Market index returns

Week to date since May 15, 2024 as of May 22, 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.

• Fed minutes and PMIs point to higher for longer: Fed minutes from the meeting concluding on May 1st were released this week and showed some members questioning whether rates were restrictive enough and were even ready to tighten more if needed. This stood in contrast to some of the comments Chairman Powell made at the accompanying press conference. Much of the debate surrounded data from the first three months of the year, which showed inflation was not slowing quickly enough, though we would note April’s data did reveal an element of slowing price gains. It was also noted in the minutes that a few members felt financial conditions were still “too easy” and there were a few dissenters to reducing the pace of Treasury runoff from the Fed’s balance sheet, though most participants did vote in favor of the reduced cap. Reinforcing some of the hawkish views was the Purchasing Manager Index (PMI) data for May (released this week), which largely exceeded expectations and expanded from April’s levels. The overall Composite PMI of 54.4, its highest level in over two years, exceeded estimates of 51.2 and expanded from 51.3 the month prior. Most of the expansion came from Services PMI which clocked in at 54.8, but even Manufacturing PMI at 50.9 showed accelerating activity. Upon the release, Treasury yields moved higher, and investors pushed out expectations of a first cut, with a full cut not priced in until December of this year (per Fed Fund futures).
• China brings the house: China is contemplating having local state-run enterprises buy unsold houses directly from developers (at steep discounts). One proposal includes commitment of RMB 300 billion (~$42 billion USD) in relending for local governments to buy the houses and convert them to affordable housing. However, there are concerns that this measure is insufficient as estimated values of the current inventory of unsold housing stock are as high as RMB 22 trillion (~3 trillion USD). Additional measures being implemented include reducing minimum down payments for home purchases, removing the national floor on mortgage rates, and lowering the loan rates for housing provident funds by 25 bps. While we are skeptical that these actions alone will lead to a meaningful recovery in Chinese real estate activity, shares of Chinese property developers did make a move higher on the news.
• Rising sun or setting sun?: Japan’s economy contracted by more than expected in the first quarter of this year. A decline of 2.0% on annualized GDP was more than economists’ prediction of a 1.2% shrinkage for the first quarter of 2024, while the 4th quarter of 2023 was revised down from a 0.4% expansion to flat (0.0%). This now represents three consecutive quarters of contraction or no growth as 3Q 2023 GDP growth was -3.6%. The most recent quarter was hampered by declines in private consumption, business spending, and net exports, although a rise in inventories did contribute positively to GDP. This news likely places additional pressure on the Bank of Japan (BoJ), which was widely expected to raise interest rates later this year after hiking in March for the first time since 2007 and leaving the era of negative interest rates. However, this could potentially signal the bottom as recent shunto wage agreements should lead to increased income for many unionized workers (and thus more consumption); core machine orders in March grew by almost 3% on both a quarter-on-quarter and year-on-basis indicating some confidence from the manufacturing sector; and the weakened yen should provide some support for export activity, which has weighed on GDP over the past few quarters.

• Time to trim? (Real Estate): DWS recently released its Japan Real Estate Market Outlook Report. Uncertainty over Bank of Japan (BoJ) policy drove a slowdown in office transactions in 2H 2023, while transaction yields in Tokyo also marginally widened. However, transaction activities in other sectors remained relatively healthy, underpinned by favorable lending circumstances and strong investment demand—especially for the hotel sector which saw record transaction volumes in 2023. Despite the policy uncertainty, Tokyo maintained its position as the top transaction volume market in the Asia Pacific region last year. Osaka secured the ninth rank during the same period. It is also noteworthy that the Q1 2024 transaction volume of Tokyo saw a healthy recovery by 34% from the same period of the previous year, though it was still on a preliminary basis. After all, Japan’s favorable borrowing environment still offers a clear advantage. The office yield spread in Tokyo — the difference between the average cap rates and 10-year bond yields — remains wide at 2.4% in the first quarter of 2024 (preliminary), relative to other major markets including New York (1.8%), Sydney (1.4%) and London (0.4%). With further interest rate hikes expected in the coming quarters, transaction yields in Japan are expected to experience modest upward pressure, potentially presenting a narrow window of opportunity for investors to optimize their portfolio. To learn more, check out our recent paper here.
• Eh, I need some natural gas (Infrastructure): We recently attended an industry conference held by the American Gas Association (AGA) and were intrigued by the number of comments and conversations we heard surrounding natural gas’s role in the buildout of the infrastructure necessary to support AI. The amount of power needed to operate data centers capable of supporting AI applications is immense and needs to be available 24/7. To date, the lack of available and reliable energy has been a limiting factor in the development of new data centers. While many data centers and electricity generating utilities have ambitions to use renewable sources of energy, there simply isn’t enough capacity at present to support AI-driven demand, making natural gas a crucial element for building new data centers. It’s also one of the cheapest fuel sources for generating electricity, and power costs are one of the largest operating expenses for data center users. Local distribution companies (LDC) that supply gas to consumers and generating companies will need to expand existing distribution networks to where the gas is needed, likely much closer to where there are large concentrations of data centers. These buildouts won’t be cheap, but as regulated utilities, the LDCs will be entitled to the return on equity (ROE) granted by their regulators, which helps to limit the risks involved in new projects. 
• Brother, did you get me some silver? (Commodities): Silver prices have been on the rise recently, with spot prices coming within a whisper of $32/oz this week. While not quite hitting an all-time high (as seen in Gold and Copper recently), this does reflect the highest price in over a decade, with much of the surge resulting from a short squeeze.  Fundamentally, however, the supply side is tight, with production expected to contract marginally this year, and investments in new projects being notably low while demand remains robust. Silver is not only used as a precious metal for jewelry and tableware but also has several industrial uses and is even used in some medical applications. Recent demand is being bolstered by additions to photovoltaic production capacity (e.g. solar cell manufacturing) and a recovery in industrial demand, particularly from China. Silver is expected to remain in production deficit (meaning demand is outpacing supply) this year and next, which would represent the 4th and 5th years of structural market deficit. While elevated prices could incentivize additional production, any ramp-up at new or existing mines would take time to implement, and we could see prices move higher in the meantime.