Market Musings 11/07/21: Are we heading towards a summer correction?

Summary:

  • Podcast: Why invest in Real Estate today?
  • The surprising fall in bond yields
  • Growth retakes the lead in equities: Tech, Health care
  • European mid-caps still lead

Podcast: Why invest in Real Estate today?

  • How robust are prospects for the residential and logistics real estate segments today?
  • Is the "death of the office" exaggerated, despite the rise of remote work?
  • Which segments of the commercial real estate market do you prefer today?
  • How can investors gain exposure to this asset class within a diversified portfolio?

Why Invest in Real Estate Today?

The surprising fall in bond yields

Economists have been chattering about the resurgence in inflation, particularly in the US, over the last couple of months. US headline inflation hit 5% in May, driven by a number of key components such as petrol prices, the cost of used cars and the cost of renting cars.

In the months to come, US inflation will be kept high by a number of other factors, including the cost of renting combined with rising house prices. So why have US 10-year bond yields (TNX), i.e. long-term interest rates, fallen to 1.3% lately? Normally with strong economic growth and rising inflation, bond yields should rise to reflect this economic strength.

US 10-Year Bond Yield Peaked in April

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Source: TradingView.com

This is puzzling, but deserves close attention. The US central bank, the Federal Reserve, have persistently repeated their view that this surge in US inflation is ‘transitory’, and would not last. Does the bond market believe this view, after all?

Commodity prices have started to cool down of late, which could lend some credence to this “transitory” narrative. Lumber prices, a key material in house construction stateside, has more than halved from its peak over the last month of so.

Lumber prices ease back after a surge

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Source: TradingView.com

It is also true that certain one-off effects, like the blockage of freight shipping in the Suez Canal due to the Ever Given grounding, are contributing in the short term to a lack of goods reaching Europe and the US from Asia and are thus pushing up inflation for now. But these effects will surely wear off soon enough.

But perhaps the bigger story is…

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