Market index returns

Market index returns Month to date since September 30, 2024 as of October 31, 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 in October, with most of the downdraft coming late in the month. They started downward early in the month as a short-lived port strike occurred in the U.S. and as Iran launched a missile strike on Israel, but quickly reverted to positive territory during the middle of the month, with the MSCI World Index even hitting a new all-time high. However, investor optimism faded as interest rates moved higher and softer economic indicators became evident, leading the broader market to lose its footing and close October at its low for the month. Then, just as the calendar page flipped to November, markets changed course, with the MSCI World Index up over the first five trading days of the month and setting a new all-time high by November 7th. Stock markets appeared emboldened by the resounding election of Donald Trump as the next U.S. President, but so too were bond yields, with the U.S. 10-year Treasury yield reaching 4.47%, its highest level since early July (although it has eased a bit in the ensuing days). Spot gold prices, which reached a new all-time high of $2,788 per ounce late in October, had fallen by over $100 per ounce by the time the election results were known, while the U.S. dollar strengthened materially to 105.1 (per the DXY Index) just following the election but remains below levels seen earlier this year.^[1]

Against this backdrop, Real Assets declined in October and underperformed the broader markets. Global Infrastructure securities returns were negative but held up the best and beat the broader market in relative terms, with strength evident in the Americas midstream energy segment. Treasury Inflation-Protected securities (TIPS) and Commodities also outperformed the broader market, with the latter seeing positive performance from livestock and precious metals. Losses were greater in Natural Resource equities, which underperformed the broader market, with metals & mining names dragging down the group’s return. Global Real Estate securities fell the most in October, as sharp losses in the UK, Europe, and Canada weighed heavily on the space. Over the first five trading days of November, all of the Real Assets classes are in positive territory for the month (aside from TIPS which are flat), but all are trailing the more robust gains seen in the broader equity market.^[2]

• Why it matters: The U.S. election is now behind us, and that fact alone is good news no matter how you look at it. It will be a few months before the new president takes office and the new Congress is seated, and even longer before new legislature and policies are enacted. Yet savvy investors are already positioning their portfolios for the impact of a Republican sweep on capital markets. Unfortunately, we can’t be certain exactly how everything will play out, and second- and third-order effects will take even longer to become apparent. You can’t balance a budget by cutting taxes for everyone, and reducing government spending has its own ramifications. New U.S. tariffs on Chinese goods might help some U.S. industries, but likely do little to help China regain its economic footing, and after all, it’s a global economy we live in. Will these new policies reignite inflation, and if they do, just how heavily will President Trump keep his thumb on the Fed? We pray that the conflicts in Ukraine and the Middle East are peacefully resolved, but history shows us that a change in U.S. government alone often does little to resolve issues between other sovereign nations. Maybe this time will be different. 

• Macro Dive: This week, we quickly recap the U.S. elections and some of the expected changes to come. We also look at the actions of two central banks. Then we review recent data from the Institute for Supply Management (ISM). 

   

  • The votes are in: The U.S. held its quadrennial presidential election (and many other elections) on November 5th, with former President Donald J. Trump, the Republican nominee, recapturing the White House. In a sign that the race may not have been as close as polls and the media suggested, President-elect Trump not only won the electoral college but won the popular vote. Additionally, the Republican Party took control of the Senate, previously controlled by the Democrats, and it appears the Republicans will also maintain control of the House. Controlling both the executive and legislative branches (and having a judiciary branch that tilts conservative), the Republicans should have few obstacles to implementing their political agenda, although there are still some procedural maneuvers the Democrats can take in Congress. We don’t believe that every campaign promise will be kept, but big changes are coming. Corporate tax rates are likely to be lowered, stricter immigration policies will almost certainly be implemented, and many regulations on businesses and industries are likely to be removed. New protectionist policies are expected for the country as a whole, including an emphasis on onshoring and tariffs on a wide variety of foreign goods. We will be monitoring these events as they unfold, but below we present a preview of some of the likely implications for Real Assets.^[3]
  • Two cuts, one day: This week, and on the same day, we saw interest rate cuts from both the Bank of England (BOE) and the U.S. Federal Reserve (Fed). The BOE was up first and cut benchmark rates by 25 basis points (bps) for the second time this year. The vote was 8 to 1, with the lone dissenter in favor of keeping rates steady. However, the UK budget, released by Finance Minister Rachel Reeves last week, includes increased taxing, spending, and borrowing and has not been particularly well received. Rates on UK Gilts have backed up since, and BOE Governor Andrew Baily even cautioned on cutting rates too quickly and ensuring inflation moves towards their target. A bit later, the Fed concluded its 2-day policy meeting with a 25 bps rate cut, a smaller step than the 50 bps cut that occurred in September. In prepared remarks, the committee noted it sees risks to inflation and employment as “roughly in balance.” Fed Chair Powell was peppered with questions about the election during his press conference but indicated the election alone did nothing to change the Fed’s mandate and that they don’t fully know yet what “the timing and substance of any policy changes” will be. He also reiterated his commitment to fully serving out his term (which ends in 2026) even if asked to step down by the incoming president.^[4]
  • ISM trend continues, but at what prices paid: Recent ISM data told a familiar story; Manufacturing activity in the U.S. in contracting, while services continue to expand. The ISM Manufacturing Index for October was 46.5 (below 50 is contraction, above 50 is expansion), which was below estimates of 47.6, and below September’s 47.2, and also represented the seventh consecutive month of contraction (and the 23rd out of the last 24). Prices paid in manufacturing jumped to 54.8, above expectations of 50.0 and September’s 48.3, with noted short supplies of electrical and electronic components continuing. Days later, the ISM Services Index for October was released at 56.0, its highest reading since July 2022, indicating sector expansion for the 50th time in 53 months. Prices paid for services also continue to expand, with a print of 58.1 for October, just above estimates of 58.0 but decelerating from September’s 59.4. The prices paid data for both manufacturing and services warrants a watchful eye as it could be an early sign of remerging inflation and likely partially to blame for rising interest rates. As for the continued weak manufacturing activity, this is an area that could reverse over the next year (or so) as a greater focus is placed on reshoring, especially in light of the incoming administration.^[5]

