Market index returns

Month to date since September 30, 2023 as of October 31, 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 sentiment has remained positive so far, with most risk assets continuing to trend higher this week. Market volatility has continued to fall alongside longer-term interest rates, with the 10-year U.S. Treasury falling below 4.5% during our review period, the lowest level since September 22. Despite headlines about the humanitarian crisis in Gaza, investors have largely been discounting the events in the absence of major escalation by other players in the region. Additionally, perceptions of a stalemate in the Ukraine-Russia war have added to investors’ sense of security. Among the Real Assets classes, Global Real Estate securities led returns this week and bested the broader equity markets due to strength in UK property stocks, the Nordics, and self-storage in the U.S. Global Infrastructure securities and TIPS also finished in positive territory (but lagged the broader markets) while Natural Resource Equities were flat, and Commodities declined largely due to a pullback in the energy complex.

Why it matters: A period of calm has come over the markets as the lack of significant economic data releases or policy meetings provided a welcome respite from recent volatility. Nonetheless, major geopolitical risks remain, global economic growth is still expected to slow into next year, and the U.S. Congress still needs to pass a new fiscal budget (or another continuing resolution) within the next week. Given that market sentiment can pivot on a dime, we continue to advocate for portfolio diversification via an allocation to Liquid Real Assets. Liquid Real Assets can offer low correlations to traditional asset classes and attractive long-term return potential. Furthermore, a professional active manager can take advantage of market dislocations, shifting between sectors or securities in pursuit of alpha, while also dialing market beta up or down as conditions warrant.

Digging deeper: We first take a trip to China to lament what’s going on with price levels but find some solace in a pleasant upgrade by the International Monetary Fund (IMF). We then investigate a few of the commodity market segments before heading to our favorite co-working location to write up our notes…only to find the doors have been padlocked.

• Pressure mounts on the Politburo: New inflation data out of China this week showed CPI falling 0.2% year-on-year, while PPI fell 2.6%, both indicating a deflationary environment. This stands in stark contrast to most developed markets, where persistent inflation has been an issue for the past two years, but perhaps is not surprising given China’s flailing property markets, high youth unemployment, and sagging export and manufacturing activity. On a positive note, the International Monetary Fund (IMF) increased China’s expected GDP growth for 2023 and 2024 this week to 5.4% and 4.6%, respectively, up from 5.0% and 4.2% in their October World Economic Outlook, though the IMF now notes a strategy is needed to contain risks from the property sector and local government debt issues, and the country would be wise to lower interest rates and implement “pro-market structural reforms aimed at boosting productivity”.
• Cracks in the crack spread: All energy commodities we track were down this week, but we wanted to offer insights on recent performance from crude oil and gasoline. WTI Crude has again fallen below the $80/bbl level and was headed towards $75 during our review period, while Brent Crude also briefly dipped below $80 but appears to have found some support at that level. Gasoline has also fallen, with some national retail measures indicating prices fell for 41 days straight. Crack spreads, an indicator of refiners’ profitability, have fallen drastically from ~$43 in August to ~$23 right now, though they are off the lows of around $18 that were seen in October. These spreads have been weakening on the back of a slowing U.S. economy and milder weather that is specifically pressuring the heating oil portion of distillate demand. Although negative for refining margins the downstream benefit of lower gas prices should likely result in softer headline CPI readings in upcoming months.
• Precious metals lose some of their lustre: All the precious metals commodities we track were down this week, though silver (with its many industrial uses) fell less than 0.2%. Platinum was the laggard, dropping over 6%, but palladium, which fell almost 5%, has dropped below $1,000/oz for the first time in five years. Automobile demand has dampened overall, but a focus on electric vehicles (EVs) over internal combustion engines (ICEs) has been particularly painful for palladium (though a boon for copper) as EVs don’t require catalytic converters. Furthermore, platinum is being widely substituted for palladium where catalytic converters are needed, given that palladium still trades at a premium to platinum. Gold was also down this week, finishing our period at $1,950/oz (and closer to $1,940 as we write) after briefly topping the $2,000 level. While ETF holdings of physical gold are down almost 7% this year through October, the World Gold Council estimates that China increased its reserve gold holdings by over 78 metric tons in the 3rd quarter, an increase of almost 4% from the quarter prior.
• WeWork needs a “ReWork”: WeWork, once the largest co-working space operator and previously the largest private office tenant in Manhattan, filed for bankruptcy this week. Through its Chapter 11 filing, the company looks to shed unprofitable leases and “ReWork” their debt obligations. The co-working behemoth once boasted a $47B valuation, with 777 locations spread across 39 different countries, but following Covid-19 lockdowns and slow return to office trends, many of those locations have remained empty. While we have highlighted the recent woes in office REITs before and this certainly doesn’t help the current vacancy situation, we would remind readers that office assets make up less than 7.0% of the FTSE EPRA Nareit Developed Index and less than 4.5% of the FTSE NAREIT All Equity REITs Index, our global and U.S. listed REIT proxies. Furthermore, we would mention that listed REITs generally have limited direct exposure to WeWork at present and that the WeWork story will likely become a case study in mismatching assets and liabilities after signing long-term leases with landlords but offering service contracts lasting only a month (or even just a day).

