With future global economic growth outlook appearing strong (IMF expects global growth to hit 3.9% in 2018, up from projected 3.7% in 2017), central banks around the world are beginning to look into pulling back on stimulus. Inflationary pressures are signaling an exit for banks, and workers are starting to demand higher wages in the face of rising prices. The Fed, ECB, and Bank of Japan and England are all saying that they are looking to reduce asset purchases by up to 70% (Deutsche Bank). Interest rate hikes are also coming, and some suggest that with the future outlook sitting how it is at the moment, the Fed may have to raise rates higher and faster than expected (would possibly hike rates more than the 3 times expected this year, and do so earlier). With major banks pulling back, fear of company profits being eroded by rising borrowing costs, and inflation looking to grow rapidly, investors are scared. On Feb. 5th the VIX jumped nearly 116% and sits at levels not seen since 2011.
Bond Yields have been rising, also pushing equities lower. Yields rose to 2.89% for 10 year US treasury notes on Feb. 2nd, up from 2.4% at the end of December 2017. Many banks are already revising bond yield expectations for both German and US bonds, raising expectations for 10 Y T Notes to as high as 3.25%.
Across the board global real assets fell. Commodities managed to stay strong for most of the decline, yet many futures are trending down. Gold fell from 1345 on Monday to 1317 as of Thursday. Oil also had its biggest decline since Nov’17, from 65 on Monday to 59.70 on Friday, and oil futures are continuing to fall. Real estate, infrastructure, and utilities all took a hit as well. Everything rattled on Monday, but many indices appeared to have settled for the time being. Systemic fear rather than a rational sought out correction appears to be the main factor for the universal decline. Many continue to stress that inflation is going rise to fast, and that rates will only be implemented sooner and higher. Just today the bank of England suggested that they would need to rise "earlier" and by a "somewhat greater extent" than they thought at their last review in November.
Many indices are now in ‘correction’ territory, pushing 10% declines across the board. Our assumptions have been that real assets would perform better under inflationary conditions and that they have low correlations with traditional asset classes such as stocks and bonds, and low correlations among the sub-categories of real assets themselves. Research suggests, and believe, that this still holds true, but with a universal correction most all assets are trending away from the highs that they hit last week. However, with many marcoeconomic factors still looking strong, and outlook expectations still positively growing, real assets are likely to come out of this correction as strong performers, particularly real estate and commodities.
Figure 1 Light Sweet Crude Oil Futures, M (CL=F)
Figure 2 Gold Apr 18 (GC=F)
Figure 3 S&P Global Infrastructure Index (^SPGTINNH)
Figure 4 Fidelity MSCI Real Estate ETF (FREL)