Market update: Liquid real assets - As of June 30, 2020 Macroeconomic indicators - DWS.com
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6.30.2020 Alternatives
Market update: Liquid real assets
As of June 30, 2020
Macroeconomic indicators
Broad themes
_ Stocks slip against weak economic data and as COVID-19 cases rise. The U.S. saw weekly unemployment claims
sustain above 1 million throughout June as job losses remain stubbornly high. However, continuing claims beat
expectations, an encouraging sign, while durable goods gained +15.8% during May. In the U.S., the final Q1 GDP reading
reaffirmed the 5% contraction initially recorded while globally, market sentiment took another blow after the IMF issued it’s
economic forecast, predicting the global economy will contract 4.9% this year.
_ Globally, new cases of COVID-19 have continued to surge (notably in Beijing, Tokyo, and across the U.S.), tempering
investor optimism as worries mount over another potential round of lockdowns. The crisis continues to exacerbate social,
economic, and even racial divides in the U.S. as President Trump continues to maintain a hard line on protestors. Despite
this, consumer confidence has remained relatively resilient. On the flipside, markets remain vulnerable as investor
expectations waver in this uncertain environment. Washington continues to inch toward additional stimulus, which could
be on the order of $2 trillion with another round of stimulus checks gaining traction as a viable option.
_ The Small Business Association (SBA) has issued nearly $630 billion in funding to date. Ambiguity surrounding eligibility
for loan forgiveness continues to be problematic, but the Payroll Protection Program Flexibility Act passed at the end of
May has helped to alleviate some of these concerns. Mnuchin initially told Congress that he would continue to loosen
restrictions, but would not release the names of borrowers to the public. He has since walked back his statements in the
wake of criticism over lack of transparency, indicating he will work with lawmakers to establish appropriate oversight.
_ Overall, we see global activity bouncing back, once lockdown measures are lifted, but only until capacity constraints start
to kick in. From then onwards, we believe the recovery can only continue in slow motion. As a result, we do not expect
most industrialized countries to reach pre-crisis levels of output before 2022. That translates into the U.S. shrinking by
about 6% in 2020, before growing by roughly the same amount in 2021 from a much lower base.
_ Trade tensions flare between U.S., China, and Europe. President Trump has renewed tough talk on China despite
China’s efforts to fulfill its commitments under the Phase One trade deal. Several factors are at play, including China’s
controversial approval of a security law that will greatly increase it’s influence over Hong Kong, as well as former U.S.
National Security Advisor John Bolton’s startling accusation that President Trump sought help from Chinese President Xi
Jinping in his bid for reelection. Inconsistencies in U.S. policy and rhetoric towards China are hurting investor sentiment.
Meanwhile, the U.S. is also at odds with the EU as it considers implementing a fresh round of tariffs on European goods.
_ Gold approaches $1,800/oz levels. Gold prices have found support above the $1,700/oz level (for the first time since late
2012) against a negative economic backdrop. ETF buying has resumed, pushing Gold ETF volume to a new peak:
according to Bloomberg, Gold ETF now holds the equivalent of 102.8 million ounces compared with 82.9 million ounces at
the end of 2019. The environment remains supportive in the near-term, with the Federal Reserve reiterating its intention to
maintain zero interest rates well into 2022, increasing the relative appeal of owning Gold (a non-yield bearing asset).
_ Crude oil fundamentals continue to show signs of recovery. Front-month WTI contracts remained supported throughout
June in the $30-$40/bbl range, well off April lows. The cuts announced by OPEC+R are beginning to be realized while
outside of the agreement, we have see announcements of production cuts in non-OPEC countries as well. Gasoline prices
have also recovered well, with the DOE’s report showing a drawdown in gasoline from increased demand. This considered,
we would expect any slowing in recovery due to resurgence of COVID-19 will trigger a sharp correction.
_ Volatility, as measured by the VIX, remains vulnerable to short-term spikes. The VIX reached an extreme level of 83
on March 16th, the highest level since 2008. Less correlated asset classes tend to act differently when the VIX spikes above
the 31 level. The VIX closed below 30 on May 8 th, and remained there for several weeks indicating some normalization
across markets. However, figures spiked above 40 on June 11 th, highlighting the potential for short-term spikes given an
uncertain global macroeconomic and geopolitical backdrop.
For institutional and professional investors only.
Please note certain information in this presentation constitutes forward-looking statements.
