strong returns for the group. Treasury Inflation-Protected securities (TIPS) fell behind the broader market but still provided positive returns. Commodities and Natural Resource equities saw negative returns in our review period, dragged down by energy and agriculture in both cases.^[2]

Why it matters: Economic growth in the U.S. continues to defy expectations, but China’s economy is ill, and the European Central Bank (ECB) is flagging new downside risks to its economy. Meanwhile, the world still waits to see what action Israel will take in response to Iran’s missile strike on October 1st and if Iran will then retaliate in turn. The war in Ukraine appears to have no end in sight and has taken an even stranger turn with North Korea providing troops for Russia. Back in the U.S., Congress still needs to pass a full fiscal year 2025 budget and also needs to address the debt ceiling within the first days of 2025, but both of these events will be post the presidential election. Speaking of which, some recent polls show a slight tilt in favor of a Trump presidency, but regardless, it’s going to be a tight race with likely many legal challenges to come after voting has ended. With this in mind, we reiterate our preference for an all-weather diversified strategic portfolio that includes an allocation to Liquid Real Assets.

Macro Dive:  We’ll first look at the most recent retail sales data in the U.S. Next, we’ll recap the latest ECB meeting and rate decision. Then, we’ll review the latest economic data out of China.

• U.S. consumers defy expectations (again): U.S. retail sales in September grew by 0.4% from the month prior, beating expectations of 0.3% and growing by the fastest rate since March. Excluding automobiles, sales grew even faster at 0.5%, beating estimates and the prior month. Excluding automobiles and gasoline, sales grew faster yet at 0.7% and again blowing past estimates and the prior month. Digging deeper, automobile sales were flat and gasoline station sales fell 1.6%, likely reflecting the lower price of gasoline in September (the prompt month futures contract was down almost 6%), but electronics and appliance store sales declined the most rapidly at -3.3%. The fastest growing category was miscellaneous store retailers, growing by 4.0% and was followed by health & personal care stores at 1.1%. Given the robustness in retail sales (and other positive economic news), the Federal Reserve Bank of Atlanta raised its GDPNow forecast for 3Q24 to 3.42% after raising it to 3.24% just the day before.^[3]
• A cut now. A bigger cut later?: The ECB cut its main three benchmark policy rates by 25 bps this week as inflation in the Eurozone remains on target, coupled with the need for easing as there have been some recent “downside surprises in indicators of economic activity.” Inflation fell to just 1.7% in September, largely helped by a sharp drop in energy prices of 6.1%, although food price inflation remains slightly elevated. They further noted inflation may increase in the final months of 2024 but should resume its disinflationary path in 2025, while weak manufacturing activity and exports are leading the economy to perform worse-than-expected and “risks to economic growth remain tilted to the downside.” Geopolitical risks, namely the conflicts in Ukraine and the Middle East, gave cause for concern and were noted as potentially amplifying a lower growth scenario. When asked why they didn’t cut by 50 bps given the economic risks, ECB President Christine Lagarde responded at her press conference that only a 25 basis points (bps) cut was on the table at this meeting, that the decision was unanimous, and future decisions will be data-driven. However, investors believe that larger cuts might be in store with overnight index swaps indicating at least a 25 bps cut at the ECB’s December meeting and a greater than 50% chance of a 50 bps cut occurring then.^[4]
• A long road ahead:  China reported annualized GDP growth of 4.6% for the third quarter, better than estimates of 4.5%, but it has now been decelerating for 2 quarters and puts their goal of about 5% for the full year at risk. Some signs of the continued slowdown were evident in other data released the week prior. Deflation remains a concern with September’s PPI dropping by 2.8% on an annualized basis and CPI only grew by 0.4%; both were below estimates. Exports grew only 2.4% in dollar terms, while imports only rose 0.3%, again below estimates and slowing from August’s pace. Given that the yuan strengthened against the dollar in September, results were even worse in local currency terms, as exports grew only 1.6% and imports declined by 0.5%. New home and used home prices both declined in September, the 16th consecutive month for the former and the 17th for used homes (which have also been down 35 of the last 38 months). Following the GDP release, the People’s Bank of China (PBOC) almost immediately promised more monetary support including a re-lending facility for public companies and major shareholders to buy back shares. While China’s economy still has a long road ahead to recovery, its stock market took the PBOC’s comments to heart, with the CSI 300 moving from negative territory to finish the day with a 3.6% gain.^[5]

