21-Feb-24 Equities
John Vojticek

John Vojticek

Head of Liquid Real Assets, DWS
Geoffrey Shaver, CFA

Geoffrey Shaver, CFA

Portfolio Management Specialist – Liquid Real Assets
Edward O'Donnell

Edward O'Donnell

Senior Product Specialist, Liquid Real Assets

Real assets gain ground during a week of rebound

Weekly Edition

Market index returns



Week to date since February 14, 2024 as of February 21, 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 showed resilience by edging higher in our U.S. holiday-shortened review period, flying in the face of hotter-than-expected Producer Price Index (PPI) data and the release of U.S. Federal Reserve (Fed) meeting minutes, which showed the Fed is hesitant to cut rates too quickly. In support of the markets’ strength, earnings reports continue to show revenue and earnings growth that exceed consensus views, especially in the technology sector, which was evidenced by Nvidia’s report (which came out just after our review period), where results broadly drove markets higher on renewed AI euphoria. Against this backdrop, all Real Assets classes outperformed the broader equity markets, with the exception of TIPS, which had a minor loss. Global Infrastructure securities rose the most, with strong performance from the Asia Pacific region. Natural Resource Equities and listed Global Real Estate followed, led by results in agricultural-related equities and also property stocks in the Asia Pacific region. Commodities had slighter gains, with solid returns from natural gas and industrial metals offset by weakness in agricultural commodities.

Why it matters:  It’s becoming increasingly evident that investors’ hopes of interest rate cuts occurring early this year were too optimistic. Some, including former U.S. Treasury Secretary Larry Summers, have recently suggested that the Fed’s next move might even be another hike, but we do not fall into that camp. Nonetheless, we have observed an upswing in market-based inflation expectations as 5-year breakeven inflation levels have risen from 2.15% at the start of the year to 2.40% currently, driving the 10-year U.S. Treasury yield above the 4.3% level. We would remind readers that rates in the US are also being impacted by a lack of fiscal discipline that has become the norm du jour as politicians (on both sides of the aisle) are perfectly willing to kick the can down the road. Economic growth signals in the U.S. have been mixed but will likely slow if benchmark policy rates are held above the R-star level for an extended period of time. Parts of Europe and Asia are in recession, but recent PMIs have improved sequentially, providing early signs of recovery.