1
Due to various risks, uncertainties and assumptions made in our analysis, actual events or results or the actual performance of the markets covered by this
presentation report may differ materially from those described. The information herein reflect our current views only, are subject to change, and are not
intended to be promissory or relied upon by the reader. There can be no certainty that events will turn out as we have opined herein.Market update: Liquid real assets 6.30.2020 /
_ For real assets classes:
_ On the listed real estate side, both in the U.S. and abroad, we have seen companies in hardest hit segments eliminate
guidance, reduce dividends, and draw down their lines of credit in an attempt to retain liquidity during this operationally
challenged period. During the final week of June, in the U.S., hardest hit segments continued to pull back on fears
following a surge in COVID-19 cases, namely Hotels, Regional Malls, and Net Lease. Industrial REITs, which slid last
week on renewed trade tensions between the U.S. and both China and Europe, rebounded modestly, along with Self
Storage and Healthcare. Internationally, it was similar story as stocks generally slumped on pervasive COVID-19 woes.
_ Commodities posted modest gains last week, with industrial metals the standout sector, driven by improving supply and
demand dynamics for Copper as COVID-19 continues to disrupt the supply chain. Energy continued to lag as Crude Oil
and Gasoline extended losses on the week driven by fears of a second wave of COVID-19 infections in the U.S. On the
natural resources side, precious metals were the standouts, benefitting from a supportive environment for Gold, while oil
and gas companies were the laggards.
_ The infrastructure space declined slightly over the week, supported by strength from more defensive sectors, with cell
towers and utilities in the U.S. and Europe leading the way. Elsewhere, the Americas midstream energy sector
outperformed though stock level dispersion remains evident. On the other end of the spectrum, transports were among the
laggards as well as Asia ex-Japan.
Global real estate
Broad themes
We believe there will be severe long-term damage to cash flows in areas like retail and hotels, which have been among the
hardest hit sectors across real estate markets. Across the real estate landscape, we are currently focusing on the likelihood of
recovery of cash flows to pre-COVID-19 levels combined with current valuations to assess potential opportunities. Looking
ahead, as it relates to our stabilized cash flows projections, Retail and Hotels are the clear outliers. We believe longer term
certain sectors will be repriced due COVID-19 impact and some sectors will be winners like, Towers and Datacenters, while
other sectors like Malls and Retail which already have secular headwinds will have that disruption accelerated.
Sector-level themes
_ Hotels – underperformance was expected in this environment in a sector with the shortest lease duration, highest
correlation to GDP growth, and significant lost EBITDA from travel restrictions and group cancellations. Hotels are starting to
re-open, but we think it will be a considerable amount of time before corporations allow significant travel and large
conventions resume, resulting in a more muted than in other sectors despite the short lease duration.
_ Malls – many issues currently plague the mall sector, but specific to COVID-19, mall retailers sell discretionary goods that
remain likely to be scaled back as people continue to avoid highly-concentrated/populous environments. We anticipate that
an expected slow-down in sales will likely push distressed, highly-levered retailers into bankruptcy if they were already
struggling for survival pre-COVID-19. At this time, nearly all retail companies have fully drawn their lines of credit.
_ Office – the likely consolidation of office space due to increased work-from-home acceptance in addition to increased capital
needs to retrofit common areas and tenant spaces for the post-COVID reality make this a sector that is likely to be under
pressure for the foreseeable future.
_ Healthcare – this sector is typically defensive but COVID-19 is a considerable threat to the 80+ age cohort that is the
primary tenant of assisted living and skilled nursing facilities. COVID-19 has been particularly deadly and widespread with
this demographic, hurting Healthcare REIT operating fundamentals and operator financial health. However, rent collections
in this sector are currently at pre-COVID levels, signaling a high likelihood of cash flow stabilization.
_ Net Lease – this is another sector that is typically very defensive, with long lease terms and bond-like cash flows. The
sector has seen pressure given exposure to restaurants and entertainment venues like theaters that were abruptly shut
down. Because this sector has more non-investment grade tenants that are in areas of the economy hit hard by the
pandemic shut-downs (restaurants, child care, etc), this is a sector where we expect to see increased bankruptcy activity.
Data Centers – this sector is benefitting from outsized cloud usage that is likely (in our view) to lead to another cyclical
upturn in hyper-scale leasing or interconnection demand skyrocketing as more and more employees work from home.
_ Industrial – this sector is benefitting from the acceleration of e-commerce migration and has seen recent outperformance as
a result, even despite obvious macro risks. Given the importance of logistics networks in the on-line focused economy and
very strong rent collections to date, we have a strong positive view on this sector.
Source: DWS International GmbH.
Past performance is not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might
prove inaccurate or incorrect.