Real Assets, Real Insights: First, we’ll review returns of private real estate funds in the third quarter. Then we’ll look at a possible solution for the unsatiable data center demand for power. Finally, we’ll inspect what has natural gas prices tumbling once again.

• All right, we’ll call it a draw (Real Estate): Preliminary results of the NFI-ODCE (NCREIF Funds Index-Open End Diversified Core Equity), a widely used proxy for private real estate funds, showed a 0.25% total return (gross of fees) for the 3rd quarter of 2024. Should this stand, it marks an inflection point for private real estate funds, which previously showed seven consecutive quarters of negative returns. However, digging deeper, that return was comprised of 1.05% of income and a 0.79% decline in property values, indicating property prices were still falling last quarter, albeit at a slowing rate. That +0.25% return in private real estate was dwarfed by U.S. listed real estate securities (as measured by the FTSE NAREIT Equity REITs Index) which returned 16.08% in the quarter, comprised of 1.09% from dividends and 14.99% from stock price appreciation. Only in a Monty Python movie could we call that comparison a draw, but we would expect private market values to improve as the listed market can lead by 9 months to over a year. Nonetheless, we see the current environment ripe for listed real estate securities to continue to perform well, as new supply is generally low, balance sheets are healthy, the unsecured debt market remains widely open, and short-term borrowing costs should be headed lower if the Fed continues to cut rates.^[6]
• The nuclear option (Infrastructure): In recent days, both Amazon and Google have indicated a willingness to embrace nuclear energy to power their data centers. In both cases, the power would come from small modular reactors (SMRs). SMRs differ from conventional nuclear reactors as they are a fraction of the size, can be assembled in a factory and transported to a site, and generally come with more advanced safety systems. However, SMRs, which have been operational outside of the U.S. for a few years, are limited to about 300 MW of output, but multiple units can be used, increasing the total power output. Google signed an agreement with Kairos Power to bring a first unit online by 2030, with additional units deployed through 2035 totaling up to 500 MW. Amazon entered a memorandum of understanding (MOU) with Dominion Energy (D) to explore SMR developments in Virginia, although no firm timeline has been set. In related news, it has been reported that Amazon and Ken Griffin (of Citadel fame) are both participating in a $500M capital raise by X-Energy, a privately held developer of SMRs. As power needs grow for data centers, given the exponential growth of artificial intelligence (AI) applications, we expect this is only the beginning of the reliance on SMRs for electricity generation.^[7]
• Welcome to fall (Commodities): It’s not just the leaves turning red, but also natural gas prices. Natural gas was the worst performing commodity we tracked this week, with prompt-month futures contracts in the U.S. falling 9.4% and the total return on U.S. natural gas futures down almost 40% year-to-date. Across the continental U.S., temperatures have been above average, and further warming is expected over the next week or two. Gas production remains stubbornly high in the U.S., and it was even reported that the rig count has increased over the past few weeks, providing little support during this shoulder season. Much of the recent weakness could also be attributed to the significant damage from the last two hurricanes as gas-fired power plant generation was throttled back with millions of customers losing power. From a longer-term perspective, we still expect to see a contraction of the surplus production, although this appears to be delayed for the time being, leaving it to the demand side of the equation for any potential price recovery. Conversely, prices in Europe (per TTF futures contracts) are up about 2.4% over the past week (and ~7% this year) as much of their gas still comes from Russia or the Middle East, where uncertainty of future supply remains an issue.^[8]