• Real Assets, Real Insights: While implications from the recent U.S. election on Real Assets will evolve over time, we want to present some of the items that could occur and what we’ll be watching carefully. Then, we want to highlight some recent activity in data centers that continues to show current demand is almost insatiable, but providing sufficient electricity to power them remains a challenge. 

• Election outcome expectations for Real Assets:^[6]

   

  • Real Estate Securities: Real Estate Investment Trusts (REITs) are likely to experience less of a direct impact than other asset classes but could see second-order effects from changes in tax policies, inflation, and economic growth. It’s too early to say what will happen to inflation, but new tariffs could increase onshoring and shift logistical patterns, potentially requiring new facilities to be built for manufacturing and distribution. Additionally, reduced regulation could encourage business creation and confidence, which might support demand for real estate. In residential rental, the easing of regulation (and likely less rent control) could be a tailwind, although partially offset by stricter immigration policy, which would likely affect lower-quality housing first (which is generally not owned by the listed REITs). Federal minimum wage efforts are likely to stall, and any reduction in personal income tax could be beneficial to retail properties. 
  • Infrastructure Securities: A decrease in corporate tax rates would have the biggest beneficial impact on those sectors exposed to corporate taxes, which we expect to include U.S. Rail and the U.S. Midstream Energy sector. U.S. Rail could also benefit from reshoring and higher oil and gas production, which would create higher volumes and a positive operating environment. Energy and pipeline companies could further benefit from lower regulations, which would allow them to build out the critical infrastructure needed to de-bottleneck key basins in the U.S., and we expect these benefits to materialize both near- and long-term. Utilities should be able to build more quickly and with less regulatory scrutiny, which could lower costs for consumers. There will likely be less of a push towards renewable sources for electricity generation, with more natural gas and nuclear power used to meet incremental demand. The lives of coal-fired power plants could be extended from a regulatory standpoint, but many generating utilities already have plans to phase them out. Water utilities will likely see the promised focus on clean water, which could create new opportunities for them, but existing regulations and Environmental Protection Agency (EPA) mandates would likely be rolled back. 
  • Commodities & Natural Resources Equities: We expect to see new policies which would support production of and exportation of crude oil and natural gas. We also expect more stringent policy on Iranian exports of crude as a punitive measure for Iran’s nuclear and foreign policies. However, these measures do little to address the demand side of the equation and would thus expect prices of crude and natural gas to fall. However, a de-emphasis on fleet conversion to electrical vehicles (EVs) and curtailment of environmental regulations for vehicle fuel efficiency, could lead to an increase in demand for gasoline. New tariffs could serve as a bargaining chip, which would likely be very relevant for agricultural commodities. Tariffs could be relaxed for those countries promising new import quotas for American agricultural and livestock commodities. Tariffs could also serve to promote domestic steel production. However, current IRS benefits to promote domestic steel demand could disappear if Trump and the Republican party cut funding to the IRS, offsetting the benefits from tariffs. We would also expect expansion of “natural resource nationalism” policies for strategic materials such as copper and steel. This trend could elevate prices but also increase isolation towards competing economic powers such as China, or even Europe. 

• Data Centers lease big (Real Estate): To call data center leasing in the third quarter robust would be an understatement. An industry brokerage firm, Cushman & Wakefield, reported in their most recent report that data center vacancy in the Americas had fallen to 3% and new construction projects were over 80% pre-leased. The demand for high-quality data center space, which is being driven by AI, was also evident in the earnings reports from the listed data center companies. Digital Realty Trust, Inc. (DLR) reported signing new leases that would generate $521 M in annualized rent. Not only was this a new single quarter record for them, but it was more than double their previous record, which was set in the first quarter of this year. Another listed data center owner-operator, Equinix, Inc. (EQIX), doesn’t provide the same level of leasing transparency but also noted it was a record-breaking quarter for new leasing. Not only did both companies discuss the strong leasing environment, but they also indicated market rents have been rising amid difficulties in developing new properties, given a lack of available power and certain electrical and mechanical components.^[7]

• The quest for power (Infrastructure): Earlier this year, we reported on Amazon’s purchase of a 960 MW data center in Salem Township, PA from Talen Energy that just happened to be adjacent to a nuclear power plant owned by Talen. Amazon and Talen planned to directly power the data center behind the meter. However, the Federal Energy Regulatory Commission (FERC) recently voted to reject an amended interconnection service agreement (ISA) that would have increased the amount of power allowed to flow to the data center directly from the nuclear facility to 430 MW, although the prior ISA for 300 MW will still be allowed. Interested parties argued Amazon would benefit from the transmission system but wouldn’t be paying its share to keep the grid updated and that those transmission costs would be borne by other customers. Talen and Amazon are reviewing their options, and it’s possible the FERC could rule on another amendment to the ISA, but for now Amazon will need to purchase its power in front of the meter for amounts above and beyond a 300 MW load. Until this matter is resolved, it’s likely any new data center power deals will need to stay in front of the meter.^[8]