2Market update: Liquid real assets 6.30.2020 / Global infrastructure Broad themes Across the infrastructure space, shifting risk-on to risk-off sentiment seems to be influencing short-term returns. In this environment, we believe remaining nimble and vigilant in terms of managing exposure is of paramount importance. We continue to expect meaningful performance dispersion over the near-term, and believe companies with high quality fundamentals and earnings resilience will ultimately provide the best risk-adjusted returns. As such, we continue to focus on attractive companies supported by high quality assets, with balanced exposure across sectors and geographies. Within the infrastructure space, we expect defensive regulated assets to hold up well given greater visibility around long-term expectations. On the other end, more cyclical oriented sectors offer a differentiated profile and potential return enhancement, such as toll roads, rails, and pipelines. Near-term, we anticipate broader market volatility and economic uncertainty to offer tactical opportunities. Sector-level themes _ Midstream Energy – We continue to focus on high-quality names that exhibit balance sheet liquidity and have limited exposure to crude oil volumes. We remain biased towards names with gas oriented business models. _ Regulated Utilities – With the most resilient business models, relative performance should improve (in our view) if we see continued market volatility. In the U.S., fundamentals are stable, but disperse valuations and business profiles require selective exposure. For non-U.S. utilities, we are particularly cautious and are being very selective, favoring names that we believe are fundamentally stable and attractively valued. _ Communications – Given it's defensive in nature, cell towers should benefit from secular tailwinds such as stable demand and organic growth. Towers are mostly resilient market volatility given recurring-revenue models and built-in rent escalators which place them in good position to sustain revenue growth, even in an economic downturn. _ Transports – Currently, we prefer high quality names that are attractively valued. We have recently seen traffic volumes pick up for North American railroads, and see select opportunities, though the success of the economy reopening underpins the pace at which cash flows accelerate. For airports, near-term opportunities may be limited, though long-term we expect air travel in certain markets to surpass pre-COVID-19 levels. For toll roads, our outlook is more positive as companies in the space are benefitting from easing lockdown measures and travel restrictions resulting in upward traffic trends. Natural resource equities Broad themes _ Higher-beta natural resource equities generally followed equity markets lower against a volatile political and economic background this week. Gold and precious metals names were the top performers while agricultural chemicals names were the clear laggards, followed by Steel against a rocky reopening backdrop. Sector-level themes _ Iron ore and nickel producers – Fundamentals remain strong on healthy Chinese stainless markets, but the risk rally appears to be taking a pause on reopening concerns. _ Precious metals and mining companies – rising COVID-19 infection rates in several countries has resulted in increasing risks to supply, in our view. A few Gold names have attracted a large portion of flows into the space, pushing valuations to multi-year highs. We are monitoring for names with reasonable valuations and potential catalysts. _ Copper producers – we retain our positive view on Copper at this time given the upside potential at current levels as economies seek to reopen, favoring producers with relatively strong production growth prospects versus peers. _ Paper and packaging – we are positive on the space in the near-term, as we have observed strong corrugated products and personal and hygiene products demand, supporting our view that strong e-commerce demand has been underappreciated in sell-side estimates. _ Energy companies – with oil prices recovering, it appears the worst may be behind us for the energy space. Energy equities are already pricing recovery in oil prices in the range of $40-$45/bbl, indicating there may be more limited upside potential here versus other natural resources sectors. Source: DWS International GmbH. Past performance is not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might 3 prove inaccurate or incorrect.
Market update: Liquid real assets 6.30.2020 /
Commodities
Sector-level themes
Energy
_ Oil prices corrected sharply this week, collapsing on renewed trade and reopening concerns. Fears over a second wave of
COVID-19 in the U.S. triggered significant selling activities in products as investors reduce recovery expectations from re-
opening of economy. On the supply side, as OPEC reaffirmed that countries which have lagged in conformance will be
within production cap in July, Norway, which announced an extension of their 250K bpd cut into June, will increase
production by 116K bpd starting in July. Natural gas prices corrected to the upside after declining over 10% last week.
Mild weather across the globe has pushed down demand expectation from air conditioning needs. With Europe well
supplied, expected LNG shipments for the U.S. were cut due to lack of customer demand. The end result is an
unexpected large increase in Nat Gas storage.
_ Our view: With more clarity on the supply side for oil, we expect demand uncertainty will be a focus for the market in the
near term. We expect oil prices are likely to fluctuate around market sentiment on recovery and that investors aret likely to
maintain negative sentiment in energy until COVID-19 cases show signs containment in the U.S. We expect supply to
increase starting in August from OPEC+R. Some U.S. producers have also announced the resumption of production given
current oil price levels. We also expect the demand recovery for countries outside of China to be at a more gradual pace
than what the current price would imply. Other downside risks include the degree of sustainable success in reopening the
global economy and escalation of tensions between the U.S. and China. Should the U.S. / China relationship deteriorate
further, economic downside expectations would likely cause oil to be repriced downward once again.
Metals
_ Base Metals performance was mixed. Copper continued to build on prior-week gains as COVID-19 cases continue to rise
in Chile, forcing mines to stop production.. For Copper, supply disruption due to COVID-19 outbreaks in Brazil and Chile
are helping to combat a worrisome economic outlook. Several investment banks also published revised forecasts on
Copper, reflecting increases in demand expectations due to expected Chinese infrastructure demand in 2020H2.
