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- Real Assets mixed, broader equities move higher
Market index returns
Week to date since July 03, 2024 as of July 10, 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 continued their upward march, with the MSCI World Index setting a fresh all-time high (as did the S&P 500 and NASDAQ in the U.S.) at the end of our review period, with the global index now up over 15% this year. A tech-fueled rally, largely driven by artificial intelligence (AI) ambitions and multiple expansions has been the primary reason for the broader stock market melt up (although a rotation from large cap tech to smaller cap names is being seen post our review period). Additionally, softer payroll data and marginally higher unemployment claims in the U.S., coupled with decelerating inflation (released after our review period), have given new hope that multiple interest rate cuts could come from the U.S. Federal Reserve (Fed) this year. A soft landing (or no landing) scenario in the U.S. remains the base case for many investors as economic growth, while slowing, remains healthy for now. Against this backdrop, Real Assets saw modest positive overall performance this week, but with mixed results at the individual asset class level. Global Real Estate securities gained the most, narrowly trailing the broader markets, as Nordic property stocks, European residential stocks, and data centers in the U.S. saw robust gains. Global Infrastructure securities also saw healthy returns, with particular strength out of the UK and Europe. Treasury Inflation-Protected securities (TIPS) saw slightly positive performance while Natural Resource equities and Commodities declined, with the latter dragged down by energy and livestock.[1]
Why it matters: Trees don’t grow to the sky, and investors’ preferences can change in a heartbeat. Capital markets appear to be in a period of smooth sailing for now, but any number of events, many of them unknown, could spoil this rally in a hurry. Markets survived the recent elections in Europe without much damage, but the November presidential election in the U.S. could have wider implications, and we’re not even sure who all the candidates will be at this point. Investors have largely downplayed the conflicts in the Middle East, but they could flare up again at any moment and have a dramatic effect on the cost of oil. The Ukraine-Russia war still has no end in sight, and NATO’s recent labeling of China as a Russian enabler only risks exacerbating an already tense situation. And then there are the important unknowns for markets to digest: has inflation really been whipped, where will interest rates be next year, and are there any more new geopolitical conflicts around the corner (we’re looking at you China and Taiwan)? With all this in mind, we continue to maintain our preference for a balanced, well-diversified portfolio, that strategically includes an allocation to Real Assets.
Macro Dive: First, we’ll review recent employment trends in the U.S. and then turn to the latest inflation data and how these two items together could change the Fed’s mindset on the timing of rate cuts. Then, we’ll look at the election results in the UK and France and what they might mean for the future.
Why it matters: Trees don’t grow to the sky, and investors’ preferences can change in a heartbeat. Capital markets appear to be in a period of smooth sailing for now, but any number of events, many of them unknown, could spoil this rally in a hurry. Markets survived the recent elections in Europe without much damage, but the November presidential election in the U.S. could have wider implications, and we’re not even sure who all the candidates will be at this point. Investors have largely downplayed the conflicts in the Middle East, but they could flare up again at any moment and have a dramatic effect on the cost of oil. The Ukraine-Russia war still has no end in sight, and NATO’s recent labeling of China as a Russian enabler only risks exacerbating an already tense situation. And then there are the important unknowns for markets to digest: has inflation really been whipped, where will interest rates be next year, and are there any more new geopolitical conflicts around the corner (we’re looking at you China and Taiwan)? With all this in mind, we continue to maintain our preference for a balanced, well-diversified portfolio, that strategically includes an allocation to Real Assets.
Macro Dive: First, we’ll review recent employment trends in the U.S. and then turn to the latest inflation data and how these two items together could change the Fed’s mindset on the timing of rate cuts. Then, we’ll look at the election results in the UK and France and what they might mean for the future.
