Market index returns

Week to date since January 10, 2024 as of January 17, 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.

• Greenback down but not out: One beneficiary of rate cut expectations being pushed back is the U.S. dollar (potentially further buoyed by escalating unrest in the Middle East). Shorter-term rates have held steady this year, but 10-year U.S. Treasury yields have risen about 30 bps to 4.18% from the start of the year, while 10-year UK Gilts are up 42 bps to 3.95%, and 10-year German Bunds are up 32 bps to 2.34%. Meanwhile, the U.S. dollar has strengthened by 2.1% year-to-date, with the DXY Index touching 103.5 but remaining well below the recent highs of 107 seen in October. If the dollar continues to strengthen, we could see weaker asset prices, especially in gold and crude oil (all else being equal).
• UK inflation strikes back: Inflation in the UK unexpectedly picked up in December with their Consumer Price Index increasing by 0.4% month-on-month (20 bps ahead of estimates and 60 bps higher than November’s decline) and the year-on-year print growing by 4.0% (20 bps ahead of estimates and 10 bps higher than November) with the primary culprits being rising alcohol and tobacco prices. Core CPI (which excludes food, energy, alcohol, and tobacco) also remained elevated at 5.1% year-on-year (20 bps ahead of estimates and unchanged from November), with the largest increases coming from travel and transportation services. Further evidence of persistent inflation was seen in their Retail Price Index (RPI) data, which also exceeded forecasts on both a monthly and annual basis. In the immediate aftermath, yields on 10-year Gilts jumped by about 19 bps to 3.98% on the day of release, expectations for the first rate cut from the BOE were pushed back, and the total number of expected 25 bps cuts in 2024 was reduced by almost a full cut.
• Is China ready for a rebound?: China reported fourth quarter GDP growth of 5.2%, missing expectations by 10 bps, and full-year 2023 GDP growth was also 5.2%, in line with expectations, exceeding the government’s target of “about 5%,” which was set earlier in the year, and well above the 3% growth achieved in 2022. However, the country is still suffering from a deflationary bout with both CPI and PPI having negative prints for December and from elevated youth unemployment, which registered at 14.9%, as they resumed reporting this figure for people aged 16 to 24. We would note that the government changed this calculation by now including the cohort that is still in school, hence raising the denominator and flattering the number relative to its previous methodology. Perhaps most troubling is their faltering property markets, which saw new home prices in major cities fall by 0.5% in December, continuing a downward trend despite government support, and total property investment falling by almost 10% for the full year. 2024 growth is likely to decelerate, as major banks are estimating GDP growth of only 4.6%, though we won’t get the government’s official target until early March.
• And behind door #2…: Congress wins another short-term spending bill extension. With the deadline quickly approaching, the U.S. Congress passed a short-term spending bill, which will be sent to President Biden for signing. This bill provides funding until March 1 for some agencies and March 8 for others. The Senate passed the bill first in a 77-to-18 vote, while the House passed it 314-to-108, with the bulk of the holdouts coming from the most conservative members of the Republican party. What the bill did not include was any additional aid to Ukraine or spending for border security, two issues that will likely resurface in the next round of negotiations.

• Let’s talk about that lag (Real Estate): It should come as no surprise that direct real estate pricing can lag public market valuations by about a year, given the former’s focus on appraisal-based valuations compared to observable daily pricing metrics for public markets. Recent returns have provided further evidence of this trend, with preliminary returns for the NCREIF ODCE Index (a benchmark consisting of US open-end private real estate funds) declining 4.8% in the fourth quarter of 2023 and delivering a -12.0% return for the full year 2023. This decline is relative to +18.0% and +11.4% gains for the FTSE NAREIT All Equity REITs Index for the comparable periods. The private real estate fund markdowns for direct real estate were to some degree foreshadowed by signals from listed markets in 2022 (REITs down ~25%). Private real estate fund exit queues began increasing in 2022 in anticipation of these pricing shifts, but limited transaction volumes resulted in only modest redemptions in 2023. While exit queues are abating for direct real estate funds, our private market research colleagues suggest modest further downside to appraisal values before getting incrementally better in the back half of 2024 and returning to historical return expectations in 2025. For more on the potential recovery and 2024 outlook for direct real estate, we would recommend checking out the Global Real Estate Strategic Outlook published by our esteemed DWS peers.
• Ready for takeoff (Infrastructure): Airports form a vital part of the global infrastructure ecosystem, and while they don’t change hands frequently, they can command multi-billion dollar valuations when they do. With air travel demand in 2023 exceeding pre-pandemic levels (a trend we expect to continue in 2024), we anticipate several airports (or fractional ownership of) to trade in the not-too-distant future. First, there is a pending deal for 25% ownership of London’s Heathrow to be sold by a listed infrastructure company to private and sovereign funds for ~$3B USD. Next up, the Greek government is planning an IPO of Athens International Airport as early as next month, with 30% of the shares of Greece’s largest airport being offered to the public. There is also talk of a listed infrastructure company bidding on Edinburgh Airport, the largest in Scotland, which is being marketed by a private funds consortium and is expected to draw an equity valuation of €3B to €3.5B. Finally, we could also see airports in Aberdeen, Glasgow, and Southampton in the UK change ownership this year, as well as Queensland Airport in Australia and Chisinau Airport in Moldova.
• How does your garden grow (Natural Resources): Fertilizer can help improve crop yields and is among the primary revenue sources for the Agriculture Chemicals segment. The sector has not been for the faint of heart as fertilizer prices held steady through 2020 but began climbing in 2021 due to supply-chain issues, and after a short pullback in early 2022, spiked upon the Russian invasion of Ukraine as natural gas (the primary feedstock for nitrogen fertilizers) prices surged and supplies in Russia and Belarus (the world’s top potash fertilizer exporters) were interrupted. In turn, some growers switched production to crops such as soybeans, which require less fertilizer, or reduced the frequency of applications, which could result in lower yields. Fertilizer prices have since retreated but are still higher than at the end of 2020. Of the key components, nitrogen is cheaper as prices for natural gas (an input for urea and ammonia) have pulled back and potash is in ample supply (with Russia and Belarus exporting near pre-war levels), but the market for phosphorus is still tight (China has instilled export restrictions). Overall, we see no immediate catalyst for a pickup in fertilizer demand, and producers’ margins could remain under pressure given overall cost increases and deteriorating farmer economics. Nonetheless, we will be watching carefully, as supply disruptions via changes in the Ukraine-Russia conflict or unpredictable weather can quickly impact prices.
• Is oil in troubled waters? (Commodities): As year-end 2023 approached, it was widely expected the supply-demand equation for crude oil would be balanced. Rather, Chinese oil demand decelerated more quickly than expected, and WTI crude oil prices fell 18% in the last quarter of 2023. The IEA’s postmortem estimates that stockpiles actually expanded slightly in recent months, and they expect demand growth to ease in 2024. OPEC is sticking to its projection of a significant deficit in 2024 and 2025, but a sustained surplus could result from increasing output from non-OPEC nations, primarily the U.S. In fact, the IEA is forecasting that 2024 production increases from non-OPEC countries should outpace (further slowing) demand growth “by a healthy margin.” Among the events that could change this outcome, we would highlight 1) extended and/or further reduced production quotas from OPEC+ Russia (or Saudi Arabia could cut alone), 2) increased demand, primarily from Asia, or 3) escalation of the current conflicts in the Middle East. Furthermore, tensions in the Red Sea are driving oil prices higher as insurance premiums soar and some tanker volume is rerouted around Africa. Expensive freight and the build-up of inventory on water could cause contra-seasonal stock draws if the situation does not improve.