_ Precious Metals were up again this week with safe-havens in favor. As the Fed signaled a prolonged zero rate
environment into 2022, market interest in Gold has rebounded. Platinum extended prior-week declines, reflecting
concerns over the speed and sustainability of economic recovery, while Palladium rebounded modestly.
_ Our view: The impact of COVID-19 is highly differentiated across the metals complex. As the number of cases rise
globally, some metals experience supply disruption while others experience a decline in demand. We expect the sector
will continue to have very differentiated performance in the near-term. Further, as the initial restocking post COVID-19 in
China is largely completed, the focus is now shifting to actual demand flow from recovery in industrial activities. As the
industrial sector lags consumer recovery, we expect base metal prices to trade range bound until infrastructure project
demand comes in later in the second half of the year. We expect gold prices to continue to be supported with the Fed
reiterating its intention to maintain zero rates well into 2022.
Agriculture
_ Agriculture commodities were up modestly last week. Corn led the way, followed by Coffee while Cocoa was the clear
laggard. Planting progress has been at or above historical averages. With current weather forecasts showing mild weather
into summer, crop yields across all crops are expected to be strong. Corn price declines are expected versus other grains
as ethanol demand is expected fall with Gasoline demand as a result of COVID-19. Similarly, Sugar prices are expected
to remain under pressure as Sugar is used to produce ethanol in Brazil. Investors also expect any change in re-opening to
have a disproportional impact to restaurant business volume. Lean hogs prices tumbled last week as investors price in
potential demand disruption as a result.
_ Our view: Mild weather has given a boost to the widely held view of a robust production season this year. As COVID-19
cases rise, investors once again shift their attention away from Chinese purchases to potential demand destruction from
reduced economic activity. Prices for agricultural businesses are likely to remain under pressure until the COVID-19
concerns ease.
Source: DWS International GmbH.
Past performance is not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might 4
prove inaccurate or incorrect.Market update: Liquid real assets 6.30.2020 / Important information The brand DWS represents DWS Group GmbH & Co. KGaA and any of its subsidiaries, such as DWS Distributors, Inc., which offers investment products, or DWS Investment Management Americas, Inc. and RREEF America L.L.C., which offer advisory services. Please note certain information in this presentation constitutes forward-looking statements. Due to various risks, uncertainties and assumptions made in our analysis, actual events or results or the actual performance of the markets covered by this presentation report may differ materially from those described. The information herein reflect our current views only, are subject to change, and are not intended to be promissory or relied upon by the reader. There can be no certainty that events will turn out as we have opined herein. An investment in commodity involves a high degree of risk, including possible loss of principal amount invested, and is suitable only for sophisticated investors who can bear such losses. The value of shares/units and their derived income may fall or rise. Any forecasts provided herein are based upon DWS’s opinion of the market at this date and are subject to change dependent on the market. Past performance or any prediction, projection or forecast on the economy or markets is not indicative of future performance. This material was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It is intended for informational purposes only. It does not constitute investment advice, a recommendation, an offer, solicitation, the basis for any contract to purchase or sell any security or other instrument, or for DWS or its affiliates to enter into or arrange any type of transaction as a consequence of any information contained herein. Neither DWS nor any of its affiliates gives any warranty as to the accuracy, reliability or completeness of information which is contained in this document. This presentation is intended only for the exclusive benefit and use of our clients and prospects. This presentation was prepared in order to illustrate, on a preliminary basis, a specific investment strategy and does not carry any right of publication or disclosure. Neither this presentation nor any of its contents may be used for any other purpose without the prior written consent of DWS. The information in this presentation reflects prevailing market conditions and our judgment as of this date, which are subject to change. In preparing this presentation, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. We consider the information in this update to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of composite performance or suitability for investment. Past performance is not indicative of future results. No representation or warranty is made as to the efficacy of any particular strategy or the actual returns that may be achieved. The information on the benchmarks is presented for illustrative purposes only and is not intended to imply the potential performance of any fund or investment. Benchmarks are not available for direct investment. Benchmark performance assumes the reinvestment of all distributions, but does not assume any transaction costs, taxes, management fees or other expenses. The performance of the benchmarks may vary from investments held in the account. The information on the benchmarks is presented for illustrative purposes only and is not intended to imply the potential performance of any fund or investment. Benchmarks are not available for direct investment. Benchmark performance assumes the reinvestment of all distributions, but does not assume any transaction costs, taxes, management fees or other expenses. The performance of the benchmarks may vary from investments held in the account. War, terrorism, economic uncertainty, trade disputes, public health crises (including the recent pandemic spread of the novel coronavirus) and related geopolitical events could lead to increased market volatility, disruption to US and world economies and markets and may have significant adverse effects on the product and its investments. © 2020 DWS Group GmbH & Co. KGaA. All rights reserved. CRS-075468
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