What we are watching: For starters, we’re watching market volatility given how much it has pulled back recently, along with high yield credit spreads. We are also monitoring the frosty relationship between China and Taiwan. Also, worth a nod this week is the recent rate decision from the Reserve Bank of Australia (RBA) as we consider how the Australian economy is expected to grow this year and next. Finally, we will be eagerly watching to see who might be next to join the European Union (EU), as the slate of candidates was recently updated.

• Volatility’s brief bark had no bite: Given the inverse relationship between market volatility and returns, equity market volatility has been falling since the last week of October. The VIX index (which estimates the expected volatility of the S&P 500) has fallen from near the 22 level in October to the mid-14s this week. While this is not quite down to the 12-13 range seen in mid-September, it did represent a swift retracement. Bond volatility (as measured by the MOVE index) has also come down as bond prices rose and yields retreated, dropping from the 142 level in early October to end our review period at 117, but remains elevated on a historical basis. One area of the fixed income market we pay close attention to is the spread on high yield debt, which has been volatile itself recently. High yield spreads started November at 4.66% before dropping to 4.22% in just 3 days, before widening again to end our review period at 4.39%. Still, the recent fall in base rates should be a welcome signal to corporate borrowers.
• Is trouble brewing in Taipei?: Taiwan is scheduled to hold a presidential election in January 2024 with current Vice President William Lai of the Democratic Progressive Party (DPP) the frontrunner. While tensions between Taiwan and China are already high, China’s leadership views Mr. Lai as an antagonist given his prior support for Taiwan’s independence. Opposition parties have until November 24th to register their own candidates, but if no new clear favorite emerges, a Lai victory in January would likely fan the flames. We still view the odds of a military conflict in 2024 as low, but Chinese hostility towards the new Taiwanese president would likely increase friction. One upcoming event that could prompt de-escalation is an expected meeting between Chinese President Xi Jinping and U.S. President Joe Biden at the Asia-Pacific Economic Cooperation (APEC) summit in San Francisco next week, where both sides will look to stabilize relations between the U.S. and China.
• Taking a hike in Oz: The Reserve Bank of Australia (RBA) hiked rates by 25 bps this week – while this represented the RBA’s 13th hike in 18 months, it was likely needed as inflation remains stubbornly high at a 5.6% annualized rate for September, well above the RBA’s target 2-3% range. Continued tightening is expected to weigh on economic growth. Using the IMF’s October outlook figures as a guide, Australia’s GDP growth is expected to slow from 1.8% this year to just 1.2% in 2024; yet, as the country’s population has been growing more quickly than its economy, both years will likely feature negative growth on a per capita basis.
• Bigger is better: This week, the European Commission adopted their 2023 “Enlargement Package,” a set of documents that explain its policy on expanding the EU. Ten countries in various stages were named in the report. Notably, Ukraine, Moldova, and Georgia were added to the candidate list for the first time. They now join the likes of Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, Serbia, and Türkiye which remain in various stages of candidacy. While no specific deadline was set for any of these countries to join the EU, the Commission reminds us that “accession is and will remain a merit-based process, fully dependent on the objective progress achieved by each country.”