Macro Dive: This week we review the latest Fed meeting minutes and related Fedspeak before turning our attention to the (once again) upcoming deadline for Congress to strike a budget deal. We conclude with a summary of recent policy changes in China that will include some new furry visitors to the U.S.
  • No Punchbowl for You: Minutes from the Fed’s January 30-31 meeting were released this week, in which most members cited concern over cutting rates too soon and allowing inflation to reignite, though a minority did express caution that holding rates high for too long could weaken the economy. What they all agreed on was that policy rates have likely peaked and the next move would indeed be a cut, but the timing of the start of easing remains in question. Additionally, a new question has arisen about the pace of quantitative tightening (QT). While members agreed that a smaller balance sheet was desirable, the runoff has gone smoothly to date, and financial system liquidity has “remained more than ample.” Debate arose as to whether the pace of selling or run-off should be slowed, and the minutes indicated that the QT discussion will be revisited at the March meeting. Currently, the Fed Funds futures markets are estimating an ~84% chance of a cut by the June meeting, with near certainty of at least one cut by the July meeting
  • Another Fast and Furious Sequel:  While we have no insight into the 11th installment of the movie franchise starring Vin Diesel, we do know the U.S. Congress is going to be in Fast and Furious mode to solve the current budget standoff when they return. The current continuing resolutions (CRs) expire on March 1 and March 8, and portions of the government could shut down after those dates absent another CR or full spending bill. Complicating efforts to get anything done, the Senate is out of session until February 26, and House sessions will not resume until February 28, leaving precious little time to negotiate or finalize a deal (but thank goodness it’s a leap year). Certain members of the Republican party are insisting on no more CRs, only a full fiscal year spending bill, though House Speaker Johnson (also a Republican) has yet to echo that sentiment after having had to walk back as much in the last round of negotiations. In any event, we hope the debate on the fiscal year 2024 budget is resolved soon, as the kickoff of planning for fiscal year 2025 will start when President Biden delivers his proposed budget to Congress on March 11. We would place a low likelihood on a 2025 budget being passed before this November’s presidential election.
  • Slow progress is better than no progress: This week, the People’s Bank of China (PBoC) delivered a rate cut on the 5-year Loan Prime Rate (LPR). The 5-year LPR, which is a widely used mortgage reference rate, was cut by 25bps to 3.95%, the largest cut on record. This move is aimed at supporting their flagging residential property market by lowering the cost of financing for new home buyers or those with mortgages already in place that are tied to the reference rate. In another move meant to shore up their declining stock market, the China Securities Regulatory Commission (CSRC), headed by newly appointed Chairman Wu Qing, announced a ban on institutional investors net selling equities at the market open or close. Chairman Wu has also announced a commission to monitor short selling on national exchanges and to crack down on firms that profit from short selling strategies. Finally, in perhaps a conciliatory move, panda diplomacy is back! It was announced that a pair of giant pandas will be heading to the San Diego Zoo this year. Recall that China allowed panda loan agreements in Memphis and D.C. to expire last year, leaving Zoo Atlanta as the only location in the U.S. to house great pandas.
Real Assets, Real Insights: We will highlight a new entrant to the listed real estate space and some secular tailwinds in senior housing. We’ll also review a growing list of oil and gas midstream pipelines that might be for sale before turning to a deeper dive into what’s been driving the price action in natural gas.
  • New kid on the block (Real Estate):  This month provided a U.S. REIT IPO, the largest in the past six years. American Healthcare REIT, Inc. (NYSE: AHR) went public on February 6, raising $870M of gross new equity in the process. AHR, with an equity capitalization just short of $2B and an enterprise value of almost $5B, is focused primarily on the senior housing, skilled nursing, and medical office segments of healthcare. The former non-traded REIT’s IPO was well received, with the stock closing over 10% higher on its debut. Their IPO timing may serve them well, as the fundamentals for senior housing assets appear to have turned a corner. Senior housing assets were particularly hard hit during the COVID pandemic, as move-outs accelerated and move-ins became almost nonexistent. Now, occupancies are on the rise, staffing issues have abated, and U.S. demographics appear to be in their favor as the first wave of the baby boomer generation is set to reach the age where senior housing becomes a viable option.
  • A pipeline of pipelines (Infrastructure):  We’re monitoring a growing list of pipeline assets (now at 15) in North America that are currently on the market or could be up for sale soon. These assets span a range of product delivery, including crude oil, distillates, and natural gas, and various geographies across the U.S. and Canada, but are somewhat concentrated in natural gas and the Permian Basin. The list mostly includes partial ownership interests but does include a few wholly owned assets. The sellers are widely known to the marketplace due to recent M&A activity at the parent company or other corporate actions, or they have publicly announced their intent to sell. We view this as clean-up activity after the recent wave of consolidation we’ve witnessed in upstream exploration & production (E&P) companies and in the midstream companies themselves. We believe there are many potential buyers, both public and private, but with big checks to write and motivated sellers, we view this as a buyer’s market. We will be watching carefully as to whether and how these deals close for additional insight into the pricing of midstream assets.
  • Production reduction (Commodities): Natural gas has been on a (mostly downward) wild ride, with prices falling almost 30% in 2024 through February 20, and this follows a decline of ~65% in 2023. But during this review period (Fed 14 to Feb 21), natural gas was the best performing commodity, rising in excess of 12% as Chesapeake Energy Corp. (NASDAQ: CHK), one of the largest natural gas producers in the U.S., announced they would cut output by ~20% and reduce capital expenditures by in 2024 by ~$1.3B. Other North American producers have also announced reduced investments but have been reticent to cut production given a host of new LNG export terminals expected to open over the next few years. Rig counts have held steady to date, though CHK announced the shuttering of two rigs as part of their planned reduction. We’re skeptical that CHK’s decisions alone will lead to a sustainable recovery in natural gas prices, but we will be watching closely to see if others follow suit. Our skepticism regarding a near-term rebound is a result of continued headwinds related to well-stocked inventories in Europe and increased carry costs in the U.S. due to rising storage prices, which could see more gas brought to the market, outweighing any supply reductions in the short run.

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