- Job gains slows its roll: On the surface, 206k jobs gained in June (above estimate of 190k) appeared to be another month of robust gains, but peeling back the layers told a different story. For starters, private employer payrolls only added 136k, below estimates of 160k and below May’s downwardly revised 193k jobs added. Manufacturing payrolls lost 8k jobs in June, and May was revised down from a gain of 8k jobs to zero manufacturing jobs. Speaking of revisions, the prior two months (April and May) were revised down by 111k jobs, indicating those months were not as robust as initially reported. Furthermore, June’s unemployment rate crept up by 10 basis points (bps) to 4.1%, still low by historical standards but now at its highest level since 2021. Even as job gains slow, there are signs that employment remains in a healthy spot as earlier in the week the JOLTS survey (a measure of job openings) posted a read of 8.14M job openings in May, above estimates and higher than April’s 7.91M openings, and even as initial and continuing jobless claims creep higher, they remain at benign levels. Overall, markets reacted positively to the slowing job gains with most major stock indices moving higher on the day and investors pricing in higher odds of a first rate cut from the Fed in September.[2]
- A tale of two stories – inflation: Just following our review period, two measures of inflation were released in the U.S. First, and taking up most of the financial headlines this week, June’s CPI came in at 3.0% year-on-year and -0.1% month-on-month, both lower than expectations and with a monthly print that was negative for the first time since May of 2020—where much of the decline was attributable to lower gasoline prices. Core CPI (which excludes volatile food and energy prices) was 3.3% year-on-year and 0.1% month-on-month, both below expectations. After the CPI release, Treasury yields dropped across the curve, and expectations of a September rate cut from the Fed increased. The following day, PPI data was released, largely showing wholesale inflation coming in above expectations and accelerating from May in contrast to CPI. PPI for June was 2.6% year-on-year and 0.2% month-on-month, while core PPI was 3.0% year-on-year and 0.4% month-on-month. Even with the higher PPI, expectations for a September rate cut were fully priced in (via Fed Funds futures), with a second cut also fully priced in before the end of the year, and about a 50% chance of a third cut occurring in December.[3]
- Budgets go pound for pound to be franc: In election news, the U.K. saw a landslide victory for the Labour Party. This is the first change in the ruling party in 14 years and could provide a fresh start for the economy, which has been showing signs of improvement. New Prime Minister Keir Starmer is working to “not raise taxes on working people,” including national insurance, income, or VAT. The party is looking to clamp down on tax avoidance and level the playing field for businesses, and may make some changes to capital gains taxes, inheritance tax, and private equity income. They expect modest, but not radical, policy changes. The party also announced a new National Wealth Fund to boost growth and investment in food and energy security. The drive to develop cleaner energy sources could further investment opportunities for Real Assets in the U.K. In France, the snap election resulted in no clear winner, which has both positive and negative implications. Financial markets will likely appreciate that none of the more extreme positions gained a majority. On the flip side, French parliamentarians will have a learning curve to overcome working under formal and informal coalitions. The new government will have to deal with a budget deficit expected to exceed 5% this year, which triggered an Excessive Deficit Procedure by the European Commission. S&P Ratings Agency downgraded France’s long-term debt rating to AA-, from AA at the end of May and the cost of country’s debt has recently exceeded that of Spain’s, which is lower-rated at A.[4]
Real Assets, Real Insights: We’ll start with a look at a recent bond offering from a healthcare REIT that reinforces listed Real Estate’s unique access to diverse sources of capital as compared to their private market peers. Next, we’ll review the impact of Hurricane Beryl on infrastructure assets as it moved through the Caribbean and Gulf of Mexico. We’ll conclude with a look at what’s gotten coffee prices all jacked up this year.
- Filling the WELL (Real Estate): In a positive sign for the ability of public companies to raise funds by accessing the capital markets, Welltower, Inc. (WELL) priced an upsized offering of $900 million senior convertible notes, up from $750 million, at a rate of 3.125% per year, due in 2029, and not redeemable by the company before July 20, 2027. The private placement (144A), available to qualified investors, offered an initial exchange rate equating to a 22.5% premium over their closing price on July 8, 2024. The deal also offered initial purchasers of the notes an option to buy an additional $135 million in notes, which was fully excised, indicating $1.035B of total issuance. This capital is slated to be used for general corporate purchases, repayment or redemption of debt, and investment in health care, wellness, and senior housing properties. Welltower Inc. is a real estate investment trust that invests in senior housing operators, health systems, and post-acute providers in the United States, Canada, and the United Kingdom. The senior housing segment has been one of the fastest growing areas for net operating income within real estate investment trusts, as occupancy rates have been rebounding from pandemic lows and demographics remain favorable.[5]
- When Beryl rolled into town (Infrastructure): Natural disasters, which are all too frequent and unpredictable, have the ability to inflict significant damage to infrastructure in the areas they touch, with recent Hurricane Beryl a prime example. Beryl crossed the Caribbean Sea as a Category 5 storm, striking Jamaica, the Cayman Islands, and others in its path. While there were around a dozen deaths, building damage, power outages, and cancelled/delayed flights and cruises, the airports and seaports remained largely unscathed, and the Latin American Airports have largely resumed normal operations, a lucky win for them. Weakening as it first touched land in Mexico, Beryl was downgraded to a tropical storm but resumed Category 1 status as it turned up the Gulf of Mexico. Oil rigs in its path in the Gulf shut down as a precautionary measure, but also were largely undamaged, as were Gulf Cost refineries, with no notable damage nor reported loss of life. However, Houston, TX took a direct hit, which is where the real destruction started. Widespread damage to electricity distribution lines left over 2.26M customers without power according to CenterPoint Energy (Houston’s primary electric utility company) although other sources gave a tally closer to 3M. Almost 12k frontline workers have been mobilized to restore power, and while millions of customers’ power has been restored, it appears that close to 500k customers will be without electricity until next week.[6]
- Coffee prices see a caffeinated high (Commodities): Coffee bean prices have seen a jolt higher, up almost 9% this past week, and are now 37% higher year-to-date, trailing only cocoa in the commodities we track. This is mainly due to rising production concerns among major robusta growers in Vietnam and Indonesia. These concerns have also led to pricing tailwinds for arabica coffee, as shortages of the cheaper robusta variety should lead to higher demand for the premium arabica beans. Additionally, buyers fear a weaker harvest in Brazil as some farmers are seeing smaller-than-usual beans following the droughts in late 2023 that hurt crop development. While we expect coffee prices to remain volatile in the near-term due to these weather concerns, we see downside risk in the medium to long term as arabica coffee stockpiles have been rising and the 2024-2025 crop surplus is projected to be around ~6M bags. We’d also note that higher prices for coffee this year have allowed farmers to spend more on fertilizer and increase overall farm conditions.[7]
