Real Estate extends rally, Commodities stumble

Market index returns

Week to date since November 29, 2023 as of December 6, 2023

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:

This week, broader equity markets traded sideways ahead of labor market data due out in the U.S. and following negative economic news out of China. Amongst the Real Asset classes, listed Global Real Estate and Global Infrastructure securities continued their upward March as investors appeared encouraged by improved prospects for an abatement of high interest rate headwinds. Gains there were broad-based with just a few pockets of weakness in Asia ex Japan and U.S. midstream energy. To understand why, look no further than Commodities markets where crude oil prices took a nosedive, ending our review period south of $70/bbl – front-month contract prices reacted to a potent combination of waning Chinese demand and near-record U.S. production levels. Natural Resource Equities also ended the week lower.

Why it matters: As we look ahead to 2024, things are looking up, though we remain somewhat cautious on lofty expectations for a soft-landing scenario. America’s commitment to bankrolling Ukraine’s counteroffensive appears to have faltered, and the U.S. Congress still needs to pass a budget for the current fiscal year before continuing resolutions expire in January and February. We also expect a degree of grandstanding in 2024, which is a presidential election year. Central banks are likely to shift their strategy from fighting inflation to protecting economic growth, but economic conditions vary by region and timing remains an open question. We continue to advocate for an actively managed allocation to Liquid Real Assets, which can help investors with portfolio diversification through low correlations to other asset classes, offering attractive long-term return potential and the ability to dial market beta up or down as conditions warrant while maintaining (or even increasing) liquidity.

Digging deeper: Below, we offer a festive take on economic conditions as we consider important implications for the alternatives space. We then dive in at an asset class level to discuss select market dynamics in greater detail.

Let it slow, let it slow, let it slow: This week, investors bracing for a harsh economic winter instead continued to enjoy a delightful seasonal chill that has been cast across U.S. labor markets. Weekly jobless claims increased slightly while continuing claims moderated, coming off a two-year high. Additionally, the Bureau of Labor Statistics released the November Jobs Report, which certainly kept spirits bright. Data showed 199k jobs were added in November, just ahead of expectations of 190k and up from 150k in October, while the unemployment rate fell to 3.7% versus a forecasted 3.9%. Accordingly, hopes for a soft-landing scenario remain alive and well, though market participants have adjusted expectations for when the U.S. Federal Reserve (Fed) might begin cutting rates a bit further out (by May 2024, according to the CME FedWatch tool).
Has Germany caught a ‘bah humbug’?: Alas, our friends in Deutschland (Europe’s largest economy) are grappling with less favorable economics. Unemployment in Germany registered at its highest level in over two years in November at 5.9%, up from an already elevated 5.8% in October and evidencing its struggle to mount a sustainable and meaningful recovery. This week, factory orders were revealed to have fallen unexpectedly in October, declining 3.7% month-on-month versus expectations for a mild increase. Market participants are concerned that production declines are all but inevitable and could herald a recession, putting a damper on what is typically a “frohes fest” and might instead become a “fright-fest”.
Black gold vs. yellow gold: Diving in at an asset class level this week, it’s worth noting that performance has diverged for our two most closely tracked commodities (and important market indicators), namely crude oil and gold. Data released this week indicating reduced demand out of China (crude oil imports fell 9% year-on-year in November) has driven the oil price to collapse, particularly as oversupply concerns abound and after OPEC+ meeting results fell short of expectations. Meanwhile, Gold has been on a tear since the beginning of October, surging from $1,820/oz on October 5th to a high of $2,072/oz on December 1st before moderating somewhat. Importantly, it has remained north of the psychologically important $2,000/oz level even following the release of the November jobs report this Friday. We believe there is further upside risk for Gold from here, particularly if a recession materializes and forces the Fed to pivot.
Real Estate roundup: This week, we also draw attention to U.S. Real Estate securities (pick your proxy – we like the MSCI U.S. REIT Index and FTSE NAREIT All Equity REITs Index), which have extended gains since bottoming out near the end of October and delivered gains on the order of 16-17% through December 8th. As illustrated in our accompanying dashboard, 9 out of 11 U.S. property sectors have delivered positive year-to-date returns in 2023. Of those 9 sectors, the top 3 (data centers, regional malls, and hotels) have outpaced the returns of the S&P 500 over the same period. We would also note that listed property markets are generally regarded as a leading indicator for direct markets – particularly as fundamentals across most sectors remain healthy and rate headwinds abate, this is definitely a space to watch heading into 2024.

What we are watching: In focus this week are two of our favorite central banks whose next moves could have significant implications for global markets. We wrap by discussing two niche yet promising opportunity sets in the Real Assets space – European student housing and U.S. data centers.

Fed on a wire: And just like that, the next Federal Open Market Committee (FOMC) meeting is nearly upon us. The meeting is due to commence on December 12th, and consensus suggests that the Fed will remain on the sidelines as it attempts to steer inflation toward its 2% goal while avoiding recessionary territory. However, the Fed will also update its long-term economic growth projections and expectations for future interest rate hikes and offer more clues in the form of commentary. Market participants will be keen to understand where the Fed stands, if it remains concerned about another inflation flare-up, and if another interest rate hike is still on the table. Between now and then, we’ll also get a glimpse at consumer sentiment and CPI – we intend to stay vigilant.
Jumbled signals from Japan: This week, seemingly benign comments from Bank of Japan (BoJ) Governor Kazuo Ueda moved markets when he characterized the central bank’s situation as “even more challenging” in 2024. Markets participants remain on edge as they attempt to gauge the BoJ’s exit from (and the end of an era of) easy monetary policy. Short-term interest rates there remain in negative territory and inflation has now been running above target (2%) for over a year, but concerns over economic fragility are a sticking point – most recently, data released this Friday showed an economic contraction of 2.9%. Markets will be watching closely between now and the next BoJ meeting due to take place on December 18-19th for more clues.
5-star accommodations: By this, we’re referring to the appeal of investments in student housing in Europe, of course. Demand for student housing continues to grow due to a combination of demographics and increasing educational attainment rates both in Europe and in key countries exporting students to Europe. Our Real Estate Research team makes a compelling case for this niche market, which centers on the potential for strong rental growth and a resilient demand case. For more on this unique attractive opportunity set, click here.
What’s the big deal?: This week, a major player in the U.S. data center space, Digital Realty, announced a deal in partnership with Blackstone, Inc. that it would launch a joint venture with the intention of establishing 10 data center “campuses” in three major metropolitan areas – two in Europe (Paris, Frankfurt) and one in the United States (Northern Virginia). Total development costs are estimated at roughly $7B. As mentioned in our previous issues, demand for data centers is booming, supported by trends such as AI requirements and the adoption of cloud services which necessitate hyperscale expansion. This is driving explosive growth in the data centers sector – a trend we expect not only to continue, but to accelerate. We suggest keeping tabs on this space as it adapts and innovates to support an insatiable appetite for computing and associated requirements.

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